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For Social Entrepreneurs:
a social entrepreneur's task of raising financing poses unique challenges.
For one thing, social ventures are often structured as nonprofits, which means they can't offer an ownership stake in exchange for capital, like a traditional business might. After all, "a nonprofit doesn't have equity," says Rick Aubry, a social entrepreneurship professor at Stanford University's Graduate School of Business. However, some social enterprises are mimicking equity-like structures to work around the ownership issue, he says.
But even for-profit social businesses have trouble, too. For starters, such companies typically don't have the potential for market-rate returns, as they often cater to impoverished communities within developing nations. Not to mention, many social ventures have long incubation periods—meaning that years can go by before they will become profitable, let alone sustainable.
Despite these challenges, there are a number of like-minded investors willing to consider the social as well as the financial impact of a business. And, in exchange for that support, some investors may accept little or no compensation. Here's a look at some of your funding options.
Social Investment Funds
Social investment funds, like the Nonprofit Finance Fund, pool together various sources of funding, such as donations from wealthy individuals, foundations, financial institutions and corporations. These funds differ from regular investment funds as they generally anticipate lower than market-rate returns. Their larger motive tends to be advancing social causes instead.
Additionally, some investment funds are aimed at specific disadvantaged regions or populations. For example, the Acumen Fund, a nonprofit global venture fund based in New York, trains its funding eyes on locations in India, Pakistan and East Africa. Yasmina Zaidman, a spokeswoman at Acumen, says that the fund's social investors are less interested in reaping financial rewards. Instead, she says, "they are looking to invest in philanthropic ventures; the return they're looking for is the social impact."
Foundations
A number of foundations including Ashoka and Skoll Foundation provide seed-stage and growth-stage grants (that don't need to be paid back) to social ventures. The Draper Richards Foundation for Social Entrepreneurship, for example, provides early-stage grants of $300,000 over three years to social entrepreneurs.
Grants can be tough for for-profit social enterprises to secure. However, foundations also can give loans though "program-related investing" or PRI. These type of investments are legally considered charitable although the foundation doesn't have to accept below-market rates. A for-profit social enterprise can ask for a loan at little or no interest. "The expectation is that [the money] will be paid back at much more beneficial terms for the recipient" than regular lenders might require, says Aubry, the Stanford professor.
Banks and Corporations
Some community banks may loan you the money to get your social venture started. These banks typically earmark federally-backed funds to lend to ventures with community development or social missions. An example of a bank that offers such loans is ShoreBank based in Chicago.
Do-gooder corporations often have similar community development missions. For example, Deloitte & Touche and Pfizer both offer support to the Nonprofit Finance Fund. Typically, corporations block off a portion of their budgets to donate funds (or products or services) to socially responsible endeavors. Meanwhile, a number of corporations including Citigroup and Google have set up foundations, which also offer grant money or other aid to social ventures.
Angels and Venture Capitalists
For-profit social enterprises can seek out cash infusions from angel investors or venture capitalists that have a social bent. These investors typically want market-rate returns in exchange for their financial support. They're partial to entrepreneurs with plans to do good in the world — and usually, they're willing to wait a little longer (than traditional angels or VCs) to reap returns. For example, The Investors' Circle, a network of angel investors and VCs, says it invests "patient" capital in companies that address social and environmental issues.
Of course, any entrepreneur who works with an angel or a VC gets more than money. Angels and VCs work closely with entrepreneurs to shape the company, sometimes taking board seats or management positions. A social angel or VC isn't any different, but will work within your mission to eke out market-rate returns, says David Berge, founder and managing member of Underdog Ventures, a social venture capital firm in Island Pond, Vt. "A social VC is going to be predisposed to like what you're doing," he adds.
source: smSmallBiz.com
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Choosing which venture capital firm to send your plan
Question:
I'm getting to the end of my business plan and I think it should be a winnner. I know you include a venture capital database in your software. How do I use that to select which venture capital firm I should submit my plan to?
Answer:
The business of venture capital is frequently misunderstood. Many start-up companies resent venture capital companies for failing to invest in new ventures or risky ventures. People talk about venture capitalists as sharks - because of their supposedly predatory business practices - or sheep - because they supposedly think like a flock, all wanting the same kinds of deals. This is not the case. The venture capital business is a business, and the people we call venture capitalists are business people who are charged with investing other people’s money. They have a professional responsibility to reduce risk as much as possible. They should not take more risk than is absolutely necessary to produce the risk/return ratios that the sources of their capital ask of them.
Venture capital shouldn’t be thought of as a source of funding for any but a very few exceptional start-up businesses. Venture capital can’t afford to invest in start-ups unless there is a rare combination of product opportunity, market opportunity, and proven management. A venture capital investment has to have a reasonable chance of producing a tenfold increase in business value within three years. It needs to focus on newer products and markets that can reasonably project increasing sales by huge multiples over a short period of time. It needs to work with proven managers who have dealt with successful start-ups in the past.
If you have to ask whether your new company is a possible venture capital opportunity, it probably isn't. People in new growth industries, such as multimedia communications, biotechnology, or the far reaches of high technology products, generally know about venture capital and venture capital opportunities.
Business Plan Pro has a list of venture capitalists included with every CD. It is updated yearly. Its biggest fault is it may be giving you too much, which makes it harder to find the right one. You really need to know which venture capital firm is interested in what kinds of deals, in what industry, for what deal size, and at what stage of the company. Don't send a plan to a company that isn't interested in your type of plan.
The best place to look for lists and more information about venture capital is here on the Web. I recommend the Yahoo! listing as an excellent starting point for a venture capital search. That page will lead you to a lot of others. I'm hoping that the Western Association of Venture Capitalists (WAVC) puts up a website soon, but in the meantime, the organization is listed in Menlo Park, CA. There is a website for the National Venture Capital Association, at www.nvca.org. Pratts Guide to Venture Capital Sources is an annual directory available for $225 (the last time I looked; prices may change) plus shipping. There is also a CD-ROM version, which is more expensive. You can get more information at Securities Data Publishing, 40 W. 57th St., New York, NY (212) 765-5311. Other useful links on the Web include venture capital sources, an alternative listing of venture capital companies, plus some other good resources, Price Waterhouse's venture capital listing, and of course many others. If you start with Yahoo! you'll have more leads than you can handle.
FoundRead has a post called 9 VCs You’re Gonna Want to Avoid (but there are actually 12). It particularly applies to startups who already have revenues, who are now being courted by VCs. It’s an open question, but I’d just like to ask the general UK startup community out there: What do you think would be the UK/European equivalent? Here are some suggestions (inspired by that post) to get you going:
1 ) Mr. Armchair (Lots of opinions about Google)
2 ) Mr. One-Hit-Wonder. (Sold a dotcom in the late 90s. That’s it.)
3 ) Mr. Revisionist Historian (Invested in eBay after it went public)
4 ) Mr Arsehole (Nice one minute, nasty the next. Divorce is a hobby. Fun to get pissed with though).
5 ) Mr. Blue Blood (5th-generation money, smart, but always knows better than you).
6 ) Mr. Mr Aggressive (Wants you to float next week).
7 ) Mr. Product Manager (Micro managing your business - and you - so you don’t have to)
8 ) Mr. Regurgitator (Brings up every case study, just not the one right for your business)
9 ) Mr. Imitator (Read an urban myth about a VC who got 20% of a company)
10 ) Mr. Retired-on-the-Job (Well off, but no longer mentally firing on all cylinders)
Oh, and here’s a bonus:
11) Mr Tranche (Happy to back you this year, but next year… well, let’s see how the first year goes)
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