By Phoebe Harpham, Social Enterprise Scheme, OHO
Are you a budding social entrepreneur with a great idea to change the world? A charity seeking to be more financially sustainable? Or a business wanting to extend itself beyond a goal of pure economic profit and support a project that benefits society? Well that’s all well and good – but how are you going to finance your great idea?
Securing finance is the biggest challenge facing social entrepreneurs in Australia. The costs involved in starting up, establishing and growing a social enterprise are many, and the traditional sources of securing finances are limited. Compared to a traditional start-up business whose primary goal is economic profit, a social enterprise is viewed by many investors and banks as a high risk venture with limited potential for financial return.
Why would investors consider investing in a social enterprise?
The opportunity of financial returns along with making a positive social and environmental impact is appealing to a new wave of investors – impact investors. Likewise, philanthropists may view investment in social enterprise as a way to get more bang for their buck. Instead of donating money to a charity, a philanthropist may choose to invest in a social enterprise which will provide them with a financial return. Philanthropists can then use this return to reinvest in other social enterprises or charitable causes.
How can you attract investors?
It is important that your organisation is ‘investment ready’ before courting investors. To do this you need to ensure you have the right human capital in place, the right processes and a robust business plan. Investors will also want to know how their money is to be spent, when they are likely to have it returned and what benefit (apart from financial) they will accrue by providing the finance. The old adage “by failing to prepare, you are preparing to fail” has never been so pertinent.
What types of funding are available?
Unlike traditional businesses who can rely on loans from the bank or charities who can apply for a grant from the government, social entrepreneurs need to think outside the box when it comes to securing finance. Here are a few options that you may consider when seeking finance for your social enterprise:
Angel Investors – are affluent individuals who are willing to forgo high risks for the opportunity to invest in an idea they believe has potential. They usually provide seed-funding to help with start-up costs in exchange for equity. Many Angel Investors are retired entrepreneurs or executives and can provide you with the benefit of their business experience and networks as well as their financial support.
Crowdfunding – leverages the power of the ‘crowd’ to raise capital. Crowdfunding is reliant on a large number of people each making a small donation or investment to support a cause/organisation that they believe in. Websites such as, Bzzbnk and Kiva are designed specifically to help social entrepreneurs connect with individuals. Some crowdfunding websites offer individuals the option of making a loan (rather than a donation) and provide updates on the loan status until it is repaid. In this way, crowdsourcing could potentially create a new niche of investors – micro impact investors. A successful crowdfunding campaign may provide enough seed funding to kick-start a social enterprise and build its public profile.
Social Impact Bonds – are outcome based financial contracts used to fund and deliver social enterprise projects. They are negotiated between private investors – who fund the start-up and operational costs of the project, a social enterprise – who delivers the project, and the public sector – who reimburses and rewards the private investors with additional financial returns if the project delivers on its objectives. Social Impact Bonds were first trialled in the UK in 2010 and in Australia in 2011 to innovate and improve efficiency in the juvenile justice and foster care sectors.
Venture Capitalists – are similar to Angel Investors in that they provide seed funding for the start-up costs of a social enterprise. They differ from Angel Investors, however, as they are professional investment managers acting on behalf of a pool of investors, rather than just investing on behalf of themselves. Venture Capitalists may seek out social enterprises to add to the investment portfolios of their clients.
Community Finance Loans – are specifically designed for people and organisations that cannot access finance from mainstream financial institutions or banks. Of particular interest is the Social Enterprise Development and Investment Fund (SEDIF) – an Australian Government initiative developed specifically for social enterprises. SEDIF has a total investment pool of over $40 million and is managed by three external fund managers – Foresters Community Finance, Social Enterprise Finance Australia, and Social Ventures Australia. These fund managers have been tasked with the responsibility of administering loans and financial advice to eligible social enterprises for the purposes of starting-up, growing and expanding their businesses.
Although still in its infancy, impact investing in Australia is starting to take root. Australian Government initiatives such as the implementation of Social Impact Bonds and Community Finance Loans such as SEDIF are helping to forge new markets and unlock capital from private investors. We still have a long way to go before we catch up with the likes of the US and UK, however, social entrepreneurs can be encouraged that we appear to be at least moving in the right direction.
For further information on how you can secure finance for your social enterprise, contact our Collaborative Partnerships Manager or to find out how your business can help support a social enterprise project contact our Social Enterprise Manager.