Chapter 6 Funding Social Entrepreneurship

Opening Discussion Read the case of FareStart and answer the following questions:  Why was FareStart able to attract a variety of funder types?  What might be some of the challenges of maintaining highly diversified funding sources?

Chapter Outline Funding public sector and for-profit social entrepreneurship Funding nonprofit social entrepreneurship Philanthropy and social entrepreneurship Government funding Earned income, loans, and equity

Funding Public Sector Entrepreneurship Entrepreneurship in government can be funded through normal tax-related channels, with tax dollars allocated to agency budgets. Public entrepreneurship can also take the form of market-based activity:  Government-run business enterprises receive payments for goods or services.  These are treated the same as private businesses with respect to purchases and sales.

Government Revenue from “Business and Other” Sources Includes revenue from government social entrepreneurship

Funding For-Profit Social Entrepreneurship The firm creates social value over and above routine market-related transactions. More firms are starting to integrate social ventures with the firm’s strategy and marketing. Funding comes overwhelmingly from internal sources:  Internal budget allocations  Percentage of corporate income  Donations, mostly from employees

Funding Nonprofit Social Entrepreneurship For public charities, 2010 revenues came from:  Private fees: 49.6%  Government: 32.2% (fees 23.9% + grants 8.3% )  Contributions: 13.3% Funding for social entrepreneurship varies based on funding available in the venture’s subsector.

Sources of Nonprofit Revenue by Activity Fields Revenue sources vary widely by subsector.

Sources of Nonprofit Revenue Growth by Activity Fields Growth of income sources also varies widely.

Nonprofit Social Venture Funding The data shows that nonprofit social ventures can get funding from a variety of sources. The social value produced for others is key to appeals for philanthropy. The value of goods or services produced for consumption is the key to sales. The objectives of government are the key to obtaining government contracts or grants.

Characteristics of Nonprofit Funding Types Note that each type of funding affects the nonprofit differently.

Characteristics of Nonprofit Funding Types Private contributions have high volatility, and donors can create pressure on goals and processes. Government funding may last longer, but government has many requirements and standards. Commercial income can vary in volatility, funds can be used as needed, and there is pressure to use standard business techniques.

Income Portfolios Think of multiple funders as constituting an income-generating portfolio. Give priority to portfolio considerations. Align funders with the mission. Seek portfolio balance in regard to funder numbers, stability, growth potential, and so on. Consider the economic role of funding (cover costs, generate surplus, and so on). Avoid funder incompatibilities.

Philanthropy and Social Entrepreneurship Most funding from individuals; religion gets most. Donations can play more or less of a central role. Most donors are conservative; it may be difficult for a new venture to get wide support. Donor-investors may support ventures that  Are committed to social change.  Share values of nonprofits they support.  See themselves as partners in social value creation.  Want donations to achieve demonstrated results.

Philanthropy and Social Entrepreneurship Venture philanthropy is another source of funding:  It uses the venture capital model.  It includes multiyear funding, funding for overhead and capacity building, and organizational assistance.

Philanthropy and Social Entrepreneurship The federal government’s Social Innovation Fund combines public and private funds:  The government grants funds to intermediaries.  Intermediaries match funds and identify recipients.

Government Funding It can come through a variety of paths:  Directly from an agency  From one level through another level  From individuals who get money from government Funding can present challenges in terms of requirements, transaction costs, slow payments. Nonprofit can respond by making more use of their boards, knowledgeable executives, engaging policy.

Earned Income It is important to consider the degree of income generation and contribution to the mission.

Earned Income Disposable (low income, low mission relation): Is this worth doing? Supplemental (low income, high mission relation): Can the level of income be increased? Sustaining (high income, low mission relation): Is too much income being generated? If so, consider splitting off a subsidiary. Integral (high income, high mission relation): Beware of tensions between mission and market.

Earned Income Strategies Getting paid for what you already do  Starting to charge clients Launching a new venture  Production of goods and services  Assets of staff or other tangible or intangible assets Building revenue relationships  Partnerships with corporations  Cause-related marketing, joint ventures, licensing, sponsorship

Loan and Equity Financing Program-related investments are made by foundations and provide a return on investment. Impact investors seek to make positive impact and financial return:  May place a higher value on either return (finance first) or impact (impact first).  Social impact bonds: intermediary raises private capital, monitors activity, and evaluates results.

Discussion Consider the variety of funding methods we have outlined in the previous slides and answer the following questions:  Which would have the easiest time raising funds for social ventures: nonprofits, for-profits, or public agencies?  How might a nonprofit have to relate differently to donors versus investors?  How might the search for earned income influence the mission of a nonprofit?