Finding the right type of funding for your innovation
A blog by Tej Dhami, a Frontier Tech Hub Advisor
Raising funds to develop and scale early-stage social innovations can be an intimidating task. The funding landscape for social innovators is broad, encompassing a wide range of financial instruments. This blog explores the various types of funding available to social innovators, their sources, and when each type is most appropriate.
How to scale
Scaling innovations for social or environmental change is a complex process with multiple potential pathways including:
Open sourcing the innovation to drive adoption – most applicable when ongoing costs are minimal and the innovation requires little maintenance
Selling, transferring, franchising, or supporting others to scale the innovation – this can be done through a non-profit or for-profit entity depending on the innovation, the associated costs, interested parties, and the ambitions of the entrepreneur(s)
Creating a social enterprise or other commercial entity to scale the innovation – only possible where there are customers willing to pay for the product, these customers could be the end users or government or other non-governmental bodies willing to pay for the product or service for a specified user group/context
Finding the right model
Determining the right funding model depends on multiple factors, including the venture’s stage (e.g., ideation, income generation), its income and profit potential, and impact area.
The Funding Spectrum
Funding for social innovators spans a wide spectrum, ranging from non-repayable grants to various forms of repayable capital, such as loans and equity. Understanding where your enterprise sits on this spectrum and aligning it with your funding needs and goals is critical.
1. Grants
Grants are ideal for piloting new ideas, testing concepts, building capacity in uncertain revenue-generating areas, and addressing high-risk, high-impact initiatives with limited commercial returns
What for: Grants are best used for piloting new ideas or testing concepts, building capacity in areas where revenue generation is still uncertain and addressing high-risk, high-impact areas where commercial returns are limited.
From whom: Grant funders can include government programmes, foundations, high net worth family offices and challenges funds such as the Global Innovation Fund or Humanitarian Grand Challenge (further examples here).
Important to consider: While grants are invaluable, they often come with restrictions on how the funds can be used, detailed reporting requirements, and timelines that may not align perfectly with your project’s needs.
2. Debt
Loans or other debt instruments involve borrowing money that must be repaid with interest. Only social innovators with a reliable revenue stream generating a surplus or those with visibility on revenuefor example the investment will allow them to deliver a new contract may consider this option. Types of debt financing include:
Traditional loans: Offered by banks or impact lenders, often with more flexible terms for social enterprises.
Revenue-based financing: Repayment is tied to a percentage of the enterprise’s revenue, making it more adaptable to cash flow fluctuations.
Social bonds: Debt instruments issued to raise funds for social or environmental projects.
Blended finance: A mix of concessional capital (e.g., grants) and commercial capital, designed to de-risk investments.
What for: Debt can be a suitable choice for scaling operations, expanding into new markets, or investing in equipment or infrastructure.
From whom: ???
Important to consider: Social investors require regular reporting on pre-defined impact metrics as part of the loan agreement. Unsecured loans typically have short loan terms (3-7 years) which may put too much pressure on cashflows. To apply for loans the social innovator will need multi-year cash flow projections in addition to historic accounts and will typically need to submit some form of application or business plan showcasing the use of funds and how they will generate a return on the investment.
3. Equity
Equity funding involves selling a stake in your enterprise to investors in exchange for funding.
What for: Social businesses with high growth potential. Investors are taking a greater risk with an equity investment than debt as there is no timeline for repayment or returns. There is therefore the expectation that the business will deliver significant growth, thereby increasing the value of their stake in the organisation.
From whom: British International Investment (British International Investment (BII) - Debt - GET.invest) , Acumen (Patient Capital), specialist banks such as CAF
Angel investors typically fund very early-stage enterprises
Impact investors prioritise measurable social or environmental impact alongside financial returns.
Venture capital (VC) typically focus on high financial returns but a growing number of VC firms are now incorporating impact metrics.
Important to consider: Equity financing comes with the trade-off of giving up partial ownership and control. It is best suited for enterprises with scalable models and significant growth potential.
4. Crowdfunding
Crowdfunding has become a powerful tool for social innovators, enabling them to raise small contributions from a broad pool of individuals
What for: Crowdfunding is appropriate for a wide range of social innovations but is particularly useful for smaller fund raises and consumer-facing social innovations. This is because crowdfunding can help validate ideas and build a customer base.
From whom: Ethex and Crowdfunder are crowdfunding platforms specializing in social and environmental investment opportunities
Important to consider: Successful crowdfunding campaigns require significant input and effort to create a compelling narrative, maintain communications and build a network of supporters willing to contribute.
5. Additional funding structures:
Hybrid Instruments: Hybrid funding instruments combine elements of grants, debt, and equity to meet the unique needs of social innovators. Examples include:
Convertible debt: A loan that can be converted into equity at a later stage.
Recoverable grants: Funding that operates like a grant but must be repaid if the enterprise achieves certain financial milestones.
Choosing the Right Funding Type
To select the most suitable funding type, social innovators should consider:
Stage of development: Early-stage ventures often rely on grants and donations, while growth-stage enterprises may seek debt or equity.
Revenue model: If your enterprise has a steady income stream, debt or equity might be viable. If not, grants or philanthropic funding are more appropriate.
Risk appetite: Entrepreneurs willing to share ownership can explore equity, while those seeking to retain control may prefer debt or grants.
Impact alignment: Ensure that the funder’s goals align with your mission and values.
Final Thoughts
Navigating the funding landscape as an early-stage social innovator can be daunting, but understanding the spectrum of options and their nuances is the first step toward securing the right support. Each funding type comes with its own set of advantages and trade-offs, so it’s essential to align your funding strategy with your goals, stage of growth, and impact aspirations. By making informed choices, you’ll not only secure the capital needed to grow your enterprise but also build lasting partnerships that enhance your mission
If you’d like to dig in further…
🚀 Check out our prior blog post Creating an investment worthy story for your innovation — Frontier Tech Hub
📚 Follow our Kenyan-based pilot, Data for matchmaking: connecting start-ups and funders — Frontier Tech Hub
📚 If you are an investor with interest in learning more about our portfolio of graduating and alumni pilots, please get in touch though Frontiertechhub@DT-Global.com with ‘Funders Circle’ in the subject line.
