How To Raise Capital As A Social Entrepreneur?
How to raise capital asa social entrepreneur?How to turnyour ambition tohave a positiveimpact on theworld into abusiness caseWhat ‘social’investors want:4 guidingprinciplesSocial enterprisesprovide asolution fortoday’s trendswww.pwc.nlSocial Enterprises How to raise capital as a social entrepreneur?1
At PwC in the Netherlands over 4,300 people work together from 12 offices.PwC Netherlands helps organisations and individuals create the value they’relooking for. We’re a member of the PwC network of firms in 157 countries withmore than 184,000 people. We’re committed to delivering quality in assurance,tax and advisory services. Tell us what matters to you and find out more byvisiting us at www.pwc.nl.2Social Enterprises How to raise capital as a social entrepreneur?
How do you turn the ambition to havea positive impact on the world intoa business case?Dutch social entrepreneurs struggle to find capital to start and expand their social enterprise.This article aims to address this issue by supporting social entrepreneurs who are looking foran investor. Currently, the debate concentrates on the focus of potential investors—does theinvestor place more emphasis on social aspects or financial ones? We identify different typesof social enterprises and investors. Finding the right match requires mutual understanding.Based on our findings we conclude that there is no trade-off. Although popular belief holdsthat impact and profit are mutually exclusive, the investors interviewed indicated thatimpact and profit are mutually beneficial. A social enterprise looking for funding needs tohave a clear vision about its purpose in society as well as its financial goals. Mission drift is apotential risk in growing the business of a social enterprise. Aiming for the highest outcome,or impact, requires an alignment of financial and social goals. PwC doesn’t recognize atrade-off when creating impact. It does require a thorough understanding of the businessand the investor’s needs. We elaborate on the results in the third chapter of the article.We base our findings on a combination of literature analysis and ten extensive interviewswith Dutch investors in social enterprises. The investors differed in size and goals andincluded banks, angel investors, investment funds and more. When analyzing the results wewere able to identify overarching themes that applied to the majority of the investors in theirinvestment cases.Social Enterprises How to raise capital as a social entrepreneur?3
1. Access to capital is crucialfor the growth of the Dutchsocial enterprise sector1.1. Dutch social enterprises experiencedifficulty accessing capitalIn the UK and in the US the social enterprise sectoremerged earlier, and is more developed, than in theNetherlands1. These and other governments supportthe sector in various ways. One of the instrumentsused by governments in order to facilitate or evenboost the sector is specific tax and legal regulationsor, more far-reaching, specific incentives such as taxbreaks. This is not (yet) the case in the Netherlands.Still, with or without government intervention, Dutchsocial entrepreneurs are keen to play their part indeveloping the Dutch social enterprise sector. Indoing so, they experience challenges, one of whichis accessing the necessary capital to start or growtheir organization2. Social enterprises struggle to findinvestors3 and convert their belief into an investorready business case. The lack of easy access to capitalresults in stagnating expansion for individual socialenterprises and the social enterprise sector in general.1 McKinsey & Company(2011) Opportunitiesfor the Dutch SocialEnterprise Sector.Amsterdam, p. 4.2 McKinsey & Company(2011) Opportunitiesfor the Dutch SocialEnterprise Sector.Amsterdam, p. 11.3 Kennisland, SocialEnterprise NL (2013)Stimulansen voorde social enterprisesector: Ervaringen enlessen uit Europa,p. 7.4Although accessing capital is a challenge faced bymany ‘regular’ businesses as well, there is an extradimension for social enterprises as potential investorsneed to be willing to take the enterprise’s financialand social mission into account. Social enterprisesalso often propose innovative ways to solve aproblem, thereby making it hard to point to earliersuccess stories of other organizations. In this articlewe try to close the gap between social enterprisesand investors. We identify causes for the currentmismatch in understanding and providing practicalrecommendations.Social Enterprises How to raise capital as a social entrepreneur?1.2. Finding a good match between socialenterprise and investor is keyInvestors differ in their approaches to topics suchas social return, financial return and risk. Likewise,social entrepreneurs differ in how they balance andalign social and financial factors. Having a goodunderstanding of what one’s organization has tooffer may sound as an obvious requirement, butgaining this understanding is crucial before the socialenterprise approaches potential investors. This is keyin finding the right investor for the purpose of theenterprise. Too often investors are confronted with a‘scatter-shot’ of ideas.
