The struggle to finance social enterprises

Social entrepreneurs often face fundamental difficulties in raising finance to bring their ventures to life. Should they be a charity and seek donations or a business and look for commercial funding? The problem they are facing is that donors prefer to give money to charities, not profit-making businesses. At the same time, commercial funders often don’t offer financing terms that social enterprises can meet.

Social enterprises, driven by a social mission, often don’t have a stable, long term source of finance and commercial investors neither understand nor trust them. They often believe that ‘social’ equals ‘soft’ and is nothing but a polite word for ‘loss-making’. This results in a situation in which social entrepreneurs find themselves falling between charitable and commercial funding, not appealing to either. The current financial system simply doesn’t seem to be designed to meet the needs of such hybrid organisations that are businesses serving a social mission.

In response to this dilemma, social entrepreneurs learned to help themselves and invented their own solutions. One example is Faisel Rahman, the Co-Founder and CEO of Fair Finance, a social enterprise offering affordable personal loans and debt advice to individuals who would otherwise be wholly excluded from the mainstream banking system. The problem Fair Finance was facing was that the organisation wasn’t set up to raise equity and couldn’t offer the kind of financial returns most venture capitalists would be looking for. With the support of organisations such as Ashoka, Fair Finance was eventually able to find socially-minded investors to invest in their business model, raising over £1m.

Financial instruments like Fair Finance are just the start. New funders and institutions are increasingly addressing this emerging market for socially mission driven businesses. Many come from a philanthropic background, others include businesses such as CAF Venturesome and SharedImpact. In addition, new forms of fundraising, such as crowdsourcing, where social enterprises can aggregate donations and micro-investments from large numbers of supporters via online platforms (such as Kickstarter and Buzzbnk), are almost springing up on a daily basis.

However, this is just the start – more is needed. Corporate organisations with deep pools of financial and business expertise can play an invaluable role, utilising their skills to help social entrepreneurs develop new sustainable business models and find the funding to support them. Some of the most forward thinking organisations so far include Deloitte which has launched Social Innovation Pioneers, under which its consultants provide pro bono strategic advice to 50 social ventures. Another example is Accenture which runs Accenture Development Partners, which works with socially engaged organisations to come up with sustainable business solutions.

With more and more organistions following the trend, it will be extremely interesting to see how this sector will develop from here!

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Filed under Investment, Social Entrepreneurship

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