Top Trend 2010 #1: Creativity in Seed Funding

My prediction for the most important trend that will shape social entrepreneurship in 2009 is that we will see an explosion of creativity in seed stage funding and an attendant uptick in for-profit social ventures.

The idea that social and environmental goals can sometimes best be achieved by markets, and financial returns can be an important part of building a sustainable enterprise has been steadily becoming more mainstream. Many younger change-focused people in particular are excited about the opportunities at the intersection.

Yet seed funding has remained a major barrier to new organizations. On the one hand, there is the traditional nonprofit fundraising route. Friends and family are used to donating money to support new nonprofits. There are some seed stage funders - mostly in the form of fellowships like Echoing Green (which awesomely has recently opened up to for-profits). But even if you get Echoing Green and then work your way up to Skoll and Draper Richards, you're still just looking at a couple hundred thousand a year. What you're left with is the need to have a clear and consistent revenue stream, or alternately build a traditional nonprofit fundraising apparatus.

On the for-profit side, well, the option has basically been boot strap it until you have clear revenue and can maybe get in with one of the small number of socially focused venture firms like Good Capital. The relative youth of the field has made the notion of figuring out how to do the due diligence and cultivate deal flow an economically prohibitive barrier to institutional seed funding for social ventures. Some angel groups like Investors' Circle have tried to help this, but the options remain extremely limited.

What you're left with is a situation where many young organizations are tempted to choose the nonprofit route in large part because of the relatively clearer access to financial resources in the short and medium term. I believe this creates an unhealthy pressure towards one model, and in turn, has clipped overall innovation in the social startup space.

Yet in the second half of 2009, I've seen a bubbling of activity that suggests to me that 2010 is poised for significant creativity around seed funding for social ventures.

There is significant growth and maturation in the pipeline of organizations training young social entrepreneurs. College-focused training programs like ThinkImpact, StartingBloc, and the Global Engagement Summit are forming relationships with extremely early stage incubators and funders like SparkSeed and the Unreasonable Institute. In turn, those early stage funders are deepening their relationships with later stage organizations, exemplified by Unreasonable's partnership with First Light Ventures to run a Village Capital fund.

What's more, social venture firms like Good Cap and Grey Ghost are increasingly interested in cultivating younger organization as part of their portfolio. First Light and Village Capital were created by Grey Ghost to experiment with a model of deal flow cultivation that takes inspiration from the community at the root of microfinance. Good Cap is brainstorming around how to build an entrepreneur-friendly fun that runs in conjunction with their Bay Area Hub coworking spaces.

And in the last few weeks, an incredible conversation has exploded around the idea of investing in an individual in exchange for a portion of their lifetime earnings. A post by investor Rafe Furst set off the conversation on this blog, and a follow up email chain has produced more than 100 responses and the likely announcement of a few social entrepreneurs who are going to officially put their future earnings up for auction.

The point is simply that the time has come for more engaged, more experimental funding for seed stage social ventures. I believe that even if the actual shift is just two to three more seed funding opportunities, the impact on the psyche of founders figuring out what to build could be immense.

I believe this is the most important trend because it's pretty clear that the business institutions we have today, with some exceptions, are behaving as though they're incapable of doing what's needed to solve the problems we have. We need more capable, creative nonprofits, and smarter businesses with a longer term view of their goals and a more complicated perspective on the value they create.

Maybe this is why I'm an entrepreneur, but I think much of this is going to have to come from new organizations (or wholly new spirits within organizations) to shift the paradigms we have now. The more capital and support we can throw towards the folks who think they have that in them, the better.

The world is already being disrupted. The question is whether we can be innovative enough to turn that in our favor.

(Photo: fmc.nikon.d40)