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2. Balancing primary objectivesresults in different types of socialenterprises and investors2.1. We focus on starting social enterprisesThere are multiple social enterprises, each one ofthem with another focus. There are organizationsthat start as a social enterprise with a clear purpose,while others move from existing organizationalmodels towards becoming a social enterprise. Thereare three possible starting points (see figure 1).Firstly, charities such as NGOs may move from “pure”philanthropy (donations) towards an entrepreneurialapproach, for example by providing paid services oroffering loans instead of grants. Secondly, traditional“for profit” companies are increasingly becomingmore social by redefining their mission and incorporating social goals alongside financial ones. Finally,there are social enterprises which combine socialimpact and profit from the start. This is a relativelynew category and these organizations are generallyyounger, without existing investment relationships.Investors note that social entrepreneurs often leantowards either entrepreneurship (i.e. the businessside) or idealism (i.e. the social mission) as shownin figure 1 above. The entrepreneurs that focus onentrepreneurship merely have a more solid businessplan, but they might struggle to integrate the socialmission into their enterprise. In extreme cases thisshows entrepreneurs trying to be a social enterprise,because the term is starting to get more and moreattention. Idealists on the other hand focus more onthe social mission and the contribution they wantto make to society, making this a core part of theirbusiness model. Their weak spot often lies in thedifficulty to formulate a solid business case and thelack of a clear idea about how to become financiallystable. As one investor noted: “Some entrepreneurswould be more successful in an NGO and shouldn’tbother trying to be an entrepreneur.”Even so, they need capital in order to start-up,flourish and grow. Although NGOs and traditionalcompanies also need investors, we focus on start-upswith limited resources at their disposal, because theyface the greatest challenges attracting an investor.Improving their access to capital is likely to give thegreatest boost to the emerging social enterprisessector.A social enterprise combines both impact and profitThere is discussion about the exact definition of a social enterprise, but the European Union uses a widelyaccepted definition.This definition states that a social enterprise is a company:- with the primary objective to achieve social impact rather than generating profit for owners and shareholders;- which uses its surpluses mainly to achieve these social goals;- which is managed by social entrepreneurs in an accountable, transparent and innovative way, in particular byinvolving customers and stakeholders affected by its business activity.6Social Enterprises How to raise capital as a social entrepreneur?
Figure 1. An overview provided by ShaerpaSocial ValueFinancial ValueCharitiesGrantsonly, notradingSocial EnterprisesGrantsandtradingImpact onlyPotentiallysustainable 75tradingrevenueBreakevenall l businessProfit distributingsociallydrivenImpact firstCSRcompanyCompanyallocatingpercentage tocharityMainstreammarketcompanyFinance first2.2. We have identified five types of investorsWe have identified five types of investors interestedin investing in social enterprises. Below we brieflyoutline the main characteristics of each type.1. Angel investor: these investors invest in anorganization based on ideological considerations. This means that the social mission of theinvestment target is the primary objective. Angelinvestors focus strongly on social return beforefinancial return. They often provide financial aidto start-ups and the amount of capital investedis relatively small, which means the risk for theangel investor is low. The capital can be a one-timefinancial injection or ongoing support to carry thecompany through difficult times (e.g. the start-upperiod). Angel investors may be among the socialentrepreneur’s family and friends, but can also beestablished foundations.2. Crowd funding: crowd funders make use ofplatforms that bring together small amounts ofcapital from a large group of individuals. Theseindividuals work together because they believein the social mission and/or business model ofa social enterprise. Depending on the group ofpeople that participate, the focus can be on thesocial mission or the financial possibilities (infact, this may differ per individual crowdfunder).To attract investors, crowdfunding makes use ofthe easy accessibility of vast networks of friends,family and colleagues through social mediawebsites. As with angel investors, the amountinvested per person is generally small, althoughthe overall investment may be large.3. F inancial institution: these organizations havea significant sum of capital available and placemore emphasis on financial return. The socialmission is not