SOCIAL ENTREPRENEURSHIP: DEFINING AND FUNDING AN EMERGING FIELD Michael Brett Walker A Thesis Submitted to the University of North Carolina Wilmington in Partial Fulfillment of the Requirements for the Degree of Master of Business Administration Cameron School of Business University of North Carolina Wilmington 2012 Approved by Advisory Committee Noreen O’Shea Claire Auplat Vince Howe Chair Accepted by Dean, Graduate School
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SOCIAL ENTREPRENEURSHIP: DEFINING AND FUNDING AN EMERGING FIELD
Michael Brett Walker
A Thesis Submitted to the University of North Carolina Wilmington in Partial Fulfillment
of the Requirements for the Degree of Master of Business Administration
Cameron School of Business
University of North Carolina Wilmington
2012
Approved by
Advisory Committee
Noreen O’Shea Claire Auplat
Vince Howe Chair
Accepted by
Dean, Graduate School
ii
TABLE OF CONTENTS
LIST OF TABLES .......................................................................................................................... v 1. INTRODUCTION ...................................................................................................................... 1 2. LITERATURE REVIEW ........................................................................................................... 2
2.1. Defining Entrepreneurship: Harvard Almost Had It Right ................................................... 2 2.1.1. Definitions ....................................................................................................................... 3 2.1.2. Final Definition ............................................................................................................... 4
2.2. Defining Social Responsibility: Taking the ‘C’ out of CSR ................................................. 4 2.2.1. Definitions ....................................................................................................................... 4 2.2.2. Final Definition ............................................................................................................... 6
2.3. Defining Social Entrepreneurship: We Do Not Accept Donations ...................................... 6 2.3.1 Definitions ........................................................................................................................ 7 2.3.2 Final Definition ................................................................................................................ 9
2.4. Current State of Research on Social Entrepreneurship ....................................................... 10 2.5. The Funding Gap ................................................................................................................ 11
2.5.1. Venture Capitalists ........................................................................................................ 12 2.5.2. Angel Investors ............................................................................................................. 13 2.5.3. Bootstrap Financing ...................................................................................................... 13 2.5.4. Incubators ...................................................................................................................... 14 2.5.5. Microfinance ................................................................................................................. 15 2.5.6. Crowdfunding ............................................................................................................... 16
3. RESEARCH PROPOSITIONS ................................................................................................ 19 4. METHODOLOGY ................................................................................................................... 20 5. FINDINGS ................................................................................................................................ 21
5.1. A Look at the Non-Crowdfunding Alternatives ................................................................. 21 5.1.1. Venture Capital and Angel Investment ......................................................................... 21 5.1.2. Bootstrapping and Incubators ....................................................................................... 23 5.1.3. Microfinance ................................................................................................................. 25
5.2. Crowdfunding ..................................................................................................................... 27 5.2.1. Promotion, Promotion, Promotion ................................................................................ 27 5.2.2. Rewards and Recognition ............................................................................................. 28 5.2.3. The JOBS Act and Equity-Based Crowdfunding ......................................................... 29 5.2.4. Match Funding .............................................................................................................. 30
5.3. New Funding Methods: Low-Profit LLCs and Program Related Investments ................... 31
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6. DISCUSSION ........................................................................................................................... 33 6.1. Crowdfunding Promotion Model ........................................................................................ 33
6.1.1. Clarity of the Idea ......................................................................................................... 34 6.1.2. Appropriate Communications ....................................................................................... 34 6.1.3. Creative Content ........................................................................................................... 34 6.1.4. Connection and Involvement ........................................................................................ 35
6.2. Crowdfunding Recognition and Rewards ........................................................................... 35 6.3. Different Funding Methods for Different Funding Ranges ................................................ 36 6.4. Will Equity-Based Funding Help Social Entrepreneurs? ................................................... 36 6.5. Using Other Methods as Inspiration ................................................................................... 37
6.5.1. Venture Capital: Management Team Criteria ............................................................... 37 6.5.2. Bootstrap Financing: To-Do List Before Starting a Crowdfunding Campaign ............ 38
7. CONCLUSION ......................................................................................................................... 40 7.1. Research Limitations .......................................................................................................... 40 7.2. Future Research .................................................................................................................. 40
7.2.1. Crowdfunding Promotion Model .................................................................................. 40 7.2.2. Top Funding Methods for Social Entrepreneurs ........................................................... 41 7.2.3. Impact of Equity-Based Crowdfunding ........................................................................ 41 7.2.4. Short-Term Incubator Business Model ......................................................................... 42
BIBLIOGRAPHY ......................................................................................................................... 43 APPENDICES .............................................................................................................................. 46
Appendix A: Interviewed Persons’ Profiles .............................................................................. 46 Appendix B: Interview with Carmin Black ............................................................................... 47 Appendix C: Interview with Shu Shu Zheng ............................................................................. 49 Appendix D: Interview with Mike Norman ............................................................................... 51 Appendix E: Interview with Dr. Howard Rasheed .................................................................... 53 Appendix F: Interview with Carlos Parajon .............................................................................. 57 Appendix G: Interview with Justin Gerock ............................................................................... 60 Appendix H: Interview with Alissa Orlando ............................................................................. 64 Appendix I: Interview with Alex Budak .................................................................................... 67 Appendix J: Crowdfunding Promotion Model .......................................................................... 71 Appendix K: Top Funding Methods for Social Entrepreneurs .................................................. 72
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ABSTRACT
This study first examines existing definitions of entrepreneurship and social
responsibility that helps filter through current characterizations of social entrepreneurship, a
subcategory of entrepreneurship, whose definition varies greatly in existing literature. The study
then proposes a working definition for social entrepreneurship that will be used to wholly
understand the boundaries of this study. After defining social entrepreneurship, I look at the
current state of research and present what I believe is a research gap in the funding of social
entrepreneurship and gather further research on the topic. My secondary research ends with a
review of current funding options for social entrepreneurs. I then provide research questions and
three propositions indicating crowdfunding as an ideal funding option for social entrepreneurs.
To confirm my propositions, I complete eight semi-structured interviews with individuals
highly involved in the funding options identified in my research. Through these interviews, only
one of my three propositions is confirmed. My findings highlight several strengths and
weaknesses associated with the different funding methods and introduce new funding
possibilities available to social entrepreneurs. I then discuss implications of the findings and lay
out guidelines for social entrepreneurs using crowdfunding. The study concludes with
suggestions for further research and points out its limitations.
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LIST OF TABLES
Table Page
1. Existing Definitions of Entrepreneurship ................................................................................. 3
2. Existing Definitions of Social Responsibility ........................................................................... 4
3. Existing Definitions of Social Entrepreneurship ...................................................................... 7
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ACKNOWLEDGEMENTS
I would like to thank all of my professors and the staff at the University of North
Carolina Wilmington for providing me a strong foundation to work upon; Dr. O'Shea, Dr.
Laviolette, Samanta, Corinne, and Dominique at the Novancia Business School in Paris for
creating a great study abroad environment to learn and grow in; and most of all my parents for
always supporting me in every decision I make.
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DEDICATION
To my brother, Kent.
I wish for you
nothing but the best in life.
You are a better person and have a greater impact
on people than you could
possibly know.
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1. INTRODUCTION
“We make a living by what we get, but we make a life by what we give.” When Winston
Churchill said this, I don’t think he had social entrepreneurship in mind. Nonetheless, the quote
touches so well on the basic fundamentals of social entrepreneurship that it is hard not to make
the connection. Working to live, but living to give is at the heart of this field. Fighting to keep a
business running so that it can improve the lives of those needing help. This is the obstacle social
entrepreneurs fight every day to overcome.
The purpose of this study is to assist social entrepreneurs in this struggle between
sustainability and generosity, to recommend a form of funding for social entrepreneurs not fully
engaged at this time. I do this by analyzing social entrepreneurship and uncovering gaps between
this field and general entrepreneurial funding. I analyze the different options available and offer
a solution to remedy the funding problem experienced by social entrepreneurs. Interviews of
industry experts are then used to support or discredit my propositions. These findings inspire a
model to help social entrepreneurs maximize funding procurement for a specific funding method.
The study concludes with recommendations on future research for the social entrepreneurship
field in regards to funding.
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2. LITERATURE REVIEW
2.1. Defining Entrepreneurship: Harvard Almost Had It Right
Before reviewing literature on social entrepreneurship, it is important first set boundaries
for the research. To set boundaries on the term is to define exactly what is and what is not social
entrepreneurship. That seems to be a problem with the variety of definitions for social
entrepreneurship currently found in literature. To remedy this problem, the study’s literature
review has researched and analyzed definitions of entrepreneurship and social responsibility to
help form a definition for social entrepreneurship; providing a clear formwork for the study to
operate within.
Similar to how the term social entrepreneurship is currently being debated,
entrepreneurship went through a difficult period of dissimilar expert opinions. Cunningham and
Lischeron (1991) wrote about the challenge of defining entrepreneurship and focused on six
schools-of-thought with four separate underlying beliefs. Ultimately, they left it up to the
researcher (or educator) to decide which explanation of entrepreneurship is most appropriate for
his specific objective. But a unified and universally understood definition of entrepreneurship is
needed if there is any hope to for researchers to begin defining subcategories of
entrepreneurship. Because of this, definitions developed from researchers in the field of
entrepreneurship have been examined to create a single definition that can be used as a outline
for defining social entrepreneurship
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2.1.1. Definitions
Table 1: Existing Definitions of Entrepreneurship
Most all of these definitions hit on an important part of entrepreneurship, creating value.
There are also underlining themes of realizing and pursuing an opportunity through resource
acquisition. The definition formed by Dr. Howard Stevenson and eventually adopted by the
Harvard Business School, “the pursuit of an opportunity beyond the resources you currently
control”, is a popular definition of entrepreneurship; but it omits a seemingly important trait seen
in the other definitions, creating value. Subsequently, I have chosen Dr. Stevenson’s definition
and adapted it to include the concept of ‘value creation’ seen in the other definitions.
Author Definition
Churchill, N. C.
“The process of uncovering and developing an opportunity to create value through innovation and seizing that opportunity without regard to either resources (human and capital) or the location of the entrepreneur – in a new or existing company” (Maier and Pop Zenovia, 2011).
Schumpeter, J. and Swedberg, R.
“The ability and willingness to undertake the organization and management of production. Entrepreneurship involves the recognition of opportunities (needs, wants, problems, and challenges) and the use of resources to implement innovative ideas for new, thoughtfully planned ventures.” (Baker et al., 2007)
Stevenson, H. “The pursuit of an opportunity beyond the resources you currently control” (Stevenson, 2000).
Barthélemy, G. “The recognition of an opportunity to create value, and the process of acting on this opportunity, whether or not it involves the formation of a new entity” (Schoof, 2012).
Bhattacharyya, S. “Something new, something different that would change the rules of the game and transmute values” (Bhattacharyya, 2006).
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2.1.2. Final Definition
For the purpose of this review, the definition of entrepreneurship is the creation of value
through the recognition and utilization of an opportunity that requires external resources.
Subcategories of entrepreneurship can now be easily defined by identifying specific types of
value creation, pursued opportunity, and/or acquired resources.
2.2. Defining Social Responsibility: Taking the ‘C’ out of CSR
The term social responsibility has been examined to help define social entrepreneurship.
It is assumed that social responsibility is an important element of which social entrepreneurship
comprises. As it currently stands, research on corporate social responsibility (CSR) is abundant.
However, the terms ‘corporate’ and ‘entrepreneurial’ are not interchangeable and thus these
definitions, in their current form, are not suitable in helping to define social entrepreneurship.
Given the goal of this literature review and the inadequate quantity of research on social
responsibility, ‘social’ components of CSR definitions have been analyzed whilst ignoring their
‘corporate’ elements.
2.2.1. Definitions
Table 2: Existing Definitions of Social Responsibility
Author Definition
World Business Council for Sustainable Development
“Sustainable economic development working with employees and their families, local community and society as a whole, in order to improve their standard of living” (Crisan and Borza, 2012).
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Davis, K. & Blomstrom, R. L.
“A person’s obligation to consider the effects of his decisions and actions on the whole social system” (Tetřevová, 2011).
Jones, T. M. “The notion that corporations have an obligation to constituent groups (stakeholders) in society other than stockholders and beyond that prescribed by law and union contract” (Tetřevová, 2011).
Carroll, A. B. “Encompasses the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time” (Tetřevová, 2011).
Kotler, P. & Lee, N.
“A commitment to improve the community’s well-being through discretionary business practices and contributions of company resources” (Saunders, 2012).
The notion of an obligation, expectation, or commitment appears in most all of the
definitions. These terms coincide with the “responsibility” half of social responsibility where an
individual or organization is assumed to meet or aid in achieving certain social expectations.
Where the definitions do not agree with each other is when they attempt to describe the “social”
component. Crisan and Borza (2012) and Saunders (2012) talk about improving well-being and
standards of living; while Tetřevová (2011) goes into more detail by specifying economic, legal,
ethical, and discretionary expectations to society that go beyond laws and contracts. I feel it is
problematic to try and identify all of the different kinds of duties society might expect to be
fulfilled. These can be subjective and unique to each person and group. Because of this,
Tetřevová’s (2011) elaborations of societal expectations will be omitted from the definition of
social responsibility.
Promoting well-being and higher standards of living seems to be a good starting point to
explain the “social” facet of social responsibility. The definition should connect these
improvements with their recipients. Crisan and Borza (2012), Tetřevová (2011), and Saunders
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(2012) have identified beneficiaries of social responsibility as stakeholders outside the
shareholders, as the surrounding community, and as society in general. Limiting social
responsibility to stakeholders and local communities does not allow it to occur between
unfamiliarized parties. The term “society” fixes this problem but it is awkward using this word as
part of social responsibility’s definition when “society” is essentially part of the term. Therefore,
the beneficiaries will be described as any group of people whose standard of living is considered
unsatisfactory and who are the target of improvement from an individual or another group.
2.2.2. Final Definition
For the purpose of this review, the definition of social responsibility is the expectation for
individuals and organizations to improve a specific group’s unsatisfactory standard of living. It is
now possible to define social entrepreneurship after defining the terms “entrepreneurship” and
“social responsibility”.
2.3. Defining Social Entrepreneurship: We Do Not Accept Donations
Social entrepreneurship is a term under dispute and looks to be struggling to find its place
in the academic world. There is no unified definition, which makes it hard to develop a “proven
method, code of practice, or core business model to follow” (Dacin, M. et al., 2011). With each
new piece of literature written on the topic, a new definition seems to accompany it. According
to Dr. Stacey Childress, even the faculty at Harvard Business School cannot agree on how to
define social entrepreneurship (Harvard Business School, 2008). As a result, I have assembled
different definitions of the term and will use these along with the final definitions for
entrepreneurship and social responsibility to shape a definition tailored to my research goals.
