Ashley Richardson, Enterprise and Innovation Lead at Peabody, offers her perspective on the grant vs. investment debate and suggests some reasons why investment might be the route to take after all
Many social enterprises are rethinking their business models and exploring more sustainable financial options. It is said that without access to sustainable revenue streams, contracts, capital and workspace, 90% of social enterprises fail in their first three years of business.
A simple search of available finance for social entrepreneurs leverages different financial opportunities, many of which can be appealing but what are the drawbacks? Despite the apparent advantages of grants, there are some disadvantages which may get you thinking about taking on investment.
According to one prominent London funder, in 2016 2917 grant proposals were submitted of which 1033 received funding- competition is fierce, and the success rate is not favourable (approx. 35%). Arguably one of the most significant drawbacks of grants is the money you receive is typically bounded to outcomes and restricted in how you spend it which can reduce its effectiveness in a growing enterprise. Add to this the grant terms are usually between 1-3 years and you are forced to start the process over before the grant term even comes to an end.
It is important to know your business and therefore understand the level of risk you are willing to take but a hybrid investment may be a positive step forward and can work brilliantly alongside other income streams.
Here are four reasons why investment might be your next step.
- Flexible– the first five years of a social enterprise can be trying. We know that things often don’t go as forecasted and so changes are essential. Investors understand this and tend to be open to change, especially if that change is likely to make your business succeed.
- Support– investors take time to know your business and therefore your needs. Unlike a grantor, investors are more likely to get involved and support your organisation. Your success is linked to theirs, and thus the relationship can be developed further to provide essential support, especially for start-ups.
- Freedom – Social investment can be less restrictive, as funding is not linked to specific outcomes and projects. You have the opportunity to specify what your needs are and how the investment can be used. There are fewer restrictions on what can be resourced and things such as capital budget, staff income, management costs are not off limits.
- Financial sustainability – Social investment forces organisations to ensure the financial and business processes are robust and effective. Before you obtain investment, you will have to be very clear on your priorities and objectives as a business and how you intend to achieve your plans. This can be especially helpful in driving your business to the next level and can bring about organisational resilience.
There are many investors, trusts and foundations on the market that offer social investment meaning there is probably one out there that aligns with your business. Before choosing one, do your research, ask plenty of questions and look at the track records. This relationship is one that can last for years so make sure they are a good fit for you and your business.
If you’re considering social investment for the first time, the Good Finance website provides a range of information and resources to help, including an overview of the different types of social investment to help you decide what might be right for your enterprise.