Showing posts with label Social Financing and Fundraising. Show all posts
Showing posts with label Social Financing and Fundraising. Show all posts
Tuesday, 20 November 2012
This post is about new alternative financing options and the challenges they present to social entities around the world.
Along my journeys around the world, I worked with more than a hundred social organisations of all types. From ‘first storey’ ones running programmes to secondary and tertiary social institutions like funding intermediaries and foundations. The full list is here. Given the financial stresses that the world is currently under, I’m sure you can imagine that much of my time was spent in helping design new structures and approaches for reducing dependency on traditional fund-raising.
The big challenge that non-profits, intermediaries and social entrepreneurs have been facing is that traditional funding has dried up with the recession, while at the same time the number of entities effectively vying for the same funds is increasing as the internet levels the global playing field. Couple this with the fact that most funders haven’t really got a clue what they’re doing and you’ve got a situation where organisations are forced into a pied piper situation. Follow the funder into whatever hole they dictate. This is both demoralising and unproductive en-route to any desired social impact.
In most countries around the world, there is also limited or no Government funding for social or non-profit enterprises, so organisations are having to consider other alternatives.
The simple reality is that transformative work can rarely be funded by revenue generating activities alone. It takes between 8 and 15 years to really transform the lives and environments of people and communities and that kind of intensive support and interaction can rarely be funded by peripheral revenue streams. If a social organisation in the transformation space is able to cover 15 or 20% of its operating cost through its own revenue streams, it’s usually doing pretty well.
The danger of revenue streams is that they often feel like high priority even though they are not the primary finance source. This means that they can often drain the time and energy of the leaders of the organisation away from the social mission, or worse still result in significant mission drift. The best way to take on revenue streams is to ensure that they have their own dedicated people and that they spin off from work that the organisation already does in delivering its social mission.
Unfortunately, there's only a certain number of corporates large enough and interested enough to run social sponsorship programmes. In Mexico for example there were probably only about 20 obvious candidates... HSBC, AXA, Zurich Bank, Scotia Bank, Axtel, Kleenex, Kotex, Marti, Danone, Wal-Mart, Gamesa, Colgate, Novartis, Pfizer, Cemex, Bimbo, P&G, Cadbury, Kraft, Pepsi Co and Femsa - and only about 2 of these were actually local companies. What I found therefore was that social organisations, large and small, were all competing for funding from the same players. The small ones can't really compete with the bigger organisations, and the bigger organisations need more funding than is now available after the recession, so nobody wins except the funder, whose primary goal is brand kudos and audience recognition.
I'm not sure what the solution is, but I'd imagine that if all these companies and foundations co-operated to create a single fund, and then split this to cater for larger umbrella organisations and smaller grassroots organisations separately, there'd be a better distribution of funding. Specifying focus areas would still allow companies to be associated with the projects that fit the image they want to project, and they'd all benefit from the economies of scale and removal of duplication of administrative effort and cost.
My usual advice is that if your organisation isn’t simply an alternative business, and doesn’t have legal, contractual and financial expertise equivalent to that of the investing entity, the power imbalance is too steep. However good it looks on the surface; best avoid.
Where organisations start out as social businesses or ‘social enterprises’ they may avoid the problem of managing business models in context, but immediately face the ongoing challenge of balancing out social impact and profit. This is simple enough with one-dimensional products or services like solar lamps or microfinance, but not so easy with long term transformative or development goals. The big myth being perpetuated by the sector is that impact and profit are not mutually exclusive, but in reality they often collide head-on. The ongoing exploitation and failures of Microfinance across the world are a good example of this. At some point the commercial entity’s priority typically shifts from social benefit to financial survival and/or growth. Without very clear ongoing definitions and regulation of priority, the grey area often blurs and we’ve ended up in a sector that is massively based on spin.
It is definitely possible and desirable to design transformative programmes so they can be self-financing, but the sector is neatly ignoring the fact that they take longer to break-even than equivalent businesses that don’t have to cost for ethical and development practices. These entities may be financially viable but are unlikely to ever make serious money for their owners, and the number of small and mid-sized social enterprises that operate at survival levels bears this out.
