There wasn’t a lot of seed capital out there for ardentCause when Kathleen Norton-Schock and Rosemary Bayer launched their firm five years ago.
The Troy-based company had a number of appealing features that typically attract early investment. It was a tech firm specializing in software for a niche market. It was led by a pair of IT veterans. Its target market (providing the backend IT for non-profits) was underserved with a high ceiling for growth. And yet there was no money for ardentCause.
“The challenge for us is we’re a social-enterprise corporation,” Bayer says.
Specifically ardentCause is a low-profit limited liability company (commonly known as a L3C), which means it’s a socially entrepreneurial venture that operates somewhat like a non-profit but still aims to make money. The co-founders jokingly refer to the business model as “a for-profit company with a non-profit soul.”
It was also one of the first of its kind in Michigan. So new to the game that when the duo sought to register their company the state hadn’t yet created the proper paperwork to do so.
That meant bootstrapping wasn’t just a necessity but the main focus for growing ardentCause.
Bayer and Norton-Schock have been more than up to the task. Today ardentCause is cash-flow positive with a staff of 11 employees and one intern. It routinely hires its interns and expects to hire another three people within the next 30-60 days to keep pace with its growth. And ardentCause did this with less than $100,000 in seed capital raised from Invest Detroit and a grant from BAF.
Angel investors and venture capitalists write big checks for startups with the big profitability potential. Companies that choose to focus more on social impact than exponential growth often mean that the business model isn’t designed for returns that are big and quick.
“We talked to a lot of people (angel investors and venture capitalists) and it just didn’t fit their model,” Bayer says.
Flower child capitalists
Early startup investors are usually seeking an exponential return on their investment. The hope is that they’ll realize proceeds worth 10-20 times their initial stake. So if an angel investor (a high-net-worth individual) puts $100,000 into a new company, he or she expects a return of $1 million or more within a few years. Of course, not every investment delivers. But for many, the rewards must be large enough to convince them to take a gamble.
Social entrepreneurs pride themselves on their social mission. They want to make the world a better place while earning profits and will not sacrifice one to maximize the other. Their mission statements often include buzzwords like ethical practices, triple-bottom-line, community-based, and sustainability. It’s the type of jargon that inspires folks like Mitt Romney to give the side eye when it comes to spreading seed capital.
“They resist the notion of it [social entrepreneurship] because they consider them the hippie children of the business community,” says Romy Gingras, president of Gingras Global. “They immediately dismiss them.”
Gingras has been a certified financial planner for years. She has also worked as a business consultant, helping small firms make the leap from launch to establishment. The success rate for new small businesses typically hovers around 50 percent. Gingras says 90 percent of the firms she has coached toward best practices have found success. She launched Gingras Global three years ago with the idea of helping bring similar success rates to social entrepreneurs.
“These businesses have some of the highest failure rates and the best missions,” Gingras explains.
The Auburn Hills-based firm also offers investor support services with the idea of helping bridge the gap between hard-nosed conservative business pros and progressive entrepreneurs who wear rose-colored glasses.
“The social entrepreneurs tend to overstate their social mission,” Gingras says. “The investors need that translated for them. We come in and become that translator.”
Investors don’t just need translation. Often they need a bit of education, too. People like Gingras hope that some added perspective will elevate angel investors into impact investors that help create social change.
“It’s much harder to be a social entrepreneur than a regular entrepreneur and we all know how hard it is to be a regular entrepreneur,” says Rich Tafel, president of Public Squared.
The Washington, D.C.-based firm helps facilitate social innovation by connecting innovators with investors. Tafel is also working to rally more impact investors to plant seed capital with social entrepreneurs. Both Tafel and Gingras encourage impact investment by teaching angel investors that social ventures need more time to ripen and expectations of exponential returns need to be curtailed to ensure outcomes.
“There are a lot of investors at the angel level who want to invest because they want to do good,” Tafel says. “It (the impact investor community) is very nascent but it’s getting more and more sophisticated.”
The sophistication of social entrepreneurs
A lack of socially oriented investment isn’t just the fault of impact investors. A lot of the responsibility falls on the social entrepreneur.
“The social entrepreneur is often focused on cool non-profits,” says ardenCause’s Norton-Schock. “That’s great but it’s missing important pieces. There is a lot of training needed for entrepreneurship.”
Michigan Corps is in agreement. The Detroit-based non-profit is one of the primary organizers behind the Michigan Social Entrepreneurship Challenge. This year’s competition focuses on impact investors, specifically teaching social entrepreneurs what it means to walk in an investor’s shoes. To see what they see, understand why they make decisions to invest.
“There is a lot of education needed,” says Elizabeth Garlow, executive director of Michigan Corps. “There is a need for greater sophistication. They need to be able to show both a greater return on investment and a measurable social impact.”
Which can mean less drum circle and more cubicle. Garlow believes that social entrepreneurs need to pay closer attention to their business’ professionalism and profitability. They need to inspire confidence with their appearance and business practices. And they need to learn how to approach investors and negotiate terms. If more social entrepreneurs tightened up their fiscal game, she thinks the impact investors would follow.
“There is a great level of interest from the investment community,” Garlow says. “The challenge is bridging the two worlds.”
Jon Zemke is the Innovation & Jobs Editor for Metromode and its sister publications, Concentrate and Model D. He is also the Managing Editor of SEMichiganStartup.com. He also runs a business turning blighted, foreclosed properties in Detroit into community assets, but he shies away from the title social entrepreneur.
All Photos by Chris Gerard