Raising capital: beyond the dollars and cents
Many social enterprises – organisations that exist to make a positive impact in the world while running a financially sustainable business – often see capital as the be-all and end-all. And while it’s certainly important and serves as one measure of success, it should not be the sole focus for organisations who want to build a resilient, thriving business.
Capital is a tool, not the goal
At Sefa, we help social enterprises take on debt and other forms of capital every day. What we continue to tell our clients is that while capital is an important tool, it is just that – a tool you use to keep your operations going and unleash your full impact potential.
Rather than looking at capital in isolation, think about how you will work with it. What will it do? How will it influence the decisions you make? Once you have it, what will it mean for how you run and manage the business? Capital needs to be integrated with all other operational elements of the business, rather than serve simply as a tick of a box or a sign of success.
And the only way to do this effectively is to roll up your sleeves before and after you secure that capital.
The work doesn’t end when the money lands
While securing an investment is important, the road to success doesn’t end there. Once you have the money in the bank, you need to make sure you can continue to repay the loan or demonstrate the effectiveness and outcomes of the grant or other capital you received.
You need to assess whether it made a difference to your product, customer growth or depth of impact you wanted to achieve. If not, you need to find out why. This requires honesty, the ability to step back and analyse, and the gutsiness to make tough decisions and sometimes say no. And then take the time to see if your decisions make a difference. If they did, you may have unlocked the plumbing system for your enterprise and impact model.
This knowledge will help you on the road to your next capital raise.
You’ll have bolder plans for making a positive difference with your venture on the issues you are looking to solve – with not only capital but also capability in the business by its side.
One of the benefits of debt is it provides an operational and financial discipline for organisations – something that grants don’t. Debt brings a lot of structure to the entire capital raising process, because it has a lot more rigour. And this is incredibly important for social enterprises to develop as they need to focus not only on impact, but also on running a professional, resilient business.
From a funder’s perspective, knowing an organisation has the structure and discipline to continue to repay the loan means they can invest in them with confidence.
The importance of preparing for capital
Social enterprises and funders often underestimate the importance of the work that goes into preparing for capital. Because it has less immediate and tangible outcomes (often its value shows up after you’ve secured capital) it tends to be overlooked.
Yet, if you don’t really know your business, how can you expect investors to back it?
Doing the pre-work – from getting clarity of your purpose through a Theory of Change, reviewing your governance arrangements and being comfortable with preparing future financial scenarios – creates a lot of value for organisations, well beyond the dollars and cents. And it provides assurance for funders that you know how the capital will work, the risks and opportunities associated with using it, and, in the case of debt, you will be able to make repayments.
Organisations who put in the time, are curious and want to unpack financial conundrums and questions gain more clarity and make well-informed decisions. They are more prepared to raise capital, will increase their chances of success and, ultimately, run a business better. Striving for social or environmental outcomes.
A big benefit of pre-work is the mindset shift that arises from it. It’s one of the most powerful things that can create change within an organisation. When you better understand your financials, your profit and loss and the multiple ways you can strengthen your business, you gain a lot of confidence. This can lead to changing how you position your proposals to customers, which can mean winning additional contracts and generating more revenue. And that could eliminate the need for investment.
Even if you’re unsuccessful in securing capital at a particular point, the preparation work can improve your overall business model and daily operations. And increase your chances of securing capital in the future.
It’s also important for funders to understand that this process is critical to enable an organisation to take on an investment. As funders, we can’t just expect an organisation to jump from startup to taking on repayable capital. It takes time and a lot of work.
Start at the beginning
The capital raising journey can take time. So start early, build trusted partnerships, be vulnerable and dive deep to get to know what makes and breaks your business. Take your time to get things right and see this as an opportunity to work on your business.
Finding purpose-aligned funders who get you, are prepared to go on the journey with you and be by your side for the long-term will make sure that your investment in time and effort also gets high returns.