Ask any social entrepreneur (or entrepreneur for that matter) what they need in order to grow and create and impact, and you will probably hear this response: “I need to raise money”. But that isn’t necessarily true. If raising money was the key to success, then why do 75% of venture-backed startups fail?

Raising capital is necessary in some cases. For instance, take clean-burning cookstove social enterprises like Burn or Inyenyeri, which needed an influx of capital to scale teams and manufacturing; or social enterprises like Mawingu and ARED who bring power and internet to disconnected communities also need to raise capital to build the infrastructure to scale their services. While capital for these organizations was indeed important, before raising money, they had something more important: Customers.

In many other cases, raising capital is unnecessary and can even be harmful. LighterCapital highlights 6 risks that social entrepreneurs should be aware of if they decide to try to raise.

Certainly, enterprises need capital to grow, but while Founders rush to impact investors to access this capital, there is often a better way.

Follow the Money

Over the last 20 years, impact investing funds have invested a total of about 405 Billion USD. That is a massive number, to be sure, but it pales in comparison to the over $12 Trillion USD that is spent every year by businesses JUST on transactions with other businesses. In other words, solving a problem for the corporate sector that allows you to tap into the Trillions of dollars already being spent will open up way more opportunities for funding than raising investment capital.

As an early-stage social enterprise, you likely have two driving objectives:

#1: Growth.

#2: Impact.

Growing your operations will grow your revenues, and growing your revenues will grow your impact in the community and create more world-positive jobs.

So how can you most effectively do both?

By partnering with the corporate sector, you can build sustainable revenue streams that help you advance your mission, accelerate your impact, and grow your revenues — while embedding sustainability into a more equitable and regenerative economy. That exchange goes both ways, with plenty of lessons for social enterprises to learn from the corporate sector about operational effectiveness at scale.

Driven by consumer demand, employee activism, and societal pressure, businesses are spending more than ever to achieve sustainability, equity, and other social impact targets. The private sector is finally realizing that it has a role to play in achieving the Sustainable Development Goals — something that you, as a social entrepreneur, have been doing all along.

Understanding Global Value Chains

To help make this more real, let’s look at what it takes to produce a cup of coffee (here’s more on the journey from bean to cup).

This means that when a consumer spends $3 on a latte, roughly $.30 of that stays at the coffee shop. But the majority of the remaining $2.70 goes to the businesses along the global value chain that turned raw coffee beans from a farm in, say, Colombia, into the drink you’re holding in your hand. 

Let’s take a look at Vega Coffee as an example. It got its start selling high quality, environmentally friendly, farmer-roasted coffee directly to consumers at the very end of the value chain, eking out just enough profits to sustain a small team. Despite great marketing, a great team, and a wonderful product, Vega was looking for more opportunities to achieve the scale and impact it had potential to create. Looking across the coffee value chain, Vega saw that many people in businesses and universities drank coffee that was purchased by intermediate buyers (businesses, not the end-consumers). Before going to raise more money, Vega ran some experiments, and found that with some slight edits to its value proposition and packaging, it could create new revenue opportunities by selling to these intermediate buyers. During the COVID-crisis, Vega also nimbly adapted their value proposition to help businesses show appreciation for their teams by purchasing coffee for their employees working from home.

As we shared in our S-GRID announcement video, there is a massive increase in spending by businesses across global supply, service, and distribution chains to become more sustainable and equitable. With the vast majority of consumers demanding more just, equal, and sustainable products and services, social enterprises can plug into these chains even if their products come at a higher cost than current competitors.

How Social Enterprise Can Scale on Revenue

In the MovingWorlds S-GRID program, we help social enterprises identify these revenue growth opportunities – in place of or as a supplement to raising money through other means – by going through these steps:

1. Map the Value Chain
2. Identify Market Segments, and Narrow Your Focus
3. Analyze Potential Business Models and Shortlist Your Best Options
4. Test Your Value Proposition
5. Build Your Systems to Use Data and Be Efficient
6. Repeat and Get Even More Real Customer Feedback

1. Map the Value Chain

Whatever product or service you deliver, you are part of a value chain. You can see this in our coffee example, and you can apply this to almost any segment.

In general, most “value chains” involve the following stages:

1. Designing
2. Sourcing
3. Processing
4. Manufacturing
5. Distributing
6. Selling
7. Post-consumption

Sometimes these stages happen in different orders, sometimes they have more steps, and sometimes they have less. But in general, all products and services move through most of these stages. To understand where potential new revenue streams lie, you want to start with mapping your value chain. 

2. Identify Market Segments, and Narrow Your Focus

Once you have mapped your value chain, it’s time to start thinking about different businesses within each stage of the value chain. This should be an interactive process with as many stakeholders as possible included (here is more info on stakeholder mapping). 

