5 min read
What are Social Funders?
Social funders are people and organisations who specifically invest some of their capital in ventures with a clear social and/or environmental mission. Many such funders are looking to fund particular causes, such as environmental protection, or to benefit a specific community or group such as the elderly.
Here are 5 types of social funders:
1. Social Angel Investors
Social angels are wealthy private individuals who invest their own money into ventures that support social causes they care about. Many are philanthropists experimenting with social investing as a more sustainable way of supporting social causes (i.e. if the investment succeeds, they will receive their funds back which they can invest again into more social projects). They are a major source of funding for early stage ventures.
Given their diversity, angel investors differ widely in the level of financial return that they are looking for. Some expect the same returns as a purely commercial investment, others are willing to accept a lower return because of the social nature of the investment. Since social angels invest their own money, they can often be more flexible and quick to make decisions that institutional investors such as impact investment funds (who need to get their investment decisions reviewed and approved by an Investment Committee).
The amounts that social angel investors are willing to invest per deal will vary widely depending on the individual investor. We have seen typical investments of between USD 10,000-50,000 per angel, with an average of around USD 30,000. Angel investors typically invest in earlier stage investments given their smaller investment size. An angel deal will normally have a group of angels co-investing together. For example, an early stage social venture looking to raise a seed round of USD 400,000 might do so from 8 angel investors investing an average of USD 50,000 each. Of this group, one or two of the investors typically play a more prominent role than the others (we call these ‘anchor investors’) who invest more (say USD 100,000+ each).
Foundations are charitable institutions set up to make grants or otherwise directly engage in social impact work. Some are set up by individuals, others have been set up by institutions, companies or even governments. Examples include foundations such as NESTA, one of the largest foundations in the UK supporting science, technology and arts. The typical foundation has an endowment which is an amount of capital that it has been gifted, which generates income which it can use to fund its operations and make grants. Normally foundations are set up to make grants, but some foundations are now experimenting with using a portion of their endowment to make social investments into projects aligned with their social mission and values (so called ‘Mission Related Investing’ or MRI).
Some foundations are also willing to use a portion of the annual income generated by their endowment to directly invest in social ventures. This is known as ‘Program Related Investment’, or PRI, since they would be using the same capital that would otherwise be available to make program related grants. The PRI market in the United States in particular is very large thanks to the favourable US tax code for PRI loans (most PRI is in the form of low cost debt). Moreover, the US tax code requires PRI loans made by foundations to be at ‘below market rates’ of interest and with the primary purpose of creating social impact, not maximising profits. This makes the PRI market very attractive for US based social entrepreneurs looking to tap into this source of funds.
3. Impact Investment Funds
Impact Investment Funds are professional funds set up for the purpose of making investments into social ventures. Funds tend to provide either loans or equity but not both, as debt and equity are very different forms of investment. A few are able to offer either form of investment. Impact funds usually have a geographic focus (i.e. only investing in specific countries or regions) and a sector focus (i.e. renewable energy or water and sanitation). You should work out which funds to invest in your region and your sector. ‘Sector’ may be defined broadly – some funds such as Acumen, for example, support ventures serving the ‘base-of-the- pyramid’ i.e. economies where the average per capita income is less than $4 per day. But this could cover projects as diverse as clean cookstoves and affordable medicine.
Many impact funds are set up with a finite life, which is usually 7 years (a few go longer). That means that they must sell out of all of their investments by a certain date within 5-7 years from launch of the Fund and return all of their capital back to their investors. If you raise capital from an investment fund, expect them to sell their shares in your venture within that time-frame. In order for them to do this, they may ask you to begin preparing the whole company for sale sooner than that (within 5 years to give time for sale). You must therefore be open to selling your company in this time- frame if you raise funds from an Investment fund, and discuss with them if this is indeed their ‘exit strategy’.
The advantage of raising capital from an Impact Investment Fund is that they can usually invest in larger sizes than angel investors.
The typical Impact Fund can invest USD 1–3mn in a venture, and many can invest more. In fact, many funds prefer not to invest small amounts (i.e. below USD 1mn) as the amounts may be too small for them to manage efficiently. This means that funds often favour companies that are raising USD 1 – 5mn+ in capital. Examples of Impact Investment Funds investing in earlier stage social ventures include Acumen, Aavishkaar (investing in Indian social enterprises), the Beyond Capital Fund, BonVenture (in Germany), LGT Venture Philanthropy, and the OASIS Fund (managed by Bamboo Capital).
4. Government & Development Agencies
Development Institutions are governmental or quasi-governmental organisations set up for the purpose of financing regional development projects. They include large multilateral agencies such as the International Finance Corporation (IFC, part of the World Bank), the Asian Development Bank (ADB) and the European Investment Bank (EIB), as well as many other regional and local development agencies.
These agencies usually have substantial amounts to invest and are ideal for supporting larger scale projects, particularly in infrastructure, that can clearly be tied to a goal for developing a particular region. If your project falls into this category (for example, if you are building infrastructure to bring affordable energy to remote rural areas), looking at the websites of suitable Development Institutions might be a good research option for you. Many agencies will list clearly on the site how to apply to them, and the kinds of Funds which they manage. Funds will usually have a specific geography and sector in mind. Be warned though that Development Institutions typically run very rigorous application processes that may take considerable time, and could be 6 months or more on decision making. You therefore need to apply early and be prepared for the time commitment.
Some commercial banks lend through their Corporate Social Responsibility (CSR) programs. Banks only provide loans; they typically do not invest equity into businesses unless they manage their own Impact Funds. If you are looking for a loan from a bank, you should investigate which banks in your country have programs that lend to social entrepreneurs. This can be found through their websites.
Even if banks do not have an explicit social entrepreneurship or ‘Community Lending’ program, they may be able to provide you a line of credit or a working capital facility as a regular business customer. If working capital (i.e. the funding of cash shortfalls that arise from any timing mismatch between your revenues and costs) is an important feature of your venture, then approaching a bank for working capital funding can be a useful source of funding.
To learn more about how to map funders and find the right funder for your venture head to our Social Investment Toolkit website to download module 8 for free.