necessarily the main businessobjective as is often the case with crowdfundersand angel investors. While financial institutions invest relatively large sums of money insocial enterprises, they tend to choose less riskyinvestments than venture capitalists.4. I nvestment fund: this investor has a large,often conservative, amount of capital available.Investment funds aim to ensure steady growth incapital over the long term. Think for example of apension fund—although stakeholders appreciatesocially responsible investments, they are alsointerested in the long term financial returns. Dueto its future payment obligation, investment funds,such as pension funds, focus more on financialreturn than on social return and look for low riskinvestments.5. V enture capitalist: this investor invests alarge sum of money in start-up firms and smallbusinesses with expected long-term growthpotential. The risk for investors is high, butinvestments have potentially high returns (bothsocial as well as financial).Social Enterprises How to raise capital as a social entrepreneur?7
Trade-off’sdo not exist!Alignment betweenfinancial and socialobjectives is key.Avoid mission driftat all times!Build a balancedmanagement team.Align expectations andcreate safeguards for yourpurposeAn investor will neverbelieve that you make iton your ownMeasure your impactYour contributionbecomes visible ifmeasured.How to raise capital asa social entrepeneur?8Social Enterprises How to raise capital as a social entrepreneur?
3. What ‘social’ investors want:4 guiding principlesThe ‘million-dollar question’ is how the aboveobservations can help social entrepreneurs to improvetheir access to funding. Based on our discussionsand observations we formulated 4 guiding principlesfor social entrepreneurs when trying to get accessto capital. Having an in-depth understanding of thebusiness increases your chances of finding the rightinvestor for the purpose of the enterprise. Focus and aclear vision of the purpose of the social enterprise canresult in optimal impact for both parties.3.1 Trade-offs do not exist! Alignment betweenfinancial and social objectives is keyAccording to popular belief it is impossible to ‘dogood’ and make a profit at the same time. However,the investors we interviewed tell a different story:profit (or a solid financial base) and impact can andshould both play a prominent role. As a representative of a financial institution puts it: ‘We expect thatthe social enterprise shows a convincing (social)mission, but also a convincing business case.’ Whenintegrated, the two aspects strengthen each other,making an attractive financial return to expandyour impact. There are already many well-knownexamples. Taxi-Electric, a price competitive taxiservice that runs its cars on electricity and employsthe long term jobless is increasing its impactby selling as many taxi rides as possible. TonyChocolonely and Specialisterren are also well-knownexamples of social entrepreneurs, who increase theirpositive impact as they grow their sales and revenue.Increasing the effect of your social mission canincrease financial gain and vice versa.Investors look for organizations in which bothaspects come together in an integrated way. Thissaid, the starting point might differ for investors asshown chapter 2. For instance, angel investors mightinvest in idealists and look for ways to improve theentrepreneurial side of the social enterprise, whileinvestment funds often start working with socialentrepreneurs by focusing more on the entrepreneurial/ financial side and assisting them withintegrating their social goals.A social enterprise integrates both the social missionand the financial drive to maximise its impact. Anysuggestion that there might be a trade-off betweenthe social and financial goals will weaken thebusiness case. Investors not only expect you to havea clear understanding of your social goals and yourbusiness model, but they must be able to observethe integrated approach and vision. Most businesscases that investors receive don’t have a firm basis formaking investment decisions. Be prepared to discussand optimize your plan together with your investor.3.2 Build and present a well-balancedmanagement team. An investor will neverbelieve that you make it on your ownInvestors stress the importance of a team thatshows its commitment to the social enterprise,rather than a single person. Having a group ofpeople willing to invest time and effort in the socialenterprise is regarded as an indicator of futuresuccess. Investors look for a social enterprisewith a strong (management) team that shows abalance of complementary skills. Financial institutions, investment funds and venture capital firmsspecifically mention that they look for these signswhen considering an investment. Yet, this does notmean it is impossible to get funding on your own.Crowdfunding and angel investors, for instance,do support individuals, but in general investors aremore likely to invest in a team. So, it is advisableto consider the inclusion of more people at anearly stage. Gathering a management team in theorganization that consists of a diverse group of peopleSocial Enterprises How to raise capital as a social entrepreneur?9