For these different businesses, there are three key considerations:

1. Business segments (I.e. grocery stores, local coffee shops, intermediate businesses)
2. Specific businesses (i.e. the names of the businesses found in the segments above)
3. Buyers within the business (i.e. the head of marketing, the head of procurement, the head of operations, the office manager, etc. – the different people within the specific business that you will have to identify and customize your value proposition for)

3. Analyze Potential Business Models and Shortlist Your Best Options

While they may be somewhat redundant, you want to create a few potential business models across various points of your supply chain. The best tool you have for this is the Business Model Canvas. With this, you can easily map out your business model for each of the potential market segments, and compare them.

Once you do this, you want to think through the top two to three among the business models you’ve mapped. Don’t do this alone: talk to your peers, talk to a mentor, get an outside opinion from a pro bono expert, go talk to real potential customers. 

4. Test Your Value Proposition

With a business model in hand, you’re going to want to focus on the cornerstone holding it together: Your value proposition. 

This is a LOT of work, but it is critical for success. A business model canvas is a series of assumptions that need to be tested, and the only way to test them is to go talk to potential buyers. Using the story of Vega above (here’s a great video with more details), you can picture a canvas, with the value proposition at the center, for the following key audiences:

1. Business during COVID: For businesses that want to keep their employees engaged and feeling appreciated (and productive!) during COVID, Vega coffee helps you easily send high quality, ethical coffee to your employees for the same cost of brewing the coffee in the office you are no longer using, and in a way that helps you meet your sustainability targets.
2. Large universities: For universities that provide coffee to their staff, Vega coffee provides you bulk, high quality, and tasty coffee that your staff will appreciate, and that demonstrates your commitment to living the values that your institution teaches.
3. Individual coffee drinkers: For stay-at-home coffee brewers, Vega coffee sends tasty coffee right to your doorstep with the stories of the well-compensated farmers that grow it, so that you can know your purchase is empowering communities.
4. Processed food companies: For processed-food companies — like smoothies, ice cream, healthy snacks — Vega coffee delivers high-quality, ethical, tasty coffee on-time and on-budget to your production facilities so that you can reliaby sell even tastier treats to your high-margin customers who will be willing to pay more knowing that you have sourced your ingredients in a world-positive manner.

(Editor’s note: These “value propositions” are not the published marketing language of Vega. Rather, this is a formula that social enterprise can use internally to align on the value they provide to different segments: To: [Buyer Segment] –> With: [problem] –>  Brand is: [explanation] –> So that: [Higher Level Benefit])

Take point #1 as an example… look at all the assumptions in that one short statement:

1. Do businesses care if their employees are engaged?
2. Is the cost really the same?
3. Will employees feel appreciated?
4. Does the company care about sourcing from ethical partners?

Why is this step important? Think about how the packaging, sales systems, marketing, distribution, pricing, and even invoicing and payment processes will change for each of these buyers. This is the step where you can rapidly test to see which you should optimize for. So for each of your top business model canvases and their respective value propositions, “get out of the building” and go test your assumptions.

5. Build Your Systems to Use Data and Be Efficient

A little bit of work upfront can save you a lot of time later and help you make the right decisions down the line.

There is a lot more that goes into building a sales cycle with a feedback loop, and we’ll dive deeper into this in S-GRID, but there are a few key things to keep in mind here:

1. Develop a system (this can be in a spreadsheet or CRM like SAP’s) 
2. Discuss this with your team members, set goals weekly, and ensure all team members are keeping your data up-to-date
3. Use automation tools (reminders, workflows, mail merges, etc.) to help you track data and be efficient
4. Analyze data – qualitatively and quantitatively – to understand which segments have the most potential

PBworks Lean Startup wiki is a great resource for learning more about this, and once you’ve gone through multiple iterations, you will want to then build a sales process.

6. Repeat and Get Even More Real Customer Feedback

We can’t stress this enough: for all steps outlined here, you want to go talk to real people as much as possible. Focus on potential customers – people that represent businesses and have the potential to buy goods, services, and/or programs from you.

When receiving new feedback, you want to keep revisiting and working through this process to answer the questions:

1. Do I understand my value chain?
2. Am I going after the highest value segments, and the right businesses within them?
3. Am I targeting the right people?
4. What is the data telling me about which segments and businesses have the most potential?

In Conclusion

Building sustainable revenue streams by incorporating into global value chains is a long process with a lot of work, but it’s better than going out of business or sacrificing equity. More importantly, going through these steps will help your organization achieve the growth partnerships it needs to create a more equitable and just planet:

1. Map the Value Chain
2. Identify Market Segments, and Narrow Your Focus
3. Analyze Potential Business Models and Shortlist Your Best Options
4. Test Your Value Proposition
5. Build Your Systems to Use Data and Be Efficient
6. Repeat and Get Even More Real Customer Feedback

Interested in submitting an application for your social enterprise to participate in S-GRID? Thanks to generous sponsorship from SAP, participation in the program is free for 2020. Learn more and apply here.