Understanding funding for social entrepreneurs

For any business the ultimate goal is to become financially self-sustaining, and one way to achieve this is through investment and fundraising. At The Circle we adopt a ‘More Than Profit’ approach and encourage others to do so as well. Having a ‘More than Profit’ approach means that companies with a social impact should aim to be self-sustaining from doing what they do (e.g. the sales of its products and/or services) and should not be reliant on a single income stream.

We do however understand that income through investment plays a key role in starting up, upscaling, exploring new sectors, and developing new products or services. Without an injection of cash at these pivotal points in a business’ growth, many will stall or even fail.

Therefore, as a social entrepreneur, it’s is important to understand when and how to fund your business.

Why raise money?

Sometimes extra money is needed to grow. Many social entrepreneurs exist month to month with just enough money to cover their overheads; a cash injection can give the company an opportunity to grow, increasing offerings, developing new products and services, upscaling, expanding into new markets, exploring new ideas and approaches etc. In these cases an injection of funding is required to allow the company to scale, with the overall aim of becoming financially stable with comfortable profit margins, escaping the cycle of surviving month to month.

Thinking a little more long-term, a cash injection can also allow the company to scale to a level that will allow founders to implement their exit strategy. Whether through a trade sale or IPO (Initial Public Offering), a viable exit strategy relies on a company being large enough and having a large enough turnover, assets, and market share to attract the outright sale, or sale of shares of the company.

What options are available?

There are a myriad of potential funding options for start-ups.  Many are saturated with interest from different organisations, some are sector specific, and some more generic. The Circle Academy for instance, is an example of an accelerator that is open to all sectors, provided they aim to have some kind of social impact. A start-up can identify the types of funding that they would like to acquire, and then will go about finding an individual or organisation within that area that will have the right focus, expertise and offering for them. Some funders will only support tech companies, some are interested in social impact and some are only interested in products or services that are concerned with security and defence for example. It’s all about finding the right fit for your organisation.

Here’s a breakdown of the funding options available:

1. Grants

Grants are a restricted form of funding, meaning that they have to be used for a specific project or purchase e.g. IT equipment. Grant income is often used to cover the cost of activities or equipment for projects or aspects of an organisation which cannot cover their own costs but ultimately create a social impact. For example, a project which provides free day trips for young disabled people and their families may not be able to cover costs but will have a positive impact.

Whilst grants do not need to be paid back, they require a lengthy application process, and are intended to support a very specific project or area of the business, requiring periodic reports on expenditure and whether or not targets are being reached.

2. Business Accelerators

Whilst these don’t necessarily equate to a cash injection into the business, these types of programmes often offer work space and access to knowledge, support and advice – investing time and expertise, rather than cash, alongside potential access to networks, and signposting to funders. These kind of programmes often act as an excellent springboard for social entrepreneurs to develop the skills that will afford them a higher chance of success when taking their business idea to potential funders, and a fundamental step to success for social entrepreneurs. The Circle Academy is an excellent example of this.

3. Loans

Loans are non-dilutive*, and tend offer a lot more flexibility when it comes to spending compared to grants. However, as is the nature of a loan, they must be paid back. Start up loans are personal loans, rather than business loans, meaning they are unsecured. In these instances particularly, it is important to ensure that budgets are in place, and money is spent wisely in order to ensure you are able to pay back the loan along with any interest.  The government offers start-up loans from £500 up to £25,000, with fixed interest rate of 6%.

4. Crowdfunding

Crowdfunding has boomed in popularity due to its affordability and accessibility through social media. It gives almost anyone the opportunity to access investment or indeed become an investor with little expertise or financial output. Whether investing for altruism or for an incentive, individuals can easily be drawn into startups with simple to understand offerings, drawn in by ingenious innovation or a social cause close to their heart. Indiegogo, Kickstarter, and Crowdfunder are a handful of very well-known crowdfunding platforms where campaigns that are well crafted can often be very successful in generating thousands of pounds of investment.

5. Angel Investors

These are individuals, or syndicates that invest money, typically in exchange for equity in a business, and often also want to impart their wisdom and expertise into the start-up. Contrary to popular belief, these are not always high net worth individuals. Individuals who have been part of a syndicate for 6 months need only invest upwards of £3000 per year. And access to angel funding from syndicates is more accessible than you might think, with 23 syndicates in Scotland – the highest density in Europe – there are plenty to choose from.

6. Venture Capitalism

The simplest and most accessible way to understand this type of investment is to look at the TV show Dragons Den; high net worth individuals or corporate organisations offering access to significant sums of investment for equally significant equity in the business. As with all lenders – but moreso in this instance – investors will want to see evidence of great potential for scalability, larger profit projections and a good track record. As this type of investment often demands a large equity stake, or even outright sale of the business, this may be more suited as part of an exit strategy.

*The term ‘non-dilutive’ encompasses any type of funding that does not require you to give up a share in your company, and can include anything from bank loans to grants from trusts and charitable organisations.

What does this all mean for social entrepreneurs?

Whilst this information is a lot to unpack, it can be useful for social entrepreneurs to be aware of the sheer breadth of opportunity for investment that is available to them, particularly at the early stages. This is absolutely not something that you can expect a social entrepreneur to unpack in a day, but it’s definitely something to consider and perhaps research further.

This can be a lot to consider as an individual, and whilst its excellent that such a number of options exist, it can be a lot for someone already undertaking the tasks involved in founding a business. It therefore may be considering consulting an expert. The Circle offers consultancy services with our team including The Circle’s Founder and Chief Executive Kirsty Thomson, who has secured over £13 million of funding for organisations, so far in her career; Kirsty’s workshop on grant writing may be a good place to start for those interested in grant funding in particular.

The Circle Academy is also an excellent information resource, covering governance, legal structure, business planning and more alongside funding as part of an in-depth training programme for social entrepreneurs. The next cohort of The Circle Academy is due to commence in September.

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