Diary of a Social Venture Start-up: Finding Funding
Like many entrepreneurs, I spend a lot of my time looking for money. I'm not talking about digging under couch cushions (unless of course you have...
Like many entrepreneurs, I spend a lot of my time looking for money. I'm not talking about digging under couch cushions (unless of course you have a really, really big couch); I'm talking about serious cash. And, if you're starting a business, you can expect to spend a lot of your time looking for it, too. Last time around, we talked about one way to obtain funding: social venture capital. But most social VCs are geared toward organizations that have already in some way proven themselves. If you're just starting out, where do you find the money to get you up and running?First off, you'll need to decide if you're going to finance via debt, equity, or some combination thereof. The difference is simple. Debt financing is just what it sounds like; you're going to owe people money. You've agreed to pay back the funds over a given period of time at a specified interest rate. It's a loan. Equity financing involves, effectively, selling ownership of the company. In exchange for some amount of money, you're willing to grant an investor a particular percentage of the entity.Which strategy you choose will have a lot to do with how you structure your company. If you're a nonprofit, you're not going to be able to offer shares or ownership. Likewise, setting up your company as a for-profit closes off certain avenues for raising money. But no matter your corporate structure, there's money to be found-you just need to know where to look. A lot of it boils down to what's known as the four Fs:Founders: I've talked a bit about this previously: skin in the game. If you're not invested in your idea, nobody else will be. If you are, more people will be willing to play ball with you.Friends: They're a good source of capital-if you're okay with the risk. Your friends will want to support you, they'll want to hear your ideas and, usually, they're some of the easiest people to convince. But beware: a deal gone bad can mean a friendship gone bad.Family: See "Friends" and increase the risk involved exponentially. If you let down an investor, you deal with it. If you let down family, it will follow you around forever. Personally, I refuse to take investments or borrow money from family; I'm completely uncomfortable with the idea. But if your daddy happens to be an oil baron or the Duke of Somewhere or Other, and you're okay with it, go right ahead.Fools: This covers anyone else you might be able to convince to invest in a business that doesn't technically exist yet. Often, entrepreneurs look to angel investors. Some angels might be successful entrepreneurs looking to help others succeed, others might be retired professionals-it's a diverse pool that's certainly worth exploring. If you live near a major city, a simple Google search should turn up any number of local angel investor groups.Also, as a social entrepreneur, there's a good chance your organization might qualify as a nonprofit, which opens up additional options (which, coincidentally, also start with F):Foundations & The Fed: Basically, this means grants. There are many types of grants available to nonprofits from both private institutions and the government. If you can, look for unrestricted grants, which, as the name implies, come with no strings attached ("We like your idea. Here, have some money"). Be advised, however, that many grants are not this simple. Some come with performance triggers, meaning you get funds only upon hitting predefined goals. Others are "recoverable," meaning if your organization becomes successful, you're expected to repay the investment.As in other areas of social entrepreneurship, there have been recent innovations in dealing with funding. The Unreasonable Institute, for instance, invites aspiring social entrepreneurs to apply to their 10-week summer institute, during which they develop their model, receive advice from industry leaders, and complete their business plans. In an innovative twist, it is the entrepreneurs themselves who determine who gets funding. It will be up to participants to decide how a $150,000 fund gets invested. Think of it as a boot camp for social change. If you're interested, applications are due December 15.The Takeaway: While raising seed capital isn't easy, it is doable. From taking loans and granting equity to exploring grants and angel investors, a number of options exist to help get your business off the ground. The money is out there-finding it is the hard part (and forget about the couch cushions. I've already looked).