Out in the field and away from the ‘first world’, I found most social enterprises to maintain non-profit rather than commercial status. Their charity status usually goes a long way towards subsidising costs and provides them with alternate means of financing if their revenue streams fail to meet operating expenses in the pursuit of social impact.
It’s specific to their context, but you’ll get the jist.
Some organisations like Sustentavia are also starting to provide this improved operating capacity as consultancies. They have clever business models which recognise that you can't really expect cash strapped social organisations to pay for services up front when they don't have the money, and hence aim for long term partnerships and investment in future financial success instead.
Overall, you could suggest that I paint a bleak picture, but this is the reality out there. We still have a way to go. Of course, as mentioned earlier, there are exceptions to every rule and laudable successes in every financing category, but exceptions aren’t going to solve problems on the scale we’re dealing with around the globe.
My usual suggestion is to understand the risks and challenges that the different options present. Then pick and choose the financing mechanism, or combination of, that your organisation is best able to manage and cope with. If you proceed sensibly then any of the above should work reasonably well for you.
Along my journeys around the world, I worked with more than a hundred social organisations of all types. From ‘first storey’ ones running programmes to secondary and tertiary social institutions like funding intermediaries and foundations. The full list is here. Given the financial stresses that the world is currently under, I’m sure you can imagine that much of my time was spent in helping design new structures and approaches for reducing dependency on traditional fund-raising.
Traditional Fundraising
- Donations from Friends and Family
- Street level and online collection campaigns and donation drives
- Larger scale hand-outs and Endowments from High Net Worth Individuals
- Grants from Foundations and Funding Intermediaries
- International Development Funds – Governmental (eg USAID) / Trans-Governmental (eg WorldBank)
- Corporate Social Responsibility
The big challenge that non-profits, intermediaries and social entrepreneurs have been facing is that traditional funding has dried up with the recession, while at the same time the number of entities effectively vying for the same funds is increasing as the internet levels the global playing field. Couple this with the fact that most funders haven’t really got a clue what they’re doing and you’ve got a situation where organisations are forced into a pied piper situation. Follow the funder into whatever hole they dictate. This is both demoralising and unproductive en-route to any desired social impact.
In most countries around the world, there is also limited or no Government funding for social or non-profit enterprises, so organisations are having to consider other alternatives.
Alternative Financing Options
The following in no order of priority are rapidly growing in take-up all over the world- Revenue Streams
- Sponsorship from large corporate or multinational entities
- Crowd-funding
- Social Loans
- Social Investment
- Hybrid Value Chains (Inclusive Business Models)
- Self Financing Business Models (Social Enterprise)
1. Revenue Streams
Most people would have you believe that non-profit entities generally have no financial or business acumen. This is not true at all. Many mid-sized and large non-profits operate a range of activities that generate income. Social organisations can directly or indirectly monetise a range of things from Products to Services to Advice, Brand, Data and I.P. (knowledge, learning, methodology, tools). Thinking along business principles brings a range of operational benefits including agility and efficiencies. This is the option I usually recommend, but organisations have to be watchful to maintain priorities.The simple reality is that transformative work can rarely be funded by revenue generating activities alone. It takes between 8 and 15 years to really transform the lives and environments of people and communities and that kind of intensive support and interaction can rarely be funded by peripheral revenue streams. If a social organisation in the transformation space is able to cover 15 or 20% of its operating cost through its own revenue streams, it’s usually doing pretty well.
The danger of revenue streams is that they often feel like high priority even though they are not the primary finance source. This means that they can often drain the time and energy of the leaders of the organisation away from the social mission, or worse still result in significant mission drift. The best way to take on revenue streams is to ensure that they have their own dedicated people and that they spin off from work that the organisation already does in delivering its social mission.
