Theresa Newhard

Why Social Enterprises Need Money to Grow On

SSIR Money to Grow OnIn The Search for Social Entrepreneurship, Paul Light writes, “If the idea is matters, so does management?to the extent that management is essential for scale-up and impact, socially entrepreneurial organizations need to embrace it.” Light’s idea that high performing organizations should invest in management and organizational development systems makes sense, but in order for many social businesses to do so, the philanthropic landscape will need to change.

William Foster, partner at leading nonprofit consulting firm Bridgespan Group, recently wrote about the need for foundations to provide “growth capital” grants to later-stage organizations with sound business plans, strategic clarity and a sustainable financing model. In his Stanford Social Innovation Review article, Money to Grow On, he suggests that funding organizations should approach grantmaking in a similar way that venture capitalists approach making investments: high performing organizations with proven success should be awarded larger infusions of unrestricted cash to ramp-up and achieve long-term social change.Foster writes, “Before venture capitalists invest in a company, they conduct a thorough review of the company’s management team, business model, and strategic plan, along with an analysis of the company’s competition and market. More often than not, they walk away from deals that are in many respects attractive. Few nonprofit donors undertake such rigorous due diligence. But they should.”?

For organizations working in the base of the pyramid space, this idea is already starting to take root. VisionSpring recently announced a prospectus, which is aimed at attracting $5 million in growth capital. The prospectus details how resources will be leveraged to create and measure increased social returns. Donors do not have to look far to reference past financial statements or catalog other partners who are investing in their model — all these details are easy to find and effectively illustrated in the report.

VisionSpring Chairman and co-founder Jordan Kassalow explained the prospectus? purpose in a recent interview with Rob Katz: “[it] is all about solving a pain point–that we didn’t have enough capital to execute our vision. So we want to get more dollars up front to build the team and systems to replicate and expand what we’re doing.”? Since its soft launch in June, the Prospectus has already helped raise over $1 million.

Agora Partnerships is another organization serving the BoP that recognizes entrepreneurs’ need for growth capital to create sustainable economic and social value. Agora identifies and advises socially responsible entrepreneurs who want to grow their businesses to create jobs and solve the problems of poverty. Those organizations with the most promising plans are providing with financial resources and additional business development support.

Like many organizations in this space, VisionSpring and Agora Partnerships are hybrid organizations–they combine non-profit tax status with an earned-income business model. Their non-traditional model may make securing traditional grants even harder, especially, perhaps, because their balance sheet shows a steady revenue stream. For these social enterprises, measuring and communicating successful results will be especially critical in securing unrestricted growth capital. Social enterprises face an uphill battle in many regards–whether in terms of hiring, communications, impact measurement, etc.

But when it comes to fundraising, the arguments put forth by William Foster are a useful guide. Like Agora Partnerships and VisionSpring, other social enterprises may choose to use a prospectus to raise the kind of scale-up capital they need to reach sustainability. Over time, we’ll be able to assess the utility of this new approach–but for now, it appears to be working. Just ask Jordan Kassalow.

(This post first appeared on the Acumen Fund blog.)