Early Stage Social Enterprises: Read This Before Raising Grant or Equity Capital
When I look at my podcast download stats, one episode stands out: bootstrapping a social enterprise. It makes sense: finding grant money or equity investors takes a lot of time and effort, and it’s not guaranteed.
In my experience, there are pros and cons to spending all that time applying for grants or raising equity capital. At times, taking the bootstrapping route can be the better option, especially if your goal is scale. Here’s my breakdown of the pros and cons of finding and taking “free” grant money or raising capital early on.
- If you raise early capital, you don’t have to eat Ramen noodles while you’re building your social enterprise. You can pay yourself a reasonable salary, maintain a certain standard of living and maybe even enjoy a few luxuries.
- Another advantage is that when you take capital from a big-name funder, like the Bill & Melinda Gates Foundation, you get a kind of credibility. It tells others that they’ve checked you out and you’re OK. This can add some clout to help you find future partners, like investors, universities and employees.
- Early capital gives you the ability to hire a team, so you don’t have to do everything yourself from day one.
Of course, grants or equity capital can be your only option if you’re developing hardware, or something with a lot of upfront R&D cost. They also have a role to play in funding entrepreneurs from poorer backgrounds with a great idea. But if you do have an option, weigh the cons against the pros before you decide.
When you take grant money, you’re beholden to your donor.
Your donor(s) will hold you accountable to certain deliverables and milestones; most of the time, you are agreeing to do certain things in exchange for the money. You’re doing those things because you have a theory of change — if you do certain things, people’s lives will be improved, which is what donors want. You’re agreeing to give up some flexibility in exchange for a grant. It has its obvious benefits, but it can be limiting. In reality, things can change. The best way to tackle the problem is not necessarily the one you started out with; your thesis might even change. If you’ve accepted donor money, it might be harder to adapt.
You’ll be pressured to focus on impact early on, rather than building a company.
In a successful social enterprise, the product or service comes before the impact. You need to build the car before you go the distance. If you’re too concerned with the impact early on, you might not be focused on what’s important — like whether the product is a good fit for the market. While demonstrating impact early on makes donors happy, it might not be the best thing for building a scalable business.
Elon Musk once said “The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model.”
So focusing on impact too early would rule out this option of building a really good product or service, gaining a foothold in the market with higher-income customers, and then making your product or service much cheaper at scale.
When you take early capital, your costs will exceed your revenues.
I see this all the time: people raise capital, grow their team, but when the capital runs out, they can’t continue paying people. So they hop from one grant or investment round to the next without balancing their costs and revenue.
As a bootstrapped startup, it forces you to be disciplined about spending money. Hiring someone is a big decision because it increases the rate at which money goes out the door. Consider instead having received early capital. You have a healthy bank balance and hiring people is an easy decision to make. When the grant runs out, hopefully your revenues would have grown to meet your increased costs. If not, then it’s back on the cycle of raising funds, taking your focus away from building a product that people will pay for.
Raising grants and reporting to donors is a time sink for the whole team.
The process of raising grants is lengthy, and time consuming. First, there’s the task of researching donors. You need to painstakingly go through their website to find out whether they’re a good fit for your social enterprise. There are thousands of potential donors, so the common shortcut is to ask your peers and advisors for recommendations. Even this can be a slow process. Once you have the shortlisted donors in your sights, the next step is a long and drawn-out courting process. There’s hours of research to find out what they fund, how they fund, when they fund, and how to apply for funding. It may be that there’s an ‘open call’ for applications, so you need to spend hours preparing your application and then waiting for the results. You might fly out to conferences to meet them or try to find an introduction from your network. Finally, once you get the funding, there’s the due diligence process, the monitoring and evaluation forms to fill in, the narrative report to submit, the countless ‘check in’ calls and the visitors to host when the donor’s in town.
Ultimately, grants and investors can distract you from your business and customers.
Greg McKeown said in his book ‘Essentialism’ – “If you don’t prioritise your life someone else will.” As mentioned above, when you take grant money, you’re choosing to spend a considerable amount of time on the donor, rather than on your business. Early on, you should be learning all the jobs that are necessary to grow your business. You’re doing your finances so one day you can write the job description for a finance manager. You’re doing customer service, so one day you can write the job description for a customer service manager. You’re doing sales, product design, running an office, driving the delivery truck, onboarding new customers – the founding team needs to do everything in the early days. That’s a lot on its own, and it takes focus. Worrying about donors and investors only makes it more complicated.
Audrey Cheng’s Story of Bootstrapping Moringa School
Audrey Cheng is a successful founder who swears by the bootstrapping approach and is living proof that it can work.
Audrey spoke to me about her journey. It began while working for a Kenya-based investment firm. There she saw many founders seek funding too early. They ended up getting a really poor deal and having to give up huge chunks of their company because they weren’t showing enough growth. She’d also seen what grants had done to founders. She learned that grants could be quite distracting, taking away the discipline of selling and iterating a product with real customers.
When she started Moringa School, a tech skills accelerator in Nairobi, Kenya, she decided to do it differently. She worked a summer fellowship before starting, so she would gain more skills and enough money to start her company. She invested some of her savings into the company and kept some aside to cover her living expenses.
As with any new company, it was hard to get traction early on. She interviewed over 120 applicants for their first class of students. She finally convinced 4 high-quality students to pay the full tuition fees for her first cohort, and her startup was born.
She managed her accounts ruthlessly, taking courses in advanced excel and pushed herself to learn new skills quickly. Every dollar spent had to be justified. Moringa was focused on providing clear value to students from day one.
The experience taught her discipline. She ensured that every hire was a great addition to the team and that they would make a clear contribution to the bottom line. She wasn’t distracted by delivering milestones to donors or reporting back on ‘lessons learned’. Her team was lean and fully occupied.
When she went out to raise her first investment, it was from a position of strength. Moringa had reached a reasonable scale, her team was strong and they felt confident they could meet the expectations of donors and investors. The discipline she learnt from bootstrapping has made its way into the company culture and stands her in good stead for continued growth.
This article aims to give early stage social entrepreneurs food for thought when considering raising external capital. But with writing and getting feedback, I’ve realised there’s so much nuance to explore. Such as the idea of giving grants to entrepreneurs from poorer backgrounds, as a more equitable approach to entrepreneurship and development. Or the effects on worker health and the environment when operating at lower costs. What is your perspective on this? Tweet it out or share it on LinkedIn to encourage debate amongst your peers. Or leave your comments below. Thanks to Satya Suri, Rachel Sklar and Audrey Cheng for reviewing this article.