The Critical Role of Mission-Driven Capital in Social Enterprises

This article explores the crucial role of mission-driven capital in the success of social enterprises, focusing on how these businesses can attract and secure funding aligned with their social and environmental goals. It delves into the differences between traditional venture capital and mission-driven capital, highlighting the importance of patience and long-term commitment for impact-focused organizations.

• Mission-driven businesses need a long runway to grow a sustainable business and therefore are not a fit for the venture capital investing model, which expects a quick scale-up and exit.
• In contrast, mission-driven capital, at its best, is more patient and is willing to stay in the relationship through thick and thin.

Securing Mission-Aligned Capital

The article emphasizes the importance of carefully vetting potential investors, considering it a critical decision akin to choosing a life partner. It stresses the need for entrepreneurs to engage with multiple investors, conducting thorough interviews and paying close attention to their questions and approach.

• When business is booming, Investor relationships are typically smooth, but when challenges arise, an entrepreneur finds out if they have a trusted partner by their side.
• If the diligence questions that investors ask you are overwhelmingly about financial returns, they might be a different breed than those who spend a similar amount of diligence time learning about the business holistically, understanding its mission, and getting to know the entrepreneur.

The Power of Strategic Finance for Social Enterprises

The article highlights the significance of strategic finance, contrasting it with operational finance and explaining how it helps social enterprises anticipate challenges and ensure long-term viability. It details the core areas covered by strategic finance, emphasizing its crucial role in balancing profitability with social and environmental impact.

• Strategic finance is distinct from what we’ll call operational finance. Operational finance is more day-to-day and includes things like closing the books, paying bills, collecting, and short-term cash management.
• In contrast, strategic finance is forward-looking and incorporates strategic planning and capital strategy. Strategic finance can anticipate future challenges and see around corners to ensure long-term viability, which is why veteran CEOs frequently say that their CFO is their co-pilot.

Key Considerations for Mission-Based Businesses

The article provides valuable insights into key considerations for mission-based businesses, focusing on the need for long-term thinking, scrappiness, early profitability, and efficient resource management. It emphasizes the importance of strong margins, disciplined decision-making, and the impact of financial decisions on the organization's mission.

• Mission-driven businesses need to take the long view because the challenge is twice as hard as a conventional business. For mission-driven businesses, that means being scrappy, focusing on early profitability, and working with small, agile teams that can adapt to what is and isn’t working. Scrappy means keeping losses low, tightening your cash conversion cycle, being really efficient about managing inventory, and taking debt rather than equity when possible.
• At Do Good CFO we like to say “No Margin, No Mission” because if the company isn’t financially sustainable, you won't achieve your mission. Companies with weak margins don't have the cash needed to adapt when unexpected shocks occur. So margins are a key leverage point to a successful business, and you need to be asking questions like how profitable is each unit I sell? Do I have customers that are unprofitable? You have to be disciplined and refrain from selling through channels characterized by high volume but low profitability. You certainly can't lose money on each product and expect to make it up on volume. And you have to get your gross margin right before you can scale or you will burn through your cash quickly.

Questions to Ask Potential Investors and Fractional CFOs

The article offers a comprehensive list of questions that mission-based brands should ask potential investors and fractional CFO candidates, covering topics like value alignment, investment horizon, return targets, financial expertise, communication skills, and bandwidth.

• When interviewing potential investors, ask questions that test value alignment between founder and investor. For example, ask: “What is the duration of the fund in total and how much time remains?” This is critical because a short time horizon for the fund means increased pressure to generate an exit. Another good one to ask is: “What rate of return are you targeting? Who are your Limited Partners (LP’s)? What are their return targets?” Two more examples include: ““When there is a tradeoff between financial return and impact, how do you think about that?” and “Can you speak to portfolio companies you have supported during tough times?”
• When seeking a fractional CFO, here there are some important questions to ask:
• Does this person understand your business?
• Can they help you attract mission-aligned capital?
• Do they have a strategic approach?
• Are they a strong communicator?
• Do they have bandwidth?

When to Bring on a Fractional CFO

The article concludes by outlining key signs that a company is ready to bring on a fractional CFO, such as rapid growth, need for capital, cash flow challenges, product pricing uncertainty, and accounting department overhauls. It encourages organizations to proactively invest in strategic financial management rather than waiting for crises to arise.

• There are five top signs an organization needs a fractional CFO:
• The first is that the organization is growing quickly, is at a crossroads, or is at an inflection point.
• Another sign is that the organization needs to raise mission-aligned capital or secure a major grant.
• The third sign to bring on a fractional CFO is that cash is tied up
• A fourth sign is uncertainty about product pricing, margin viability, or the path to break even
• The last sign is that the Accounting and finance department needs an overhaul