7
2.3.1 Definitions
Table 3: Existing Definitions of Social Entrepreneurship
Author Definition
Davie, G. “Most often refers to someone who launches a for-profit or nonprofit venture with a social change agenda such as healthcare delivery or job creation” (Davie, 2011).
Dacin, Dacin, & Tracey (2011)
“Combines for-profit and nonprofit organizational activity” (Dacin, M. et al., 2011).
Boschee & McClurg “Uses earned income strategies to pursue a social objective, and a social entrepreneurs differs from a traditional entrepreneur in two important ways: traditional entrepreneurs frequently act in a socially responsible manner, secondly, traditional entrepreneurs are ultimately measured by financial results” (Dacin, P. et al., 2012).
Hartigan “Work is aimed at progressive social transformation … A business to drive the transformational chance. While profits are generated, the main aim is not to maximize financial returns for shareholders but to grow the social venture and reach more people in need effectively. Wealth accumulation is not a priority – revenues beyond costs are reinvested in the enterprise in order to fund expansion” (Dacin, P. et al., 2012).
Tracey & Jarvis “Identify and exploit market opportunities, and assemble the necessary resources, in order to develop products and/or services that allow them to generate “entrepreneurial profit” for a given social project” (Dacin, P. et al., 2012).
Dacin, Dacin, & Tracey (2012)
“Applying business principles to solving social problems” (Dacin, P. et al., 2012).
United Kingdom: Department of Trade and Industry
“Primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximize profit for shareholders” (Chell et al., 2010).
Dr. Stacey Childress “Pursuit of an opportunity to create pattern-breaking social change regardless of resources you currently control” (Harvard Business School, 2008).
8
These definitions emphasize using for-profit business models and strategies to solve
social deficiencies. This is the key difference between social entrepreneurship and conventional
entrepreneurship. While the success of entrepreneurship is traditionally measured in financial
terms, Dacin, M. et al. (2011) states that social entrepreneurship aspires to solve a social problem
and as a result has two missions. First, a social value creation mission is the entrepreneur’s
absolute motive. Second, an economic value creation mission that is only necessary to sustain the
social value creation. In other words, profits come second to improving unsatisfactory standards
of living; both remain important in social entrepreneurship.
Davie (2011) and Dacin, M. et al. (2011) include nonprofit activities in their definitions,
but this contrasts with the previously stated definition of entrepreneurship. Nonprofit
organizations create value using external resources but rarely do they pursue an opportunity. Dr.
Stacey Childress believes that social entrepreneurship is different from nonprofits in the way it
attempts to help. She states that “rather than trying to do what traditional nonprofits do, which is
to form workarounds to broken systems to make the pain a little less painful, social entrepreneurs
actually try to intervene at the level of root causes and solve the problem or at least dramatically
change the shape of the problem.” In other words, social entrepreneurship tries to treat the actual
illness whereas nonprofit efforts are seen as only treating the symptoms. Consequently, I have
excluded nonprofits from the definition of social entrepreneurship.
Revisiting the final definition of entrepreneurship provides a framework to start crafting a
definition for social entrepreneurship. It needs to create value, pursue an opportunity, and utilize
outside resources. This review’s final definition of social responsibility describes the type of
value creation that is associated with social entrepreneurship, by improving a specific group’s
unsatisfactory standard of living. The opportunity identified and exploited in social
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entrepreneurship cannot be restricted to one category. Dacin, P. et al. (2012) and Dr. Childress
do not limit the types of potential opportunities because they seem to understand that is part of
the beauty of social entrepreneurship. An individual can transform a supply chain, invent a
product, or innovate existing business models to stimulate social change. I believe new
opportunities in social entrepreneurship can only be limited by its actors’ imaginations and
creativity.
The acquisition of external resources differs some in this sense. While actors of social
entrepreneurship should seek out resources any place they are available, they should bear in
mind the differences between their organization and nonprofits and how they restrict some
funding opportunities. Social for-profits do not receive the same amount of funding through
donations as nonprofits despite working toward similar goals. This is because the simple fact of
making a profit deters donors away from social entrepreneurship (Smith et al., 2012). Therefore,
it seems like organizations operating under the scope of social entrepreneurship must rely on the
same resources as other for-profits. With all of this information, I am now equipped to form a
definition for social entrepreneurship.
2.3.2 Final Definition
For the purpose of this review, the definition of social entrepreneurship is improving a
specific group’s unsatisfactory standard of living through the pursuit of an opportunity and by
using external resources available to for-profit organizations.
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2.4. Current State of Research on Social Entrepreneurship
Despite not having a formal definition, there are still ample amounts of research on social
entrepreneurship. According to Dacin, M. et al. (2011), this research has been more qualitative
than quantitative. They identify the need of scholars to apply and adapt existing entrepreneurial
theory to social entrepreneurship instead of trying to ‘reinvent the wheel’ with new theory. Yet,
adapting models from entrepreneurship could be problematic given the double bottom line
required by social entrepreneurship (Dacin, P. et al., 2012). As previously stated, profit is the
primary motive in traditional entrepreneurship. Conversely, both social change and profit are
required to qualify for and sustain social entrepreneurship. As a result, existing models may not
be easily adapted for social entrepreneurship’s bottom line. It appears that without a unifying
definition with established boundaries, this field could be pulled in multiple directions and never
successfully speak with one voice (Davie, 2011).
One example of this happening can be seen in the contrasting views of Gregory Dees and
Paul Light, two scholars in the field of social entrepreneurship. Dees sees social entrepreneurship
as the initiative of individuals whose “abilities are innate” instead of being learned (Davie,
2011). Light disagrees with Dees and sees a shortcoming with this kind of thinking. He believes
that focusing on a certain type of person may result in a “cult of personality” and exclude support
for certain types of people and organizations who are deserving of it (Davie, 2011). I think both
provide valid points, not everyone is made to be an entrepreneur but those who don’t fall into the
traditional mold should not be held at a disadvantage.
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2.5. The Funding Gap
As mentioned earlier, a double bottom line exists for social entrepreneurship (Dacin, P. et
al., 2012). Dacin, M. et al. (2011) asks the question if social entrepreneurship presents “higher
legitimacy hurdles than conventional entrepreneurship, given the need to demonstrate both
financial and social worthiness?” Entrepreneurs in this field must create social change and
generate profits to be considered successful, and these two requirements can sometimes be at
odds with each other. Because of this, funding is a unique obstacle to overcome. Social
entrepreneurship has the donation possibilities of a nonprofit and the capital acquisition options
of conventional for-profits. In each instance, however, social entrepreneurs appear to be at a
disadvantage. Organizations that do not operate to generate a profit have an easier time attracting
donations (Chell et al., 2010). According to Schoof (2012), financial self-sustainability is an
important trait for socially entrepreneurial ventures. This could deter donors away from these
organizations because they feel contributions would be put to better use towards an organization
that cannot support itself without donations, such as a nonprofit. Consequently, I have doubts
whether donations can be a practical funding option for social entrepreneurship. Likewise, for-
profits with a single bottom line (concerned with making profits and have no social change
mission) seem to have an advantage over social enterprises when attracting investors. Investors
are primarily concerned with making money through their investments instead of improving
society. If they wanted to put money towards a worthy cause, they would most likely look to a
nonprofit instead. This means that gathering outside funding is a chief concern for the social
entrepreneurship field.
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2.5.1. Venture Capitalists
It seems today that one of the most popular terms when it comes to funding is venture
capitalist. Entrepreneurs often dream of attracting interest from these individuals because it is not
unusual for their investments to be hundreds of thousands or perhaps even millions of dollars. In
fact, most venture capitalists do not invest less than two million dollars (Lavinsky, 2010). Along
with the capital, these investments regularly include expert advice and an expanded network
provided by the investors (Van Slyke and Newman, 2006). Unfortunately for young or
inexperienced entrepreneurs, venture capitalists are more inclined to invest in companies whose
leaders have had past exposure to the market or relevant field (Pandey et al., 2003 and Prelipcean
and Boscolanu, 2008). New and small businesses also have a hard time drawing interest.
According to Vishnu Varshney, one of India’s first venture capitalists and CEO of Guharat
Venture Finance, venture capitalists invest in well established companies and provide less seed
capital (Pandey et al., 2003). They are unlikely to invest in a company that has not reached
certain milestones, such as developing a product or securing customers (Lavinsky, 2010). I
believe that given the economic climate and financial crisis, this unwillingness to invest in riskier
companies is one way these investors are reducing their risks.
Social entrepreneurs could have an even harder time enticing venture capital investments
because of their double bottom line. Venture capitalists want to invest in companies that are
committed to high returns (Prelipcean and Boscolanu, 2008). As mentioned earlier, social
entrepreneurship’s main commitment is to social change; profits come second and in some
instances may even be pledged to benefit the organization’s social mission. Venture capitalists
13
do not appear to be an ideal starting point for social entrepreneurs to search for funding,
especially if they are inexperienced or starting a new company.
2.5.2. Angel Investors
Angel investors are an alternative that seems to be more promising. They outnumber
venture capitalists and have invested more (total) capital than there counterparts (Lavinsky, 2010
and Jensen, 2002). It is also much easier to obtain funding from these ‘angels’ (Lavinsky, 2010).
They are wealthy individuals who invest their own funds into projects that are too small or new
for venture capitalists (DeGennaro, 2010). Another significant difference is the angels’ long-term
outlook and patience when it comes to financial returns (Collewaert, 2009).
While angel investors provide less funding than venture capitalists, a large majority still
seem to expect positive financial returns. I believe they are a better alternative for traditional
entrepreneurs, but may not solve the funding problem faced by social entrepreneurs. Angel
investing is one of the least studied methods to finance new companies; meaning research
connecting it to social entrepreneurship is even scarcer (Wong et al., 2009). It may be possible to
attract cause-aligned angels, just as it would be possible with similar venture capitalists;
however, there is no indication throughout the research I have done that indicates these types of
investors are prevalent and a practical funding option for most social entrepreneurs.
2.5.3. Bootstrap Financing
According to (Carter and Aukan, 2005), bootstrap financing is the largest source of
financing for entrepreneurs. It is defined as the use of personal funds instead of external finance
to meet resource needs and launch a venture (Carter and Aukan, 2005 and Bhide, 1992). There
14
are many different forms of bootstrapping such as using personal savings, credit cards, equity
loans and mortgages, delaying payments to suppliers, and withholding the owner’s salary (Carter
and Aukan, 2005 and Loyola University, 2008). These are considered traditional bootstrapping
methods and carry with them certain advantages and disadvantages. Since the money originates
from the entrepreneur instead of coming from an outside investor, the flow of money is more
carefully examined making it easier to identify problems (Bhide, 1992). However, the self-
funded entrepreneur is taking on much more risk if the business should fail. Bootstrapping may
also not be an option for a lot of entrepreneurs; either because they have little to no money in
savings, a low credit limit, no major asset to take an equity loan out on, or a small network with
no connections to suppliers. I believe bootstrapping is not enough to solve an entrepreneur’s
funding problem. In addition to my concerns over its practicality for most entrepreneurs, my
research has identified a gap between social entrepreneurship and external funding. Since
bootstrapping is an internal answer to a lack of funding, I do not believe it is a valid solution.
2.5.4. Incubators
There are places, both physical and virtual (Moraru and Rusei, 2012), where young
businesses operating in similar fields can come together and draw upon each other’s knowledge
and expertise. Incubators work to help companies endure their first few years by providing an
array of services (Early, 2010 and Moraru and Rusei, 2012). According to Moraru and Rusei
(2012) and Chandra and Fealey, 2009), these can include services such as training and
professional advice, access to mentors, rented space and an office infrastructure, and a network
of external connections to fulfill legal needs. They also talk about the range of financial services
incubators offer to its member companies. These include help in obtaining government grants
15
and contracts, business plan development, added credibility when applying for a bank loan,
connections with banks and investors, and even exit options such as an IPO or acquisition help
(Early, 2010 and Chandra and Fealey, 2009).
But there appears to be a drawback to relying on incubators to help solve the funding
issue; the number of companies that are approved and helped by incubators is a fraction of the
total looking for funding assistance. According to Chandra and Fealey (2009), there were
approximately 1,000 incubators in the United States in 2005. Early (2010) states that a little over
27,000 companies were provided services and help by these incubators during that year and a
year later in 2010 there were still only around 1,000 incubators in this country. The growth of
these organizations seems slow and the number of firms they support too few. I believe this is
because incubators in the United States are “funded primarily by government grants and
university and corporate support” (Chandra and Fealey, 2009). In addition to this, they also
receive rental and consulting income; but it is not enough for most to become self-sustaining.
The business model of incubators appears to be limiting their numbers and thus restricting their
ability to help overcome the funding gap. Considering these factors and realizing that a large
majority of existing incubators are not likely to be supporting social-specific firms seem to “paint
a gloomier picture” for social entrepreneurship funding.
2.5.5. Microfinance
Microfinancing is the business of providing a range of different financial services (such
as loans, savings, insurance, and payments), traditionally to poor areas of the world where
conventional financing options are not generally available (Microfinance, 2005; Schnitzspahn,
2008; Reno-Weber, 2008; and Klein, 2010). According to Klein (2010) however, these services
16
are now being offered to small businesses that are having a hard time getting bank loans. The
most common form of microfinancing is a microcredit (Schnitzspahn, 2008 and Reno-Weber,
2008), where an individual receives a loan with an interest rate based on the size of the loan.
Reno-Weber (2008) explains how the level of interest rates depends on the size of the loan; a
smaller loan equals a lower interest rate.
I believe some social entrepreneurs could use this method to acquire funds. However, it
appears that microfinancing would become too expensive for projects that require a large sum of
capital and the entrepreneur would have to search elsewhere for funds. Also, as stated before,
this type of financing is mostly seen in low-income populations (Microfinance, 2005). Because
the trend of offering microcredits and other similar services to small businesses looks to still be
in its infancy, the availability of microfinancing to entrepreneurs seems insufficient.
2.5.6. Crowdfunding
Crowdfunding (also known as crowd sourcing) is a relatively new way to fund ventures.
It is the procurement of capital from a large collection of investors rather than the usual large
investment from one or a few donors (Wallace and Vuong, 2011). It is mostly web-driven (Blair,
2012) and offers new advantages to both the funded companies and the individuals investing in
them. (Greenwald, 2012) introduces his readers to Kickstarter, a crowdfunding website where
“startups keep their equity, maintain full control over strategy, and gain a committed community
of early adopters to boot.” He explains how donors do not have to pay for anything if the project
fails to reach its set target. Thus far, crowdfunding has consisted primarily of donors giving
money to individuals for small gifts or nothing in return. That looks to change as some websites
17
are hoping to start allowing entrepreneurs to offer equity shares, which could make a few venture
capital firms vanish (Greenwald, 2012).
