Social Enterprises Need New Funding Models

Any entrepreneur can tell the stages of funding that you go through in building a venture.
 
You rely either your own money or other people’s money from the so-called three Fs: friends, family and fools.
 
Once the idea has some solid thinking behind it, it's time to figure out how you can make this thing work.

That’s when you need an angel investor. They are the early stage folks who see passion and vision and are willing to put money into an unproven idea to see if the wild-eyed dreamer can pull the concept together. Once the concept is proven, then more sophisticated investors will be involved – typically venture capital or private equity. Finally, you end up with the most traditional money: banks and commercial capital.
 
It’s a well-worn path that can lead you to the big score. (Can you say Facebook?) But what happens if you are building something that has goals beyond the creation of wealth for the investors? What if you seek a broader set of objectives that include social benefitsas well as economic sustainability? In that case, the trail is a lot less clear.
 
In the social benefit space, this sort of investment continuum doesn't yet exist. It's still a ladder with several rungs missing.
 
We’re hearing a lot these days about social enterprises. A social enterprise is a business that produces economic and social value. Halethorpe’s Vehicles for Change, which refurbishes donated cars and awards them to low-income families, is an example of a for-profit enterprise that also aims to do good. Baltimore’s Harbor City Services, which creates job opportunities for people recovering from substance abuse and mental illness, is another example.

But the vast majority of socials entrepreneurs still think of foundations as the best source for ongoing operating income. And as long as we keep behaving this way, we'll keep having the same results. On the other hand, if a few brave folks break free, it makes it much easier for others to follow suit. 
 
Currently, many funding models are being tested to keep social ventures afloat for the long haul. They include program-related investments, a direct investment made by a foundation that has to be repaid; social impact bonds, bonds that are repaid by successful social intervention programs; pay for performance, the idea that social benefit programs should be funded according to proven long-term outcomes; and, impact investing, a catch-all term for any funding mechanisms that generate social and financial return.
 
These are all efforts that are moving us in the right direction. But they are isolated efforts. We need more -- much more. The good news is that it’s a problem that we have the power to solve. We just need the courage.

J. Howard "Jim" Kucher is a serial entrepreneur and a recognized thought leader in social entrepreneurship. As president and CEO of Social Venture Constructors LLC, Kucher is currently working with several major social benefit initiatives to improve outcomes and increase sustainable revenues. He is also the former director of the entrepreneurship program at the University of Baltimore's Merrick School of Business. He can be reached at [email protected].