Why do-gooder startups will fail without early financing

Why do-gooder startups will fail without early financing

Startups like <a href="http://www.huskpowersystems.com">Husk Power</a> need overhead to develop their ideas. Photo: <a href="http://www.flickr.com/photos/31600567@N03/6006057063/">Acumen Fund (flickr)</a>
Startups like Husk Power need overhead to develop their ideas. Photo: Acumen Fund (flickr)

Bringing a great idea to scale requires high startup costs, but social enterprises often struggle because many funders don't like to cover overhead.

As an article in the Harvard Business Review's blog recently explained, this doesn’t make much sense if we want NGOs to produce results.

Almost all social sector organizations are small and perennially underfunded, with barely three months' worth of working capital at their disposal. And that hasn't changed in the last 12 years.

Compare that to the world of venture capital. If a business entrepreneur came to us with a plan for growing a new business without spending a penny on overhead, we would show him or her the door. Why should it be any different for a social entrepreneur?

But if we can get it right, there's money and social impact to be made.

We live in a world awash with capital—some $200 trillion in financial assets. … If we can create instruments ... that can deliver a financial return of about 7%, a high social return and limited downside risk, then we can meet two needs. We can provide reasonable returns that are uncorrelated with equity markets and attract capital to entrepreneurs who can develop innovative and effective ways of improving the fabric of our society.

Of course, developing markets are not Silicon Valley, and carry different risks. For example, wealthier nations may steal key talent from a startup once it gets off the ground. But even good ideas sometimes flop a market with a 20 to 30 percent success rate. For social enterprise startups, the potential to improve society is huge, and if investors can make some money in the process, then why not?

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