All too often capital request proposals never make it past the underwriting stage. Why is that?
Perhaps you’ve tried to raise capital and you even did a good job pitching it. You were even asked to submit a proposal… and then you got a “not accepted” or another “no.”
Did your documents give underwriters what they needed to know?
I’ve seen hundreds of requests for capital throughout my career and this article provides insight into what will help you give the underwriters what they need to advance your project to the next stage towards approval.
Here are a few of my behind-the-scenes tips on how to address what most underwriters are looking for in capital requests and an example of how to present it on paper.
Tip #1: Tell your future impact story with math and logic
Most entrepreneurs are great at selling the vision and value of their idea or work. However, not all are good at converting it into logical stories that someone else can recalculate.
It is important that you start with a logic model that outlines the social impact and change that your social enterprise is trying to achieve.
Your model requires that you have a quantifiable output. For example, if you're running an education program you would count the number of graduates; if you were a health agency you might count the number of vaccinations; if you were an employment opportunity enterprise you would count the number of job placements or jobs created. Each of these quantifiable metrics can be projected and each has their own inputs and activities that cost money.
Detail your unit economic cost required to deliver the output you are promising.
Let’s take the health agency example. This non-profit social enterprise has a pilot project to administer 10,000 doses of COVID-19 vaccinations per month in a remote village in Africa. The vaccine is free, but there are other costs that must be covered, including: required cold-chain refrigeration, energy use and loan payment on that equipment ( $1.25/dose), nurse and staff time ($15.25/dose), and the allocated overhead costs of the vaccination program (20%) will cost $5.00/dose. This adds up to $21.50/dose or $21,500 per month to operate the program at scale and cover all of the cost to properly administer the vaccine.
Notice how much easier it is for impact capital underwriters to understand your logic and see that you’ve done your homework once you break down the cost per unit.
Tip #2: Demonstrate a share-the-risk table among different sources of capital
Impact capital underwriters often want to know the total project cost to be successful and, more importantly, who else is investing. Most do not want to be the sole source paying 100%. What part of your proposal tells this story? The Sources and Uses Capital Table provides this information.
It is imperative that you identify all additional capital required, the type of funds, and their status when you request funds.
These general sources of funds may include: owner’s equity, grants, loans, equity investment or in-kind contributions. Here is the Sources & Uses table for our vaccination project example:
| Use of Funds | Source of Funds | ||
| Vaccine-12 months | $360,000 | Drug Company (In-Kind donation, pending approval) | $360,000 |
| Refrigerator-Delivery-Installation | $100,000 | Loan(pending approval) | $100,000 |
| Start-up Cost-expended to date for feasibility-hire, train, promote | $7,000 $7,000 | Owners Equity (spent)Grant (requested) | $7,000 $7,000 |
| Working Capital-2 months | $43,000 | Grant (requested) | $43,000 |
| Total Project Cost | $517,000 | $517,000 |
Remember to show any funds that you’ve already invested that can be documented, in this case start-up costs already funded by owners equity.
Tip# 3: Detail your assumptions and other options
Another important thing that helps impact capital underwriters is documenting your assumptions that help tell the story of your logic and calculations. Also identify any assumptions that may change and your back-up plan to handle them. Here is how that would be provided for the vaccination project:
- The current market rate value of 10,000 doses is $30/dose and we will administer 10,000 per month over 12 months with an in-kind donation of about $360,000.
- Loan terms: 0% interest from mission lender over 10 years, $10,000/year in principal repayment (approved by the board). If not approved, the Board can borrow at 2%.
- Board approved a feasibility study and application process with the government ($7,000) last year, but requires other sources to approve any other expenses.
- Working capital is needed to help pay for start-up costs including hiring, training staff, and promoting the vaccination program.
- The health agency’s board is committed to a pilot program, but can only pay for 10 months worth of monthly program costs and requires grant money for the first 2 months ($43,000). Local non-profit organizations have offered to donate to help cover the cost of administering the program to help differ operating costs.
The goal here is to list the use of funds according to other investors or types of funds. Be sure that you say if the funds are Requested, Pending, or Committed and be ready to document.
The next time you're trying to raise social impact capital, remember these tips and what the underwriters will be looking for.
P.S. If you are interested in getting some help with your next capital raise, check out our Investment Lab for Social Enterprises self-paced course or put your name on the list for our next learning cohort.