Until recently, that seemed to be one shortcoming of crowdfunding, entrepreneurs not
being permitted to offer equity through these websites. In the past, the Securities and Exchange
Commission (SEC) has limited investments by prohibiting public solicitation and setting a
constraint on the number of non-accredited investors into one company (Shane, 2011). These
changed, however, after the JOBS Act was passed in April (Wasik, 2012). According to Walsh
(2012), the new law “opened the door for private companies to seek funding this way
[crowdfunding] from a wider pool of small investors, with fewer legal restrictions” adding “the
U.S. Securities and Exchange Commission (SEC) is expected to issue detailed rules for equity
crowdfunding in January.”
Close to 1.5 billion dollars were raised last year using crowdfunding; and that number is
projected to double this year (Wasik, 2012). With the new rules that are soon to be released in
2013, the rate of growth for crowdfunding activity could “skyrocket”. It seems like this type of
funding holds a lot of future promise for social entrepreneurship. It would be interesting to know
how the investors on crowdfunding sites feel about investing into a social-specific company
compared to a regular single bottom-line for-profit. CivicSponsor, a crowd sourcing website for
community/public projects (Wallace and Vuong, 2011), has already taken the crowdfunding
business model and applied it in a social setting. The site has even adapted the original model to
involved outside businesses, allowing them to match money raised by individual investors on
projects of their choice (Wallace and Vuong, 2011).
Crowdtilt, a crowdfunding website based out of San Francisco, originally started as a
social fundraising site similar to CivicSponsor. While cause-related campaigns were the site’s
18
focus, it also allowed users to raise funds for personal, non-social needs. Eventually James
Beshara, one of the company’s co-founders, noticed his website was being used more for things
like parties and vacations rather than charities. He and co-founder Khaled Hussein soon revised
the site’s vision to serve a wider audience instead of concentrating on its nonprofit roots. (Moran,
2012)
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3. RESEARCH PROPOSITIONS
After completing my secondary research on social entrepreneurship and funding options
available to entrepreneurs, I have identified what I believe to be a solution for the apparent
funding gap in social entrepreneurship. Crowdfunding is an exciting option for seemingly all
entrepreneurs. I originally feared that investors on crowdfunding sites would be more inclined to
provide equity-based funds to companies without a social change mission. However, motivation
to invest could resemble employee motivation, where non-monetary recognition for doing
something good can outweigh financial gains. Given social network sharing capabilities, I
believe individuals are equally or more motivated to invest in social-specific companies on
crowdfunding websites because of the goodwill recognition they could receive from their social
network. Based on this, my premise is that crowdfunding is the ideal method for social
entrepreneurs needing funding. With my primary research, I hope to explore the following
propositions:
P1: Social entrepreneurs are better served by crowdfunding than traditional
entrepreneurs.
P2: Social entrepreneurs’ funding needs are best served by crowdfunding over other
funding alternatives.
P3: Equity-based investments on crowdfunding websites will provide social
entrepreneurs with more access to funding.
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4. METHODOLOGY
To test my propositions, I relied on qualitative research. I used emails, website contact
forms, and social media to contact 25 individuals with varying experiences and expertise in the
different funding options available to entrepreneurs and analyzed earlier. I aimed to interview
people from various parts of the world with management or ownership-level involvement.
Because my propositions focused on crowdfunding, 11 of the 25 potential interviewees were
from crowdfunding websites. I requested online interviews via Skype audio-calls, which I taped
with a separate voice-recorder and transcribed myself.
Out of the 25 total individuals I contacted for interviews, eight agreed to be interviewed.
Appendix A provides a profile for each person interviewed. Seven of the eight interviewees
agreed to perform the interview over Skype while one requested an in-person interview. I was
able to get one person with experience in venture capital investments, two in bootstrap financing,
one in microfinancing, one that has researched funding and innovation in social
entrepreneurship, and three with experience in crowdfunding from separate websites. One of the
bootstrappers used the funding method (bootstrapping) to start a social enterprise while each of
the crowdfunding websites in my interviews serves a different market: general, social, and
equity-based crowdfunding. All of the transcribed interviews can be found in Appendices B
through I.
The interviews were semi-structured with a range of nine to 14 prepared questions. For
each interview, some questions were modified to correspond with the specific funding method
the interviewee was best acquainted with. Other questions were added to address issues not
present in the other funding methods.
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5. FINDINGS
5.1. A Look at the Non-Crowdfunding Alternatives
5.1.1. Venture Capital and Angel Investment
Carlos Parajon is a managing partner of Harbor Island Equity Partners. Thus far, Harbor
Island Equity Partners (HIEP) has invested in 17 companies in the five years of its existence. Its
scope is smaller than most private equity firms given its 25 million dollar fund. Mr. Parajon
states that while the overall criteria and amount of due diligence remains the same on deals
ranging from one million to one billion dollars, smaller companies working with smaller deals
“really have to focus on the management.” His reasoning behind this is because management
teams, CEOs, and owners and founders are more difficult to replace in small, family companies.
Parajon has never invested into a social venture before. He believes this is because a
business whose primary mission is social change does not fit HIEP’s criteria. Part of what the
private equity company is looking for in its investments is high levels of return. He explains how
a company who “comes to me with a farm idea to feed the poor and 50 percent of their profits
are going to a cooperative in India, that doesn’t meet our criteria.”
Carmin Black, a social entrepreneur and bootstrapper who owns HALF United, holds
similar opinions. Her company is currently in talks with a venture capital firm. Ms. Black
believes that leadership is a critical factor when venture capitalists consider investing in
businesses. She does not think that investors are concerned with whether the business is helping
a social cause and accepts that their major concern is making their money back. Dr. Howard
Rasheed, a professor from the University of North Carolina Wilmington, reinforces the venture
capital struggles experienced by social entrepreneurs when he states “it is probably easier to get
some kind of grant than it is to get venture capital for a social venture.”
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Mr. Parajon does acknowledge, however, that some private equity firms do include social
ventures into their strategies. While it is not typically part of private equity strategies, some firms
have focused their models on social entrepreneurship. Parajon introduces a firm located in
Durham, North Carolina known as SJF Ventures. Even though it does not operate purely within
the social entrepreneurship spectrum, SJF Ventures does “blur the line” with its emphasis on
sustainable agriculture and clean energy industries. The firm has a non-profit accelerator, called
SJF Institute, which attempts to link sustainable entrepreneurs with funding in the venture
industry. Parajon knows there are venture firms out there that are willing to receive lower returns
to help have a social impact. He also knows that it is “unusual, uncommon, and unlikely that you
are going to have that effort under the same roof as a typical venture capital private equity firm.”
While the availability of venture capital for social entrepreneurship appears to be limited
by strict criteria and investor needs, it is also important to look at the general accessibility of
venture capital to all entrepreneurs. Alissa Orlando with Hilltop Microfinance Initiative and
Justin Gerock with Pirate Holding Group both see this general accessibility as being restricted to
a lot of entrepreneurs. Ms. Orlando views venture capital as an option for “privileged
entrepreneurs” who have past knowledge of these services and the skills required to make a
quality pitch to potential investors. She believes that people who are looking for a few thousands
or tens of thousands of dollars for a venture do not meet those qualifications and that the scale of
their needs require a completely different source of funding. In Mr. Gerock’s experiences, a
person needs to have an extensive history of starting ventures and to also know someone, directly
or indirectly, involved in venture capital investments. He states that “it’s 95 percent who you
know and not what you know, not what your idea is” and that “it really comes down to who you
know as far as what money you are going to get.”
23
In every interview where angel investors were mentioned, they were grouped together
with venture capitalists. There was no distinction between the two and not once were angel
investors discussed without venture capitalists preceding or succeeding the term. Their skill-sets,
equity investments, and investment expectations were always stated as if they are one in the
same. Therefore, no new information on angel investing was found apart from what was
discussed during my conversations involving venture capital.
5.1.2. Bootstrapping and Incubators
As previously mentioned, Carmin Black is a social entrepreneur who used bootstrapping
to fund her business. Along side her brother, Ms. Black started HALF United out of Wilmington,
NC with 200 dollars. In my interview with her, she explains the slow pace they initially used.
While difficult, Black pointed out the benefits of taking their time in the early stages of
development. Everything was paid for in cash, which resulted in zero debt. She did not want to
take on any risk because they had no business experience. Ms. Black and her brother kept their
day jobs and ran HALF United during their nights and weekends for two and a half years.
Because there was no debt or investors, they were under no stress and were given a lot of
freedom.
Justin Gerock, a life-long bootstrapping entrepreneur currently managing a holding
company, voiced a similar opinion. He also sees starting slow as a positive and believes
entrepreneurs should have certain knowledge, experiences, or a relevant skill-set before putting
everything they own on the line. Mr. Gerock also believes an entrepreneur’s initial pace should
depend on the type of business he wants to start. If the work can be done during nights and
weekends, then the entrepreneur can keep his day job and run his new company on the side;
24
similar to what Ms. Black and her brother did. Black, however, does not recommend this strategy
“for people who are ready to get a business started now; who know how to get a business off the
ground and get funding.” This is akin to the opinions voiced about having past knowledge and an
extensive history in reference to venture capital.
When I asked Ms. Black if she would use bootstrapping again to help grow her business
or start a new one, her answer was “I probably wouldn’t bootstrap it. I would probably go find
funding right off the bat.” She believes this is because her experience with HALF United has
taught her how to run a company and she now knows what it takes to make one work. She is
currently in talks with a venture capitalist and would even consider taking out a loan to help the
organization grow. While Mr. Gerock has also spoken with a venture capitalist, he is firm in his
belief that who you know is more important than what you know when it comes to external
funding. He prefers relying on his network of close friends and family because of past
experiences with deceitful business partners and a boost in motivation to not ruin close
relationships when money is involved.
During my interview with Gerock, the topic of Incubators came up. He loves the idea of
incubators and would like to start one of his own. One underlying theme of our conversation was
the importance of a good network for entrepreneurs. He sees incubators as sort of another way to
bootstrap, mainly by expanding the network of people available to assist him. Gerock discussed
joining an incubator-like organization, American Underground, and how it has helped him, “Just
being in this click instead of being the person trying to benefit from it, you come across as a
person also in this struggle and that brings everybody together.”
Mr. Gerock then went on to introduce me to two new incubator business models. Durham
Stampede provides the same services as any incubator; it gives ten companies a workspace with
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advisors and allows them to intermingle with each other. The big difference, though, between
this organization and traditional incubators is the fact that these companies are given two months
to work alongside each other and use the office space and advice provided for them. Its goal is to
get the companies to accomplish in 60 days what it would normally be able to do in 12 months.
This model, however, is not self-sustaining and is supported through the Durham Chamber of
Commerce and Duke University. Groundwork Labs and Triangle Startup Factory are other
organizations that offer similar services. Their distinctions are a 90-day timeframe, taking a
seven percent equity stake in the companies, and providing the companies with 40,000 dollars.
Mr. Gerock states that at the end of the 90 days, an event is held where the companies pitch their
ideas to a group of investors. He adds, “I went to one not too long ago and there was not a single
company that didn’t ask for a half million dollars or more.”
5.1.3. Microfinance
Alissa Orlando, a college student with three years of experience working with
microfinancing organizations, sees microfinancing as a lender of last resort for most
entrepreneurs. She believes there are better funding alternatives, especially for individuals with a
good credit score. Ms. Orlando even suggests that microfinancing is used more as a “stepping
stone” to help acquire funding through other methods. She states, “in terms of the long-term
impact on clients, the credit building is what really does it because then you can graduate to more
formal financial institutions.” This is vastly different from how microfinancing is viewed in other
parts of the world, Orlando explains, because credit scores are nonexistent in the majority of
developing countries.
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The entrepreneurs that turn to microfinancing to help fund their ventures can be put into a
relatively small financial-needs range. Dr. Rasheed described the amount of funding usually
provided from microfinancing as “peanuts” and “pennies”. Hilltop, the company Ms. Orlando
currently works for, offers microloans from 1,000 to 12,000 dollars. This differs from the 10,000
to 35,000 dollar microloan range typically seen in the Washington D.C. area where Hilltop is
located. Orlando describes how the entrepreneurs served from this type of funding are looking to
pay for small-scale projects or items, such as a new refrigerator for an existing business.
Comparatively, she states venture capitalists and angel investors generally work with hundreds
of thousands and millions of dollars.
When it comes to social entrepreneurship, Ms. Orlando further encourages entrepreneurs
to seek other methods of funding. She believes social ventures have access to “free money” such
as grants or donations and are able to get loans a lot cheaper than microloans, which usually
carry a ten to 15 percent interest rate. She recommends going to a small business lender and
names Capital One as an ideal small business lender.
But Ms. Orlando will definitely not turn social entrepreneurs away if they meet Hilltop’s
criteria. The microfinancing organization prefers companies that have been in operation for at
least one year and are able to give an estimation of future income. It also takes into consideration
the potential impact of their loans and consulting services. This is usually in reference to how it
will affect the individual and his or her family. If a social entrepreneur applied for a loan, this
consideration would be expanded to include the people his business helps, which would increase
his chance to get approved for the loan.
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5.2. Crowdfunding
Shu Shu Zheng and Alex Budak, from the crowdfunding websites Pozible and
StartSomeGood respectively, provided perspectives from two different types of crowdfunding
websites that operate in different parts of the world. Despite their key differences, the
information collected from each of the interviews were similar. The average funding amount
sought after on Pozible, the generic crowdfunding website based in Australia, is between 3,000
and 5,000 United States Dollars. Also, the website has a 43 percent success rate of projects
reaching their funding goals. On StartSomeGood, the social-specific crowdfunding website
based in the United States, the average funding amount sought after is around a few thousand
dollars as well with a 42 percent funding goal success rate. The similarities did not end there.
5.2.1. Promotion, Promotion, Promotion
Ms. Zheng and Mr. Budak along with Mike Norman from WeFunder, an equity-based
crowdfunding website not yet in operation, were specific on the best way to attract investments
and donations. While a good idea is important, these three crowdfunders believe what really
matters is the way the idea is promoted and presented. Budak stressed the art of storytelling and
how it is at the heart of fund raising. He states, “It is really much more about making sure your
‘ask’ is clear, that you’ve connected as the person behind your venture and told your story, why
you care about it.” Mr. Norman spoke about creating an experience for investors by involving
them in the project’s story. He also described the advantage social projects have when telling
their stories. There is a group of people that will be helped by the development of this project,
and the story can be told around their hardships, why they need help, and how the project is
28
going to help them. Budak believes other crowdfunding projects not focused on a social-cause
cannot tell as compelling a story.
