venture philanthropy

Call it either venture philanthropy or social venture capital – they both fall under social investments. This is a short piece on the lessons that can be drawn from the field of venture capital to be applied to venture philanthropy.

The emergence of social venture funds in an ever changing world has revolutionized the type of support available to nonprofit organizations. Although very little consensus has been built around the primary functions of social venture funds, at their core these funds aim to apply investment management practices (typical of venture capital and private equity firms) to build the capacity of nonprofit organizations to obtain greater returns on their investment – whether social, environmental and financial in a blended value approach.

The need for highly-engaged support mechanisms (social venture funds) for nonprofit organizations, particularly those lead by youth is crucial because of the culture of dysfunction that permeates through most organizations. The dysfunction exists through a range of critical elements – strategic planning, staffing, training, management, financing, and performance measurement – that success in delivering high-quality solutions becomes highly improbable.

Existing social venture funds commonly define themselves as “a multi-donor fund specifically created to address social issues that utilizes venture capital practices to maximize investor value and impact”. In the article “Virtuous Capital: What Foundations Can Learn from Venture Capitalists”, the authors Christine Letts, William Ryan, and Allen Grossman identify six points that distinguish social venture fund practices from those in more traditional grant-making:

1. Risk
• VC firms take risk and are rewarded accordingly. Rather than being avoided, risk is managed.
• Foundations avoid risk because they are not rewarded one way or the other for taking risk. Accordingly, foundations compromise the likelihood of measurable return.

2. Performance Measures
• VC firms focus on performance measures that will lead to long-term growth.
• Foundations focus on short-term program outcomes and avoid the question of long-term consequences.

3. Closeness of Relationship
• VC firms are comfortable with close working relationships with investees. They are involved in deal flow, CEO selection, strategic planning, etc.
• Foundations tend to keep their distance in their relationship with grantees. In addition, they tend to be totally uninvolved in operations.

4. Amount of Funding
• VC firms fund few deals but they put enough money in chosen deals to make a difference. They will also help with subsequent funding needs.
• Foundations fund a small part of each deal. They tend to undercapitalize and seldom help with subsequent funding needs.

5. Length of Relationship
• VC firms will stay involved over a number of years, and this is known to all participants.
• Foundations seldom stay involved for more than two or three years.

6. Exit Strategy
• VC firms have an exit strategy identified at the point of entry. Often the exit is made possible by another VC firm.
• Foundations rarely have an exit strategy.

By identifying the common venture capital techniques that funds might use to maximize investment value, including long-term investment, funding for capacity building, the establishment of evaluation metrics and strong criteria for investment, it is hoped to encourage a new perspective in social investing where investors have a sense that they have a stake in their investments and are closely engaged in the growth of the organizations. Very simply, if the investor has serious expectations about achieving measurable outcomes, be they social or economic, their commitment will be increased – they will involve themselves when necessary so that success might be attained.