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Venture philanthropy

Venture philanthropy uses many of the tools of venture funding to promote start-up, growth and risk-taking social ventures. It plays an important role in diversifying capital markets for non-profits and social purpose organisations. The field is small but maturing. Organisations include BonVenture in Germany, Impetus Trust and CAN-Breakthrough in the UK, d.o.b. Foundation in the Netherlands, Good Deed Foundation in Estonia, Invest for Children in Spain, Oltre Venture in Italy and Social Venture Partners and Venture Philanthropy Partners in the US.

Traditional grant making organisations have for some time been criticised for failing to help nonprofits build capacity, grow and become financially sustainable. Venture philanthropy is a response to this criticism, and seeks to use many of the tools of venture capital funding to promote start-up, growth and risk taking social ventures.

The term ‘venture philanthropy’ was first coined in 1969 by John D. Rockefeller III who used it to describe ‘an adventurous approach to funding unpopular social causes’. When the term resurfaced in the mid 1990s, it was associated with a growing community of dotcom millionaires who were seeking to apply both their wealth and their business acumen to the most pressing social problems.

The way in which the first venture philanthropists sought to transform the charitable sector alienated many of those they were trying to help. The main elements of venture philanthropy – building operating capacity, close engagement between donors and recipients, and clear performance expectations – were said to be long-standing features of the best philanthropy and not new at all.

Yet as the novelty and controversy subsided it was clear that this
approach did address some of the limitations faced by many of those operating as donors and recipients in the grant economy.

Definitions

There are six main features of venture philanthropy as it has come to
be practised:

1. High engagement: venture philanthropists have a close hands-on
relationship with the social entrepreneurs and ventures they support,
driving innovative and scalable models of social change. Some may
take board places on these organisations, and all are far more intimately involved at strategic and operational levels than are traditional non-profit funders.

2. Tailored financing: as in venture capital, venture philanthropists
take an investment approach to determine the most appropriate financing for each organisation. Depending on their own missions and the ventures they choose to support, venture philanthropists can operate across the spectrum of investment returns. Some offer non-returnable grants (and thus accept a purely social return), while others use loan, mezzanine or quasi-equity finance (thus blending risk-adjusted financial and social returns).

3. Multi-year support: venture philanthropists provide substantial and
sustained financial support to a limited number of organisations. Support typically lasts at least three to five years, with an objective of helping the organisation to become financially self-sustaining by the end of the funding period.

4. Non-financial support: in addition to financial support, venture
philanthropists provide value-added services such as strategic planning, marketing and communications, executive coaching, human resource advice and access to other networks and potential funders.

5. Organisational capacity-building: venture philanthropists focus
on building the operational capacity and long-term viability of the
organisations in their portfolios, rather than funding individual projects
or programmes. They recognize the importance of funding core operating costs to help these organisations achieve greater social impact and operational efficiency.

6. Performance measurement: venture philanthropy investment is performance-based, placing emphasis on good business planning,
measurable outcomes, achievement of milestones, and high levels
of financial accountability.

While most American venture philanthropy activity is based on grant making, the Europeans have tended to make use of a broader range of financial instruments and packages that go well beyond simple grants. These include underwriting, mezzanine funding, long-term ‘patient’ capital as well as equity and ‘equity-like’ investments and loans. As such, the defining characteristic of venture philanthropy is not the type of financial package used, but rather, the kind of relationship between the recipient and donor/investor. Far from seeking a financial return on investment as the primary driver, the overwhelming majority of venture philanthropy activity in the US is based on non-returnable grants. In Europe, it is also the case that the social trumps the financial in terms of returns on investment.

Venture philanthropists work with a range of organisations – not solely charities and not for profits. These include social enterprises and social entrepreneurs, trading charities and socially driven commercial organisations. There are now some 100 venture philanthropy organisations around the world. Just over half are based in the US, a third are European and the rest from elsewhere, reaching as far as Japan, China and Argentina. Originally led by ‘high net-worth’ individuals and their foundations, it now takes in traditional foundations, hybrid foundations, a range of social venture and ethical funds and even some for-profit funds. Some refer to themselves as primary practitioners who provide financial and non-financial support. These include BonVenture in Germany, Impetus Trust, CAN-Breakthrough and Venture Partnership Foundation in the UK, d.o.b. Foundation in the Netherlands, Good Deed Foundation in Estonia, Invest for Children in Spain, Oltre Venture in Italy and Social Venture Partners and Venture Philanthropy Partners in the US.

There are also a range of organisations – such as UnLtd and Ashoka – which provide either capital or professional services to an organisation – but not both. For example, CAN-Breakthrough – based in London – provides performance based finance and strategic support to help social purpose organisations scale their social impact. Unlike other venture philanthropists, however, Breakthrough do not provide funding for start-ups and focus instead on providing growth capital to established social enterprises – usually those with at least three years trading history and a sustainable and scalable business model. At the 2007 Charity Awards, Breakthrough were highly commended in the grant making category for ‘achieving a breakthrough for social enterprise’.

Benefits

Since the beginning of the decade venture philanthropy has played an important role in diversifying capital markets for social purpose organisations and reaffirming some key principles for good grant making. In particular they have filled a gap between traditional grants for non profits and commercial market rate equity and loans. Capital investments made by venture philanthropists also aim to address issues of sustainability and scale.

Those seeking funds from venture philanthropists can expect help in strengthening their capacity and management. They often provide skills and expertise that small organisations cannot afford. The funding on offer is usually longer term and takes account of core operations. But above all it is the approach that is distinct. The key word is venturing, with its focus on drive, flexibility, capacity, and all the creativity that is needed for a start up venture to succeed. Far from minimising risk and distancing themselves from operations, venture philanthropists readily shoulder some of the risk and responsibility for success of the venture, and are quite prepared to get engaged and play a role on the board.

To consider…

Yet there is an issue of contrasting cultures. Social enterprises and grant-based organisations are often highly entrepreneurial, but see through different lenses to those coming from the venture capital (VC) field. VC ideas like performance outcomes, investor control, the bottom line, scaling and exit do not sit easily with a community organisation working on a poor estate. What, for example, does an exit strategy look like for a charity providing a service over the long term?

How does it feel for young people at a youth club to know that they are being measured? How does the commitment to user control fit with ideas of investor control? Where does the balance lie between social and financial returns? Some venture funds are explicit that it is the financial returns that are primary. Bridges Community Ventures, for example, refused 40 applications for social enterprise funding in 2004 for this reason. But this merely underlines the point we made in relation to equity funding: social purpose organisations must be clear about the terms under which they wish to receive funding. They must be careful in their choice of investing partner to ensure that the partner accepts the primacy of the social mission – that in the words of the Mondragon group ‘finance remains subordinate to sovereignty’.

There will always remain a tension between financial and social returns on investment. For venture philanthropists the challenge is how to internalise the distinctive culture and economy of mission-driven organisations in order to be able to provide the expertise, the support and the capital that are often so needed. And reciprocally social organisations need to recognise that they too have much to learn from the venturing skills and imagination of the venture capital community.

While the initial excitement and controversy which surrounded venture philanthropy in the US in the mid 1990s has subsided, the movement continues to develop both in North America and in Europe – where it plays an important role in diversifying capital markets for non profits and social purpose organisations. The field is small but maturing and with it a particular set of skills and methods are being developed which have important ramifications for traditional grant making and grant receiving organisations.