Text, videos, images will be the main avenues used to tell the stories; and while most of
this storytelling will take place on the crowdfunding websites, part of it will be seen on social
media networks. While it can certainly be helpful, Ms. Zheng acknowledges that social media
can also hurt a crowdfunding campaign. She warns against being annoying, and Mr. Budak
provides us with a solution to prevent this from happening. He recommends a creating a
marketing plan before starting any crowdfunding campaign. His reasoning behind this is that it is
easier to map out what you will do and then actually do it instead of thinking about and
executing the campaign at the same time. For example, updates evenly distributed over the
length of the campaign will keep donors aware of and interested in the project without pestering
them with daily or hourly emails and social media posts.
5.2.2. Rewards and Recognition
But there is another factor people consider when choosing projects on crowdfunding
sites. Rewards for donating were mentioned briefly in my interviews. Ms. Zheng believes
rewards help draw funding and should to be “relatively interesting” but that they won’t
necessarily ruin a campaign. Mr. Budak agrees with this by saying, “While they do help, it is
usually not the deciding factor between whether or not I am going to give. It might be more of a
deciding factor for how much I decide to give.” He does, however, present us with an example of
one company’s campaign that offered “awesome rewards”, where the rewards were an important
motivation to donate.
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Zheng and Budak highlighted more donor tendencies and offered advice to social
entrepreneurs turning to crowdfunding. Ms. Zheng discussed how most donors visit Pozible’s
website because they want to support a friend’s project, while others visit because they see a
project they like on social media and even fewer because they want to browse the different
projects and donate to one that interests them. In light on these tendencies, her advice was to
build a fanbase away from the crowdfunding website before starting a campaign. According to
Mr. Budak, there are a lot of donors that do not care about receiving donation recognition. They
prefer to remain anonymous instead of sharing the cause and their donation amount through
social media. Even so, he believes crowdfunding fills the early-stage funding gap for
entrepreneurs. As a social enterprise grows, however, and its business’s model is proven to be
successful with a significant social impact, it becomes easier to get grants and attract big
investors. Crowdfunding still remains a good option at that point, but Budak believes it is not the
best.
5.2.3. The JOBS Act and Equity-Based Crowdfunding
My question of how the JOBS Act will affect crowdfunding for social entrepreneurs
elicited a variety of opinions. Norman, Budak, and Parajon agree that this will provide a lot more
funding opportunities for entrepreneurs, which is definitely a good thing for social entrepreneurs.
Mr. Norman believes, however, that the extent of help and funding social entrepreneurs may
receive will depend on the number new investors that are interested in social projects. Ms. Zheng
warns of investors potentially questioning a social enterprise’s true motives if it is offering equity
stakes. She also believes this type of equity-funding is more suitable for larger projects, citing a
30
funding gap on Pozible where many projects aiming for over 10,000 dollars do not reach their
goals.
If a social enterprise is able to gather enough equity investments, there will be more
advantages than just obtaining the necessary capital to “kickstart” the business. Norman explains
how social entrepreneurs will be able to tap into the knowledge and experience of hundreds of
other individuals. Similar to how venture capitalists and angel investors help, entrepreneurs will
be able to call upon their crowdfunding investors to assist with marketing, product feedback,
recruitment, and customer acquisition. These hundreds of investors will also have a stake in the
success or failure of the company and will work with the entrepreneur to make it succeed.
Mr. Parajon sees a couple negatives coming out of the new crowdfunding equity
investments. Before the JOBS Act, the SEC had certain rules and regulations to protect
unaccredited individuals from investment fraud and scams. There is now a risk of seeing this
fraudulent activity on crowdfunding websites once equity investing is open to unaccredited
investors. Parajon also believes entrepreneurs and investors alike prefer fewer amount of
investors involved in one company. Logistically speaking, he thinks it will be a nightmare trying
to communicate with and accommodate hundreds or thousands of different investors.
5.2.4. Match Funding
During my interview with Shu Shu Zheng, I was reintroduced to match funding; she
talked about Pozible’s match funding. When a project receives match funding, an organization or
corporation matches every dollar raised with a specified dollar amount. Pozible has partnered
with a film funding body in Australia that offers three dollars for every one dollar raised. Any
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film project on the crowdfunding website that is able to raise over a certain amount of money
will also get this match funding.
5.3. New Funding Methods: Low-Profit LLCs and Program Related Investments
Dr. Rasheed presented a new development in funding for social entrepreneurs of which I
was not previously aware. He introduced low-profit limited liability companies (L3C) and
program related investments (PRI). According to him, L3Cs are the latest development in social
entrepreneurship and tackle the problem of private inurement. As the name suggests, it is a
limited liability company with typically low profits. These businesses have a primary goal of
social change and a secondary goal of making a profit. This will impact the social investment
market by opening up more PRIs that foundations will be able to invest in.
While this sounds great, Dr. Rasheed also explained how foundations are allocating only
one percent of the 43 billion dollars they distribute each year to PRIs. But that is not because
foundations do not want to invest in program related investments. On the contrary, they would
prefer to invest rather than give grants. Once a grant is given, that money is gone; when an
investment is made, foundations then have a chance to be paid back and could then reinvest that
money further. Foundations could conceivably quintuple the one percent they are distributing to
PRIs. Dr. Rasheed states that the reason they do not is because of the risk these PRIs have of
becoming jeopardized investments; a jeopardized investment carries with it a 25 percent excise
tax.
Creating a low-profit limited liability company that qualifies for PRIs is not practical for
most social entrepreneurs. Program related investments are for “big picture” projects that require
major funding. According to Dr. Rasheed, it becomes more difficult to acquire funding the more
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money an entrepreneur needs. It is especially difficult to sell a foundation on funding multi-
million dollar projects. As an example, it took Dr. Rasheed three years to finally get the Cisco
Foundation to help fund a mentorship organization he is involved in. He was eventually able to
accumulate almost one million dollars in funding from Cisco and the Gates Foundation.
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6. DISCUSSION
To analyze these findings, I sought after common themes across the separate interviews
that would help confirm or refute my propositions. Departures from these themes were searched
for with explanations for nonconforming answers. Stories provided by the interviewees were
used to contextualize the themes established. These findings were then examined for like
associations and combined to create a new model or suggest further research.
6.1. Crowdfunding Promotion Model
The findings refute two of my propositions and confirm the other. They revealed that the
success of a crowdfunding campaign depends more on the quality of promotion than any other
factor. Effective promoting is contingent upon the clarity of the idea, appropriately spacing out
communications, using creative content, and being able to connect with and involve the donors.
This conflicts with my first proposition that states “social entrepreneurs are better served by
crowdfunding than traditional entrepreneurs.” A project linked to a social cause will not
intrinsically have a greater chance of reaching its funding goals than other for-profit projects.
However, social entrepreneurs are provided some assistance since storytelling is a part of
crowdfunding promotions, more specifically the creativity and connection elements. A social
mission can be leveraged and used to tell a more compelling story than a mission primarily
focused on making a profit. Even so, the quality of the story will depend on the ability of the
entrepreneur, giving social entrepreneurs no inherent advantage. A Crowdfunding Promotion
Model in Appendix J illustrates the four elements needed for a successful crowdfunding
promotion. It also presents storytelling as an important component for creating both creative
content and a connection with donors.
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6.1.1. Clarity of the Idea
Without a clear explanation of the venture idea, donors will find themselves confused and
could misunderstand the purpose and direction of the project. The entrepreneur already knows
the details and understands how the idea works. It is his responsibility to ensure that other
individuals are able to grasp the idea just as it exists in his mind. This requires a certain level of
empathy, where the entrepreneur is able to see his promotion from many perspectives and put
himself in the same mindset as potential donors. To see what they would see, and understand the
message through their context; that is the key to the first element of the Crowdfunding
Promotion Model, clarity of the idea.
6.1.2. Appropriate Communications
Entrepreneurs will use a variety of tools to promote their crowdfunding campaign. Emails
and social media websites appear to be the most heavily used means of communicating with
current and prospective donors. Emails should be used primarily for informing current donors
about new developments involving the project. These updates should be sent at consistent
intervals with appropriate spacing between them. A high frequency of updates could be viewed
as invasive, which could deter future donations from these individuals.
6.1.3. Creative Content
To generate interest from donors, the content of the crowdfunding campaign needs to be
creative and original. There are thousands of crowdfunding projects currently vying for funds
from the same crowds of people. A promotion that sets the project apart from others is vital, and
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the tools available to entrepreneurs to do this are text, photos, and videos. The most important of
these are videos, and it is here where storytelling becomes important. It is difficult to try and
portray a story using only text. Feelings and emotions are easier to depict in photos and films.
While a picture certainly helps communicate a story, videos offer a simpler experience for the
donor. They make it is easier to see the beauty of a swaying tree or the pain in a child’s face
because those images are in motion and becomes more real to the viewer. Creativity that utilizes
text, photos, and videos will certainly attract donors to a project. The next challenge is giving
them a reason to stay with the project and make a donation.
6.1.4. Connection and Involvement
This is where the last element crowdfunding promotions become relevant. Part of the
purpose of telling a story is to connect with the donors on a more personal level. It can also be
used to grow their involvement with the project, by incorporating donors into the story through
text, photos, and videos. The project’s crowdfunding and social media webpages should be used
to host two-way conversations with current and potential donors. Offering this level of
connection and involvement with the people behind the idea will give donors a sense of
importance, one they equitably deserve considering their contributions. I believe crowdfunding
campaigns using this promotion model will be better positioned to reach its funding goal.
6.2. Crowdfunding Recognition and Rewards
The findings also show how recognition for supporting a social mission is not a great
motivator for crowdfunding donors. While social media networks introduce a large number of
people to projects, people are not motivated to share their donations with their social networks.
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Using alluring rewards, however, as part of the campaign can increase the amount people are
willing to donate to a project. So a crowdfunding campaign that can effectively promote its idea
and offer interesting rewards is well positioned to reach its funding goal.
6.3. Different Funding Methods for Different Funding Ranges
It was also discovered that my second proposition stating, “social entrepreneurs’ funding
needs are best served by crowdfunding over other funding alternatives” should be divided into
distinct funding ranges. My secondary research suggests other funding alternatives, such as
venture capital and angel funding, are intended for specific funding ranges. I incorrectly assumed
crowdfunding could be the best option for all levels of funding. The findings do not support this
claim in regards to large projects that require hundreds of thousands or even millions of dollars
to fund. This is because crowdfunding is typically used for projects needing a few thousand
dollars. Venture capitalists, angel investors, and the newly introduced program related
investments are better suited to serve the larger scale projects in the high-end funding range.
Match funding, however, could change this in the future. If it were to become a widely used
funding tool by more organizations, match funding could attach itself to crowdfunding and be
used to fund larger projects. Equity-funding on crowdfunding websites could also make it an
attractive option for entrepreneurs operating in the high-end funding range.
6.4. Will Equity-Based Funding Help Social Entrepreneurs?
The findings are clear that future equity-funding capabilities on crowdfunding websites
will provide social entrepreneurs with more funding opportunities. What is unclear is the total
amount of these opportunities that they will see. While my third proposition, “Equity-based
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investments on crowdfunding websites will provide social entrepreneurs with more access to
funding,” is confirmed; to what degree remains unknown. Some individuals will not invest in
social projects for one of two reasons. First, as seen in the private equity/venture capital market,
an investor’s biggest concern is his return on investment. There are some investors specifically
interested in social enterprise, but the vast majority interested in high financial returns
overshadows them. Second, some donors that are interested in social-specific projects become
deterred from giving funds if for-profit fundraising methods are involved. Providing equity
stakes is a fundraising strategy permitted to only for-profit businesses. A social entrepreneur
using equity-funding on a crowdfunding website will undoubtedly discourage some individuals
from donating funds for the project. It will be interesting to see what actually happens when the
JOBS Act regulations affecting crowdfunding sites take affect next year.
6.5. Using Other Methods as Inspiration
6.5.1. Venture Capital: Management Team Criteria
Other findings in reference to venture capital can also have an impact on equity-based
crowdfunding. The quality of management teams is an important consideration for venture
capitalists analyzing potential investments. This becomes even more significant when analyzing
smaller companies. Large corporations have an equally large talent pool to draw upon. If either a
single member or a whole management team needs to be replaced, it is easier for them to do so.
When a Chief Executive Officer retires or resigns, the company is able to replace him or her
without the company failing. A small, family-sized company does not have the same ability. The
management teams for these smaller businesses usually consist of owners and founders. If the
owner of a five person social enterprise does not perform well or becomes disinterested with the
38
social mission and decides to leave, the company will cease to exist. As a result, it is important
for small organizations, like we see on crowdfunding sites, to also promote the skills, experience,
and dedication of their management teams. This will further encourage equity investments by
providing another way for investors to connect with the project. It will also put a chief concern of
theirs at ease.
6.5.2. Bootstrap Financing: To-Do List Before Starting a Crowdfunding Campaign
Some findings relating to bootstrapping could lead to recommendations for crowdfunders
and result in more successful crowdfunding campaigns. Bootstrap financing was found to be a
good option for projects needing a few hundred dollars to start or just to cover the initial starting
costs for any business. With this type of funding, there is no time limit placed on the
entrepreneur. He is able to make decisions in a timeframe that is comfortable for him and not
dependent on the needs of others. There is also less risk and stress involved because the
entrepreneur is not thousands of dollars in debt. Finally, an entrepreneur who uses bootstrap
financing for small projects or low starting costs is free to make the decisions he believes are
best. Investors are not yet involved, meaning there are not other individuals with a stake in the
company who want the entrepreneur to do certain things and make them happy. This kind of
bootstrapping can be a pre-campaign strategy used by crowdfunders to help attract more funding.
Before initiating a crowdfunding campaign, entrepreneurs should have specific tasks
completed. Having a name and logo trademarked, obtaining a business license, and registering a
domain are examples of tasks an entrepreneur can complete before seeking external funding.
Doing these would demonstrate an entrepreneur’s confidence in his idea and his preparedness for
completing future requirements. This is similar to the suggestion of having the marketing plan
39
and promotional strategy established before starting the crowdfunding campaign. A business’s
name, image, (virtual) location, and legal right to operate should be established before the search
for external funds is started. It may attract more funders and increase the amount they are willing
to donate or invest.
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7. CONCLUSION
This study demonstrates the potential of crowdfunding for social entrepreneurs. It has
also provided key guidelines for entrepreneurs to follow when creating a crowdfunding
campaign. Social entrepreneurship is still a young field that lacks established boundaries and
agreement among its scholars. Crowdfunding is a funding method still in its early stages; one
that will soon experience substantial changes to its model in the United States. This study should
serve as a basis for future analyses on these two subjects. Researchers can examine the definition
for social entrepreneurship established in this study and analyze its usefulness for future studies.
7.1. Research Limitations
The findings in this qualitative study are limited for three reasons. First, out of a total of
eight interviewees, seven work in the United States. This limits the study’s international scope. A
higher number and a more diverse selection of interviews obtained from various parts of the
world provide an international representation of social entrepreneurship and crowdfunding.
