Small business owners across the United States are confronting the fact that financial help from the federal government, if it comes at all, may not be enough to weather the COVID-19 crisis. Economic fallout from the pandemic and the specter of a recession pose threats to every entrepreneur, especially to those in the business of creating social impact.
When social entrepreneurs lose, society loses. These are innovators focused on developing programs and products to create public benefit or protect public goods such as the environment, education and community well-being — and many rely on philanthropic support to get the traction necessary to turn profits. But in an economy where both donors and consumers are conserving financial resources, social entrepreneurs must become ever more agile in how they fund and conduct their work if they are to succeed.
When social entrepreneurs lose, society loses.
"I saw a big drop in attendance in March and an even deeper drop in April," said Tamira Fleming, a mechanical engineer and social entrepreneur who teaches math and science to children. "I’ve found that both parents and kids are having to work to adapt to learning from home, which means I have to adapt to teaching that way."
Fleming launched STEM Connextion Academy as a social enterprise that uses profits from tutoring middle-school and high-school students to help fund programs for low-income and homeless students in East and South Dallas to get the skills they need to compete.
"When I started tutoring kids in math 19 years ago, I did so as a sole proprietor," Fleming said. "There’s an even greater market demand for STEM training today, so running this service as a business makes sense."
As an award-winning doctoral student in education, Fleming has everything on her side to make STEM Connextion Academy succeed — except timing. With coronavirus, she is confronted with the same reality that school districts across America are facing: a severe lack of preparedness in bringing K-12 education online, particularly for students from low-income communities who are often ill-equipped to participate.
As Fleming works to get her pupils and their parents comfortable with virtual tutoring, she seeks other sources of funding to help sustain her business. She has succeeded in fundraising before, earning a scholarship in October for $15,000 in seed funding from the Texas Business Hall of Fame Foundation. She and 31 other scholars also earned seats at the induction ceremony for the Texas Business Hall of Fame — investments the foundation hopes will inspire them to become future inductees. (The 2019 inductees included six billionaires, including Kendra Scott and Robert Smith.)
However, social entrepreneurs have long struggled with funding challenges, and the pandemic has worsened the situation. Today, Fleming is setting her sights on staying in business and fulfilling her mission. She has applied for innovation grants, but nothing has come through yet. In search of more ideas, she contacted me for information. To help, I interviewed several global experts in funding for social entrepreneurs. Their insights are summarized below.
Private dollars for public good
“As a coach, I urge entrepreneurs to figure out what type of capital they need,” said Benjamin Vann, founder and CEO of Impact Ventures, a nonprofit startup accelerator and social enterprise whose mission is centered around removing barriers for under-resourced — or as Vann prefers, “underestimated” entrepreneurs — and helping high-growth companies access the capital they need to scale.
According to Vann, most entrepreneurs seek conventional forms of funding: debt; equity; and grants. Sources of funding they target typically include micro investors, angel investors or groups, venture capitalists and private equity funds. Which type of funding to aim for comes down to the goals you have for your enterprise.
"If you’re launching a consumer product, or if it’s a high cash-flow business, you can take on some debt to avoid giving up equity," Vann said. "On the other hand, in a lifestyle business, your goal is not to scale fast. So, it’s a different approach than someone who is trying to grow really fast to get to an exit. In this case, equity may make more sense."
Here in Texas, access to financing is the top concern for micro, small and midsize businesses (MSMEs), according to the Federal Reserve Bank of Dallas. Furthermore, minority and women-owned MSMEs are considerably less likely to have access to capital and more likely to fund themselves through personal savings and credit cards. In fact, 14 percent of Dallas residents are unbanked, with no savings or checking account — twice the national average. This is why, for many underestimated entrepreneurs and a fair number of startup entrepreneurs, the fallback remains the classic fundraising approach: friends and family.
"These things (raising friends and family capital) are often best done in intimate settings," Vann said. "I would pull four or five friends and family members together, do a presentation for them and say you’re looking for a certain amount of investment from each. The key here is being more strategic and finding the people who first believe in you before the business."
Adapting for self-reliance and financial sustainability
A recent webinar, hosted by EarthX, addressed access to finance on the global level. Guest speakers for the Tech4Good Global Roundtable included Eva Csaky, executive director of the Hunt Institute for Engineering & Humanity at Southern Methodist University, and Xiaochen Zhang, president of FinTech4Good.
"Technological advancement and globalization have led to a great deal of innovation, progress and prosperity, but this has not been equally shared," Csaky said. "There have been winners and losers based on circumstances beyond individuals’ control." But she also has a conviction that “technology can be leveraged for good … and when intentionally used, can be a highly inclusive and climate-smart force."
"A silver lining of the current crisis is that it is pushing our society up the technology adoption curve," Zhang said. "Companies who earlier did not embrace remote work are realizing the benefits due to the current situation; telemedicine is a good example."
A number of technology solutions covered by Csaky and Zhang can open up access to finance for social entrepreneurs and make them more resilient. Their solutions range from practical to transformational, with crowdfunding perhaps the most active and accessible among them at the current time. A number of crowdfunding platforms exist, some of which even offer access to grants. But Zhang concedes that technology alone is not a panacea.
"Anyone who thinks you launch a crowdfunding campaign and the money just flows to you automatically, probably that dream will not come true," said Zhang. "You need to really design it properly, and also throughout the campaign process, you need to allocate capacity in different aspects ... all those adaptations should be combined with the business model itself, otherwise it will not work."
Slowly or rapidly, it’s dawning on social entrepreneurs that the cavalry isn’t coming.
Csaky and Zhang also explored blockchain, digital currency and other transformational technology solutions on the horizon, although regulatory and behavior-related barriers can be pervasive in advanced economies. They also touched on smart philanthropy and blended finance — approaches that significantly can increase the amount of financial resources available to entrepreneurs.
Csaky and Zhang have been working with those innovative financial mechanisms in the international development finance arena for 20 years and they are starting to gain traction in the United States as a way to maximize financing available for entrepreneurs.
"Access to finance, as of now, is the most critical need," Zhang said. "It’s not about getting to the next level, it is survive or die."
As for Fleming, she is doing all of the above: considering her model and goals; asking for help from experts; and continuing to innovate.
"The crisis has reduced enrollment, but I’m staying hopeful," she said.
She is also being resourceful. She contacted the Small Business Administration and got a mentor. She’s adapting her tutoring to meet with students online via Zoom and IXL. She even designed a special "May term" cohort for students stuck at home, in which they could gain "on-the-job" accounting experience by supporting other social entrepreneurs as junior business advisers. (As a parent to one child she tutors, I found this a great idea, and my son loved the experience.)
"I’m taking a step back to look at educational products I can market or design to help parents set up their own learning labs at home," said Fleming, indicating that a high-growth model may be in her future after all.
Slowly or rapidly, it’s dawning on social entrepreneurs that the cavalry isn’t coming. On the positive side, the gates have been flung open wide for experimentation. What used to be "odd" or risky behavior — conducting a group video chat in your bedroom, asking your customers to help — are now admirable demonstrations of commitment, ingenuity and resilience.
The road to self-reliance is challenging to navigate, so it’s best not to travel alone. To support founders in furthering their social enterprises, the Inclusive Economy Consortium, a peer-to-peer network I co-founded with Csaky, is actively crowdsourcing resources for social entrepreneurs. We invite you to submit resources to add to this list or contact us for information.
To learn more, visit www.inclusive-economy.org.