If We Want Social Enterprises to Thrive, We Need a New Funding Approach
by Don Shaffer
What will it take to build a thriving social enterprise sector that can lead the way to the next economy?
That’s a question that’s always on our minds at RSF Social Finance, and we’re convinced that one essential step is to challenge the dominant funding model. In that compartmentalized approach, venture capitalists aim to make as much money as they can in the shortest possible time, philanthropists give money to donation-dependent nonprofits, and early-stage investors — even in the impact sector — look for the hockey-stick growth graphs typical of tech pitches. (“Growth Financing for Social Enterprises: 5 Options and How to Make Them Work for You” provides an analysis of funding options.)
We need to rethink the purpose of capital for social enterprises and adopt an approach that crosses conventional boundaries — a model RSF calls integrated capital. Integrated capital is the coordinated and collaborative use of different forms of capital (equity investments, loans, gifts, loan guarantees, and so on), often from different funders, to support a developing enterprise that’s working to solve complex social and environmental problems.
Integrated capital addresses the funding challenges social enterprises face in a number of ways. It allows for longer development times by including some types of investment that don’t need to make a large return (or any return). It gets enterprises through the “valley of death,” where they have a promising business model, technology, product, or service, but need more capital to realize its potential and don’t qualify for traditional financing. And when community foundations and local investors participate, it creates a community commitment to the enterprise’s success.
Don Shaffer is President & CEO at RSF Social Finance