Securing Investment

CHAPTER

Securing Investment

social enterprise solutions MODULE

Securing Investment

Fundraising or securing investment is the process of raising money for an intended purpose. Your enterprise can pursue one or more different types of funding. Identifying the lifecycle stage of a business venture can help you to decide which funding opportunities are most appropriate for your situation.

For example, start-up funding is commonly available for social enterprises who are in the initial stages of setting up and operating. On the other hand, there may also be funding or contracts which are only available to experienced enterprises who have a track record of performing well.

Sources of funding

Different stages of start-up or development require different sources of funding and capital. Typical sources of financing for start-ups include:

Government grants and other private grants

These are a great source of financing for your rural social enterprise.

Grants are non-repayable funds given by one party (often a government department, foundation, or trust) to a recipient (social enterprise, business, or individual). In order to receive a grant, you are usually always required to fill out a grant application – detailing what you will use the money for.

Grants are often made to fund a specific project or set of goals, and might require a level of compliance and reporting. You may have to prove that you are meeting the goals stated in your grant proposal and provide evidence of this.

The major providers of grant funding will differ from country to country, but are generally provided by governments, government agencies, and support organisations who exist to support and develop social enterprise. Grants are also commonly offered by foundations, private companies, and lotteries.

Getting grants can be tough – there may be strong competition and the criteria for awards are often stringent. Some grants require you to match the funds you are being given, the amount of match funding required varies, depending on the granter.

Generally, you will need to provide:

  • A detailed project description
  • An explanation of the benefits of your project
  • A detailed work plan with full costs
  • Details of relevant experience and background on key managers

At a European level, there are various funding programs and grants available, such as: the European Regional Development Fund, the European Social Fund, and the European Agricultural Fund for Rural Development. At an international level, there is also the International Fund for Agriculture Development.

Business Incubators

Business incubators or ‘accelerators’ provide support for new businesses in various stages of development. However, there are also local community development incubators, which focus on areas such as job creation for rural community members, community revitalisation, and partnering to host and share services.

Commonly, business incubators help new and start-up businesses to develop by providing services such as management training or office space. As well as sharing or providing premises, incubators may offer share their administrative, logistical, and technical resources.

Generally, the incubation phase can last up to two years, and once the product or service is ready, the social enterprise will leave the incubator’s premises to start out on its own.

The Welsh ICE (Innovation Campus for Enterprise) is based in Wales, in the UK, and offers co-working spaces at reduced rates for start-up enterprises. The benefits of working in close proximity to other start-up enterprises results in natural referrals, partnerships, and peer support networks. The Campus also host expert workshops, advice surgeries and mentoring.

Read more about the Welsh ICE here.

Fundraising, donations, and sponsorships

Another source of financing for rural social enterprises is through fundraising, donations, and sponsorships. For rural and community-owned enterprises, fundraising and charity events can be a good way to raise funds via donations from individuals, groups, and businesses.

Holding fundraising events in your community can be a good way of encouraging local stakeholders to get involved and make a donation to your cause. You may also discover potential partnerships, and be able to pool resources and expertise.

Membership Fees

This is a source of financing for member-based organisations. Membership organisations offer specific benefits to their members, including:

  • Professional association with a well-known and respected organisation
  • Perks such as free consultancy and support, or discounts to conferences and other events
  • Networking opportunities with people and groups (locally, regional, national, or international, depending on the type of organisation)
  • Membership organisations also sponsor industry awards, which shine a light on outstanding work that should be showcased, but might otherwise remain undiscovered

Angel Investment

Angels are generally wealthy individuals or retired company executives who invest directly in small enterprises owned by others. They are often leaders in their own field, who not only contribute their experience and network of contacts, but also their technical and/or management knowledge.

In exchange for risking their money, they reserve the right to supervise the enterprise’s management practices. This often involves a seat on the board of directors and an assurance of transparency.

To meet them, you have to contact specialized associations or search websites on angels. At European level, there is the European Business Angels Network (EBAN), a non-profit association representing the interests of early stage investors across Europe.

Established in 1999, EBAN is today a pan-European organisation that connects early-stage market players from Europe and all over the world. Another network is Europe Angel Investors, whose website shows angel investors per country and location, and their history of investment.

Crowdfunding

Crowdfunding is a modern tool for funding a project or venture by raising small amounts of money from a large number of people, typically via the internet. Crowdfunding is seen as a form of alternative finance, and has been used by a number of social enterprise projects.

ReTweed is a social enterprise in the Scottish Borders, providing support to women with training programmes in textile skills and a safe space for women to meet, talk, learn, create, and craft together. They launched a crowdfund campaign in 2019 to fund their activities.

Read more here: https://www.crowdfunder.co.uk/bordersbags-from-retweed—plastic-free-bags

Killin and Ardeonaig Trust is a community organisation in rural Stirlingshire, who raised investment via crowdfunding to purchase their local newsagent shop to enable them to lease it to a social enterprise for community benefit.

