Find Flexible Capital
Experienced social entrepreneurs cite flexibility as the most important attribute of external financing, giving them the room to iterate their model and shift resources as they learn more about the nuances of the need they are addressing and as the ecosystem changes.
“Flexible” capital is capital that can be repurposed as new needs arise, and can be completely flexible (e.g., a general support gift) or somewhat restricted (e.g., a grant that releases payments according to broad milestones but does not dictate how to reach those milestones). Flexible capital is in contrast to more highly restricted capital, which often comes with extensive requirements for reporting against an original budget, or grant reimbursements that are issued only as predefined expenses are made.
Social enterprises understand the rationale for why many funders must constrain their funding to agreed purposes and line items. At the same time, many enterprises spoke about trying to increase their unrestricted donations or grants as a hedge against inevitable setbacks or challenges, or against central administrative costs that can be hard to fund. While many grants are in fact restricted to specific programmatic uses, the entrepreneurs in our sample reported using a number of strategies to identify more flexible funding sources, provided narratives for different types of grants/donations, and made the case to potential funders for this type of flexibility.
Lesson 1: Evaluate new sources of unrestricted funding as you scale
Water.org on unrestricted funding from corporates. While many organizations rely on traditional sources of unrestricted capital, such as high net worth individuals, Water.org found great alignment with corporate partners. While its corporate foundation partners typically provide restricted grant funding, Water.org has received significant, unrestricted funding from corporate partners.
In addition to individual donors and corporate partners, other interviewees discussed sources of unrestricted capital ranging from low-interest loans (assuming a business model that can support regular loan payments), earned income, crowdfunding, competitions or awards, some accelerator programs, and more.
Lesson 2: Carve out uses of cash that give you more flexibility
One Acre Fund on having an unrestricted funding “story” and balancing restricted and unrestricted capital. One Acre Fund (1AF) has a funding mix of about 60% restricted and 40% unrestricted capital. In large part, this has to do with donor segments (e.g., 1AF seeks “big bets” from individuals, which typically come as unrestricted grants) and clear guidelines about saying no to funding (i.e., it does not take restricted funding for programs it would have to newly create). To support this approach, and in order to resonate with the intended donor, 1AF recommends crafting a clear vision and story of how unrestricted funding will be used. For example, many donors are interested to scale what works, so 1AF makes a case for support to scale its core program (without making specific promises about particular geography). They also highlight core attributes of their core program — the SROI (social return on donor dollars, showing how far donor dollars can go), the program’s replicability and scalability, and — most importantly — the program’s impact on farmers. 1AF’s mix of unrestricted and restricted funding allows it to support the more difficult components to fund, such as shared administrative services and broader field-building. (To learn more about One Acre Fund’s approach to scaling, read their scaling snapshot.)
Water.org on R&D funding. Water.org previously created and ran a “New Ventures Fund” to support R&D around new innovations. This innovation focus is a core strength of Water.org about which it is able to tell a clear story, providing examples of innovations that have succeeded (including the pilot and launch of Water Equity). With this fund in place, donors that were not comfortable with completely unrestricted funding, or who wanted to use their philanthropy more as “risk capital” could allocate their dollars to the fund, understanding its intended purpose and history of success. Meanwhile, Water.org was able to attract more flexible funding that was not restricted to specific programmatic outputs and outcomes.
Lesson 3: Use business and/or venture plans to help you crowd in other funders
Water and Sanitation for the Urban Poor (WSUP) on unrestricted funding through a business plan. Neil Jeffery, current CEO of WSUP, credits WSUP’s four-year largely unrestricted grant from UK’s DFID with helping to support the entire business plan against which WSUP was operating — as opposed to just supporting a specific program activity or set of outcomes. The funding gave WSUP stability over a number of years, allowing it to test and adapt its intervention, and push resources into different areas as it needed to pivot to achieve its plans. (To learn more about WSUP’s approach to scaling, read their scaling snapshot.)
Living Goods on a Venture Capital approach to grant fundraising. Chuck Slaughter, founder of Living Goods, infused his deep commercial experience and approach to running a business into LG at its inception. He created a business plan and made a confident and compelling case to funders, which included his vision and plan, his team, and their track record. Importantly, he did not waiver on needing unrestricted funding to test and iterate his model to meet tangible milestones. Once he got a few funders to sign on to his plan, others joined. In the first few years, he raised several grants of $100,000–300,000, for which 90% of the money was unrestricted. This approach continues in 2018, as Living Goods maintains a significant portion of unrestricted funding. (To learn more about Living Goods’ approach to scaling, read their scaling snapshot.)
Advice from the Field on Attaining Flexible Capital
As you’re getting started:
- Sell funders on your vision and milestones rather than on your specific activities in order to give yourself the most room to develop and shift resources according to need. (See examples from Mulago Foundation’s How to Track Progress.)
- Create a clear operating plan and treat your donors and investors as partners, informing them as you learn, so that you can build trust. The more trust, the more likely they will provide more and more flexible funding.
- Look to build relationships with local, high-net- worth individuals and corporate donors to raise your unrestricted funding levels.
- Seek out social entrepreneurship-focused foundations and accelerator programs, which aim to invest flexible capital.
As you’re digging deeper:
- Through detailed cost accounting, tell a clear story with specific figures about what you need unrestricted money to do and why it is necessary.
- Be crystal clear about the costs that will not decrease as you scale your model and thus will require ongoing unrestricted subsidy.
- Carve out an R&D fund to encourage investment from donors interested in funding innovation but less willing to commit to more general flexible funding.
- When working with corporates, find out what they care most about in terms of marketing, branding, or integration with their businesses. These factors may matter more than restrictions on the cash they provide.
- If you have recurring revenues and can afford regular payments, consider low-interest loans as a strategy to garner capital with more flexible use restrictions.
Read next: Diversify Funding including Impact Investing, Financial Advice from Scaling Through Mass Disruption, or return to see all articles in Money Matters.
This article was written by Catherine Clark, Erin Worsham, Kimberly Langsam, and Ellen Martin and released in March 2018.