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May 24, 2016

Evolving Sources of Capital for Local Social Entrepreneurs

From the viewpoint of an entrepreneur, capital is always scarce.  The most recent Ohio Venture Report found that Ohio startup and seed stage ventures needed seven times more capital than was currently available—and that is in the popular high technology sector.  Central Ohio social enterprises are fewer in number and more modest in their funding needs, yet their funding gap is even more severe.

The environment is changing, however, and here are a number of new ways for social entrepreneurs to tap capital to launch their businesses.

Small Bites    Two paths are opening to attract the investor who wants to invest $10 to $100.  This summer Columbus will gain its own website for individuals to make small, zero-interest Kiva loans to local businesses.  The “due diligence” process for Kiva is the borrower’s ability to have a local organization vouch for it and to convince at least 20 friends to lend at least $10 each.  The Center for Social Enterprise Development just approved creation of a dedicated fund to be one of those first-twenty lenders to local social enterprises.

In May new rules were promulgated by the Securities and Exchange Commission to allow companies for the first time to sell equity shares to small, non-accredited investors. The solicitation must be made through a broker or a SEC-registered online portal.  The maximum size of an individual’s investment is limited by personal income and assets.  For example, an individual with income of $30,000 and net worth of $105,000 can invest at most $2,000 per year through this channel.  Entrepreneurs should note that investors will generally expect the business to be a C-corp or Benefit Corporation.

Guarantors    Another way in which entrepreneurs can get access to conventional financing is to find a third party that agrees to guarantee the loan.  Recently two Ohio family foundations have provided loan guarantees that made conventional financing possible for local social entrepreneurs.

Attract outside capital    Recently the DRK Foundation of Menlo Park opened an office in Columbus to find local social enterprises that fit into their investment approach.  Apparently a number of non-local family foundations are also looking to Central Ohio for possible investments in social enterprise.

Creating a community of local impact investors    Venture Ohio notes that a local lead investor is usually critical to attracting outside investors, so it is ironic that outside investors appear more eager to invest in local social enterprise than is the local investment community.  Nationally a number of investment funds are forming to invest in social enterprise; however, they tend to be eight-figure-sized funds and they will need to focus on large-scale national and global opportunities to put that much money to work.

For our local social enterprises to thrive, large funds cannot be the answer but rather small funds that look to make five-figure investments in about a dozen local entrepreneurs over several years.  That almost certainly requires local investors.  If you are a woman interested in learning about being a local social impact investor, contact me about attending a Pipeline Angels information session this summer.  

Stay current on all the local social enterprise activity by  regularly checking and sharing our Facebook posts and tweets.

Want to work with these social enterprises?  The Center is hiring.  Send us your resume soon!  Applications close May 27.

 

Allen Proctor, President & CEO

Center for Social Enterprise Development