Could crowdfunding work for innovative social ventures?

The forecast of a £1 billion impact investment market by 2016 is indicative of the growing realisation that more fit-for-purpose funding is needed if social ventures are to be given the best chance of tackling the major problems society faces. From social accelerators to impact funds, much progress has been made in the attempt to create a more diverse and effective funder base. However, challenges still remain. One significant issue is access to seed capital for those social ventures that are doing something quite innovative and by extension has a high risk of failure. One potential new source of finance for this space is crowdfunding.

In the past, individuals who were keen to support something they were passionate about were usually left with only one option, giving a donation, and this was also usually restricted to registered charities. One of the benefits of crowdfunding is that it allows individuals to back projects in a variety of new ways and to get something in addition to ‘warm glow’ when contributing money to something they care about. The rewards model allows backers to get some gift or perk in exchange for their contribution, and for social ventures there may be significant potential to deliver rewards that hold a lot of value for donors but cost the entrepreneur relatively little. This can be an excellent way of getting some seed funding without getting into debt or giving away an equity stake in the venture.

But not every venture is in a position to offer rewards that get backers excited and in any case it can be difficult to raise larger amounts of money through rewards crowdfunding. In these cases lending and equity crowdfunding may be more suited. While debt is often not the best instrument for startups (given the high interest rates startups are usually charged and the burden of repaying a loan when the business is still in its infancy), some platforms facilitate lending that can work for social ventures. BuzzBnk, a UK platform offer social enterprises the opportunity to seek low-interest or principal only loans from the crowd (or loan plus reward combinations) and the facility to borrow for longer periods of time.

cf

However for those startups that incur significant costs before they are in a position to start generating revenue and patient capital is needed, equity financing can be the best option. Equity crowdfunding for stratups has lots of potential but is not without its challenges, not least of which is attracting investors to ventures that are high risk when the returns are unpredictable. The financing of social ventures is one area where the model has to potential to work well however. The direct connection of people who are passionate about solving a problem to ventures that are trying to do so, presents the opportunity for the venture to obtain investment from investors that consider a double bottom line. Socially-minded backers may be willing to invest in a venture that would produce too small a return or be too risky for purely commercially-focused investors, but still have the potential to deliver significant financial and social value. However there is the risk that regulators, when considering the model, may only consider those investors that are purely financially motivated and develop regulation that prevents social ventures benefiting from investment from the crowd.

Another benefit that applying the crowd-based finance model to social enterprise funding may provide is a way of measuring the potential impact a particular venture may have. When a large number of investors are willing to give interest-free loans or invest in ventures that may not succeed in returning their cash, it can serve as a good indicator that the venture has a good chance of having significant impact. Given the challenge faced by all investors in the space when it comes to measuring impact, this crowdsourced impact evaluation may serve as a complementary resource for other funders.


By Liam Collins and Peter Baeck 

@liam_p_collins

@PeterBaeck