WHU General

A Call for Better Conditions for Social Enterprises

In an open letter, WHU, together with the IMW at the Fraunhofer Institute and SEND, calls for improvements to current crowdfunding conditions

A Call for Better Conditions for Social Enterprises
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They’re young, highly educated, and brave. They take it upon themselves to tackle the problems they see. They are not motivated by their own profit, rather a desire to serve society. Without them—and their vision, flexibility, openness to the use of technological aids, and commitment—a whole host of social initiatives may have never gotten off the ground, leaving many problems unsolved. Social entrepreneurs are incredibly important to surmounting the challenges in our world.

Many social entrepreneurs turn to what is called “crowdfunding” to finance their projects. Crowdfunding, in principle, allows people a simple way to donate to projects and get involved without having to cut through a lot of red tape. According to the Social Entrepreneurship Monitor (DSEM), run by the Social Entrepreneurship Network of Germany (SEND), more than one in seven social entrepreneurs use crowdfunding as their main source of financing. Especially in times of crisis does crowdfunding show its strengths, as it allows for quick action based on demand. Unfortunately, the DSEM says the conditions for crowdfunding in Germany are not optimal and that much of the corporate potential of these social entrepreneurs is never able to impact society.

Now, the Fraunhofer Center for International Management and Knowledge Economy (IMW),together with SEND, WHU – Otto Beisheim School of Management, and the crowdfunding platform Start Next have published an open letter outlining three concrete recommendations for the new German government to help improve the current conditions. As its core message, the letter advocates

  • linking founder loans and crowdfunding;
  • offering a VAT waiver to successfully crowdfunded projects; and
  • creating and increasing innovation funds for social projects.

Linking founder loans and crowdfunding

The success of a crowdfunding campaign is an excellent indicator of a project’s viability in the market. Yet, today’s funding programs fail to consider this. In some cases, successful crowdfunding during the early stages of a project can hinder subsequent funding rounds. For this reason, the authors of the study recommend, among other things, that crowdfunding be seen as a valuation of the project’s marketability, which should then be taken into account when deciding whether to grant a start-up loan.

Offering a VAT waiver to successfully crowdfunded projects

Typical funding streams for start-ups, as well as any funds from KfW or INVEST, are exempt from VAT. And yet, any person who pledges to social projects through crowdfunding platforms do have to pay VAT, as crowdfunding is regarded the same as any taxable online purchase. The letter recommends that all collected funds be exempt from sales tax and that crowdfunding be given parity with the other ways of financing start-ups and innovation projects.

Creating and increasing innovation funds for social projects

To better combat today’s societal challenges, this letter calls for an official, legal framework— and less bureaucratic complexity to allow for an easy coalescence of public funds with private funds (e.g., those earned via crowdfunding) in the form of special Innovationsfonds. It also recommends that these funds be used for projects that aid in achieving at least one of the United Nations’ 17 Sustainable Development Goals; and that they then be accessible to social enterprises that are not non-profit organizations.

Co-author of the letter and holder of the IHK-Chair of Small and Medium-Sized Enterprises at WHU, Professor Christina Guenther says, “Adapting the current conditions for financing a company—one which has a clear focus on adding social value—is crucial in both promoting the start-up potential in Germany and tackling today’s societal challenges through entrepreneurship.”

To download the full text (in German): Impact Crowdfunding: Verbesserung der Rahmenbedingungen zur Förderung von wirkungsorientierten Sozialunternehmen