Start-up Capital for For-Profit Social Entrepreneurs - Where the heck is it? Part 1.

Last week, Echoing Green President Cheryl Dorsey was named one of US News and World Report's "America's Best Leaders" for her important work breathing life into both nonprofit and for-profit, start-up social entrepreneurs.

Since 1987, Echoing Green has awarded more than $27 million in start-up capital to over 450 social entrepreneurs worldwide. Ashoka, which put social entrepreneurship on the map in 1981, has invested in over 2,000 social entrepreneurs; and since 1992, Investor's Circle, an angel network of social investors, has facilitated the flow of over $133 million into more than 200 social mission companies.

While impressive, the cumulative amount invested in start-up social entrepreneurs pales in comparison to the $1.6 billion that went into US seed and early stage investments in just the third quarter of this year in this slouched economy. Put another way, about 10 times more money was invested in regular start-ups in just this third quarter than in the 28 years that Ashoka has been funding social entrepreneurs.

With all the recent attention given to social entrepreneurs, when will we actually begin to see an acceptable level of investment directed towards these leaders of social change?

It's old news now, but effecting social change and turning a profit are NOT mutually exclusive. In fact, in many ways, the for-profit structure is better suited to making sure that social impact is achieved most effectively. The pressure to earn a return for your investors results in tough and often good business decisions. Yet, frustratingly, traditional notions of for-profit and not-for-profit are deeply rooted and all too often reflect an unwillingness of key players to embrace new perspectives. A clear example of this was the decision made earlier this year by President Obama's newly established Office of Social Innovation to exclude for-profit social mission companies from federal funding through this Office. It's unclear how the Office can aim to support "social innovation" while estranging some of the most innovative ideas simply because they lack the increasingly antiquated 501c3 non-profit status. The exclusion of for-profits is even more perplexing when you consider that advisors to the Office during its formation included well-known champions of for-profit social enterprise such as Echoing Green's Cheryl Dorsey, Howard Buffett, and Ethos Water co-founder Jonathan Greenblatt (Ethos Water was sold to Starbucks in 2005 for $8 million).

By NOT supporting for-profit social entrepreneurs, the Office of Social Innovation missed an important opportunity to guide funding and support towards the best social enterprises that are measured not by their poorly-defined legal status but rather by the by the impact they make. Prior to the White House Office of Social Innovation's decision that it wasn't ready to fund for-profit social ventures, Harvard Business School professor Clayton M. Christensen and Vanessa Kirsch and Kim Syman of New Profit Inc. forcefully articulated to Huffington Post readers why "breaking down the antiquated assumption that all social innovation is the province of the non-profit sector" is critical. It's painful that the White House Office of Social Innovation passed up the chance to bet on a winning strategy - our socially innovative entrepreneurs - when the government is struggling to rectify our broken economy and failing social systems, namely education and healthcare.

But don't fret, social entrepreneurs are showing us that very little can keep them down. As they work on bettering our world, we need to figure out how to empower these hidden heroes. How does a for-profit social entrepreneur find the start-up capital to turn a potential world-changing idea into reality? And if they still can't find funding, what are some good bootstrapping tips to get through the start-up phase?

For those wondering why social entrepreneurs should be given special treatment over any other entrepreneurs, consider one key point: a social entrepreneur strives to create a positive externality that cannot be quantified in simple dollars and cents. While a traditional entrepreneur looks to create wealth and may or may not change the world in doing so, a social entrepreneur purposefully uses her business as a vehicle for effecting social change. In light of our current economic situation, spiraling fiscal deficits, and overstretched social safety net, there is no better time for social entrepreneurs (and potential social entrepreneurs) to be encouraged and cultivated. Moreover, at a time when the government is struggling to support traditional businesses and industries that have failed, shouldn't we be looking to support innovative and non-traditional ventures?

Let's not allow another missed opportunity. Invest in start-up, for-profit social entrepreneurs! Social entrepreneurs need like-minded social investors that evaluate a company's social mission alongside their prospects for revenue generation. Without more social investors, we are hampering the growth of social ventures that could be the answer to many of our public problems at a time when the government is struggling to provide its own solutions. We need more funds like Echoing Green, Ashoka and Investor's Circle to take notice of a growing and vibrant social enterprise movement. Money needs to be invested in start-up social enterprise not just for the aspiring social entrepreneurs of today, but so that the next generation of social entrepreneurs can thrive. We certainly should not make it easy to get funded simply because someone has an idea to make the world a better place, but it certainly shouldn't be more difficult for a for-profit social mission business to get funded than a traditional one.

In my next post, I will share some resources for start-up social entrepreneurs (both nonprofit and for-profit). Please help me compile this list by emailing me at rachael [at] Catchafire [dot] org or by commenting below.

Follow Rachael Chong on Twitter: www.twitter.com/catchafire

Comments

[jeff.mowatt]

Same here in the UK, regrettably. Our social enterprise investment fund (SEIF) for healthcare turns out to be limited to nonprofit orgs.

Now let me show you the call for a social enterprise investment fund that was channelled to US gov in October 2006. It's the product of an American author and his UK registered "for profit" social enterprise. It starts by defining the broadest known spectrum of social enterprise to be included and goes on to identify clear social objectives with the proposal that it should be done "under oversight of an independent board of directors, particularly including representatives from grassroots level Ukraine citizens action groups, networks, and human rights leaders."

http://en.for-ua.com/analytics/2007/08/09/110003.html

This is what they got instead, a new foundation. Americans should perhaps be asking why.

http://www.eef.org.ua/en/148.htm

The model we apply as a business investing surplus, financial and intellectual capital, in social objectives derives from a white paper delivered to the steering committee to re-elect the President in 1996, offering an alternate economic paradigm to co-exist with orthodox capitalism.

