The Challenge of Financing Social Startups

The second Social Impact Accelerator ended with the final pitch event in November last year. We let the ten startups go after twelve weeks of multi-layered input on impact management, storytelling, pitch training and funding, and valuable mutual exchange. And at the same time, we know that the zebras all face one common challenge:

As a social enterprise – where positive social impact is at the core of the business model – the big question is, „How do I finance my organization?“

Unlike Silicon Valley Unicorns, which attract investors with an attractive financial return and exit strategy, access to funding for social startups is more complicated. And yet, this access is exactly what is needed to scale positive social impact at the same time as the business model.

The following blog post highlights the complexity of the issue and explains three specific challenges that arise when financing social enterprises: The expectations of the Investors, the profit-driven perception, and lacking professionalism.

Investor Expectations

A 2019 publication from Tideline points out that a narrative has prevailed in the impact investment field over the past few years: One that says that market returns and risk-adjusted returns are possible while at the same time achieving positive social impact. However, this is because it took some investors who were willing to make concessions beforehand. It was only through them that the development of a market for impact investment became possible in the first place. But there are still many areas where impact investing is not yet practiced, and therefore investors must be willing to prioritize social impact over financial return.

Being Perceived as Profit-driven

Another obstacle to financing social startups is the for-profit perception of social startups by foundations and other philanthropic organizations. Selling products and services is seen as a commercial activity, which often makes it impossible for foundations to provide money. Here, the mechanism by which social entrepreneurs can make a lasting impact is not yet recognized, and project-oriented support persists.

Lack of Professionalism to Maximize Impact

Last but not least, there is also a need for action among social startups, as they often lack the know-how on how to build impact systematically and organizationally.

On the systematic level, this means having a clearly defined impact logic that can be reviewed and adjusted to ultimately scale. On the organizational level, this means having a business model that ensures the necessary resources for the activities and allows the organization to evolve.

Swiss social startups still have potential on both levels. Especially with the professionalization of management, a better basis for decision-making can be created for investors.

Knowing these challenges for financing social startups, SENS is determined to launch and host a workgroup on this topic. With an interdisciplinary approach to the topic, we want to clarify and simplify access to financial resources for future social startups in Switzerland, as it is the basis for expanding positive social impact through an entrepreneurial approach.

Please find in the following document (in German) further background on the context and the existing challenges and the outline of transformative financing.