Models for Early Stage Funding

Several outfits, that I am counseling, are looking at the traditional VC route to raise funds. Sometimes people find this at odds with a socially focused business. The term Social Entrepreneur provides a broad umbrella that covers a number of different types of organizations – ranging from non-profits, to socially focused businesses (as defined by Yunus) to for-profits that have solutions that address a social issue in a major way.

Depending on the type of organization the approach to early stage funding will differ. Almost all start with the really early stage funding of the 3 Fs – Friends, Family and Fools. For non-profits early sources of funds and effort include friends, volunteer time, individual donors, and grant writing to foundations and philanthropists. For social businesses, sources might also include social investors – either individuals or organizations – that are willing to invest in an organization for a less than a market return. Most of these arrangements consist of loans with below market rates of return since a social business, by definition, provides no additional dividends to its investors.

‘Social Businesses’ would have a primary social objective, would be run just like a for-profit with a goal of generating a sustainable income stream, but, other than repaying the initial investments of its investors, would not return any additional dividends. A Social Business would not be grant based or a charity.

For the few socially driven businesses that also expect to generate conventional market rates of return, the traditional funding channels, from angels to early stage VCs, are a viable option. Vinit Nijhawan recently posted an article on his blog summarizing his experience raising money for an early stage startup. The requirements for early stage companies that he lists are important for all startups regardless of whether they are non-profit or for-profit.

Early stage companies need to be in an ever shrinking “sweet spot”: defensible IP (woe if you are a software company), proven management (ie you have made money for a VC), and demonstrable market need (preferably with a customer LOI in hand).

For a non-profit or social business, IP might be less relevant but a GREAT business or social idea needs to replace that. In all cases proven management and demonstrable need are a must.

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