Funding is a crucial part of setting up your social business. There is a wide variety of alternatives available when it comes to funding your project, from government support, to angel investment and of course personal financing using your own savings or surplus equity on your home.

You have to streamline your financing with your overall business goals, the type of social business you are creating and your personal preferences regarding the level of debt, risk and financial responsibility of your business.

The team of Startupnation (www.startupnation.com) have written much high quality information about starting up your venture. This article will discuss and integrate their article on funding your start-up with the specific needs of starting up a social business and additional important information to take into account when finding funding for your project.

We will walk you through the following options you have to fund your start-up:

1. Bootstrapping
2. Government and Private Institutional Grants
3. Personal Network
4. Debt Financing

Bootstrapping

Bootstrapping or bootstrap finance refers to the tendency of resource-constrained entrepreneurs ‘To finance a company’s startup and growth with the assistance of or input from others’, using creative techniques to launch and operate a business with limited (financial) resources {{150 Bhidé, A. 1992; 151 Arora, P. 2002}}. Bootstrapping is at it’s core a creative process {{150 Bhidé, A. 1992}}, which can be seen as an emergent, problem-solving process, that fits the need for being able to adapt to an unpredictable reality in which entrepreneurs build their businesses {{148 Lahm Jr, R.J. 2005}}.  In this respect it has a great deal of overlap with effectuation, in the sense that both approaches begin with a constrained set of resources, and work from this stance-point to maximize their impact {{148 Lahm Jr, R.J. 2005; 155 Vanacker, T. 2009; 150 Bhidé, A. 1992}}.

Benefits

1. Allows you to minimize the risk in terms of resource investments
2. Flexible, easy to exit
3. No track-record or proven sales required (no credit check)
4. If you’re project turns out a hockey-stick results (a full-blown success) you will receive the far majority of the results as you do not share your equity, nor take any business loans

Downsides

1. Your business will be strapped for cash
2. Growth during the bootstrapping phase will be hindered by the resource constraints. You may not be able to reach the level of professionalism that you envisioned for yourself.
3. Does not build a network of finance contacts or a track record of being a good financee. Later financing may still be difficult.
4. Down side risks are for the most part carried on your personal responsibility and reputation. If things do not turn out as planned this can potentially create a significant financial burden on your future financial situation.
5. Depending on the source of your financing you may face high opportunity costs (e.g. for constraining your savings) or high interest rates (e.g. when financing your business with creditcard debt, or money from consumer credit loans)

Grants

Grants are financial incentives aimed at supporting the entrepreneurial undertakings of social entrepreneurs. Most programs are specifically designed for a certain group of projects or entrepreneurs, determined for instance by geographical scope (e.g. only projects that focus on third-world countries), general aim (e.g. poverty reduction, education, water management), or founding team composition (e.g. minority entrepreneurs or people from a certain school or city). Social business enjoys a special status when it comes to receiving funding and grants, as its main focus lies outside of the profit-maximizing paradigm and a drive for making a change is a valid motivation for receiving funding. Grants can come from several sources, the two most important ones being private funds and the government. In the latter case the government itself is the best source of information on your different options and applicability to current programs.

Benefits

1. Non-equity financing, normally a gift or at minimum a loan at sub-market interest rates. You generally can’t beat the conditions of such financing.
2. Being part of certain prestigious and well-established programs provide the added benefits of free publicity and validation of your project’s quality and seriousness

Downsides

1. Funds or programs sometimes provide a small mountain of paperwork and bureaucratic regulations that your business must comply with. Fulfilling these requirements can at times be a lengthy and energy-consuming task.
2. Bureaucracy can impede your time to market by providing a serious lead time before receiving your money. As unfortunate as it is true, large (government) organizations are rarely characterized by their rapid action. It is therefore important to understand the length of the pipeline when applying for grants, and allowing yourself to count on various sources of income to maintain your liquidity by guaranteeing sufficient cashflow and operational flexibility during start-up
3. Requirements may limit your number of strategic options in the future.
4. As ‘Free money’ is always sought after you face a lot of competition, as the applications for grants tend to greatly outnumber the amount of capital that is up for grabs.

