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The intention of this series of posts is to share the story of the beginning and ending of a business. We will zoom in on lessons learned in different areas such as the business setup, finding the right team, the market, consumers and technology. This post focuses on funding-hard or soft money and scaling-big bang or step-by-step.
The authors of this post, Lonneke Craemers and Ties Kroezen managed NICE International, a company focused on the energy and IT sector in Africa.
NICE International was a Dutch based flagship social enterprise operating in Africa that had to wind down its activities in September 2013. In 2011 the Managing Director of NICE participated in the Unreasonable Institute. We, the authors, hope that other social enterprises can learn from our experience. In a first column, the history of NICE was outlined. In this column, we share the lessons learned on funding-hard or soft money and scaling-big bang or step-by-step.
Funding: Hard or Soft Money
Since a social venture is combining social with financial returns, most of the time both soft and hard funding can be used. With soft funding we mean grants, donations and soft loans. Hard funding is equity, commercial loans and sometimes a mix of the two.
Although the money was free, there were a lot of strings attached.
At NICE we used both soft and hard funding. For the NICE roll-out project to scale-up the business to the break-even point, we used a grant from the European Union that was co-funded with equity, a soft loan and a subscription right (a call option on new shares) from commercial companies. We only managed to access the hard funding when the soft funding was secured. For commercial investors it is attractive when part of the cost is funded through a grant. The grant will not require payment of interest or dividend and therefore positively leverages the commercial funding.
One of the main reasons NICE had to wrap-up was the bureaucracy and rigidity of the EU-grant. Although the money was free, there were a lot of strings attached. For instance, the EU required us to do all the purchases through tender procedures, which are complex and time-consuming and have an uncertain outcome. As a result we lost some long-term partners and a lot of time. Also, the financial reporting requirements were so detailed, that we were forced to hire an extra accountant. All this bureaucracy increased our overhead cost with an amount that was more than the amount granted to us.
If the choice is between funding with disadvantages or no funding at all, what do you do?
But most of all, our entrepreneurial freedom was severely restricted, as the EU required us to stick to a 4 year plan that was developed 1 ½ year before the project even started. When we were faced with changes in the market we could hardly change our plan, unless we went through a complex and time-consuming contract change procedure.
The hard funding was far better for us to handle. The commercial investors had an interest in the success of the company and were actively involved through Board memberships. They were also able to support the company through their expertise and networks.
In the end it all comes down to being realistic… if the choice is between funding with disadvantages or no funding at all, what do you do?
Our lesson learned is to be very careful when accepting both soft and hard funding.
- Soft money may be free, but it is not cheap!
- Hard money has the risk of too much pressure on financial return on investment, jeopardizing the social impact.
- Make sure you have a long-term agreement and your investor is involved and underwrites your social mission.
Upscaling: Big Bang or Step-by-Step
One of the main challenges of NICE was the relatively high overhead cost as a result of the support needed for the local businesses and later also the bureaucracy of grant procedures. In order to break-even we had to scale up the business significantly. Of course scaling-up would also mean increased reach and impact. So for both financial and social reasons we developed a plan to scale-up the business in 4 years’ time from 7 NICE Centres in one country (Gambia) to 57 NICE Centres in 3 countries (Gambia, Tanzania, Zambia). Our ambition was to scale up to 250 NICE Centres by 2020. If we would have grown more slowly, our break-even point would be further out, which was not acceptable for commercial investors.
This brought us to our knees, we had to terminate the expansion and also wind down the international headquarters.
We did not manage to realize our ambitious up-scaling plan. Due to a mix of reasons we did not grow at the rate planned. The main reasons included delays in purchasing as a result of the EU tendering procedures, inability to recruit a capable and affordable country manager for Tanzania and the need to adjust our business concept to market changes. Revenues were to pay for half of the total cost of the roll-out project, and lack of growth led to lack of additional revenues.
This brought us to our knees, we had to terminate the expansion and also wind down the international headquarters. Some may wonder why we did not try to reduce our overhead cost. We did to some extent, but we were convinced that a minimal overhead was needed to properly run and grow the business.
Should we have grown at a slower pace? It would have made certain things easier, but we would not have acquired the funding to grow at all. A catch 22 situation!
Soft money may be free, but it is not cheap! Tweet This Quote
Conclusion
Social entrepreneurs have a tendency to focus on impact and their business model. The NICE case shows that even with a working business model (especially when operating in an international context) things can still go wrong due to legal, funding and management issues. Our advice is to take these lessons learned serious from the start and get seasoned advisors.