2. Sponsorship from large corporate or multinational entities
As social networks continue to humanise and change the face of brand perception, companies are ramping up their connections with social change. This presents an increasing opportunity to leverage sponsorship for social movements and campaigns. They can also provide a range of value from expertise to connections but often need exclusivity and/or adherence to their own set of conditions. The sponsor is usually looking for three things to make it worth their while: Reach, Scale and Impact. If your project can provide these, then this is an option worth considering. Here’s the basic proposal structure you will need.Unfortunately, there's only a certain number of corporates large enough and interested enough to run social sponsorship programmes. In Mexico for example there were probably only about 20 obvious candidates... HSBC, AXA, Zurich Bank, Scotia Bank, Axtel, Kleenex, Kotex, Marti, Danone, Wal-Mart, Gamesa, Colgate, Novartis, Pfizer, Cemex, Bimbo, P&G, Cadbury, Kraft, Pepsi Co and Femsa - and only about 2 of these were actually local companies. What I found therefore was that social organisations, large and small, were all competing for funding from the same players. The small ones can't really compete with the bigger organisations, and the bigger organisations need more funding than is now available after the recession, so nobody wins except the funder, whose primary goal is brand kudos and audience recognition.
I'm not sure what the solution is, but I'd imagine that if all these companies and foundations co-operated to create a single fund, and then split this to cater for larger umbrella organisations and smaller grassroots organisations separately, there'd be a better distribution of funding. Specifying focus areas would still allow companies to be associated with the projects that fit the image they want to project, and they'd all benefit from the economies of scale and removal of duplication of administrative effort and cost.
3. Crowd-funding
Crowd-funding is simply a fancy word for getting lots of people to put in a small amount of money to your venture, typically online. In reality donation drives are an example of crowd-funding, but these typically only apply to projects and organisations formally registered as Charities. If you’re looking to set up revenue streams, finance local economic development or run a project without formal charitable status, your options used to be very limited. Today however there are a number of avenues to crowd-fund your projects. Some of them require a return on investment, while others don’t. Here’s some sites you can use- http://www.giveforward.com/
- https://www.profounder.com/
- http://www.kapipal.com/
- http://www.createafund.com/
- http://www.thepoint.com/
- http://www.crowdrise.com/
- http://www.socialvibe.com/
4. Social Loans
These may seem like an oxymoron, but they do exist, at least in the western space. Organisations like the Adventure Capital Fund provide development loans to non-profits and social enterprises which then have to be paid back the same as any other loan. These can be useful in moving organisations forward; come with a bit more flexibility than a standard bank loan; and usually involve useful coaching and business development support to help ensure ability to pay back. In principle this ought to work, but for all the talk of the triple bottom line, my experience has been that lending and investment entities do not weigh the social impact the same as financial return. Inability to pay back the loan will not be overlooked regardless of how much benefit is being provided to the community, and compromises to the social mission all the way down to liquidation will be enforced in order to ensure recovery of finance. In other words, be careful!5. Social Investment
This is the big hype of the moment. The apparent answer to all our scaling prayers. Social Investment of course is really only an option for social businesses and not a viable funding strategy for general development work. Investors aren’t interested in non-profit or human transformation programmes. They’re looking to fund new technologies, utilities, energy, products, enterprise and saleable services. The typical IRR is still 30% and for many investors this is just another opportunity to make money, gain competitive advantage in an increasingly socially aware market, and look good at the same time. Aside from the few that are really trying to do something positive, I’ve already been pulled into extricating a series of social organisations from investors doing everything from under the radar land grabs, to fraud and brute exploitation in the sharing of profits. It’s all still too new and exciting for much of the negative aspects to surface, but be sure that it will in the next few years.My usual advice is that if your organisation isn’t simply an alternative business, and doesn’t have legal, contractual and financial expertise equivalent to that of the investing entity, the power imbalance is too steep. However good it looks on the surface; best avoid.
