Funding social businesses
In our second episode, Aunnie Patton Power and Julia Winkler discuss the challenges associated with funding purpose-driven organizations and how to overcome them. Aunnie is an angel investor, an academic, an adviser to funders and founders, and an author. Her book “Adventure Finance” presents innovative funding options for startups and businesses that are not a fit for the venture capital world. Julia is the co-founder of Volunteer Vision, a digital mentoring platform promoting a diverse and inclusive workforce. Her social business is funded by impact investors, and she shares the lessons learned from her fundraising journey. We discuss innovative funding models such as redeemable equity, invoice factoring and supply change financing. We also talk about how investors can source impact investments, why organizations need different types of funding at different stages of their life cycle, and what skills are essential for fundraising.
Classic debt or equity financing is not suited for many social businesses. Affordable debt requires a collateral and a track record of profitability, which budding impact businesses often don’t have. Giving up equity to venture capital investors (VCs) isn’t an option for most social businesses, because traditional VCs are primarily interested in tech enabled highly scalable and asset-light businesses.
The right financing to align the interests of impact investors and impact entrepreneurs depends on the business model and the life stage of the organization. Examples include equity that can be bought back by founders (redeemable equity), lending against invoices (invoice factoring), or linking payments to impact achieved, and many more.
Family offices and individual wealth owners can provide catalytic capital at the intersection of philanthropy and investing (e.g. forgivable loans or convertible grants) to achieve social or environmental impact. Compared to commercial investors, they may be more flexible regarding the expected financial return and the time-horizon within which returns are expected.