Second, I was not able to interview an angel investor or an individual highly involved in
incubators. Because of this, my findings relating to those funding methods are incomplete. Third,
a quantitative analysis is required to confirm the research given the subjective nature of its
findings.
7.2. Future Research
7.2.1. Crowdfunding Promotion Model
While the findings in this study certainly answered many questions, it opened the door to
even more. Crowdfunding is not the undisputed best option for social entrepreneurs, but it is
41
certainly a great funding method for many. A quantitative study is needed to verify the validity
and reliability of the Crowdfunding Promotion Model. Each of the four elements should be
measured to find out how it affects the success of a crowdfunding promotion strategy. The
storytelling component will also have to be studied to measure its importance to the ‘connection
and involvement’ and ‘creative content’ elements.
7.2.2. Top Funding Methods for Social Entrepreneurs
The findings also hint at a possible ‘top funding methods for social entrepreneurs’ model
that could be developed (Appendix K). It was shown that bootstrap financing was the logical
funding option for projects under about 1,000 dollars while crowdfunding being most
appropriate for the 1,000 to 10,000 dollar range and PRIs coinciding with the 100,000 and above
range. Because the findings failed to identify optimal funding methods for projects in the ranges
between 10,000 and 100,000 dollars, more qualitative research is needed. Along with identifying
suitable funding methods for the missing ranges, this research can verify the dollar amounts
appointed to each of the ranges.
7.2.3. Impact of Equity-Based Crowdfunding
It is still unknown how many unaccredited investors will use equity-based crowdfunding
in the future and what their criteria will encompass when deciding on a project to invest in. A
study could be performed in cooperation with a crowdfunding website to ascertain this
information, and from it we could learn if and how this new type of funding is being used by
social entrepreneurs. To obtain an international perspective, that study could collaborate with
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two crowdfunding companies, one from the United States and the other from the United
Kingdom where equity investments are already permitted on crowdfunding websites.
7.2.4. Short-Term Incubator Business Model
Incubators are another area that may require further research. The short-term model
highlighted in this study’s findings can be compared to the traditional model seen in many
developed countries. A new study could determine which model has a higher rate of successful
graduating businesses, which model produces a higher number of and better quality innovations,
which model is more efficient and cost effective for the incubator, and which one better prepares
businesses for life after the incubator.
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APPENDICES
Appendix A: Interviewed Persons’ Profiles
Carlos Parajon is a managing partner of Harbor Island Equity Partners located in Wilmington, North Carolina. He has been a part of two different private equity firms, working with venture capital and investing in over 30 total companies. The value of the investments he has been involved with over the length of his career ranges from 100,000 to 31 million dollars.
Carmin Black is a social entrepreneur who used bootstrap financing to start HALF
United, a social enterprise that has worked to fight world hunger for three years. Before that, she interned with Toms shoes traveling around the country and speaking about the company’s 1-for-1 mission.
Justin Gerock is a lifelong bootstrapper and founder of Pirate Holding Group LLC. He
has bootstrapped numerous ventures including a personal training group, wealth management company, and a social media management and strategy business.
Dr. Howard Rasheed is an Associate Professor at the University of North Carolina
Wilmington. He has performed research in the field of entrepreneurship, innovation, and strategy, helped run and acquire funding for both non-profit and social-specific for-profit organizations, and authored a book titled “Innovation Strategy: Seven Keys to Creative Leadership and a Sustainable Business Model”.
Alex Budak is a co-founder of StartSomeGood, an 18-month old crowdfunding website
targeted specifically for social projects. He used crowdfunding to start his crowdfunding website, has spoken at the White House about social entrepreneurship, and received much of his social entrepreneurship inspiration while volunteering in India teaching girls about female empowerment and woman leadership.
Alissa Orlando is a college student at Georgetown University and the Chief Operating
Officer at The Hilltop Microfinance Initiative. She was introduced to microfinancing during her freshman year at George Washington University, where she was a part of Students for Sustainability. She then interned at Think International before deciding to join Hilltop.
Michael Norman is a co-founder of the equity-only crowdfunding website, Wefunder. He
helped pass the CROWDFUND Act portion of the JOBS Act by launching a petition to drive public participation and meeting with congressmen sponsoring the bill.
Shu Shu Zheng is the project advisor at Pozible, a crowdfunding website based in
Australia. She has worked there for almost a year reviewing all submitted projects and deciding which ones will be approved. Shu Shu also calls each of the project creators to check in on their campaigns and offers suggestions to help promote them.
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Appendix B: Interview with Carmin Black
Me: Describe, in as much detail possible, what experience you have with social entrepreneurship. Ms. Black: Three and a half years ago when I basically interned for Toms shoes, and I traveled the country with Toms going to speaking engagements a high schools and colleges around the country about the 1-for-1 mission. I learned what it meant to run a social enterprise and decided to come back to North Carolina and start my own business that gives back with my brother. He and I have done this now for three years and this [Half United] is my day-to-day life. Me: What methods did you use to fund Half United? Ms. Black: We have never had any sort of traditional funding. We’ve never had any investor; we’ve never had a small business loan or anything like that. Me: So no external funding or anything like that? It was all internal? Ms. Black: Yes, exactly. Christian and I started this business with 200 dollars and with that money we bought some products. When those sold, we took that money and bought new products and it just snowballed. For the first two years we both had part-time jobs that we had to keep. We were working by day and running a business by night or working a half-day and starting a business the other half-day. It was a lot of work. Even though that was the most challenging way to do what we’ve done, it also allowed us to be completely debt free. We paid for everything in cash, we have no debt to our name, and we don’t buy anything on credit. It is stressful but it is also not stressful. Me: If you needed funding to grow Half United or to start a new business, would you use bootstrapping again or would you look for external funding? Ms. Black: If I were to start another business, I probably wouldn’t bootstrap it. I would probably go find funding right off the bat. I would take care of things like website, public relations, and acquiring great products. I would just go full force, but I could only recommend somebody doing that who has business experience. The way we did it was really smart because we had no experience; therefore, we didn’t want to take on any risk. But if you are someone who has worked in marketing, worked in public relations, worked in advertising, or any other industry where you’re starting a business and armed with a ton of knowledge of how to make a business work and be profitable, then I say go. Shoot for the moon right off the bat. But we were wise in the sense that we knew that we didn’t know anything. We weren’t trying to take on a ton of risk and be fools about taking money that we didn’t know how to use. Me: So what methods would you use? Ms. Black: Any. We are actually in talks with a venture capital firm in Silicon Valley. It is really just the beginning stage of talking with them; like what it would look like if they took us on. Half
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United sort of has a soft foundation; we don’t have a super solid foundation. I know that even though with everything we have achieved, there is still so much more that we have to improve on and learn. I think any business, even Toms Shoes or any even well known business, there is never a time when you don’t have room to grow or room to learn. But I would probably seek any of the traditional funding methods; I might even take out a loan. But I would have a really solid grasp on financial goals and probably after a year and a half if I did not meeting those goals with the investment put in, I would probably get out. Me: When it comes to funding, do you believe social ventures have it easier or harder other ventures? Ms. Black: I think a business is only as strong as its leadership. I really don’t think that investors get too caught up with whether the business gives back or not. They want to know if the leadership behind what I am investing in, if the person spearheading this thing smart enough to make me my money back. Now if I get to feed a million children in the mean time, hey then more power to whatever I’m putting my money into. I don’t think that social ventures have a harder time or an easier time just because you’re giving back. If you’re not a smart person and you don’t have business acumen, I don’t think anybody should invest in you no matter how worthy your cause is. Me: Do you have any suggestions or ideas to increase or improve funding opportunities for social entrepreneurship? Ms. Black: Be really, really organized with your creativity. If you are going to put out a YouTube video or host an event, don’t get so excited about your event that you don’t really plan. Strategic planning for anything is extremely important and it has taken me so long to learn not to put the cart before the horse. You get so excited about what you get to do that you jump in the cart and your horses are a mile behind you and there is nothing to pull you along. Now if you are going to go out and try to gain funding from a venture capitalist, an angel investor, or something like that; yet again don’t put the cart before the horse. Have a firm grasp on who you want to help and what their needs are. You have to understand the needs of the people you are going to be helping. For example, I could tell you so much about the global hunger epidemic and why it is happening. You need to be an expert on it. Besides that, have a business plan in place and understand when you are approaching an investor that you’re a business before you’re a charity. You cannot give to your cause and you cannot help people if your business has no change of making money. Have a solid business plan in place. I remember when we first tried to write our business plan; I couldn’t understand how to gauge where our finances would be because we hadn’t made any money yet. How was I supposed to know what our financial projections for the next ten years when I never even sold a t-shirt? Don’t get so excited about your idea that you don’t do your homework. Me: How did you prepare your business plan without knowing how to predict those financials? Ms. Black: This is the great thing about bootstrapping. We basically worked without getting paid for two and a half years. We had no debt and no investors, so there was so stress. We had a ton of freedom in terms of how long it would take us to learn and how long it would take us to create
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a quality product. Nobody was giving us a deadline and nobody was telling us “make money, make money, sell sell sell!” But I don’t really recommend that for people who are ready to get a business started now; who know how to get a business off the ground and get funding. But if you are going to do it the way I did it, do it exactly the way I did it and move at a really slow pace. Don’t get overly anxious about making money. Take your time and relax in the freedom you have. Do debt, no problems. Me: So final question: Is there any other important information, which these questions may have overlooked, that you would like to share? Ms. Black: If you are starting a caused-based business, it is usually because you care more about the cause than the business. At the end of the day, I care more about the kids we feed than my business, which is really not a good way to run a business.
Appendix C: Interview with Shu Shu Zheng
Me: Describe what experience you have with crowdfunding. Ms. Zheng: My position at Pozible is Project Advisor. I’m the one that approves all the projects. I have a look at them and give all the project creators a phone call just to see how they are going with their campaign and offer some tips on how to promote their campaign. Me: How long have you been with Pozible? Ms. Zheng: Almost a year. It will be a year in November. Me: How many companies and individuals have used your website to fund projects? Ms. Zheng: It would be over 1,000. We have had over 1,000 projects on Pozible. We have roughly 300 to 400 that are currently live on our website. Me: Are most of those Australian-based? Ms. Zheng: Yes, most of them are Australian. Me: What is the typical amount sought after on your website? Ms. Zheng: It use to be about 3,000 to 5,000, but at the moment people are aiming for larger amounts; so I would probably say about 5,000 to 10,000. Me: How many projects reach their funding goals? Ms. Zheng: We have a 43 percent success rate.
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Me: What criteria do donors typically look for before deciding to help fund a project? Ms. Zheng: It’s interesting because a lot of the people who comes on our website to support a project, they are directed there because of their friends have a project on Pozible and they want to support them. That’s usually the main reason. Other times they have seen it on social media, they’ve checked out the project and think “yeah that’s pretty cool” so they make a pledge. There are a few people who check out the website to see what kind of projects are on our website, but that depends on who’s looking and what kind of projects they are into. Usually, it needs to be a solid idea; nothing too vague, it’s well thought out, and the rewards are relatively interesting. Me: Does this criteria change if they are looking to donate in a social project? Ms. Zheng: It depends on the individual and what the social cause is. I think with a good crowdfunding project, it has to be well thought out and explains everything the support needs to know. There are so many people on our website who make a pledge to a project because they simply love the project idea or they’ve watched the video and they think, “I like this video” or “This person is relatable and fun and I want to support them.” They look at the rewards and they are not too keen on the rewards; they just want to make a pledge. Yeah, that happens a lot. Me: Do you find that crowdfunding donors are more inclined to fund social ventures? Ms. Zheng: I think it is quite even. We’ve had some more social projects on our website and they haven’t done as well as something that was more creative. I think that comes down to how they promoted their project. A lot of people tend to use social media and constantly say, “Support my project! Support my project!” and that kind of message everyday to their fans or their friends and family can get really annoying and tiring. It’s about the idea, but also how you promote and present it. Me: Do you believe sharing capabilities on crowdfunding websites (such as users being able to post their donations on Facebook and Twitter) encourage people to invest/donate into social projects more than into general, non-cause related projects? Ms. Zheng: I guess sometimes it does. We have promoted a project on our own Facebook, which was about this company called Soften the Fuck Up; and basically they are all about raising awareness about male mental health. Their project was creative because they were raising funds to make a creative video, and when we promoted their project on our website it was really well received. A lot of people commented and a lot of people “liked” it. But I don’t know how many people went on a made a pledge. It is definitely a good way to bring a bit more awareness to the actual project and the cause as well. Me: Do you know of any developments in the crowdfunding industry that would attract or deter investments into social entrepreneurship? For example in the United States, equity funding will soon be legal for crowdfunding websites; and I know it is not something your website does. But do you have an opinion on whether this will help or hurt social projects? And do you have an idea on any other developments in Australia or anywhere else in the world?
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Ms. Zheng: This is my personal opinion; I don’t think it would hurt social projects all that much. However, I don’t have too much experience in that area. We get a lot of projects where simply raising 10,000 dollars is not enough for what they actually need to achieve. Equity crowd funding might be necessary for bigger projects that need a much larger amount of money to “kickoff” their enterprise. Me: Given the double-bottom line of social ventures, do you crowdfunding websites offering equity capabilities would discourage or encourage more investments into social ventures? Ms. Zheng: It is hard to say. If you are an everyday person who just wants to support a project with a social cause, and you find out that this project is also seeking equity funding; that could make you question their cause, purpose, or motives. Me: Do you have any suggestions or advice to help encourage more crowdfunding investments into social entrepreneurship? Ms. Zheng: What is important is generating a fanbase before you start. Just so you have a venture and you know a few people are interested; so once you got that project launched and ready, you have people waiting for it and they will help you “kickoff” your project and hopefully that will start it off and generate more pledges as your campaign continues. Me: Do you believe a better alternative, other than crowdfunding, exists in regards to social entrepreneurship? Ms. Zheng: I think angel investing, we’ve seen that work on our platform. It’s great but it is pretty difficult to get, to find the right person to do that. Especially with larger projects, matchfunding would also work. Let’s say you have an organization or corporation that wants to give to your project three dollars for every one dollar you raise. That kind of thing could work. It’s quite a new concept that people aren’t aware about; but I think as crowdfunding continues to be a very viable option for startups, matchfunding will hopefully fund the bigger projects that require a larger amount of money. We just partnered up with a film funding body in Australia that stated they will offer a 3-to-1 matchfunding to any film projects raising over a certain amount of money. Me: Is there any other important information, which these questions may have overlooked, that you would like to share? Ms. Zheng: I personally feel people don’t realize how much work goes into crowdfunding. Some people think they can just leave a project on the website and expect others to make a pledge and get their project over the line. I think that’s absolutely not the case. You really do need to promote the project online and offline to get your project funded. Appendix D: Interview with Mike Norman
Me: Describe what experience you have with crowdfunding.