6. Hybrid Value Chains (Inclusive Business Models)
The hybrid value chain model is relevant only to the limited spaces where social enterprises are working with local or indigenous producers or communities, and can connect these with commercial organisations looking to reduce production costs or to scale their markets; thus creating partnerships that should result in financial and social benefit for all parties. From my experience however, I find that the winner here is usually the corporation. They receive brand kudos and often a massively subsidised entry into new markets, while social and community players absorb the brunt of cost and complication. This is because they are usually entering new operational spaces without the expertise to cost, plan or deliver what they’re taking on. Not because they aren’t capable, but because their skills are differently focused. The result is usually a massive underestimation and under-costing of commercial deliverables by the social players, putting them at much higher risk than the commercial partner.7. Social Enterprise and Self Financing Business Models
Self-financing business models are the obvious answer for complete independence, but it isn't really that simple for many social organisations. For starters, many of the founders don't have deep business skills or experience because their expertise is focused on human challenges. More importantly they don't have the spare time or resource available to identify and set these models up. The standard funder solutions all focus on up-skilling the people that run social organisations, but over the past few years I've begun to realise that while this is needed, it is not going to address the problem. The reason is that business model innovation in a social context is harder than simply starting with a business idea that sells. There are of course exceptions to every rule, but redesigning organisations to cope with these new practices is often more complicated than anything you could expect someone without significant experience to achieve.Where organisations start out as social businesses or ‘social enterprises’ they may avoid the problem of managing business models in context, but immediately face the ongoing challenge of balancing out social impact and profit. This is simple enough with one-dimensional products or services like solar lamps or microfinance, but not so easy with long term transformative or development goals. The big myth being perpetuated by the sector is that impact and profit are not mutually exclusive, but in reality they often collide head-on. The ongoing exploitation and failures of Microfinance across the world are a good example of this. At some point the commercial entity’s priority typically shifts from social benefit to financial survival and/or growth. Without very clear ongoing definitions and regulation of priority, the grey area often blurs and we’ve ended up in a sector that is massively based on spin.
It is definitely possible and desirable to design transformative programmes so they can be self-financing, but the sector is neatly ignoring the fact that they take longer to break-even than equivalent businesses that don’t have to cost for ethical and development practices. These entities may be financially viable but are unlikely to ever make serious money for their owners, and the number of small and mid-sized social enterprises that operate at survival levels bears this out.
Out in the field and away from the ‘first world’, I found most social enterprises to maintain non-profit rather than commercial status. Their charity status usually goes a long way towards subsidising costs and provides them with alternate means of financing if their revenue streams fail to meet operating expenses in the pursuit of social impact.
Coping with Financing and Operating Challenges
One of the things I’ve been advocating for is for umbrella organisations to set-up Shared Service (Resource) Centres that add the skill and resource capacity that smaller organisations need in order to be able to innovate and grow. I've helped set these up for Local Government when I was working as a Consultant in the UK, and don't believe this would be difficult to set up for the social sector. I wrote a bit about them in my article on partnerships for the social sector (http://bit.ly/4BSu9y) and put up some scribbles from a workshop with UnLtd on designing Shared Resource Centres in a presentation here:It’s specific to their context, but you’ll get the jist.
Some organisations like Sustentavia are also starting to provide this improved operating capacity as consultancies. They have clever business models which recognise that you can't really expect cash strapped social organisations to pay for services up front when they don't have the money, and hence aim for long term partnerships and investment in future financial success instead.
Overall, you could suggest that I paint a bleak picture, but this is the reality out there. We still have a way to go. Of course, as mentioned earlier, there are exceptions to every rule and laudable successes in every financing category, but exceptions aren’t going to solve problems on the scale we’re dealing with around the globe.
My usual suggestion is to understand the risks and challenges that the different options present. Then pick and choose the financing mechanism, or combination of, that your organisation is best able to manage and cope with. If you proceed sensibly then any of the above should work reasonably well for you.
Monday, 23 November 2009
At it’s core, the goal of any corporate funding is Return on Investment i.e. what your project is going to do for them or their brand. Large corporations want mass recognition and kudos through their association with social projects, and clear indicators of social impact that can go into their stakeholder reporting.
So the first thing you need to remember is that corporate funders really only care about 3 things that underpin this
Finally if it is possible to demonstrate that you can use their money to create sustainable revenue streams that mean you won’t need to go back again year after year, you’re probably onto a winner!
For reference, here’s a real world brainstorm of a sponsorship pitch for a large corporation that should give you a quick overview of what you need.
