Social funding for social enterprises
Crowdfunding pools small donations from supporters to fund social projects. Claudia Cahalane finds out what makes it so appealing Claudia Cahalane, Tuesday 1 February 2011 09.30 GMT
Social enterprise Pants to Poverty is doing phenomenally well. Last year, the fairtrade and organic underwear business sold 70,000 pants and has seen a growth rate of 100% year-on-year since it began in 2005. The company is now at a critical junction where it can no longer develop organically without an injection of capital. Founder and CEO Ben Ramsden needs £250,000 to take new sales staff, buy stock and update IT systems. But despite success banks haven't offered him any decent financial offers. So he's now attempting to 'crowdfund' his business's growth, instead. Ramsden is looking for a group of supporters to offer him smaller amounts of money, rather than trying to get a big chunk from one or two sources. This also means he won't have a loan to repay.
Crowdfunding worked for Obama – he got $137 million in small donations for his election campaign. It also worked for the makers of climate change documentary the Age of Stupid. And, so far, it appears to be working for Pants to Poverty too. "Through networking, we have managed to get 15 people committed to the money or 'bond' and we are likely to have 34 by the end of February," says Ramsden. "The goal is to find 100 people who will all give £2,500. They will get 12 pairs of pants each, a tax break of just over twenty pounds, and a say in the future of the business ," adds the entrepreneur. At this stage, funders won't be offered equity, but this might be an option one day, says Ramsden. Crowdfunding has found itself in the spotlight since Obama's success. Social enterprise experts, including Cliff Prior, CEO of UnLtd, think this is perhaps the hottest fundraising prospects the sector has seen in years. "It is the holy grail of new efforts to raise social investment from the wider public," Prior says. "A number of the people we support are using crowdfunding sites or trying to raise local subscriptions. Some are using bond issues via companies such as Allia." So far the success is limited, but Prior says the market is "bubbling up." With their bond, Ramsden and his lawyers hope to create a new crowdfunding model that other social enterprises can use in the future, adding to options that already exist online, such as Wefund, Sponsume and Rockethub. Such sites let public donate to projects in exchange for rewards; like tickets to an exhibition they have helped fund. An alternative could be a crowdfunded loan from an outfit like Funding Circle. The company usually gives better interest rates to lenders and borrowers than banks and within ten weeks of launching last year, stacks of investors had loaned more than £1 million to listed companies. The latest platform in the market is Buzzbank, which launched earlier this month and is similar to Wefund et al, but allows more flexibility with donation and social loan options available. Additionally, unlike most other sites, there is an option for certain companies to fund growth of the entire business, not just a single project. Lily Lapenna, founder of youth money management enterprise MyBnk is seeking £100,000 through the site for the business.
33needs, another crowdfunding platform, will launch on 1 February. It will provide space to social enterprises looking for loans. Those who fund the loans can receive a specified share of revenue over a set period of time. So far, founder Josh Terrick has had nearly 900 requests from social enterprises around the globe who want to be listed, although he's only accepted 200 – from those he feels are 'answering a pressing need'. Tracey Spokes, founder of arts social enterprise the 13 Theatre Company, plans to use 33needs to try to crowdfund £25,000 for a musical. She is excited about the prospect. "It seems a good way to get people interested in the project. It gives the general public the chance to be 'angel investors' and feel they are part of an exciting new venture." But do investors want more than potential revenue sharing or free tickets? Do they want an equity stake in the businesses they fund, in the way the dragons do? We can find that out when another new platform, Crowdcube, launches on 10 February. "Crowdcube will give ordinary people the chance to be virtual armchair dragons. Anyone can invest as little as £10 in a business listed on the site," says co-founder, Luke Lang. "Once the investment target is met, the company is financed and investors receive shares and equity in the business with full dividend rights." One of the first socially-minded listings on the site is a company which has already received lottery funding to trial its business model and now requires £120,000 to build an equine-assisted psychotherapy business. Useful tips: • Prepare list of supporters and fans before you go out to ask for money Communicate effectively what you need and what you are proposing in return (make your offer unique to your project) and keep supporters regularly updated • Remember to build your own admin costs into the project, as well as the 5% that most platforms take if your fundraising bid is successful. And, ensure you have a buffer in case any promised funds don't materialize • Bear in mind that with most platforms, if you don't reach your target, you won't get any money. • Buzzbank, however, does allow users to set financial milestones, and if some of these are reached, that money can be claimed by the lister • Expect more crowdfunding platforms (UnLtd is getting several requests a month for funding towards such sites)
• Spend time on getting more supporters, it was vital for Obama and it is likely to be vital for you