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Mr. Norman: I helped to actually pass the CROWDFUND Act, which is a portion of the JOBS Act that enabled everyday Americans to invest in startups. Me: So you were part of that? Mr. Norman: Yep, we started on January 30 when the senate was still ruling on legislation that would ultimately enable all of this. I launched a petition to drive public participation. In the process, that brought us down to DC and a meeting with the White House and congressmen that were sponsoring the bill. I had several back and forth interactions with them over the curse of the winter and early spring to help make the legislation better. We were in the White House when the president signed it into law on the fifth of April. Me: You are the owner of WeFunder correct? Mr. Norman: Yes, so I am one of the co-founders. Me: How many companies and individuals have used your website to fund projects? Mr. Norman: We're crowd investing which means that we are only for companies that are literally raising equity or debt financing. So that part of what we are doing does not come online in its full capacity until January 2013. Me: Are there people funding projects now on your website? Mr. Norman: No, accredited investors are allowed to invest in startups right now. The whole point of the JOBS Act was to allow unaccredited investors to invest. Me: What criteria do you expect investors to use before deciding to help fund a project? Mr. Norman: Folks will want to invest in companies that align with their interests. It will all depend on the type of company. Me: Do you find that crowdfunding investors are more inclined to fund social ventures? Mr. Norman: What's nice about crowdfunders, you are investing in companies you are really passionate about. You could see a for-profit social enterprise that could easily be a profitable and sustainable business that is never going to return ten times its investment to investors. We do think that social enterprises will have a chance to raise money through crowdfunding that they haven't had a chance to do in other places. But there are going to be investors that are investing in companies that are not going to be social enterprises obviously. Me: Do you think social ventures will be at a disadvantage on crowdfunding websites? Mr. Norman: The right way to think about it, will social ventures have a wider opportunity on crowdfunding than they did before; and the answer to that is absolutely, yes. I think people are
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going to want to invest in companies that are compelling and doing cool things and really impacting folks in different ways. So some social ventures will be at a disadvantage but other will not. It's going to really depend on the specific business. Me: What suggestions or advice, if any, do you have for social entrepreneurs who want to attract crowdfunding investments? Mr. Norman: They need to recognize that, like the majority of entrepreneurs, they are selling an experience just as much as they are selling a financial upside. They need to really make sure that they are taking care of their investors and treating them well and involving them in being part of the company's success in as many ways as possible, such that it feels really good to be part of the story. Me: Do you believe a better alternative, other than crowdfunding, exists in regards to social entrepreneurship? Mr. Norman: I think it is going to be a combination of things. The way that we are building WeFunder is such that you are going to have 300, 400, 500 small dollar investors in your company and you are going to want to be able to activate them to help you with your marketing, give you product feedback, help with recruitment, nd customer acquisition. But that doesn't mean that will be the only funding you are going to want to have. It's definitely not an "either or", it's definitely a "yes and". Me: Do you think crowdfunding has certain advantages over other funding methods? Mr. Norman: Absolutely. When you have 400 investors that are passionate about your company and want to do what they can do to help you succeed, it's that many more individuals that are going to be able to help you with your marketing and your product feedback. Those are the advantages it is going to have. But angel investors and venture capitalists are bringing other value to the table themselves so it is definitely a type of "yes and" situation. Me: Is there any other important information, which these questions may have overlooked, that you would like to share? Mr. Norman: The big key for social enterprise, this is going to be a whole new access to capital for them that they didn't have before. It will be easier for for-profit social enterprises to raise money and the big benefit is going to be not only the capital, but also the value added that the investors are going to provide in terms of helping the company succeed. I really think focusing on the experience for those investors is going to be crucial. Appendix E: Interview with Dr. Howard Rasheed
Me: Describe what experience you have with social entrepreneurship.
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Dr. Rasheed: I ran a non-profit family business that use to be a for-profit, it got converted into a 501C3. We were a foster-care company. I am also an officer at a mentor organization; it has about 10,000 members internationally. It is more of a social enterprise than a social entrepreneurship because it’s not a single person that’s starting it. Me: During your time with the non-profit, did you ever use for-profit funding methods, or have any familiarity with those throughout your experience? Dr. Rasheed: Yes. [session put on pause during phone call] … a job connection platform for college students. We are actually taking the one the military uses for their wounded warriors, and the guy who owns that software is giving us a license. So I have a kickoff meeting tomorrow to identify how we are going to structure it and move it into working for college students and K-12 as well. We trying to actually design it as a social enterprise because what it allows us to do is do the advertising model where major corporations could advertise. Every time a college student clicks on that icon, they send would send us a check for 20 cents or something. We are signing up thousands of college students around the country. When we converted to being a non-profit, we were still doing contracts for the state of Florida. So it’s a for-profit mechanism, it wasn’t a grant. We didn’t receive any grants, it was all contractual. So the reason for becoming a 501C3 was because we weren’t getting donations or grants anyways. We got caught up in the younger Bush’s desire to privatize social work. Me: Were you there when the for-profit was created or did you join after? Dr. Rasheed: I joined after it was created. The issue as a social entrepreneur that we discovered was, if you are in a for-profit venture, and we were making 15 percent net on 1.7 million dollars revenue after all of our expenses and salaries; we had incentive to go to the bank and sign on a 100,000-dollar line of credit. When we become a 501C3, we had to donate all of our stock because the 501C3, non-profit, are not owned by anyone. So the issue of private inurement became an issue because now I have no incentive financially other than my wife’s salary to sign on a 100,000-dollar line of credit because if the business goes south or goes belly-up, then my wife and her brother lose their job. I’m the third person signing on it and the only person with a job since I was working at the University of South Florida; so whom does the bank come after? The whole issue of private inurement and risk taking for social entrepreneurship is critical and it really has not been resolved. So you want to save the world, whether it is with energy or food or whatever your issue is, why would you go and sign your life away? Basically signing on a 100,000 line of credit, are you that committed? Me: Did you end up signing on that line of credit? Dr. Rasheed: Yeah. We were signing it as a for-profit and we had to continue it as a non-profit, until it went out-of-business. Me: Okay, so do you believe social ventures have a more difficult time than traditional ventures raising funding? Dr. Rasheed: It depends on whether it is a non-profit or for-profit social venture.
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Me: What about just for-profit? Dr. Rasheed: A for-profit social venture can technically go to outside funding (venture funding, equity funding) whereas a non-profit is dependent upon grants. Me: Do you think these for-profit social ventures are at a disadvantage? Dr. Rasheed: No because it is probably easier to get some kind of grant than it is to get venture capital for a social venture. The social impact investment market is dependent upon two things. One is the investment, let me give you an example, into an L3C. This is the latest thing in social entrepreneurship. Its purpose is to address the issue of private inurement. So now you have a social venture that is accomplishing the mission you want, but it allows for investment. They can’t do grants because they are not a non-profit, they can’t do donations because they are not a 501C3; but they can get investments from venture capitalists, angel investors, and corporate social responsibility funds. The other big thing is, it opens up program related investments. So why is this important? You ask about funding. Foundations have to distribute 43 billion dollars a year. They are now only allocating one percent of that in program related investments. They could quintuple that. The reason they are not doing that is because if they make an investment in a social venture and the mission shifts away from what the foundation is interested in or the founding social mission in general, it could become a jeopardized investment, which carries with it a 25 percent excise tax. So the penalty is steep for a program related investment going south. Foundations are very concerned or very skeptical of doing it. They want to do more of this investing as opposed to grants, because if you invest you have the option to recycle that money. If you give a grant, the grant is gone. If you invest in a company, let’s say you guarantee a loan, once the loan is paid off you get your money back. You make an investment with the stipulation that once the company is up and running, you get paid off or preferred stock. You can do all these fancy venture capital type of things (subordinated debt, subordinated equity, etc.). So foundations want to do it but they have to do it in a way that will not jeopardize investment. Me: With the funding options I focused on (venture capital, angel investment, bootstrapping, crowdfunding, microfinancing, and incubators helping people find funding) and the ones you have introduced me to, do you believe one method is best for social entrepreneurship or do you think it depends on the person’s needs? Dr. Rasheed: The degree of difficulty gets higher as you need more money. You can bootstrap, get a 20,000-dollar grant, open up an office in your house, and buy a copy machine. You can become a part of an incubator but they generally just provide you with an office and some back-room support. You can do the microfinancing, micro-lending; but that is just peanuts, pennies. A lot of those are not difficult to get but they are very small amounts. You end up doing very micro-social ventures; basically just running a soup kitchen from the office in your house. I don’t know if any one is better, just that when I talk about these investments we are talking about multi-million dollar, potentially or hundreds of thousands of dollars at least, deals. Obviously it becomes more difficult to sell a foundation on funding you for multi-million dollars if you if you have a track record.
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Me: In my research, I focused a lot on crowdfunding and talked some about the JOBS Act. I am not sure if this would help or hurt social entrepreneurs. Are people going on crowdfunding websites really interested in getting their investment back? Dr. Rasheed: Some are, some aren’t. One of my partners is setting up a crowdfunding platform to fund scholarships for junior engineers. He brings them into a room-and-board six-month training program. He is trying to raise 10,000-dollars for five scholarships for these students starting in September. We’ve been talking about creating a crowdfunding platform for other purposes too. Me: Do you have any suggestions or advice for social entrepreneurs to increase or improve their funding opportunities? Dr. Rasheed: Do you want to run a non-profit or do you want to run a social enterprise? The difference is, do you want to operate as a business with a business model or do you want to operate with a philanthropic model where you are asking for donations; or do you want to create a revenue stream based on solid business principles to fund your social mission? My statement would be to decide which one you want to do. There are advantages and disadvantages to both. Consider options like the L3C and program related investments as a bigger picture. If you just want to operate a soup kitchen and that’s all you want to do then have at it, ask for donations and volunteers, and all that stuff that most non-profits do. If you have a bigger mission, a bigger vision; I took over the mentorship organization two years ago in fact and my mission was to reach one million kids in four years. So I am half way through that and tomorrow kicks-off a platform that has the potential for doing that. But it took me also three years to get it funded through the Cisco Foundation. A year ago in June, I was sitting across from the head of the Gates Foundation in the USA. From June to October, I had a 622,000 planning grant (not implementation grant, just planning). Cisco is kicking in, starting tomorrow, another 150,000-dollars. So in less than a year I have gotten almost one million dollars in planning grants. I have an associate in Pensacola who has a website called Non-ProfitMatch1.com. It is basically a Match.com for donors and non-profits. It has six million subscribers. Our plan is to develop a course to teach people to plan major, big projects, particularly in green technology. So one of my clients has an aquaponics idea. You can go into the inner city and create a fish farm and vegetable farm in an abandoned warehouse in a downtown area. It solves the food-desert issue, it empowers the community with jobs and training, and promotes healthy living. So you get partners, you basically build a franchise model, you get the private foundations that can kick in hundreds of thousands of dollars to fund projects like that and you just keep repeating it. That’s real social venture for community development purposes I am highly involved in. Me: Is there any other important information you would like to share? Dr. Rasheed: 501C3, unrelated business issues are some things you may want to investigate. The IRS has issued new rulings on program related investments just as of April or May this year. They haven’t made any in 20 years. That has opened up the door to what can be interpreted as viable program related investments.
