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

Andrea Samaniego^1,* 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.

For the purpose of this study, we consider the Global Entrepreneurship Monitor 2015 database, year in which a special issue on social entrepreneurship was conducted in the 58 participant economies. We make use of both the Adult Population Survey (APS) and the National Expert Survey (NES) databases at an individual level. By employing a multilevel model, we test our hypotheses to capture the unique structure of each economy and to obtain a residual variance per group for a more robust and consistent model in the long term.

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.

Keywords 

Social entrepreneurship, financing, decision making. 

References 

Agrawal, A., Catalini, C., & Goldfarb, A. (2014). Some simple economics of crowdfunding. Innovation policy and the economy, 14(1), 63-97.

Akbulaev, N., Aliyev, Y., & Ahmadov, T. (2019). Research models for financing social business: theory and practice. Heliyon, 5(5), e01599.

Austin, J., Stevenson, H., & Wei–Skillern, J. (2006). Social and commercial entrepreneurship: same, different, or both?. Entrepreneurship theory and practice, 30(1), 1-22.

Barber, B. M., Morse, A., & Yasuda, A. (2021). Impact investing. Journal of Financial Economics, 139(1), 162-185.

Bhattacharya, S., & Londhe, B. R. (2014). Micro entrepreneurship: Sources of finance & related constraints. Procedia Economics and Finance, 11, 775-783.

Bird, B. (1988). Implementing entrepreneurial ideas: The case for intention. Academy of management Review, 13(3), 442-453.

Bikse, V., Rivza, B., & Riemere, I. (2015). The social entrepreneur as a promoter of social advancement. Procedia-Social and Behavioral Sciences, 185, 469-478.

Bosma, N., Schott, T., Terjesen, S., & Kew, P. (2016). Global Entrepreneurship Monitor. Special topic report social entrepreneurship. Babson, University Tun Abdul Razar, Tecnológico de Monterrey, Universidad del Desarrollo.

Caldwell, K., Harris, S. P., & Renko, M. (2020). Inclusive entrepreneurship and motivation among people with intellectual disability: “why they act”. Intellectual and Developmental Disabilities, 58(6), 499-512.

Dees, J. G. (1998). The meaning of social entrepreneurship.

Dees, J. G., & Anderson, B. B. (2003). For-profit social ventures. International Journal of Entrepreneurship Education, 2(1), 1-26.

Doherty, B., Haugh, H., & Lyon, F. (2014). Social enterprises as hybrid organizations: A review and research agenda. International journal of management reviews, 16(4), 417-436.

Dyer, W. G. (1995). Toward a Theory of Entrepreneurial Careers. Entrepreneurship Theory and Practice, 19(2), 7–21. 

Fraser, A., Tan, S., Lagarde, M., & Mays, N. (2018). Narratives of promise, narratives of caution: A review of the literature on Social Impact Bonds. Social policy & administration, 52(1), 4-28.

Gaskill, L. R., Van Auken, H. E., & Manning, R. A. (1993). A factor analytic study of the perceived causes of small business failure. Journal of small business management, 31, 18-18.

Ghosh, R. (2012). Social entrepreneurship as a career: the time is right?. Available at: www.youthkiawaaz.com/2012/03/social-entrepreneurship-as-a-career-the-time-is-right/

Global Impact Investing Network (2017). Annual Impact Investor Survey.

Gupta, P., Chauhan, S., Paul, J., & Jaiswal, M. P. (2020). Social entrepreneurship research: A review and future research agenda. Journal of business research, 113, 209-229.

Hanssens, J., Deloof, M., & Vanacker, T. (2015). Underexplored issues in entrepreneurial finance. In Concise guide to entrepreneurship, technology and innovation. Edward Elgar Publishing.

Haugh, H. (2005). A research agenda for social entrepreneurship. Social enterprise journal, 1(1), 1-12.

Lam, W. (2010). Funding gap, what funding gap? Financial bootstrapping: Supply, demand and creation of entrepreneurial finance. International Journal of Entrepreneurial Behavior & Research, 16(4), 268-295.

Lee, S., & Persson, P. (2016). Financing from family and friends. The Review of Financial Studies, 29(9), 2341-2386.

Mair, J. & Noboa, E. (2003). Social entrepreneurship: how intentions to create a social enterprise get formed. Working Paper No. 521.

Mair, J., Robinson, J. & Hockerts, K. (2006). Navigating Social and Institutional Barriers to Markets: How Social Entrepreneurs Identify and Evaluate Opportunities. Palgrave Macmillan.

Mitra, P., Janssen, F., Hermans, J., & Kickul, J. (2022). Social entrepreneurial crowdfunding: Influence of the type of rewards and of prosocial motivation on the crowds’ willingness to contribute. Entrepreneurship & Regional Development, 34(9-10), 1001-1024.

OECD. (1999) Social Enterprises. OECD.

Petty, J. W., & Bygrave, W. D. (1993). What does finance have to say to the entrepreneur?. Journal of Small Business Finance, 2(2), 125-137.

Renko, M. (2013). Early challenges of nascent social entrepreneurs. Entrepreneurship Theory and Practice, 37(5), 1045-1069.

Rey-Martí, A., Ribeiro-Soriano, D., & Palacios-Marqués, D. (2016). A bibliometric analysis of social entrepreneurship. Journal of Business Research, 69(5), 1651–1655.

Sahasranamam, S., & Nandakumar, M. K. (2020). Individual capital and social entrepreneurship: Role of formal institutions. Journal of business research, 107, 104-117.

Sapienza, H. J., Korsgaard, M. A., & Forbes, D. P. (2003). The self-determination motive and entrepreneurs’choice of financing. In Cognitive approaches to entrepreneurship research (Vol. 6, pp. 105-138). Emerald Group Publishing Limited.

Sharir, M., & Lerner, M. (2006). Gauging the success of social ventures initiated by individual social entrepreneurs. Journal of world business, 41(1), 6-20.

Shaw, E., & Carter, S. (2007). Social entrepreneurship: Theoretical antecedents and empirical analysis of entrepreneurial processes and outcomes. Journal of small business and enterprise development, 14(3), 418-434.

Scott, J. (2000). Rational choice theory. Understanding contemporary society: Theories of the present, 129, 126-138.

Steyaert, C. (2006). Introduction: what is social in social entrepreneurship?, in Steyaert, C. and Hjorth, D. (Eds), Entrepreneurship as Social Change: A Third Movements in Entrepreneurship Book- Edward Elgar Publishing, Cheltenham, pp. 1-18

Sullivan Mort, G., Weerawardena, J., & Carnegie, K. (2003). Social entrepreneurship: Towards conceptualisation. International journal of nonprofit and voluntary sector marketing, 8(1), 76-88.

Wanyoike, C. N. & Maseno, M. (2021). Exploring the motivation of social entrepreneurs in creating successful social enterprises in East Africa. New England Journal of Entrepreneurship, 24(2), 79-104.

Winborg, J., & Landström, H. (2001). Financial bootstrapping in small businesses: Examining small business managers' resource acquisition behaviors. Journal of business venturing, 16(3), 235-254.

Zahra, S. A., Rawhouser, H. N., Bhawe, N., Neubaum, D. O., & Hayton, J. C. (2008). Globalization of social entrepreneurship opportunities. Strategic entrepreneurship journal, 2(2), 117-131.