Social entrepreneurs face a lot of the same challenges that other startups do. However, because of the unique nature of social entrepreneurship, they can also find themselves facing additional hurdles when it comes to securing investment and accelerating their innovations. In this article, we’ll look at how social entrepreneurs can use a new type of investment structure to get the capital and support they need to grow. This new structure is called a “demand dividend,” and it’s based on the concept of providing investors periodic payments based on free cash flow.
It’s important to take a moment to recognize that just because an accelerator or venture fund has name recognition, that doesn’t mean it’s the right choice for a given social enterprise — especially those in early stages of development. Rather than going after big names, social entrepreneurs need to think about choosing an accelerator that lets them cut through the time-consuming, red-tape-covered process of getting started, so that they can focus on what really matters: executing the business plan. With that in mind, we’ll look at how social entrepreneurs can leverage partnerships and the velocity of money to find the best support for their startup, as well as the unique advantages of a cooperative structure.
What does “Money Velocity” mean?
The phrase “velocity of money,” put most simply, refers to the rate at which people spend money. It’s usually measured as the ratio of a nation’s GNP to its total supply of money, and you can think of it as an indicator of how much currency is used during a given period of time, or how quickly money is exchanged from one transaction to another. The velocity of money is also a helpful index to look at when assessing the health of a given economy. By considering the velocity of money, investors can gauge the robustness of the economy and use that information to inform their investment decisions.
Benefits of Higher Money Velocity
Social entrepreneurs — and, in fact, all new startups — should always take into account the money velocity of their economy when making financial decisions. The faster the velocity of money, the more valuable the economy in question, and the more likely they are to benefit from each dollar in circulation within the respective market. Faster velocity of money means more innovations and potential financial arrangements, which lets startups avert looming credit crises; on the contrary, a low money velocity hinders innovation and can slow activities within a given economy, including startups and innovation.
If the money supply isn’t able to rise within an economy, this implies a low rate of money velocity. This can result in several negative outcomes for entrepreneurs, including a potential slowdown in the economy — or even a depression — that doesn’t support innovation. In this regard, corporation startups within a given nation often are able to secure more money as they become more productive over time and their debt-to-equity ratio drops.
The Effect of the Velocity of Money on Investment and Demand Dividends
Economists have differing views when it comes to the usefulness of money velocity as an indicator of the economy’s health. Regardless, for new ventures and entrepreneurs, money velocity is an important factor to consider — and the best way to handle this unexpected and unpredictable factor is through partnerships. Demand dividends let social entrepreneurs create these partnerships while hedging against risk and leveraging high money velocity for the benefit of themselves and their investors.
To get a bit more specific, demand dividends are a debt vehicle designed to improve the cycle of repayment while easing access to capital for new startups; this structure is especially beneficial for social enterprises, where a large liquidity event may not be on the horizon and where traditional equity arrangements don’t make as much sense. As cash becomes freed up — through the velocity of money — the entrepreneurs can issues payments to their investors, while continuing to use the surplus of capital to grow their venture. In short, demand dividends, in combination with the velocity of money, help social enterprises establish alternatives for dealing with debts and equity.
For example, if the supply of money increases, it would imply that commodity prices would increase by the same degree, since now more money would be applied to the same services and goods. (Note that the reverse can also be true, and that short-term changes in money velocity may not be reflected in price changes.) So, an increase in money velocity leads to more cash for all parties involved in a given partnership.
Connecting Money Velocity with Partnerships and Cooperative Startups
New startups should note that connecting their partnership or even cooperative startups with the money velocity within a given economy can have major benefits for their businesses. In this arrangement, the partnerships constitute a closed economy, in which each benefits from the other, leading to various advantages, including:
The Provision for Democratic Control
Cooperative social startups are controlled and owned by members of the organization. This creates a sense of co-ownership and control by the members at hand, and generally leaves no room for absentee investors. In the same manner, its board members are often elected as representatives of the members’ interests, and not imposed on them. The cooperative businesses ownership model also happens to be based upon the services or products purchased by a member, while the members also vote for all the ongoing activities within the cooperative business in the long run. This sense of democratic control is essential for empowering social entrepreneurs to pursue their world-changing missions.
Limited Liability and Greater Benefits
Members of a cooperative business always have limited liability, as they pay stabilized — that is to say, lower — prices for services and products since their own buying power as a cooperation is greater than that of an individual. They may also be able to receive higher prices with regards to their own services or products being offered to the public, compared with the prices of a single startup. On the other hand, the benefits will be distributed among the members based on usage.
Surplus Earnings and Profit Distribution Based on Proportion to Service Usage
New entrepreneurs should note that any surplus revenue or profits from the cooperative business will be transferred toward members. Profits from the corporation will be distributed based upon the general investment or ownership percentage of the members at hand, as well as the equity accounts (since a member’s equity is subject to an increase within a cooperative business in the long-term). The higher the percentage, the more money a member makes.
The goal of this article is to argue how investment funds can be structured around demand dividends to help social entrepreneurs thrive. This argument is based on the concept of money velocity and the notion that partnerships are the best way for entrepreneurs to find support for their startups by tapping into the advantages of a cooperative structure. In the long run, the ratio of the velocity of money helps investors to gauge the robustness of an economy, while a faster velocity of money helps startups by improving the economy’s value and letting them benefit from the increased dollar circulation in the market; when one dollar comes into the group, everyone should celebrate, because that dollar benefits everyone involved. Meanwhile, demand dividends improve the repayment cycle and access to capital.
The benefits of this cooperative structure, as outlined above, are many. As social entrepreneurs seek to get their ventures off the ground, they should consider these concepts and these new types of investment and partnership structures. Doing so will help them to get the support they need so that they can focus on the heart of their mission: changing the world for the better.