Social Entrepreneurship and Venture Capital/Start-Up Funding
...s where the profits are reinvested back into the business and not distributed to owners or shareholders. Thus, non-surprisingly, the venture capital market is much smaller for this industry, but it does exist and it is robust. In 2003, the Rise Initiative on Social Entrepreneurship (RISE) completed a comprehensive study on the venture capital market for social funding. The researchers sought answers to two main questions: • “Are there sources of equity capital that will make it more likely for a company with both financial and social or environmental objectives to succeed? • How much capital is available from these sources and what are their own objectives for success?” (Clark, Gaillard) The RISE study provides the most in-depth picture on the venture capital (VC) funding for social causes. The study found that there is over $1.9 billion of total capital available for investing, and the wealth is spread over many specific interests such as healthcare, education, the environment, the arts and international development. This diversity led the researchers to classify the VC market into four funding types: VCs with a conscience; VCs with an industry change focus; VCs with a focus on leadership or development and the nonprofit social investment VC fund. Please see appendix A for a detailed description of these funds. The social VC market acts very much like for-profit venture capitalists in that the VCs focus their success “first in financial terms, and then on social or environmental terms.” (Clark, Gillard) VCs in this industry use stringent social or environmental screens to ensure that their funds are invested in organizations that match the VC’s mission and where the invested funds will be used to make the maximum impact. Some of the criteria VCs use in order to evaluate this are the “value and professionalism of [the organization’s] staff and operations, or by the positive impact [the organization] can have on communities where they are located and whom they hire.” (Clark, Gaillard) The study finds that social VC funding amounts to about 6% of the overall VC market, and noted that there was a significant decline between 2001 and 2002 with a drop of 41% in social funding between those years. The study believes that the social VC market is still maturing with investors managing less than $25 million, which is a relatively small fund size in comparison to for-profits VCs. The average investment size is also smaller around $1 million as compared to $6 million with for-profit deals. Most VCs are headquartered on the east and west coasts and the majority invest in regional ventures (50%), which the study defined as being three or more states within the region. About 14% of VCs invested in more than one region of the US, and 32% invest internationally. The social venture capitalist is far from being a silent partner. They closely monitor the organizations they fund with 79% sitting on the boards of their investments. Of these firms, 91% closely monitor the financial aspects of the firm’s operations and 54% oversee the programmatic functions of the organization. (Clark, Gaillard) When it comes to evaluating financial performance, there was a wide range of IRR’s from 4% to 50%, with the average being between 21% and 35%. Overall financial performance of the social VC market is difficult to assess because it is still a relatively young market; however, there appears to be a wide belief among investors that their returns will be similar to mainstream venture capital funds. (Clark, Gaillard). One of the largest social venture capital investors is, the Global Environment Fund, a company that follows a “hands-on” approach with the firms that they invest in. According to the company’s website, the fund looks “to identify undervalued companies with experienced management and a clear vision of how to take advantage of the significant opportunities for growth and value creation.” The company has $300 million in capital for environment investments in such sectors as clean water, clean energy, waste management, environmentally sustainable forestry, and clean technology. The have invested in companies such as Essex Corp (clean energy), Global Forest Products (international forestry) and Athena (safe technology). The second largest investor is Prospect Street Ventures with $200 million in capital, this company focuses on investing into energy-related companies “that transact with the direct energy value chain”. Their investments are in the range of $5 million to $25 million. Other well known social VC firms include, NewSchools Venture Fund (education), Pacific Community Ventures (Bay Area focused, invest in small enterprising social firms), Calvert Funds (community development projects) and Coastal Ventures LLC (community based with emphasis on civil rights firms). In addition, there are a number VC firms whose sole purpose is to seek out and provide seed money and other services to social entrepreneurs. They refer to themselves as “incubators”. Notable examples are Social Fusion; a San Francisco based non-profit VC which describes itself as a “business incubator that scales nonprofit and for-profit social ventures by merging successful business practices and positive social impact.” The Juma Enterprise Center “supports socially conscious entrepreneurs in developing, funding and launching financially viable businesses that create jobs and economic stability for at-risk youth”, and Echoing Green which provides “seed grants” to get social entrepreneurs started with their business. Clearly there is a venture capital market for social entrepreneurs where an enterprising firm might access start-up funding. Does this mean it is right for all social enterprises, and can one rely on this type of funding? The answer is no. To receive this type of funding a firm must be seen as enterprising, must fit within the venture capitalist’s mission and must be seen as sustainable. This does not easily fit all social entrepreneurs, and the time it takes to receive this type of funding can be a long and involved process. In addition, as mentioned earlier, many VC firms are often very active in the operations of a venture they help fund. This can lead to conflict if the VC firm has a different idea in how the work should be carried out that what the entrepreneur believes. It can be easy to compromise one’s vision if the owner does not control the revenue. Also, the desire to receive funding can lead one down a path to secure revenue to do work that pulls resources away from accomplishing the main mission of the organization because the VC is interested in only funding a certain area of work. Both circumstances make it that much harder to be sustainable. A smart social entrepreneur should be developing a revenue mix which includes fee-for-service so that the business decreases its reliance on fundraising in order to sustain growth. Nonetheless, venture capital firms do breed success. To illustrate, Upwardly Global is an organization which provides immigrants who have recently become US citizens with support to navigate the job market, and educates the business community on how to use this segment of the labor force. This organization started when its founder, Jessica Leu, was shocked to find that there were no organizations established to help new US citizens find jobs. She notes that many of these citizens hold advanced degrees and they are often employed in menial, hourly jobs. Upwardly Global claims it is the first and “only organization” dedicated to serving the immigrant professional. The organization began as “kitchen table” project in the Bay Area in 1998 and has grown to serving 200 clients. The organization boasts a 90% success placement rate with many of its clients landing jobs between $25,000 and $55,000. 70% of its clients are women. Upwardly Global received much of its startup funding from the VC firm Social Fusion. Social Fusion provided the organization with controlled resources, allowing them to operate out its own office space and providing the venture with operation and logistical support in addition to financial funding. Social Fusion also helped the organization locate additional funding groups interested in the organization’s business plan. So...