Read more here: https://www.crowdfunder.co.uk/more-than-a-post-office

There are different crowdfunding platforms depending on what you are raising funds for. Two of the most popular sites for business, social enterprise, or creative project crowdfunding are Kickstarter and Indiegogo. You can read more about the differences between crowdfunding platforms here: https://www.crowdfunding.com/selection/

This presentation given by Tim Wright from twintangibles  (a leading crowdfunding consultancy organisation in Scotland) explains the 4 models of crowdfunding, top tips, and things to avoid: https://www.highlandtsi.org.uk/crowdfunding

Social Investment

Loans are an option to provide repayable finance to help an organisation achieve a social purpose. Charities and social enterprise can use repayable finance to help them increase their impact on society, for example by growing their business, providing working capital for contract delivery, or buying assets.

Some investors have a focus on social investment and some mainstream banks provide an element of loans with a social purpose.  To secure loan finance you will need a solid business plan and financial projections.

Scottish Community Reinvestment Trust provide an outline of loan options here:  https://scrt.scot/investment-options/

There is a useful page with country specific access to loan investment in other parts of Europe available here:  https://europa.eu/youreurope/business/finance-funding/getting-funding/access-finance/search/en

It is important to understand what the best source of funding is for your organisation. This might be one, or a combination of several. As well as understanding which source of funding is best, it is crucial to be aware of the various investment rounds which take place.

Be aware that there also different funding sources from country to country. We have outlined below, some additional general funding sources which are available in Finland and Scotland, and Romania and Estonia.

Romania and Estonia

If you are considering funding sources where other investors have an element of ownership or shares in your social business, their equity will be the amount of control they hold over your business.

Equity is the owner’s claim on the assets of the business, that is, the difference between what they own and what they owe. Essentially, equity tells a business owner or investor how much the firm is worth after all the debt is repaid.

Venture Capital Financing

Venture capital is not necessarily for all entrepreneurs. Generally, venture capitalists are looking for technology-driven businesses and companies with high-growth potential in sectors such as information, technology, communications, and biotechnology. Therefore this might not be for all rural entrepreneurs.

It is worthwhile to note that venture capitalists take an equity position in the company to help it carry out a promising but higher-risk project. This involves giving up some ownership or equity in your business to an external party. Venture capitalists also expect a healthy return on their investment, often generated when the business starts selling shares to the public.

Rural enterprises that are already selling their product or service, typically use venture capital funding to promote, establish and scale their business. An external round of funding becomes necessary for hiring key resources as well, regardless of the fact that they may or may not be profitable.

Therefore, this money can be used for:

  • Advertising and brand visibility
  • Distribution of the product or service
  • Entering new markets, engaging with different demographics
  • Achievement of defined goals and sales targets
  • Expanding a team
  • Infrastructure: equipment, office space, salaries
  • Scaling the start-up

Personal Investment

When starting a business, including a rural social enterprise – your first investor should be yourself. Either with your own cash and personal savings, or with collateral on your assets (building, land, machines, trucks, skills, etc). This proves you have a long-term commitment to your project and that you are ready to take risks.

This is typically the very first investment of money, used for market research, and development of the product or service. Often when applying for grant funding, the funder may require you to put up an amount of your own money – to show that you are serious about your project.

Seed Capital

This is money loaned by a spouse, parents, family, or friends, which can be ‘returned’ later as your rural social enterprise goals are accomplished and you yield a return. This further investment of money is also used for the beginning stages of market research and the development of the product or service.

When borrowing love money, you should be aware that family and friends rarely have much capital and they may want to be part of the social change projected to happen. Not all start-ups need seed funding, but in some cases it is critical in order to get a start-up out of its infancy and bring the product or service to market.

Scotland and Finland

If you are considering funding sources where other investors have an element of ownership or shares in your social business, their equity will be the amount of control they hold over your business.

Equity is the owner’s claim on the assets of the business, that is, the difference between what they own and what they owe. Essentially, equity tells a business owner or investor how much the firm is worth after all the debt is repaid.

Community Bonds

Community Bonds offer the opportunity to raise finance from the wider community.  Community bonds are non-transferable and non-tradable.

Typically, they are unsecured, non-convertible and like other investment, they do carry risk so a return on investment or capital is not guaranteed.  The main attraction for community investors is the social return for their communities that they see from their investment along with a financial return.

Investors receive interest upon maturity, but the interest is dependent on the performance of the Community Loan Funds, hence the returns are variable according to the profits available.  At the end of the term, the investors receive back their initial investment plus a lump sum of interest if the funds performed well.

More information on Community Bonds is available here:

https://scotcomfinance.scot//wp-content/uploads/2019/02/SCRT-Pagesscreen-res.pdf

Community Shares

Community shares provide an opportunity to attract investment from people who support your community benefit objectives and have proven effective for rural social enterprises.

Community members buy shares in a social enterprise providing goods and services that meet their needs and in turn, the enterprise is controlled and governed by the community it serves.

Community Shares can attract significant investment and are best for larger scale developments with a requirement to form a Community Benefit Society, to allow a community share offer to be established.

Community Shares Scotland provide support to assist organisations to consider and work through the process of establishing community shares.

Read more info here: https://communitysharesscotland.org.uk/our-support/

Community shares have helped to launch and grow a wide range of thriving community businesses. Examples include:

Specific funding sources

Some examples of sources of financing available for start-ups and small, medium-sized social enterprises from the ViSEnet partner countries are offered below.

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