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Appendix F: Interview with Carlos Parajon
Me: Describe, in as much detail possible, what experience you have with venture capital. Mr. Parajon: My experience is more with private equity, even though venture capital is a subset of private equity. My experience is more and longer with private equity, which is a later stage investment generally, even though I have done venture capital investments, which are earlier stage investments. I want to clarify that. I do have significant experience in both, longer in private equity with several years in New York and Wilmington. I have been managing Harbor Island Equity Partners for five years now as the managing partner. We are a 25 million dollar fund based here in Wilmington, and it is broad-based private equity fund investing in a number of different industries and companies. I would characterize it as a private equity fund and not a venture capital fund even though we have invested in startups. We typically don’t invest purely in startups. Me: What area (local, domestic, international) do you serve? Mr. Parajon: Our focus is more regional, southeast and mid-Atlantic; but we would consider national companies if the opportunities were compelling. Me: How many companies have you invested in? Mr. Parajon: Out of this fund, we have invested in 17 companies. Over the course of my career I have invested in probably over 30. Me: What is the typical amount you invest into these companies? Mr. Parajon: It varies, and it varies on the fund. In our current fund, Harbor Island Equity Partners, we’ve invested in and it depends on the structure as well so the short answer is that it depends. Not to get too long, we invest equity and we also make loans. So we can invest in any part of the capital structure meaning we’ll invest subordinated debt, we’ll invest senior debt, we’ll invest equity that could be common or preferred. So depending on the structure of the investment we will be in any part of the capital structure. The reason I make that distinction is because our investments have been as low as 100 thousand dollars but over the course of and the life of a portfolio company, we have invested up to one and a half million dollars. So we can start very low and go up to one and a half million. That is out of our fund. We can manage more than that if we syndicate with other partners, and we will manage the investment but it won’t be funds out of our actual fund. Now when I was in New York, I was with a private equity group that was much larger. Our fund was 180 million dollars, so we invested 31 million dollars in one deal. Me: How many of the investments have been a success? Mr. Parajon: Out of this fund, we are still investing. Typically in a private equity fund, you got an investment period of five to seven years and begin to harvest after that. So we are in year five
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right now, so we are still investing. We’ve had one exit so far, which was successful. So of our 17 investments, 16 are still unrealized. Me: Could you go into detail of the criteria you use and what is the most important when investing into companies? Mr. Parajon: In terms of fund size and the private equity market, we’re very small. We would be put into what is called a micro-cap category. To put it into more perspective with my own career, when I was in New York working in a private equity fund that had 180 million in capital and that was 25 years ago. Harbor Island Equity is 25 million so in scope it is dramatically smaller. The reason I give you these parameters is because when you look at a deal, we are looking at much smaller companies. Therefore, even though the criteria will be the same, the amount of due diligence that you actually have to do on a billion dollar deal is pretty much the same as a million dollar deal. For the smaller companies, you really have to focus on the management and those differentiated products and services much more carefully; because on a larger billion dollar company, you can switch the management team out because there is a depth and bench you can rely on. If you lose your CEO, you can switch them out much more easily in a sense. You can find another management team to plug in. Whereas a smaller company where you have revenues of five to ten million or two to five million and let’s say it is a family company or you’re investing with the founder, more importantly if it is the owner founder or entrepreneur who founded the company, you’re much more reliant on that management team. They’re the ones who built the company. They’re the ones who recruited the staff and employees. So you really need to have that experienced management team, you need to be tied into their interests, alignment of strategy, and focus. That alignment with the management team is a very important criterion at this stage, at this size of investment, at this category of micro-cap investment. Similarly, the product differentiation or service differentiation are also incredibly important. We’re not interested in buying a commodity company because you need that differentiation. If you are buying a small company that has a commodity product, you’re going to get lost in the market that has other big companies with deal pockets. They’ll just buy you out and drown you with their dollars and you’ll have no way to compete. So you need something that is differentiated, either so sort of intellectual property, some kind of trademark, some sort of proprietary knowhow. Whether you have exclusive marketing channels, whether you got some partnership strategy, some sort of brand differentiation, you need something that differentiates you from the other products in the marketplace and allows you to grow quicker, better, faster in some form or fashion. Finally, you want to be capital efficient. At this stage and with this size, you can’t afford to be in a capital heavy type of industry because we can’t afford it. So it has to be a type of capital efficient type of industry. Me: Have you invested into a social venture? Mr. Parajon: No I haven’t. Me: If you were to invest into a social venture, how would this criteria change, if at all? Mr. Parajon: Well we haven’t invested into a social venture, and quite simply it is not part of our charter. The reason it’s not is because it’s an entirely different asset class. That’s not a positive or
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a negative; it’s just a different asset class that we are not involved in. So when we raised funds for Harbor Island Equity Partners, we told our investors that we would invest in certain categories of investments in a private equity strategy, which did not include social ventures. It’s not typically part of a private equity strategy because the investments are different and the returns are different and the focus is different. So it’s a class unto itself, whereas there are some private equity groups that do blend it into their strategies, which is fine as long as they disclose that to their investors and partners and they understand that this is part of the strategy. We chose not to include that in terms of our investor focus so to do that know would be going back on our focus and what we promised our partners and it’s against our operating agreement. It’s just not something we would do. For example, there are private equity firms that will not invest into real estate. So social ventures is not what we do. In terms of the criteria, I wouldn’t know how to look at a social venture criterion. As I understand it, it would be a for-profit company that has a social component. It would require a new set of criteria in order to evaluate the social component and I’m not sure I have the skill set to do that. I could certainly evaluate the for-profit component I’m not sure how I would evaluate the social impact part of that. Me: Do you know of any developments in the venture capital industry that could affect social entrepreneurs? Mr. Parajon: There are two things here. One, there will be a blending of social ventures with other innovative ventures that happen to have a social outcome. So how one defines it will determine how you raise funds. If someone came to us and said, “We have a social venture and we are raising money.” That does not fit our criteria so chances are I would listen politely and say sorry we cannot invest. However, if someone came to me with an innovative idea that happened to have a positive social outcome, but they were still a for-profit and met our criteria, which could be a different story. Now I say this because the examples would be those innovative companies that have products in the sustainable, environmental industries or green-tech or clean-tech. Those sorts of industries have a positive social impact. Whether you not you call them social ventures, I leave to professionals in the social venture industry. So if somebody comes to me with a clean-tech business, I will certainly look at it. If somebody comes to me with a farm idea to feed the poor and 50 percent of their profits are going to a cooperative in India, that doesn’t meet our criteria. I may personally invest in it but I can’t do that out of my Harbor Island fund. Those are the distinctions. Now from a crowdfunding perspective, because crowdfunding is a retail approach to venture investing, which blurs the distinction that I’ve drawn for you with opt-in agreements and limited partner contracts and all of that. Now you have a retail approach where anyone can invest in anything and all of a sudden you have all kinds of money being thrown around at all different kinds of companies. So I think that would level the playing field for the social ventures looking to raise money. That being said, I’m not sure that crowdfunding is a good idea. I think the whole reason the SEC has rules and regulations around accredited investors is to protect investors from scams; because sometimes you have lawsuits arising out of companies that go bankrupt and so on. I wonder what the consequences are going to be. From an entrepreneur’s point of view, it opens up a whole new fountain of capital, but it depends how it is structured because the beauty of the way we have it structured today you have fewer investors. I can tell you one thing, that entrepreneurs today and as an investor I don’t want to be in a company that has three thousand investors at an early stage. You want to have fewer and so does the entrepreneur from a logistical point of view.
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Me: So you don’t believe that venture capital is the best option for social ventures to get funding. Is that correct? Mr. Parajon: No, I wouldn’t say that. In fact there are venture firms that have focused on that. It is a good model as long as that is the model. For example, there is a firm in Durham called SJF Ventures that is a venture firm. They are in the sustainable agriculture and clean energy industries. They are not a social venture per say, but they are blurring the lines a little bit because they could invest in a sustainable business that has a social impact but is still a for-profit company. In addition to that social venture company they have something called SJF Institute, which is a non-profit accelerator for sustainable entrepreneurs. So it is kind of like a social venture institute. They are trying to link these entrepreneurs with money and with the venture industry. So I think the venture model can help. If you do have a social entrepreneur, there are a lot of ways the venture industry can help. Not only with capital, but with access to a knowledge base. Entrepreneurs still need help with knowing how to run their businesses, how to recruit their management team, how to deal with regulatory issues, how to deal with marketing and competition, etc. There are many things they can do as well as invest capital. SJF is one example of a few I have seen of venture firms that not only invest but also have these different non-profit arms. There are venture firms that invest in only social ventures knowing that the returns are going to be lower but have a social impact. They would invest knowing that those funds would go towards social impact. So there is an amount of capital out there in the world that wants to go towards social entrepreneurs. It’s unusual, uncommon, and unlikely that you are going to have that effort under the same rough as a typical venture capital, private equity firm.
Appendix G: Interview with Justin Gerock
Me: Describe what experience you have with bootstrap financing. Mr. Gerock: My first bootstrapped business where I started making decent money, I was probably 18 or 19 and it was called Kinetic Fitness. It was a personal training group of a couple of other guys and myself who got certified in personal training. I went around to people’s homes and to different gyms and trained them. Of course once it became more popular, the gyms wanted their own in-house people. It kind of went away. It’s something I did in college just to make a few extra bucks. Bootstrapping on that was easy because it was just enough to have some business cards printed and pay the couple hundred bucks to get my certification. That was probably the cheapest as far as bootstrapping that I have done. Me: And what about your more recent and costly experiences with bootstrapping? Mr. Gerock: I did wealth management for a while. I’ll call that bootstrapping because it was 1099 just like a normal financial advisor; except for instead of doing the normal routine like working at a bank or working under a bunch of people, I ventured out on my own upfront and I learned the lesson very quickly that rent for an office, business cards, marketing, etc. gets very expensive. That year alone I spent about 80 grand running through that and ended up having my partner take some of my large clients from me, had them sign on his paperwork instead of mine
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to the point I had to shutdown. That was a bad experience. So with bootstrapping, you need to watch for who your partners are no matter what the dollar amount is. It’s making sure your partners are people legit, making sure you can keep a track of what they are doing and how they are affecting your cash flow. Me: That’s interesting. I’ve never thought about the partner aspect or the trust issue Mr. Gerock: Yeah, it seems that people to people as friends is different than as business partners. For the most part, people are shady and if you don’t maintain that “screw you, pay me” kind of attitude you will get walked on no matter what the business is. It’s one thing to be nice. I am a relatively nice guy but when push comes to shove after that issue with the financial advising situation, I can be severely mean if need be. After that one, I started a holding company just because I knew I would have other ventures. That is just sort of in my blood. So I started the Pirate Holding Group LLC in September 2009. Since then, I have ran three different businesses through it; the most recent, Privateer Digital. And along the way, and one you might want to take note of, is one called Edge Promotions. On a Sunday night at a buddy’s house, we were sitting around and he was getting ready to open up a nightclub. We were talking about his marketing one night and I kind of just piped-off and said, “Hey why don’t you give me a grand and I’ll start a promotion company for you.” The next day he called me and said, “Hey, I have a check for one thousand bucks. Let’s see what you can do.” Over the period of about six months, we used that one thousands bucks, bought some t-shirts, made up some cool cards, started promoting and got a couple clients; enough so we had a competitor buy us. So we launched it for one thousands bucks and ended up netting about ten grand out of it in the next six months. It completely blew my mind that it would happen the way it did. It was a lot of work; don’t get me wrong. It was exhausting. The fact that is went from that point to in six months people were talking about it everywhere saying, “Who are these people? Where did they come from? Why are they talking some of my business?” I had people who had other promotion companies that had been around for years angry. They were trying to send out their promotional people to do stuff in front of our club and take the employees I had. But it was good. It was a good learning experience. For one thousand dollars, that kicked off. Two years earlier I spent 80 grand just to get crossed by a partner. So that is kind of the range I have seen in bootstrapping. It’s literally all over the place. A lot of it is just luck. Me: Did you ever try other methods of funding besides bootstrapping? Mr. Gerock: I’ve actually gone for every possible thing under the sun. Most recently, Privateer Digital Media, I have received funding from my brother, which is awesome but it is probably a rarity too. A lot of people don’t have friends or family that have a stockpile of cash they are willing to give you a blank check on. It’s good because it keeps me in check. I spend less than I would if it were, let’s say, a bank loan because it’s my brother and I don’t want to ruin that relationship, so I fight a little bit harder that way. I’ve talked to literally everybody, venture capital. I had another venture we shelved because we didn’t have a team put together right. Southern Capital Ventures in downtown Raleigh, they do early stage and seed funding. I talked to them. I’ve come to realize unless you already have a couple major ventures and exits, and you don’t have family or a good friend who knows people in venture capital, you’re really not getting in there. I would say it’s 95 percent who you know and not what you know, not what your idea
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is. In American Underground located in Durham under the tobacco campus, I would say my company and maybe one other guy are the ones that are the odd men out. We didn’t go to Duke or know the right guy from down the hall. So with bootstrapping, it’s on you. Anything outside bootstrapping is usually leveraged against an asset or leveraged against some sort of relationship. It really comes down to who you know as far as what money you are going to get. Me: Do you think bootstrapping is practical for most entrepreneurs? Mr. Gerock: I’d say it is a good way to start, but it all comes down to what the venture is. Like, how quickly do you see revenue coming in? If you have a good knowledge base and it is going to be a consulting company, maybe you can bootstrap it. You can work out of your house; you can keep the costs down. I know one guy who owns a printing company. He does customer t-shirts and stuff. He bootstrapped it, but he put pretty much everything he has on the line to buy hundreds of thousands of dollars worth of equipment and have not a single order placed. Me: Do you have any suggestions or advice you can share for individuals considering bootstrap financing? Mr. Gerock: It depends on what you are doing and how you are executing. If it is something you can moonlight, let’s take consulting for instance. If you have a nine-to-five job and can start getting things lined up, like figuring out your business name or getting your business license, you can do that on nights and weekends. You don’t have to quit your job. The beginning of anything, you can start up slow because there are going to be the issues of getting paperwork to attorneys and getting an accountant. I actually hired a phone lady from Fiver.com to do a voice over for our phone prompt for when somebody calls into the office. I think I spent 15 bucks and had her do three different phone prompts. She has a normal job and she will say, “Hey, I’ve got work the next three days. I will get it to you after that.” There are people on Fiver that are moonlighting, doing hobby type jobs that have made enough money to go out and buy brand new vehicles. It really depends on what it is. If you’re a programmer and you want to make an iPhone application or build a new social network, you can do it bootstrapped, on the sidelines, and kind of keep the cost down. That venture I was talking about earlier that myself and two partners are working on, one guy is a programmer while the other is sort of an idea man and I brought the strategy to the table. It was literally something we did on nights and weekends for almost two years until we decided we were at the point now that we would need a big influx of money. So we put it on the self to wait until we know the time is right. I think the total cost we spent on that, including creating the business, finding and accountant, doing taxes properly, and buying domains, we maybe spent one thousand bucks. And that’s over two years. Me: Wow, I would have thought it would cost a lot more than that. Mr. Gerock: Yeah, it really comes down to figuring out what you really need to stink money into. There are a lot of people who think they need to have a big office, expensive phone system, or hire a receptionist. There are a lot of way to cut out those costs that really just drain money and don’t have anything to do with how the business functions. So bootstrapping is possible and I would suggest anyone should try it first. At that point, everything comes down to what you want to do with the business. An angel investor or a venture capitalist that has an equity stake is
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going to be pushing you to do things. The downside to that, you don’t have their skillset. There’s a lot greater chance you are going to screw up with bootstrapping. Me: Is there any other important information that you would like to share? Mr. Gerock: You are interested in social entrepreneurship and crowdfunding. I think with the JOBS Act being signed now and having the ability to sell small percentages of a company, I still consider that bootstrapping. If you have your friend give you one thousand dollars for one percent of your company, and nothing happens, for the most part the friend has one thousands dollars to give to you and it’s not the end of the world. They are not going to lose their house and car. So I think if there could be a way to incorporate bootstrapping under the umbrella of crowdfunding or crowdsourcing for help and actual dollars, I think that would be something people should look into, especially with the Internet now. Five or ten years ago you weren’t going to be able to do that. Me: Yes, you can leverage your social network online to get money. Mr. Gerock: Yeah, absolutely. And I’ve used Kickstarter for numerous things. My brother did it for some oddball pens called Pen Type-A. It had so many hang-ups over a year. He had done it and it finished a year ago and we literally just got the pens in. But nobody companied. Everyone would just send an email wondering what are the hang-ups. Nobody flipped out and nobody tried to sue him saying that this was suppose to be delivered a month afterward. Because it was such a small dollar amount and people knew they were going to get the first run of this cool product, they just rolled with the punches. That’s different from venture capitalists or banks. Me: So you see crowdfunding overlapping some with bootstrapping? Mr. Gerock: Yes because bootstrapping in my opinion it means keeping all your costs down and doing as much as you can internally. So yeah, I think crowdfunding is going to be the way to go. After the JOBS Act passed, I actually got a hold of Kickstarter and ask if they have any intentions of offering equity. Kickstarter said they don’t want anything to do with it. They are going to stick to what they are doing; they don’t want any equity. There is a company that just launched just like Kickstarter, but it lets you buy into companies within the legal range. They kind of consolidate and run it as the third party with escrow, holding your shares and holding the cash. But I consider that bootstrapping too because the crowd is going to if you are spending too much money or if you need more money. I am in this. This is like my entire life, everything to do with startups. If I had the money, I would start my own incubator. That is just something that I absolutely love. Me: In my research, I read about a new type of bootstrapping where companies can share employees. The same thing sort of happens in incubators. You can go to the next door down and ask a person to help you with something. Do you think incubators could be a nontraditional way of bootstrapping? Mr. Gerock: Absolutely. I pushed for a little over six months to be able to get the smallest office in Durham in American Underground solely because of who is there. Just being in this click
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instead of being the person trying to benefit from it, you come across as a person also in this struggle and that brings everybody together. So Durham Stampede in American Underground helps people with bootstrapping to a tee. They don’t take equity but they don’t give you money. What they do is give you advisors and consultants that come in to work with the bootstrap companies and give you a work space for free for two or three months. They run rounds, so they might bring in ten different companies in different stages and give them some office space and allow them to mingle together and see what they get in the next 60 days. Its goal is to make each company do in 60 days what it would normally do in 12 months. Me: This isn’t a free service, people pay to be in? Mr. Gerock: Nope, 100 percent free. I think it is funded through Durham chamber of commerce and Duke. There’s also Groundwork Labs, Joystick Labs, and Triangle Startup Factory. Triangle and Groundwork, I think, do 90 days and they take seven percent equity in your company and they give you 40 grand. Their goal is the same thing, to get you to do in 9 days what you would normally do in a year. But at the end of the 90 days they host a huge event and have people who are willing to invest. You do your two-minute pitch on stage asking for however much money you want. I went to one not too long ago and there wasn’t a single company that didn’t ask for a half million dollars or more. Some got it; some are struggling. Something else I wanted to touch on, I worked as a consultant with the SBTDC through the UNC school system. I did commercialization for green technology. People would always come up asking, “Can we get bank loans? Can we get SBA loans?” SBA and bank loans are roughly the same unless you have assets that you are willing to put up. A prime example is my Privateer Digital. I asked for a ten thousand dollar banks loan and they said sure if I would put my house up. I’m not going to put a house up for a ten thousand dollar loan and that’s what they want. Same with the SBA, unless you fall into a special category you are not going to get it easily.
