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The Number One Question For Social Entrepreneurs: Funding

So, you have a business idea that’s going to save a lot of people. That’s great. But to help anyone, first you have to find a way to pay for it.

The Number One Question For Social Entrepreneurs: Funding
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Lots of people want to start businesses that are intended to have a social benefit but good intentions are not enough–it is vital for any social initiative to be underpinned by sound business sense and practices.

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One of the issues, in my view, that has faced the not-for-profit sector in the past is that although their intentions were usually exemplary, their execution was not. It is critical for the businesses and operations to be run just as professionally as in the for-profit sector; not only will this help them achieve so much more, but it will also help them avoid one of the biggest criticisms aimed at NGOs–that of waste and not enough of the funds and activities actually reaching those who need them. For example, before he founded Pencils of Promise, Adam Braun spent almost four years learning how to run a successful business and studying how the world of NGOs works.

Another issue is that, at the beginning, an organization is reliant on volunteers. Braun offers an interesting lesson on how to work with volunteers effectively. He says: “I think it’s a big mistake for a nonprofit to assume that someone who is volunteering for you doesn’t owe you something as well,” he says. He adds: “The reality is that they’re still occupying your time and your energy and you need to treat them like staff and employees, even if they are volunteers. That is something that it took me probably a year and a half to get to because I was just so thankful that people believed in it early on.”

New socially oriented businesses should also be very careful about how the company is registered and set up in the first place. There are myriad schemes and government policies, specific to the country of registration, for social businesses that should be explored early on to avoid problems later.

But the number one question for people hoping to create a social business is how to fund it until it becomes sustainable. There are more questions than answers in this context. While lots of aspiring social entrepreneurs have great plans for their business once it is off the ground, few seem able to describe clearly how they are actually going to fund it until such time that it funds itself.

Duncan Goose from One agrees that seeking funding for a not-for-profit business is very difficult, but he sees an alternative: “Private equity people ask: ‘What’s my return? If I’m going to sink a few million into this, what do I get back?’ … Or you go to a philanthropist or big charity donor and say, ‘Give us your money and we’ll effect change.'” Goose believes there is scope for something in between. He says: “If you could get people to make a side step, that’s really where you’ll affect the future.”

In September 2010, the Italian business Vita Non Profit Content Company became the first European joint stock company that (by statute) reinvests all its dividends back into the company, to be listed on the stock market. The stock market in question is the Alternative Investment Market (AIM), London, an international market for small to medium-sized companies.

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VITA nonprofit magazine is dedicated to informing the third sector and was founded in 1994 on the back of an investigation into some of the world’s best-known charities. Some might see a paradox in a company that doesn’t share its profits with its shareholders competing in a market in which success is measured by shareholder return. But founder and president of the company, Riccardo Bonacina, says there are no inherent legal, economic, or even social contradictions to the decision to be listed on the stock market. “We see our firm identity–made firmer still by our statute–as an asset and we hope to be an example to companies everywhere,” he says.

Many social entrepreneurs think that there should be a completely separate stock market for nonprofit businesses. There is no doubt room for a whole range of solutions in this space, and people who are motivated to take part in socially beneficial business activity in any context, within any framework, should be encouraged to do so. Small organizations that begin helping only a few people can have ambitions to multiply and scale their operations. Those in large corporations can introduce sustainable ways that do good and, over time, may see the philosophy behind a pilot scheme extend across the whole of the business.

That said, I think the best way to encourage socially responsible business to become a mainstream movement is to combine positive social change with positive shareholder returns, to prove that not only can you do good and do well but that actually doing good leads to you doing well.

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