‘The question remains how toget started. To prevent earlydissolution, start withsomething small, easyto measure, preferablyalready available inyour daily business.’10
is preferred by investors. Apart from finding a suitableinvestor, it may strengthen your own organizationas well. As one investor puts it: “Having more thanone person gathered behind a leader or an idea showspersuasiveness and is a good indication that customersmight follow.”3.3 Measure your impact! Your contributionbecomes visible if measuredSocial enterprises find it difficult to measure theirimpact or at least quantify their outcome. Investorsremarked that social enterprises often express thata lack of resources is one of the reasons for this.While not all investors set impact measurement asa minimum requirement before investing, all theinvestors that were interviewed indicated that it doesmake a stronger case.Financial institutions and venture capital firms expectthe social enterprise they invest in to measure andquantify their impact. Other investors also look forways to measure impact, but place less emphasis onit. All investors recognize the difficulty in measuringimpact from their mission statement and at the sametime acknowledge the value. “We see that it helpssocial entrepreneurs to bring focus to their work andidentify more clearly what their goals are.”The way social enterprises measure impactdepends, among other things, on the maturity of theorganization. Starting organizations may for examplefind enough comfort in qualitative indicators, whilethe more experienced entrepreneur will often lookfor quantitative impact measurement. There is noconsistency between investors with regard to whatthey ask and how they want to measure impact, butevery investor is looking for ways to improve theeffectiveness of the social enterprise by assessing theimpact.The question remains how to get started. To preventearly dissolution, start with something small, easyto measure, preferably already available in yourdaily business. An example would be to measurethe number of people you employ or the amountof positive feedback you receive. Every method hasits limitations and there is no perfect system, but itallows you to see the progress you make and it bringsfocus to your work. Taking the question ‘why’ youwant to measure your impact as a starting point willcontribute to your alignment of financial and socialobjectives.3.4 Avoid mission drift at all times!Mission drift occurs when an enterprise moves awayfrom its initial mission. This usually takes place aftera couple of years, for example with new employees,leaders, owners or when a new investor is interested.Investors see mission drift as an issue when the focusof the social enterprise shifts from a balanced viewtowards financial gain, at the expense of the socialmission. If mission drift occurs to the extent thatthe pursuit of financial gain no longer contributesto the pursuit of social gain, the mission may nolonger be in line with what was initially discussedwith the investor. Investors are therefore hesitantto commit themselves to long term investments.In theory, mission drift can also take place from astrong financial focus towards a more idealistic one.However, this rarely occurs with regard to youngsocial enterprises.Moving away from the initial mission is notnecessarily a negative development. It depends onthe expectations you and your investor(s) have. Ifyou move more to financial gain, for instance, it isimportant that you are on the same page as yourinvestors. Communicating expectations is the keymessage.Investors indicate that they find it increasinglyimportant to discuss mission drift at the start ofthe investment. This is because they see missiondrift occur around them. Aligning expectations andcreating safeguards on this topic is important toprevent confusion and tension in the future.Furthermore, starting the discussion with yourinvestor on this topic shows that you have thoughtabout how you can run your business in a sustainablemanner. If you come to the conclusion that you wantto prevent mission drift there are different steps youcan take. For example, you can include mitigatingactivities in the business plan, include legal entities orset up a supervisory board.Social Enterprises How to raise capital as a social entrepreneur?11
4. Making an impact asan investor and socialentrepreneur“The Dutch social enterprise sector is lagging behindfrontrunners like the US and
business increases your chances of finding the right investor for the purpose of the enterprise. Focus and a clear vision of the purpose of the social enterprise can result in optimal impact for both parties. 3.1 Trade-offs do not exist! Alignment between financial and social objectives is key
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