finance
If financial stewardship was at the heart of every enterprise’s strategy, the world would look a lot different today. Unlike traditional companies, social enterprises’ sense of urgency to make societal impact means that they are less likely to hoard funds, and financial stewardship becomes a critical must-have management skill. Financial planning for non-profit organisations typically consists of courting donations from foundations and public fundraising which can be overwhelming and time consuming. Social enterprises, with their market-oriented approach, on the other hand are look for ways to achieve sustainability and longevity, as well as value creation.
Start-up social enterprises can tap networks of philanthropists and foundations for intital funds and grants, knowing that they need to work hard to prove their concept and social impact. The most challenging time for a social enterprise is between the growth or expansion phase, a time when the growing enterprise lacks the surplus funds to finance themselves, yet their needs surpass the levels to qualify for individual donation grants and are considered not bankable by commercial banks. Below is a table highlighting the stages of finance a social enterprise might potentially require, do also refer to our glossary terms for social finance definitions.
Capital Needs of a Social Enterprise
On the social capital ‘conveyor belt’, funds are mainly concentrated in traditional forms such as grants and donations. Micro-financing has revolutionized the development industry and the world by re-modeling the systems framework for social capital to emerging countries. It has already succeeded in institutionalising the flow of mainstream capital and the industry is still in its growing stage. Trade finance was also adapted successfully to the social finance market and credit can now be extended to farmer co-operatives in emerging markets via strong buyer account receivables. Borrowing from the conventional finance disciplines, there is the almagation of philanthropy and venture capital otherwise called ‘engaged philanthropy’. Venture philanthropy fills a void and provides short term financing to smooth over uneven cash flows and to ensure the social enterprise can carry on with their obligations.
Though less risky in investment nature, social investment funds are targeting vulnerable groups as well as social and environmental causes. Community development investments are also providing scarce resources to urban communities and vulnerable groups to aid in their own self community development. A new class of globally-minded investors seeks not only high social and environmental returns on their projects but also returns on their financial performance. Social impact investors have been a compelling partner to the micro-finance industry, structuring new investment vehicles to attract funding from the public and paying slightly below market return on their medium term notes. Social venture capital investors on the other hand, are willing to take equity risk for ownership in a new or growing social enterprise. There are encouraging signs and global initiatives in social impact investments, as well as small growing business development and social stock exchanges that would add depth to the social finance market. For a macro view of the social finance landscape, download Avantage Venture's finance typology.
In its current state, the social finance market looks promising but it is by no means robust. It is still a young industry fraught with fragmented information, lack of standardised methods of measuring social value, debt and equity gaps for small growing businesses in emerging markets and concentrated players with few intermediaries. Traditional business development has thrived because they are able to access funds and grow. A sustainable social enterprise market would also need the same in the long term. Though the global financial crisis has amplified challenges for social enterprises to access capital, one altriusm will never die "there will always be capital available for opportunities that creates positive change".
“Delivering social change, at the scale and breadth we seek, will require more capital than philanthropy and public resources alone can provide” Rockefeller Foundation, February 2009