So the first thing you need to remember is that corporate funders really only care about 3 things that underpin this
- Scale (how big in terms of geography and replicability)
- Reach (who are the audiences that will know about or benefit from the project)
- Impact (what will it achieve for all the different stakeholders)
Finally if it is possible to demonstrate that you can use their money to create sustainable revenue streams that mean you won’t need to go back again year after year, you’re probably onto a winner!
Suggested Proposal Structure
- Executive Summary
- Introduce the structure of the document
- Outline the project that needs funding
- Summarise what you’re looking for
- Context
(This is critical for sharing the big picture) - Introduce your organisation
- Outline the problem
- Outline your vision and what you believe can be done
- Project
(Here’s where you cover details) - Repeat overview of the project / solution (more info than in the Exec Summary)
- Describe the mission and goals
- Discuss the mechanisms (strategies/tactics) it will use to achieve those goals
- If there is a creative aspect cover it here.
- If the funding will enable future self-financing, describe how
- Describe the reach
- Target audiences: groups you will impact; groups you will mobilise; and groups you will engage. Outline what this means in numbers
- Geographies – Local, National and Global Networks you will mobilise; Locations of online audiences you will target e.g. US, UK; and the Offline locations for mobilising action and support.
- Describe the mechanisms of engaging audiences across different channels
- Offline
- Online
- Delivery Planning
- Timelines and Milestones
- Resources and Materials
- Costs
- Impact (This is IMPORTANT!)
- Specify and reiterate what your project will aim to achieve for all it’s different audiences
- Outline the metrics you will to use to monitor and report on the change you are creating
- Funding/Sponsorship Proposal
(Here’s where you sell) - Outline the type/nature of Funding/Sponsorship e.g.
- Number of funders
- Focus area
- Timeframe of association
- Describe opportunities for Funder/Sponsor involvement e.g.
- Signage (name/logo) on project material
- Personal appearances for key staff
- Events, Speeches, Talks
- Opportunities to showcase product and brand
- Engagement with project audiences
- Engagement with web traffic
- Potential opportunities to influence positioning and geographical location of advertising
- Value of association with your organisation/project e.g.
- Reiterate scale and nature of exposure
- Exclusive/Non-exclusive rights to use project branding (subject to appropriateness with project mission)
- Networking and recognition opportunities with key partners including Local or National Government, and/or other Corporates.
- Other services you can offer them
- Long-term value
- Reason why you want this particular Funder/Sponsor
(Do your research and show you understand their needs and why you believe they fit) - Financials
- Total you need to raise or want from them
- High level reiteration of what the money will be used for and the impact it will have
- Financial ROI for the Sponsor (try and guesstimate if possible, but don’t worry if too complicated) e.g. reduced costs of engaging audiences, brand value, new markets, product sale
- Decision deadline if you need the money by a specific date, plus the reason why
Download Funding Proposal Template
For reference, here’s a real world brainstorm of a sponsorship pitch for a large corporation that should give you a quick overview of what you need.
Wednesday, 18 November 2009
One of the biggest fundraising mistakes that social organisations make is chasing anyone who might potentially have some money, without really assessing whether or not their goals or interests fit the project. This is why generic applications get nowhere, and why creating specific proposals often fails too. You absolutely must have some kind of selection criteria to filter the right organisations to approach, before you spend time on funding proposals.
The next mistake involves assuming that presenting the social need and tugging on heart strings is enough to get people (HNWI = High Net Worth Individuals) or organisations to part with their money. This is a hit and hope affair – you might get lucky, or you might not. The real trick is to understand what your target audiences needs are, then make sure you are actually able to deliver the benefits they might want from their association with your project, and finally, stay true to your promises.
Above is a real life example of how to select your fundraising targets and then work out the benefits that might attract them. Once you understand these you can then create the messaging and marketing needed to attract them, and the engagement plans to manage the relationships over time.
Tuesday, 29 September 2009
This is more for social enterprises and charities that are raising funds in order to continue to operate and/or grow rather than for startups.
The trick is to do these in parallel. Start your research and network to build relationships with potential funders, while simultaneously putting the platforms in place. This means that by the time you've built your relationships with the people interested in your work, you've also got all your messaging sorted out and ready to go.