Personal Network

One way to get your funding is using your personal network by asking friends, family and personal contacts you have made over the years, to invest their own money into your project. This can be in the form of a loan with specified duration and interest rates, or in return for equity in your social business. As social business is generally bound to the zero-dividend approach to investor repayment, this may require some additional thinking on how to repay your investors in other meaningful ways. Be aware of the social capital that you invest alongside this hard cash, and be prepared for the consequences of dealing with potential negative scenarios. If you value your relationships it is key for you to be open and transparent about the benefits and risks of your social business project, in order for your contacts to know what they are getting into and prevent them from being negatively surprised afterwards and taking it out on you personally. An important tool in this process is open communication throughout the process. Set-up a newsletter or personal blog for your investors and keep them posted of your progress.

Benefits

1. As you have social capital and trust with your personal network this type of financing can be governed with fewer official contractual agreements. You should however still draw up a contract to officially enlist your contacts´ financing and protect their investments;
2. Your network knows you, so your personal reputation will be your track-record for the investment. This means that you will not be required to formally proof yourself and your applicability as you would with some other investors;

Downsides

1. Using your personal contacts’ money requires you to think three times on how you spend it. You have a responsibility to them beyond your professional investor-investee relationship and you must act in accordance with the trust they put in you;
2. Trust comes afoot, but goes on horse-back. It has most likely taken you years of trustworthy interaction to build such strong relationships of trust with your network, if your business does not turn the (social) profit and sustainability you set-out for this trust will very likely suffer a dent, if not disappear altogether;
3. Your loved ones and social ties are generally a one-time source of funding, so don´t expect to go back to them for (m)any capital investment rounds other than the initial one you include them in.

Debt Financing

Debt financing requires you and your project to meet the requirements for getting a traditional bank loan. Applying for such financing is a skill in its own right, and you will need some help and/or experience to maximize your potential for success on getting such financing. It can be tricky to explain your plans to a bank, as experience shows that there is an inherent difference in what is needed. The bank’s quest for minimizing the risk of insolvency, leads your counterparts at the bank to ask for many and consistently appearing forecasts and explanations of your goals, growth potential, business model, additional revenue streams, etc. As an entrepreneur you are however more focused on getting things done according to your vision and overall aim, developing and adapting your plans and business as the volatile reality of the trial context  demands it. Successful entrepreneurs acknowledge the importance of an adaptive approach to managing your start-up. Market-research and forecasts are important and a good way to get a feel for some of the factors that play a role, but the only sure thing about forecasts is that they are always wrong, so your personal ability to create the conditions and results that drive your success should be a key-factor when discussing your plans. If you manage to get your business financed, the leverage a bank loan provides can be the leverage you need to turn good into great and reach the success you envision.

Benefits

1. You do not loose any equity or decision-making power
2. If you succeed your relation with your banker can develop to be a fruitful one, allowing you to have easier access to additional future funding if you would need it.

Downsides

1. Following the risk-avoidance approach, banks typically fund businesses with an existing track record of completed sales, credit history, and other solid results to show that your business has what it takes to be profitable and sustainable;
2. Your loan encompasses interest, and you will need to keep up with your payments or you will suffer some unpleasant consequences.
3. Bank loans can demand collateral, such as your house, further increasing the personal risks you incur.

Conclusion

Besides the sources of funding discussed here there are a number of other ways to get your project from the drawing board to reality, such as Angel investors (high net-worth individuals investing personal money and experience) and Venture Capitalists (firms dedicated to investing in (usually established and high growth-potential) start-ups, offering financing and expertise in exchange for equity, control and an exit strategy in the foreseeable future). To learn some more about these forms and also to get more back-ground information on the funding possibilities discussed here, have a look at the website of startupnation.com[2] or the specific article on funding your start-up[3].

With this information we hope to have given you some better understanding and insights about the ways that are available to you when funding your project. Whatever route you choose, we at SENStation will be here to support you with the network, knowledge and inspiration you need to get to the next level. Let us know how your project develops by posting your progress on the site.

All the best and looking forward to seeing you soon at SENStation.org

On Behalf of the SENStation founding team,

Jort Duijnker

SENStation: ´Connect, Create, Inspire’

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