Funding Social Ventures – What does it take?

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[In continuation with our theme on Social Entrepreneurship, here is an interesting piece from Sanjay Anandaram. Sanjay dons his investor hat and shares some of the aspects of funding a social venture]

As more and more educated people become conscious of entrepreneurship as a powerful vehicle for effecting social impact, the issue, as in any other venture, of accessing funds becomes critical. In a regular for-profit business, funds are raised on the back of a strong team, the market opportunity, the sustainability of the business model and the potential returns. Should the same criteria be used in the case of a social venture?

So what exactly is a social venture? Isn’t every venture a social venture if it creates jobs, wealth and pays its taxes? Does a Corporate Social Responsibility (CSR) project also not qualify to be a social venture? Should a social venture make profits? Is social service different from social entrepreneurship?

In my view, a social venture is one that seeks to provide a permanent social benefit by using entrepreneurial energy. This implies that there’s a sustainable financial and business model in place but where providing social benefit is the primary goal and profits are only the means.

Social ventures therefore are structured in many ways depending on the regulatory situation. Ventures can be structured as for-profit entities with a dominant charter of social benefit; they can be set up as not-for-profit companies or as trusts. There are different investors who seek to invest in different sectors, geographies, types and stages of companies.
For example, some will only invest in ventures that promote women empowerment, some only in micro-financing institutions while others will only invest in say, Africa. Other criteria will include the minimum amount to be invested by them, the structuring of the investment (eg, equity, debt or grant), the time period within which they seek returns and the size and type of returns expected – multiples or IRR, dividends, capital gains and so on.

One must first be clear about the social benefit of the venture, the goals and time-lines before approaching an investor. It is important to also understand the investor landscape and approach only those investors who invest in ventures such as yours.

The good news is that today there are very many investors across stages, sectors and types who are interested in the social sector.
The bad news is that the interface between the social ventures and the investors needs lubrication.
The social sector has traditionally been founded and run by extremely passionate and committed individuals. They are not motivated by profits but are in many cases yet to realise that creating a person-independent enterprise is crucial for scalability and sustainability. Their focus on the operational aspects of company building namely, people capacity and capability building, financial discipline, operational excellence needs to be enhanced.
Fortunately, there are not-for-profit organizations such as The Institute for Leadership and Institutional Development (ILID) that aim to address these aspects.

Some examples of the very many types of social sector investors include:

  • Corporate set ups such as Google.org and ICICI Bank’s IFMR Trust
  • Individual, private or family offices such as the Omidyar Network, Skoll Foundation, Sir Dorabji Tata Trust, Rockefeller, Nadathur, Ford, Legatum, Aditya Birla group
  • Banks such as Exim
  • International lending and investment agencies such as IFC and FMO
  • Social venture funds like Aavishkar, Acumen, Calvert

In addition, depending on the venture there are investment banks who can be used as intermediaries and advisors in the fund-raising process.

India has the world’s largest number of NGOs and quite easily the largest number of social problems to be solved. The coming together of the social benefit minded with like-minded but disciplined and rigorous investors is crucial for social impact to be real, sustainable and visible on a national scale. The wheels are in motion. Lets all give it more momentum.

What do you think?

[The article first appeared in Managementnext. Reproduced with author’s permission.]

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