Senior Director, GSBI, Global Social Benefit Institute

July 10, 2015

Over the last 12 years the Global Social Benefit Institute (GSBI®) – housed at the Miller Center for Social Entrepreneurship at Santa Clara University – has worked with over 360 social enterprises. During that time, GSBI staff have seen far too many social entrepreneurs waste precious time chasing the wrong investors.

There are many criteria to consider when targeting investors and that is why the GSBI concentrates on helping social enterprise become investment ready. After focusing on things like their value proposition, business model, and unit economics, our social entrepreneurs work with their GSBI mentors to get to a justifiable ask.

A justifiable ask has four elements:

1. Amount of capital. How much money is needed by the social enterprise?

What is important to consider is not just the specific amount, but whether it makes sense in the context of where the social enterprise is in its lifecycle. An enterprise that has raised $200,000 in grant funding and then goes out to ask for $1,500,000 won’t pass muster for investors. That gap is too large to bridge.

An organization that is running on $200,000 won’t have the systems or management team in place to deploy that amount of capital. The question becomes how to reduce the size of the ask, and achieve a proof point along the way that justifies a larger amount.

On the other hand, asking for an amount of money that will barely achieve the next milestone isn’t the right solution either. Experience demonstrates that it takes more time and therefore more money to achieve important milestones.

It is not prudent to budget to a best-case scenario. There is a danger of getting locked into a constant fundraising mode, which no one enjoys, and that doesn’t allow the social entrepreneur to focus on what they are passionate about – creating impact.

2. Type of capital. Program staff at the GSBI hear many social entrepreneurs say, “We are looking for $250,000 in grants, debt, and equity.” Which is it? These are very different forms of money with very different consequences.

If debt is taken on, there needs to be a well-understood path to paying it back. Equity means taking on long-term business partners. Is that what is truly desired? Are these the right partners? And for equity to work, there needs to be an exit, an initial public offering, or an acquisition where another entity will buy the shares sold. Is there a possibility of that?

For many of the social enterprises we see, equity isn’t the right form of capital and yet it is used because it tends to be the default. But there are innovations happening in impact investing to create other financial vehicles to get capital into the hands of social entrepreneurs to help them achieve their goals in a way that works for them.

The Demand Dividend being piloted by the Miller Center’s Impact Capital team is one example. It is a debt vehicle that is friendly towards social entrepreneurs with payback based on free cash flow instead of a fixed term.

3. Use of capital. How will the funds be used? It is important to be specific – “growing our operations” isn’t good enough. What are the plans to do that?

Examples may be to open a new hospital, expand to a new state, build a sales and marketing team. Possible funders need to see that a social entrepreneur has thought critically about what it takes to get them to the next level.

4. Impact of the capital. Be clear about what will be achieved with the capital. In some cases the impact may be purely social; in other cases there may be both social and financial impact.

An early stage social enterprise looking for grant funding most likely will be purely social, and that is fine; that’s what grant funders expect. However, as the social enterprise matures, demonstrating both social and financial impact is expected.

When stating impact results, remember that you are making a commitment to potential funders: You invest your capital in me and I will achieve these stated results. On one hand, a social entrepreneur should be comfortable knowing how to achieve the results; and on the other, there should be some discomfort. Stretching, but not to a break point. Social entrepreneurs need to learn to live with this tension, among others.

To ease the tension, the response can’t be to give vague answers, for example “we will train thousands of youth.” A far better statement is, “in 2016, we will train 2,300 youth.” Again, a level of specificity demonstrates critical thinking and understanding of the business.

With a justifiable ask a social entrepreneur can now target impact investors that are most likely to be interested in their endeavor. This cuts down the time and frustration spent fundraising, by getting to high-quality meetings that can result in funding commitments.