May 20th, 2013 | 
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By DIANA RANSOM
From smSmallBusiness.com
MANY SOCIAL VENTURES—even the ones that eventually become self-sustaining—may never yield enough of a financial return to attract traditional backers or investors. As a result, a social entrepreneur’s task of raising financing poses unique challenges.
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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.
That’s what Scojo Foundation intends to do. Since 2001, the New York nonprofit has sought to reduce poverty through the sale of affordable reading glasses in poor communities. Today, Scojo is changing its name to VisionSpring and — much like a company going public might do — releasing a prospectus to attract philanthropic investors.
According to the prospectus, VisionSpring wants to raise $5 million by the end of the year to deliver almost 650,000 pairs of glasses to people in Asia, Latin America and Africa. The company also plans to train more than 5,000 village-based entrepreneurs on the sale of those glasses. Similar to a Wall Street prospectus, the document outlines risk factors, from currency fluctuations to natural disasters. Investors will receive quarterly reports. But unlike a traditional offering, VisionSpring’s investors are only promised a “social” return on investment rather than lucrative financial returns.
VisionSpring co-founder Jordan Kassalow, a practicing optometrist, says the prospectus was borne out of frustration. He decided “enough is enough” after watching “everyone work so hard cobbling together funding throughout the year, rather than doing what we should be doing (helping disadvantaged individuals see better).” The company worked with the Nonprofit Finance Fund, a community development financial institution that helps nonprofits secure funding, on the prospectus.
VisionSpring’s story illustrates the difficulties that a nonprofit social enterprise can face when it comes to funding. 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.
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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.
(“Starting Up,” a weekly column written by Diana Ransom for smSmallBiz.com, follows entrepreneurs through the early stages of launching a business. Write to her at dransom@smartmoney.com.)
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