Appendix H: Interview with Alissa Orlando
Me: Describe what experience you have with microfinancing. Ms. Orlando: I got into microfinancing during my freshman. I went to GW my freshman year and was part of this group called Students for Sustainability. We would sell handmade crafts made by Guatemalan women and turn the profits into microloans for them. So that’s what sparked my interest, but what I found was that a lot of opportunities for students in microfinance were focused on fund raising and I really wanted to get away from that. So spring semester of my sophomore year, I interned at Think International in their legal office in New Zealand, which is one of the big global MFIs. And then that summer, the summer of 2011, I went to [could not decipher because of background noise] and worked for a microfinance institution there. It has 96 employees, ten branches throughout the country, and it was run entirely by a Tanzanian and started by a Tanzanian woman. Her husband has died and when she was a widow she had all her property taken away, and that’s what inspired her to start a microfinance institution for widows and young women. My sophomore year when I came to Georgetown, I got involved with Hilltop. That was my first time working in small business microfinance, which is different in a lot of ways than microfinancing in developing worlds. It’s undoubtedly been my favorite experienced
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thus far both at Georgetown and the other microfinance institutions I’ve been engaged with. What we do is provide business education microloans for low-income individuals in DC. Me: What are the big differences, in terms of microfinance, you have seen from the other experiences you spoke about? Ms. Orlando: The products are a lot more advanced in the developed worlds. Obviously in the developing worlds, the loan size is a lot smaller, so microloans in DC typically range from about ten thousand dollar loans to 35 thousand dollar loans. Hilltop is a smaller scale based on the fact that we range from one thousand dollar loans to 12 thousand dollar loans. I say it is more advanced because you can offer more creative products and because there is a credit building process. In the developed worlds, you consistently have a financial portfolio in the form of a credit score, which doesn’t exist in the vast majority of developing countries. Credit building and technical assistance is such an important part of this microfinance industry. I would say that in some ways it is even more valuable than the capital, because the capital provides liquidity; but in terms of the long-term impact on clients, the credit building is what really does it because then you can graduate to more formal financial institutions such as a credit union. Me: Do you think some people turn to microfinancing, not because they need the money but because they need the credit? Ms. Orlando: That is something that some people do. We are currently in the process of getting credit building capabilities. You need a permanent address but since we don’t have an office, which is something we are trying to work around. But I know other domestic microfinance institutions and other credit unions will offer something called a credit-building loan where you get out a very nominal amount, like one hundred dollars, and you have six regulated payments over the course of a year. So the loan for this is not to get money but rather to artificially build a credit score. Me: How many applicants are approved for microfinancing? Ms. Orlando: Thus far, we have actually turned away quite a few people largely because they are startups. So a lot of startups will be looking for capital, but we won’t fund them just because they’re too risky. So what we have actually implemented is a prescreening that asks questions such as, “are you over 18” or “are you a startup” and “can you give us an estimation of your monthly income?” This is so the people who are not qualified, we can turn them away without wasting their time in terms of working with us and refer them to other services that may be better for what they are looking for; things like an IDA match savings account and other resources like that. Be really honest and tell them that our services are not for you and there are plenty of other things that may be better suited for what you are looking for. Me: So Hilltop does not prefer startups? They prefer established businesses that need a little extra money? Ms. Orlando: Correct, you have to be in operation for over a year. Something that I found really interesting is that there is this almost myth in the non-profit social enterprise industry that people
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believe ‘if you build it, they will come’. Undoubtedly, the most difficult challenges we have had have been with our microloan clients. We have actually had much more success with our business education program, where you pay 50 dollars and get six sessions, than our microloans because if you think about it, that is actually asking a lot for someone to go into debt in order to grow their business. You need to be very comfortable with risk in order to make that decision, especially if you are low-income. So we found that at least one of our clients took on the debt because they had an order to fill immediately. Me: Does your criteria change if people come to you with a social venture? Ms. Orlando: We have not had some come to us with a social business. The businesses that we do fund, we have a food cart, we have a grocery store, we have a real estate agent, and so it is all for-profit ventures. If we were to take someone with a social venture, I would treat it just like any other loan application. What would be different I would say would be when we are actually working with the business. The people we put them in contact with would obviously be different and the other opportunities would be a lot different. Me: Are you more inclined to fund social ventures? Ms. Orlando: Something that does factor into our decisions in the need of the individual and the potential impact of our loan. Since we haven’t had someone come in with a social venture, it has always been “what would be the impact of this loan or consulting on this person and his or her family?” But that impact consideration would be expanded and since a social venture would affect a lot of people, which would definitely help. Me: Do you know of any developments in the microfinancing industry that would attract or deter investments into social entrepreneurship? Ms. Orlando: I do know that the federal government plays a large role in a lot of domestic microfinance institutions through what’s called the NBFI Act. So that’s run through the Department of Treasury and I went to a Whitehouse briefing just over a year ago and I know that they are facing a lot of funding restrictions and possible funding cuts. The NBFI are huge funders of credit unions and MFIs. Me: Do you believe microfinancing compares to other funding options in regards to social entrepreneurship? Ms. Orlando: I see angel investors and venture capitalists and those types of institutions for young and privileged entrepreneurs. The people who are getting loans from us and getting services from us probably don’t even know what an angel investor is. You are basically getting free money and free advice, which is great, and if you have the opportunity to get that then you should rather than getting money from a financial institution. But who has access and knowledge of these services and the skills to make a compelling argument for their business? I would say the majority of people getting money from microfinance institutions do not have even one of those qualifications.
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Me: Do you think the angel investors and venture capitalists serve a different group of people? Ms. Orlando: Absolutely, I think the scale is totally different and you’re not going to have a business that has been in operation for a year and making revenues in the thousands and going to venture capital. It doesn’t make a lot of sense. I think in order to scale it would make more sense to look for microlenders, especially if it’s a small scale like needing a new refrigerator. But if you are trying to scale, like going to different countries and have that type of scale then it makes more sense to approach one of those higher level investors. They are generally working in the millions because not only is their money worth a lot, but their time is worth that much. Me: What suggestions or advice do you have for social entrepreneurs wanting to apply for microfinancing services? Ms. Orlando: I would say that if there are any other ways to do it, like match savings or other programs, I would recommend to look at that first. That would be my number one suggestions. Also, compare microfinancing institutions before actually selecting one because some will specialize in certain areas and have different interest rates and services. Me: Is there any other important information that you would like to share? Ms. Orlando: Here is what I would say, if it is a social venture, chances are you can get that money free or a lot cheaper than from microloans. Interest rates typically range from around ten to 15 percent. If you have a good credit score, I would say go to a traditional small business lender such as H&R Block, Citi, and Capital One. Capital One is really good, or approaching institutions that would give that type of money away for free. I think that’s a method social ventures should absolutely try first and I think domestic microlenders are lenders of last resort for people who don’t have a good credit score. Appendix I: Interview with Alex Budak
Me: Describe, in as much detail possible, what experience you have with crowdfunding. Mr. Budak: I am the co-founder of StartSomeGood, which is a crowdfunding website specifically for social ventures and projects. We help non-profits, social conscience for-profits, even one-time projects, and focusing specially on early stage social ventures. We launched about 18 months ago and have been running the site since. Me: How did you get into crowdfunding? Mr. Budak: The genesis of the idea came from; well I spent some time traveling in India. So while I was there I was traveling around as much as I could but also volunteering with a social enterprise. We were doing ultimate Frisbee with girls from the local slums. Really ultimate Frisbee was a means to teach them about female empowerment and woman leadership, that kind of thing. It was an awesome experience and we had the realization that it’s not going to be one or two organizations that are going to change the world, it’s going to be lots of people pursuing
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social good in their own way that will create that social change. I came back to the states and started thinking about my own social enterprise I might want to start. The more I thought about it, the more I realized I didn’t know how to get started; like how to that raise capital, how to get that group of supporters to be with me. So the more I though about it the more I shifted my focus from my own social enterprise to the sort of broader social enterprise landscape. Thinking about “Hey, I sort of have what I think is a really good idea. How many other great ideas must there be out there that just never take action?” So I thought about what type of platform I could build and crowdfunding was starting to take off at that point and it just seemed natural. Me: How did you get the funding to start StartSomeGood? Mr. Budak: It’s a fun story; it’s actually metta. We actually crowdfunded our own crowdfunding site. We did a small crowdfunding campaign on IndieGoGo. Me: Do you think IndieGoGo cringed at the competition they basically birthed? Mr. Budak: No. That’s what’s great about IndieGoGo, anything goes. So I think it was a good platform for us to use. We think we have a really great offering for social ventures but there are lots of needs out there. Lots of time someone will apply to our site and they’re not really doing social good, then we often recommend them to other sites and IndieGoGo is one of those. Me: How many companies and individuals have used your website to fund projects? Mr. Budak: So far we have had 82 successful projects. Me: What is the typical amount sought after on your website? Mr. Budak: There is a huge range. The smallest campaign was five hundred, the largest 101-thousand, but the median is right around a few thousand dollars. Me: Percentage-wise, how many projects reach their funding goals? Mr. Budak: About 42 percent. Me: Do you have an idea on the criteria typically used when people are deciding to fund a social project on your site? Mr. Budak: No. I don’t know if there are certain quantitative measures or checkmarks, but really it comes down to the story you tell and how you are able to tell it. We talk a lot about how fund raising, at its core, is really about storytelling. I think it is really much more about making sure your ask is clear, that you’ve connected as the person behind your venture and told your story, why you care about it and are dedicating your life to it, and connecting to them through text, video, images as appropriate; I think that is really the most important thing. It’s not as easy as saying, “Hey, do these three things.” Really, it is more of a holistic look at if you are telling a compelling story. Rewards is another interesting one. For instead we have a group running a campaign right now called EcoJars that is doing something really cool and are offering some
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awesome rewards. The rewards are eco-lids, so that’s a natural one. In those cases when the rewards are really cool and compelling, that can be a great motivator to give. But a lot of the ventures are not necessarily productized. So while they do help, it is usually not the deciding factor between whether or not I am going to give. It might be more of a deciding factor for how much I decide to give. Me: Do you believe that crowdfunding donors are more inclined to fund social projects over general projects? Mr. Budak: It depends on the individual person. But I think when we go back to the idea of storytelling; I think social ventures are really well placed to tell those compelling stories. Instead of just saying, “Hey, all we care about is profit or making an iPhone gadget” you can actually tell a story around the people you are helping. Me: Do you believe sharing capabilities on crowdfunding websites (such as users being able to post their donations on Facebook and Twitter) encourage people to invest/donate into social projects more than into general, non-cause related projects? Mr. Budak: For some people, for sure it is. These people like to do good, but they also like to be recognized. But at the same time I have been surprised by how many people choose the option to- so when you decide to give on StartSomeGood, you have the option of having your name and the amount you gave, just your name and no amount, or completely anonymous. I’ve been surprised at how many people decide to go anonymous. There is a good amount of people that don’t do it necessarily for the recognition, just to help. When we started StartSomeGood, we didn’t have the anonymous feature. We found quickly that people prefer to remain anonymous. Me: Does the JOBS Act helping to attract or deter investments into social entrepreneurship? Mr. Budak: It is going to be interesting to watch for sure. We will see what happens and how the regulations by the SEC affect everything. But in general, entrepreneurs are people who are great at dealing with limited resources and making good things happen. So the more resources, the more good stuff will happen. It will be attractive to some and not attractive to others, but the fact that they have more options is definitely a good thing. Me: Do you believe crowdfunding is the best funding option in regards to social entrepreneurship? Mr. Budak: I think for early stage social ventures, in many cases, it is. I’m not going to say absolutely, but especially for early stage social ventures it is a great thing. Going back to my own experience, it is pretty hard to get the initial capital you need. There are more systems in place once you have proven the model and show it is working and the impact it is having. Then there are fellowships and grants, investors, and all kinds of things. But I think, short of crowdfunding, there is a pretty big hole in the market there. I think it really is, if not for every single entrepreneur but for many social ventures, it is important. And as a venture grows, it remains an attractive option but certainly not the best. Best is hard to say because it depends in specific needs.
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Me: What suggestions or advice do you have people looking towards crowdfunding to start their social ventures and projects? Mr. Budak: Lots but the first thing, think about the ‘ask’ you are making. Think about how you can make it really clear. People often times doing a venture where they understand the ins and outs and all the intricacies sometimes don’t articulate those as clear as they could. So it is really about what they are doing, why are they doing it, why do they care about it, and then think about how to tell that story, through video, through text, through pictures. Making sure the ask is really clear and people know this is who I am, this is what I do, and this is the impact this would have. A good way to do this- [power went out while we started talking about making a marketing plan. The rest of some of what he mentioned about the marketing plan]. Plan this before you launch because that way you take a lot of the stress out of it and then it is just a matter of taking action on a plan instead of thinking and executing the plan at the same time. Think about, “Hey my campaign is going to run for six weeks so every two weeks I will send an email blast to all of my supporters, I’m going to create these Facebook updates every second day, and I am going to contact these 50 bloggers to tell them about my campaign.” So doing stuff like that ahead of time so that way it is just a matter of executing instead of brainstorming and executing. Me: Is there any other important information that you would like to share? Mr. Budak: No, I think you covered everything.
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Appendix J: Crowdfunding Promotion Model
Storytelling
Promotion
Clarity of the Idea
Creative Content
Appropriate Communications
Connection and Involvement
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Appendix K: Top Funding Methods for Social Entrepreneurs
Bootstrapping
Crowdfunding
?
L3C and PRI
$10,000 - $100,000
$100,000 +
$1,000 - $10,000
$1 - $1000
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