Excerpt from the recently published BAM Global Think Tank report on Business as Mission Funding.
The word ‘funding’ refers to the spectrum of financial resources required for a business venture through the normal life-cycle phases of every business: start-up, growth, maturity, and decline. It includes a range of monetary sources, each with attributes unique to each stage of growth. Funding takes on many shapes and sizes, from self-funding to crowdfunding, microcredit to bank loans, and seed funding to venture capital.
Broadly speaking, the subject of funding includes sources, structure, application and management of monies in all areas of the business. In the context of business as mission, perceptions and actions relative to both the business and the capital should be informed by Biblical principles.
In a broader context, funding is distinguished as being financial capital – such as debt or equity – alongside other forms of capital input, such as intellectual, human, social, spiritual, infra-structural and natural.
BAM funding models
Traditional sources of business as mission funding parallel those in typical business funding. In the majority of cases, profitability is the key issue that drives capital to those companies most likely to achieve viability. For most investors, profitability is a non-negotiable measure of success.
However, there are a growing number of investors looking for something in addition to just a financial return. There is a growing interest in investing in social enterprise or ‘freedom businesses’ (companies involved in anti-human trafficking work), as well as investors looking for a Kingdom-purpose and viable BAM companies to invest in. While profitability remains central (the reality is that large amounts of money will not flow to unprofitable businesses), there are many other factors that contribute to an investor decision.
People will ultimately make a decision with their heart. Hearing both sides of the story, seeing both a potential for profit and a Kingdom purpose will inform investor decisions.
André Mann, Managing Principal of Sovereign’s Capital
The following is a brief summary of a variety of funding methods. Many will overlap with other models and two or more may be combined to fund a business.
This source is often referred to as ‘family, friends and fools’. Funding is based on the business owners personal funds or funds donated and/or loaned by family and friends willing to take the risk. ‘Fools’ refers to those that aren’t friends or family, and are not professional investors, but believe in the idea enough to invest anyway.
Collateralized Debt results from borrowing money from a lender, usually a bank or other financial institution. It typically requires pledging collateral or signing a personal guarantee to secure the monies loaned. It is difficult for start-ups to secure loans as they usually do not have the consistent cash flow to service the debt. In most cases, the cash flow would be better used to fuel business growth. Small-to-medium enterprises with established track records are more likely to be viewed favorably by lending establishments. Qualifying criteria and terms, such as loan costs, interest rates, release prices, loan-to-value, etc., vary greatly from country to country.
Donor-based or hybridized funding
In this category, monies are donated to the business enterprise through church support, mission agency support or other sponsoring groups. While in the United States there are major restrictions to donor-based funding for business, other countries may not regulate this avenue as strictly. This model may include loan guarantees by a mission agency or hybridizing nonprofit and for-profit resources.
Microcredit is defined by the Oxford American dictionary as “the lending of small amounts of money at low interest to new businesses in the developing world.” This practice dates at least back to Jonathan Swift and his Irish Fund Loans to the poor of Dublin in the early 18th Century.
A newcomer to the funding spectrum is ‘crowdfunding’. This is “the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet.” (Prive 2012). Crowdfunding allows individuals to participate in capitalizing efforts for both businesses and nonprofits, with or without a financial return. Most investors are looking for social equity – the knowledge that their money is going to equip individuals or organizations for the greater good.
Just as a mezzanine floor supplies a bridge between levels of a structure, mezzanine debt links collateralized debt and equity funding. Like equity, it is not secured or pledged against the assets of the business or the assets of the business manager(s). Interest and repayments are only paid out of the positive cash flow of the business and additional funds raised by the business, just as dividend and share redemptions are only paid out of the positive cash flow of the business or additional funds raised by the business. It is like collateralized debt in that interest at a pre-agreed interest rate is due each year and capital repayable over a confirmed number of years.
In equity funding, the investor “requires ownership of an agreed proportion of the company and, in exchange for this, is rewarded with returns from the profits in proportion to the equity in the company.” (Jeffery 2012a). Types of equity funding are described by Jane Jeffery in her article, Funding Your Dream (Jeffery 2012a):
- Seed funds – “A seed, a very small amount that is in a fund specifically designed to meet the needs of companies at a very early stage… The idea is to spread small amounts of funds as widely as possible to capture a wide market in the hope that at least some will be successful… Seed funds are often established by governments to encourage specific sectors of the community to start their own business as a way of reducing unemployment.”
- Angel funds – “…Established by individuals or groups of individuals who often have an interest in assisting entrepreneurs beyond the desire to make money. They often are willing to invest in ventures, which are too risky for the venture funds. Angel investors use their own money and often take a ‘hands on’ approach to assisting start-up companies. The amounts of funds are usually small. The mentoring the investors give and the development that the investment allows entrepreneurs can become more attractive to venture funds.”
- Venture funds – “Larger funds that invest in companies with high potential for success. The investments they make are usually substantial and they require a sound business model and market potential. They expect to make a return on their investments in three to five years so the companies they invest in have a track record, a proven idea and a customer base with potential for substantial growth. The aim of the venture funds is to make money for those who have contributed to the fund.”
There is a high chance that BAM enterprises will explore the pool of impact investing capital as being an option over conventional forms of financing. Impact (or philanthropic) investments are made into companies, organizations, and funds with the intention of generating measurable social and environmental impact alongside a financial return. They may be made in both emerging and developed markets and target a range of returns from below market to market rate, depending on the circumstances. Impact investors actively seek to place capital in businesses and funds that can harness the positive power of enterprise.
The BAM Global Think Tank report on Business as Mission Funding, ‘No Water, No Fish: Funding is Vital to Business as Mission Success and Sustainability’ is now available at BAM Global Think Tank.