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Research identifies barriers to funding for early-stage social enterprises

Over the last ten years, the SAB Foundation has invested in over 200 social enterprises. We define social enterprises as businesses solving social problems. In order for SAB Foundation to invest, there must be an ability for them to employ innovation to address a social issue at scale and become self-funded or profitable over time.

Both locally and globally, there is such significant recognition as to the importance of these kinds of businesses that many universities and business schools around the world for example Oxford, Stanford, University of Cape Town, Gordon Institute of Business Science and University of Johannesburg have either curriculums or entire centres dedicated to their study and development.

While South African universities have recognised their importance and many social enterprises are started at universities, the challenge then becomes one of funding.SAB Foundation’s experience over a number of years has been that while it provides the very early stage grant funding, there are very few avenues for entrepreneurs to go down next.

Most of this innovation focuses on affordability and access for low Income groups from clean water, to cheap energy, online education and health, housing, assistive devices for people with disabilities, connecting smallholder farmers to markets and many more. At scale, some of this innovation has the ability to create large efficiencies in government spending to achieve the same or improved service delivery. We therefore believe that as a country, we must find ways to help these businesses to grow.

We initiated this research along with the Bertha Centre for Social Innovation at UCT GSB, because as an important first step, we need to understand the funding gaps and barriers as experienced by entrepreneurs, so we can figure out how to address them.

We sent the survey out through all known social enterprise networks in South Africa, including but not limited to academic institutions, accelerators, incubators, impact investors, philanthropic funders, the Technology Innovation Agency and the Industrial Development Corporation and we received 162 submissions, 70 of which came from our alumni.

Findings

From our research it is clear that the largest reported barrier to raising funding is a lack of networks. By enabling social entrepreneurs to reach them more easily, fund managers can establish more robust and diverse pipelines.

We also found that traditional funding instruments are less effective for social enterprises. More than two-thirds of social enterprises report unpredictable or seasonal cash flow and this prevents them from accessing conventional funding in order to expand their businesses.

Most social enterprises are also self-funded. The gap in early stage funding within the local ecosystem for potentially talented entrepreneurs who do not have savings or the risk appetite for using their own savings could be a lucrative area of investment for fund managers.

We identified that there is also limited funding available for businesses that turnover up to R5 million. In our sample, social enterprises have raised relatively small amounts of money, with 69% surveyed having raised under R1 million.

Building an impact fund that invests with ticket sizes between R100 000 and R1 million could strengthen the pipeline of investable deals at a later stage and provide capital to early stage social enterprises with high growth potential. By utilising innovative finance instruments that take into account uncertain cash flow, investors can open a box of new investable opportunities.

The high demand for small ticket sizes further reaffirms a need for more early stage funding for social entrepreneurs. With almost two-thirds of entrepreneurs looking to raise between R100 000 up to R3 million, there is an opportunity for investors to expand their offerings to accommodate smaller investments.

The research demonstrates that a significant amount of funding raised comes from overseas.29% of social enterprises that have raised between R500k and R5 million have done so internationally and for larger ticket sizes of over R5 million, it increases to 75%. There seems to be a mismatch in that many South African investors struggle to find great deals, yet so many of these innovators have had to seek funding outside the country.

It could be worth asking the question: what do international investors see that local investors do not? Is our investment environment too risk averse? Given the importance of this kind of innovation to the country, we need to eliminate the barriers for social innovators to widen their funding sources. We also need to make more funding available at the early stages. Regulatory reform is required to improve access to financing for
social innovation enterprises, as well as the regulatory framework for both banking and alternative funding sources and thankfully, this work is already underway.

The results from this research will, we hope, assist foundations, investors and government stakeholders to better understand the funding hurdles that these innovators face. We hope that it will encourage more funding providers to venture into this interesting field.

To access the research report please visit: https://sabfoundation.co.za/resources

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