Additional notes:
The trick is to do these in parallel. Start your research and network to build relationships with potential funders, while simultaneously putting the platforms in place. This means that by the time you've built your relationships with the people interested in your work, you've also got all your messaging sorted out and ready to go.
Additional notes:
- Networking = emails and conversations (phone and face-to-face meetings)
- Recognition = not just for brand but also methodology in terms of getting accepted as experts in the type of work being done
- Shareability = having the technical ability to share your content in social media, as well as creating and chunking it so that it is valuable and motivates people to pass it on.
Monday, 1 September 2008
I recently came across a really good article by Paul Graham on fundraising for startups. He makes some really good points and his core message resonates with me after months of working on USP, and probably resonates with anyone involved with a social startup.
The hardest part of a startup is making something people want: most startups that fail, die because they didn't do that. But the second biggest cause of death is probably the difficulty of raising money. Fundraising is brutal. I'd add to that point by saying that it's even worse if your idea is social, because funders immediately get nervous about the connotations for potential for return on investment.
Here's the full article http://www.paulgraham.com/fundraising.html, but I must warn that it's a long one!
The short version...
The hardest part of a startup is making something people want: most startups that fail, die because they didn't do that. But the second biggest cause of death is probably the difficulty of raising money. Fundraising is brutal. I'd add to that point by saying that it's even worse if your idea is social, because funders immediately get nervous about the connotations for potential for return on investment.
Here's the full article http://www.paulgraham.com/fundraising.html, but I must warn that it's a long one!
The short version...
- Have low expectations
- Keep working on your startup
- Be conservative
- Be flexible
- Be independent
- Don't take rejection personally
- Be able to downshift into consulting (if appropriate)
- Avoid inexperienced investors
- Know where you stand with them in terms of commitment
Friday, 30 May 2008
At the World Summit for Social Entrepeneurs I came across what seems to be another venture capitalist mantra... the "60 Second' pitch. Investors seem to love these pithy reductions.
The first rule I kept being told about was to narrow my ideas down to a single slice of functionality. Just one slice. If you can't do this apparently VCs get antsy.
The second rule is reduce everything down to a one minute overview. If your idea is more complex, forget about it.
All sounds to me like major ADD. I'm sure it's a outcome of interacting with too many people with rambling undefined theses, and no real ideas hidden underneath it all, but sometimes to simplify to this degree can be to lose the idea altogether; or worse - pitch something conceptually different simply because you had to reduce the number of words.
Simplifying even further than the 60 Second Pitch brings you to the 'Elevator Pitch'. This essentially comes from the notion of having to pitch your idea to some bigwig in a chance elevator meeting, during the time that it takes to get to their floor. Apparently this works out at about 30 seconds or 150 words to get the key message across. Not sure how someone worked it out, but apparently VCs love the short and sweet approach so I guess it's worth looking at if you're trying to raise investment. I recently came across some good guidelines for how you should create and focus your elevator pitch at thesearchengineland blog
The first rule I kept being told about was to narrow my ideas down to a single slice of functionality. Just one slice. If you can't do this apparently VCs get antsy.
The second rule is reduce everything down to a one minute overview. If your idea is more complex, forget about it.
All sounds to me like major ADD. I'm sure it's a outcome of interacting with too many people with rambling undefined theses, and no real ideas hidden underneath it all, but sometimes to simplify to this degree can be to lose the idea altogether; or worse - pitch something conceptually different simply because you had to reduce the number of words.
Simplifying even further than the 60 Second Pitch brings you to the 'Elevator Pitch'. This essentially comes from the notion of having to pitch your idea to some bigwig in a chance elevator meeting, during the time that it takes to get to their floor. Apparently this works out at about 30 seconds or 150 words to get the key message across. Not sure how someone worked it out, but apparently VCs love the short and sweet approach so I guess it's worth looking at if you're trying to raise investment. I recently came across some good guidelines for how you should create and focus your elevator pitch at thesearchengineland blog
- What is the core idea and what problem does it solve?
- Has it been done before (is there competition?) and is there a viable market for your core idea?
- Why are you best suited to solve the problem and what is your business model?
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