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Revising the influence of financing sources on the decision to become a social entrepreneur

Published onJun 20, 2023
Revising the influence of financing sources on the decision to become a social entrepreneur
Andrea Samaniego1,* Xavier Ordeñana2, Adriana Amaya2,
Alicia Reyes2
1Vrije Universiteit Brussel; 2Escuela Superior Politécnica del Litoral
*[email protected]

Extended abstract

Social crises such as poverty, unmet basic needs, and crime, as well as the environmental problems the world faces today, motivate some unique individuals to find innovative solutions to these problems and become social entrepreneurs (SE) (Caldwell, Harris, & Renko, 2020). Personal experiences, closeness to their communities, and their intrinsic desire to help others are among the key triggers for pursuing a social mission by setting up a venture (Austin, Stevenson, & Wei–Skillern, 2006; Wanyoike & Maseno, 2021). Social entrepreneurship initiatives often arise to fill the gaps left by market failures and the inability of governments to solve social issues, especially in developing economies (OECD, 1999). The contribution of social entrepreneurship to the economic development and to the creation of positive impact have made this field of research evolve and gain greater importance (Gupta, Chauhan, Paul, Jaiswal, 2020; Rey-Martí, Ribeiro-Soriano, & Palacios-Marqués, 2016). However, only a few studies have employed quantitative methods in this field (Gupta et al., 2020).

Indeed, there are several similarities between social and traditional or ‘commercial’ entrepreneurship, particularly in terms of the processes to start and manage a business (Sharir & Lerner, 2006). However, one of the most relevant differences relies on the expectations of the venture. A social venture is seen as a catalyst for social change more than an entity that receives monetary benefits from their activities (Gupta et al., 2020). Under this perspective, social ventures can be categorized as organizations purely driven by a social interest, or hybrid organizations with a dual mission (financial and social) (Doherty, Haugh, & Lyon 2014). In both scenarios, however, the social venture should generate returns to sustain their mission (Gupta et al., 2020).

Entrepreneurs often face complex challenges and social entrepreneurs are not the exception. One of the main hurdles in social entrepreneurship, specifically, is to have access to funding opportunities to establish or scale a venture (Akbulaev, Aliyev, & Ahmadov, 2019; Gupta et al., 2020; Sahasranamam & Nandakumar, 2020). As well as in the case of small businesses, social entrepreneurs usually do not meet the requirements and conditions established by the banking sector such as: proof of financial viability of the project and lack of collaterals (Bhattacharya & Londhe, 2014; Sapienza, Korsgaard, Forbes, 2003). Furthermore, attracting social oriented investors also represents a challenge for SEs as they may require different levels of financial returns, work with different timetables, and may expect a different social return (Dees & Andreson, 2003; Renko, 2013).

The difficulties SEs face might drive them to rely on multiple sources of funding (Shaw & Carter, 2007). In this respect, the SE’s level of personal risk might affect the decisions regarding the venture’s funding in a greater way compared with the relative costs of the funding options (Petty & Bygrave, 1993; Sapienza et al., 2003; Shaw & Carter, 2007). Exploring the impact of different funding options on the management of the social venture can provide valuable findings for policy makers, entrepreneurs, and organizations in support of social entrepreneurship (Haugh, 2005). Thus, the objective of this contribution is to analyze the effects of the different funding mechanisms on the decision of becoming a social entrepreneur.

To do so, we join the call of Hanssens, Deloof, and Vanacker (2015) in regard to the need of a better understanding of how the different sources of financing, both new and traditional, affect the entrepreneurial venture, in this particular case, social ventures. Furthermore, as stated by Akbulaev et al. (2019), very little attention has been paid to the study of different models in financing social entrepreneurship. Under the lenses of rational choice theory, and following a quantitative approach using the data collected from the Adult Population Survey (APS) of the Global Entrepreneurship Monitor 2015, this study addresses the following research question: How different funding mechanisms influence the decision of becoming a social entrepreneur?

The main contribution of our study is to provide empirical evidence on the effect of the sources of financing on the social entrepreneurial entry. In this respect, this research sheds light on how to design better public policies aimed at promoting social entrepreneurship through appropriate funding mechanisms.

Preliminary results show that obtaining informal financing from colleagues has a greater impact on the social entrepreneurial entry, compared to requesting financing from a private investor. Crowdfunding has been also highlighted as one of the financing mechanisms that increases the probability of becoming a SE, although with less impact than the two already mentioned. Additionally, the results remark that if the entrepreneur received money or expects to receive money for the start-up of the business, the probability of becoming a social entrepreneur increases. Furthermore, the greater the contribution of own resources for the start-up of the business, the lower the probability of becoming a social entrepreneur.

This results are aligned with previous research in which it was found that only a 2% of social ventures make use of their own funds, and that their founding sources are mainly governmental or non-for-profit organizations suggesting that SEs tend to experience significantly less personal financial risk (Shaw & Carter, 2007). In this respect, our study represents an important starting point for scholars to deepen our understanding of how the different sources of financing affect the social entrepreneurial entry.


Social entrepreneurship, financing, decision making. 


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