People have been talking for years about the “valley of death” between seed money and growth capital that confronts and sometimes swallows up social enterprises. Now we’re finally starting to see a critical mass of funders willing to fill the gap with capital combinations designed for enterprises that maximize social and environmental value.
All startups face this funding gap, but it’s more difficult for social enterprises to traverse. The social enterprise model is less familiar to funders of all types. A lot of early-stage investors—even in the impact sector—like to see the hockey-stick growth graphs typical of tech pitches. But social enterprises think about growth as a way to serve their mission, not as an end in itself. They may intend to remain rooted in a community and serve as a model to others, for example, rather than pursue rapid and far-reaching expansion. Or they may need a longer runway to build a supply chain or other systems, because they can’t just plug into an existing infrastructure that’s part of the problem they’re seeking to address. They may also have hybrid business models that put them outside conventional for-profit and nonprofit funding models.
These are the challenges a growing number of funders—investors, philanthropists, foundations, and debt providers—are working to address. While the dominant model remains a compartmentalized world where venture capitalists aim to make as much money as they can in the shortest possible time and philanthropists give money to donation-dependent nonprofits, forward-looking funders are taking an approach that crosses conventional boundaries.
New Funds Address Hot Impact Areas
In 2012, RSF Social Finance launched the RSF Local Initiatives Fund, in collaboration with lead donors, to pilot an integrated capital approach to financing regional food systems—one that coordinates investments, loans, and grants to provide flexible capital for social entrepreneurs. That project proved to us that providing a tailored mix of different types of capital can help early-stage social enterprises deliver on their missions. Funders were excited about the results as well, and we are about to launch four new Integrated Capital Funds: the RSF Fair Trade Fund, RSF Biodynamics Fund, RSF Soil Health Fund, and RSF Women’s Fund.
These philanthropic funds will provide loan guarantees, equity investments, and other types of capital that position social enterprises—for-profits, nonprofits, and hybrids—to obtain additional equity or debt financing and give them time to develop. We intend to support catalytic enterprises, and we know that not all of them will succeed. The goal is to recycle about two-thirds of money into new financing (we’ll consult the lead donors in each fund on the exact target ratio).
The focus for each fund is based on needs our community identified. The Biodynamic Fund and Soil Health Fund grew out of regenerative agriculture advocates’ search for the next step beyond organic. The Women’s Fund is designed to serve women-led social enterprises. The RSF Fair Trade Fund will provide loans to our fair trade borrowers’ suppliers when existing sources don’t meet those suppliers’ financing needs. For example, the fund might lend to a yerba mate farmer who sells to Guayakí (a beverage company that sells organic, fair-trade yerba mate tea leaves and drinks) and needs an irrigation system that costs $35,000—that’s too much to fund through microlending and too little for a big agriculture lender such as Rabobank. We will approve loans through a social underwriting process based on the trust we have in our own borrowers. This only sounds radical; in many ways it’s back to the future—an old-fashioned community banking approach to lending.
The Model Works—and Is Available for Adoption
Community foundations and other organizations could form similar funds, or take a similar approach to support social enterprises of all types. The model is proven: In the first two years of our pilot Local Initiatives Fund, we deployed $2 million to 40 early-stage sustainable food and agriculture enterprises, with a focus on technical assistance grants, loan guarantees, convertible notes, and place-based shared gifting circles; those funds have leveraged well over $10 million in additional financing to date.
One essential element of making this work is recalibrating our thinking around gift funding. Our purpose with these funds is to be agile and opportunistic so that we can get the right capital to the right entrepreneurs at the right time. To that end, we’re requiring minimal reporting. Philanthropy has developed a compliance culture that puts a lot of focus on layers of reporting and calculating return on investment. But making a true gift rightly involves releasing control. We think the movement to measure every little thing is a waste of people’s time; recipients should be able to just get to the work. It’s not about being sloppy or undisciplined. It’s about reestablishing a more human-centered sense of accountability.
Our goal, which we hope others will join us in achieving, is to use low-interest loans, loan guarantees, equity investments, and other instruments from philanthropic funds to leverage significant amounts of market capital for social enterprises. If philanthropic funders start using their money fearlessly where it has the greatest chance to spur sustainable social innovation, we could collectively fill the funding gap for social entrepreneurs who are on the ground testing and modeling better ways to solve our collective problems.