Mapping the Money: An Analysis of the Capital Landscape for Early-Stage, For-Profit, Social Enterprises in the United States May Samali June 2016 M-RCBG Associate Working Paper Series | No. 59 The views expressed in the M-RCBG Associate Working Paper Series are those of the author(s) and do not necessarily reflect those of the Mossavar-Rahmani Center for Business & Government or of Harvard University. The papers in this series have not undergone formal review and approval; they are presented to elicit feedback and to encourage debate on important public policy challenges. Copyright belongs to the author(s). Papers may be downloaded for personal use only. Mossavar-Rahmani Center for Business & Government Weil Hall | Harvard Kennedy School | www.hks.harvard.edu/mrcbg MAPPING THE MONEY: An Analysis of the Capital Landscape for Early-Stage, For-Profit, Social Enterprises in the United States Author: MAY SAMALI Master in Public Policy Candidate 2016 Kennedy School of Government Harvard University Client: TUMML 501(c)3 accelerator in San Francisco, CA Faculty Advisor: Carl Byers Seminar Leader: Executive Dean John Haigh Publication Date: March 29, 2016 This Working Paper reflects the views of the author and should not be viewed as representing the views of the external client, nor those of Harvard University or any of its faculty. ACKNOWLEDGEMENTS I want to acknowledge the many people who generously shared their time, resources, and expertise with me throughout the research and writing process. First, thank you to Executive Dean John Haigh and Carl Byers—my advisors at the Harvard Kennedy School—for sharing excellent insights and keeping me on track. Second, thank you to Julie Lein and Clara Brenner—co-founders at Tumml, my client for the original project—for providing thoughtful feedback throughout the research process. Third, thank you to the 80 or so social enterprise funders and founders for participating in various interviews and surveys. Without you, this research could not have been possible. Fourth, thank you to the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government (M-RCBG) for providing financial support for my primary research in San Francisco. Last but not least, thank you to Nazanin Mondschein, Rory Gerberg and Victoria Williams for assistance on the homestretch. Your attention-to-detail, thoughtful questions and big picture advice were invaluable. I am very grateful to all of you for your various contributions to my research. Thank you, May Samali ii TABLE OF CONTENTS Acknowledgements .................................................................................................................. ii Table of Contents .................................................................................................................... iii Abbreviations ........................................................................................................................... vi Executive Summary .................................................................................................................. 1 A Note About This Working Paper ......................................................................................... 1 1. Introduction ...................................................................................................................... 2 1.1 Social Enterprises Face Funding Problems .............................................................. 2 1.2 Key Research Questions ............................................................................................. 3 1.3 Definition Of Key Terms ............................................................................................ 3 1.3.1 Early-stage .............................................................................................................. 3 1.3.2 For-profit ................................................................................................................. 4 1.3.3 Social Enterprise ..................................................................................................... 4 1.3.4 Impact Investment .................................................................................................. 5 1.3.5 Funders ................................................................................................................... 5 2. Background ....................................................................................................................... 6 2.1 Social Enterprise Pioneer Gap ................................................................................... 6 2.2 Utility Of The Research .............................................................................................. 7 2.2.1 U.S. Focus ............................................................................................................... 8 2.2.2 Spotlight on For-Profits .......................................................................................... 8 3. Methodology ...................................................................................................................... 9 3.1 Objectives And Research Design ............................................................................... 9 3.2 Survey of Social Enterprises ...................................................................................... 9 3.3 Interviews With Funders Of Social Enterprise ...................................................... 10 3.4 Analysis Of Data Sets From Public Sources ........................................................... 10 3.5 Data Limitations ........................................................................................................ 11 4. Capital Landscape Map ................................................................................................. 12 4.1 Surveyed Companies’ Biographical Information .................................................. 12 4.2 Company Legal Structure ........................................................................................ 12 4.3 Amount of Capital ..................................................................................................... 13 4.4 Sources of Capital ..................................................................................................... 15 4.4.1 Most Common Capital Sources ............................................................................ 15 4.4.2 Venture Capital ..................................................................................................... 15 4.4.3 Private Equity ....................................................................................................... 16 4.4.4 Impact Investors .................................................................................................... 16 4.5 Types of Capital ........................................................................................................ 17 4.6 Capital Raising Success Rates .................................................................................. 18 4.6.1 Number of Funders Approached Per Company .................................................... 18 4.6.2 Percentage of Approached Funders Responding Positively ................................. 19 4.7 Resources Used to Raise Capital ............................................................................. 20 iii 5. Challenges of Raising Capital ........................................................................................ 22 5.1 Quantitative Findings ............................................................................................... 22 5.2 Qualitative Findings .................................................................................................. 24 5.2.1 Funders’ Aversion to Level of Financial Returns ................................................. 24 5.2.2 Funders’ Aversion to Companies in Early Stage Development ........................... 27 5.2.3 Entrepreneurs’ Heavy Time Investment and Long Due Diligence Periods ......... 29 5.2.4 Entrepreneurs’ Lack of Access to Capital Networks and Deal Information ........ 31 6. Changes to Improve Capital Access .............................................................................. 34 6.1 Quantitative Findings ............................................................................................... 34 6.2 Qualitative Findings .................................................................................................. 36 6.2.1 Establishing Intermediary Organizations And Platforms to Connect Social Enterprises and Impact-Oriented Funders ............................................................ 36 6.2.2 Introducing New And More Flexible Financial Instruments For Social Enterprises ............................................................................................................ 38 6.2.3 Providing Impact Investing Education And Fundraising Training For Social Enterprises and Funders ........................................................................................ 41 Appendices .............................................................................................................................. 44 1. Methodology ........................................................................................................................ 45 1.1 Survey Of Social Enterprises ................................................................................... 45 1.1.1 Outreach ...............................................................................................................