We generate our core funding by supplying UK government and corporations which has allowed us to leverage some of these social outcomes. For example in advocacy for reforms in childcare and adoption.

http://people-centered.net/About.aspx

[daweinst]

I think one key point is for the social entrepreneur to really think through and clearly communicate why they are taking the for profit route vs the nonprofit. It's dangerous to be in a no man's land where your company doesn't have the financial return to attract traditional VCs, and is seen as not being as socially beneficial as it could be if it was forgoing profits. A nonprofit entrepreneur is clearly in it for the social benefit. The for profit entrepreneur has the additional burden of convincing people that being for profit is key to the viability of the idea and will better insure its success.

Another major issue is getting more institutional investors who fund these social VCs to see the value of social returns in addition to financial returns. My sense is that socially focused startups generally have less financial returns than traditional startups. A big challenge is to find institutional investors who care about social return in addition to financial. I think that's where the shortage is. The government is the ideal candidate, so I see how Obama's policy is so disappointing. It's really the people who benefit from the externalities created by the startup who have the most to gain from investing. So perhaps the traditional VC model isn't ideal, and other funding options like peer to peer make sense.

Good post! Entrepreneurship is tough, and social nonprofit entrepreneurship sounds even tougher. Good luck!

[plumrelk]

Hi Rach,

This is a really good post and brings up lots of interesting points.

I especially like the point you raised about the For-Profit structure being often more effective with pressure to earn returns for investors.

I don't think that for-profit social entreprenuers should be viewed in a lesser light than non-for-profit social entreprenuers. At the end of the day, what matters is the level of social change that the entreprenuer can enable regardless of if they are for-profit or not-for-profit.

Some analysis should be done on the effectiveness and success of for-profit social entreprenuers vs. non-for profit. I am quite certain that research would show that for-profit social entreprenuers are more successful than non-for-profits.

[huffmichael23]

I think SE don't get start-up capital because the returns aren't consider high enough for the majority of the capital pools that are out there. That's the bottom line, right? (You could argue that some investors could value Profit + Social Good with comparable weights, but then you're still talking about attracting capital from that pool, and that pool of money may simply may not be large)...

Disappointing that Obama's office won't give money to For-Profits....but similarly, if you really wanted their money, you could always change your business model to recycle profits into some other non-profit function (i.e., create a 501c3 shell, assign rights IP to them, etc)...

My own opinion about for-profit SE (from looking at a number of prospectus/ideas for social entrepreneurship): most of them are simply for-profit enterprises that give money away to a non-profit, or uses locally sourced food, or something -- but they're not literally performing some sort of social enterprise function, like Micro-Finance, or like CatchAFire does. Personally, I think CAF is pretty unique, and moreover, stands a better chance of making serious profit than Micro-Finance, which has had a spotty track-record of making significant profit.

[Yes, micro-finance is a more efficient means of delivering capital to individuals, compared to traditional non-profit mechanisms -- but that doesn't make it a successful For-Profit SE, just a more effective model for delivering non-profit services]

My two cents on it.

[tompoe]

Any business plan should include SRI component, at the same level as marketing component. When investors do due diligence, they should expect to see SRI allocation of their investment. The initial funds would explicitly state that some percentage of funds received would go towards 501(c)(3) formation of SRI division. Projections would include some percentage of revenues dedicated to furthering SRI division, thus providing infusion of capital on continuing basis. It's just that easy. Catchafire.org is able to publish their business plan, one that demonstrates that sales in their online shop will be divided between for-profit and not-for-profit entities. Right?

[JC24]

Unfortunately for-profit investors (from large institutions to small VC firms) are beholden to their funding sources, which at the end of the day are predominately individuals looking to maximize their return. Until a commercial business is able to prove that the general public is willing pay a premium for socially responsible goods on a large scale (think Ethos as a fortune 500 company rather than an afterthought in the bottled water market) then I don’t think it is realistic to think that SRI investments will receive the portion of investment capital this author is calling for. The concept is well received (and why wouldn’t it!) but the appetite to actually fund this type of venture, particularly in troublesome economic times, remains small. The same financial incentives that are being enacted to support Green initiatives, etc should be applied across the entire for-profit social enterprise spectrum because after all the environment is just one of many areas of concern.

[AshokP]

As the socially responsible investing (SRI) movement gains traction with big money managers, I think a natural result is that we'll see more attention and funding trickle down to for-profit social venture funds. One of the most important ways to advance this is to get large institutional investors such a pension funds and insurance companies to formally allocate some of their portfolios toward SRI investments. I would be curious to know which groups, if any, are lobbying to advance this cause. As individuals, we can start by asking our 401k provider to give us an SRI option and by asking our insurance company (if it's a mutual company, we own part of it) to invest part of their funds in socially responsible investments.

[JC24]

To make up for the shortcomings of Obama's Office for Social Innovation, I think the administration should consider reducing or eliminating the capital gains tax for investors in for-profit social enterprises. This would make these ventures significantly more appealing from a risk/return perspective and perhaps funding in the space would begin to satisfy the demand.