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Session 7

Social Entrepreneurship and Social Innovation. Session 7. Venture Philanthropy. Overview. Creative philanthropy Venture philanthropy Case: Acumen and WaterHealth International. Creative Philanthropy. Key Questions. What do you think is the role of philanthropy? How effective is it?

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Session 7

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  1. Social Entrepreneurship and Social Innovation Session 7 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  2. Venture Philanthropy SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  3. Overview • Creative philanthropy • Venture philanthropy • Case: Acumen and WaterHealth International SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  4. Creative Philanthropy SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  5. Key Questions • What do you think is the role of philanthropy? • How effective is it? • What do you understand by foundation strategy? SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  6. The ‘Classic’ Foundation • Endowed by a wealthy benefactor • Probably several generations earlier • Governed by great and the good • Grant strategy: • Project funding • Asset strategy: • Maintain balance sheet for future generations • Custodians not original donors • Mission but no strategy? SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  7. Purposes Of Foundations Fund services e.g. revenue grant fund a support line for the elderly Seed fund and capacity build around unmet societal needs e.g. grant fund the start-up of a childcare service integrating children with disabilities • Effect societal / systemic change • e.g. project grant fund • campaigning work on discrimination against those with mental health issues SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  8. Grant Strategies • React and negatively screen • Most foundations • Research • New Philanthropy Capital • Lead, innovate, collaborate • FB Heron SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  9. Asset Strategies • Optimise income and capital growth • Unrelated to mission • Invest in mission-aligned organisations • MRI • Risk funds SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  10. A Total Portfolio Approach Fully commercial assets Negatively screened assets (SRI funds) Positively screened assets Mission resonant investments Programme related investments Grant making Purely Financial Return Purely Social Return SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  11. Below-Market Investments Public Equity Fixed Income Private Equity Cash Guarantees Subordinated Loans Senior Loans Cash Grant Support Equity Market-Rate Investments Social Investment Spectrum Ragin (2005) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  12. FB Heron Foundation • Using assets to support mission and maximize impact • $32.4 million in grants; $520 million in assets • Expanding the ‘Philanthropic Toolbox’ • Grants as part of a spectrum of tools • Maintaining investment discipline • Conforming with asset allocation policy • Using benchmarks and prudent underwriting practices (including third-party reviewers) • Partnering with others to increase impact • Co-investing, joint underwriting, syndications SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  13. FB Heron Foundation • Some key learning from PRI-making • Be serious about being repaid (“moral hazard” issue) • Invest with those you know • Consider intermediaries versus direct investments • Use third-party reviews to increase quality of underwriting and build capacity • The process does not end at the closing • You do not have to do it alone SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  14. Below-Market Investments Cash Market-Rate Investments FB Heron Foundation Below-market deposits in “low-income designated” credit unions to increase the capacity of these member-owned institutions to provide financial services to members SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  15. FB Heron Foundation Below-Market Investments Senior Loans Market-Rate Investments “Typical” program-related investments made to non-profit CDFIs, CDCs or others for a term of up to 10 years at interest rates of 1% to 6% SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  16. FB Heron Foundation Below-Market Investments Subordinated Loans Market-Rate Investments Subordinated debt (with respect to right of repayment) may include secondary capital to a credit union, trust preferred securities to a community development bank, or so-called “equity-equivalent debt” (EQ2) to a CDFI or CDC SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  17. FB Heron Foundation Below-Market Investments Equity Market-Rate Investments Includes limited partnership interests in community development venture funds, clean tech and environmental funds, microfinance funds, and preferred or common stock investments in community development banks SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  18. FB Heron Foundation Below-Market Investments Grant Support Market-Rate Investments The dual character of PRIs: charitable distributions and asset management tool Are PRIs always part of the “grants budget”? SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  19. FB Heron Foundation Below-Market Investments Guarantees Market-Rate Investments Guarantees can enhance access to capital by lowering the actual or perceived risk of lending by conventional lenders SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  20. FB Heron Foundation Below-Market Investments Cash Market-Rate Investments Market-rate deposits in community development credit unions and community development banks SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  21. FB Heron Foundation Below-Market Investments Fixed Income Market-Rate Investments Separate bond account consisting of fixed-income securities aligned with the Foundation’s programmatic interests. Includes taxable municipal securities, targeted mortgage-backed securities, and asset-backed securities SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  22. FB Heron Foundation Below-Market Investments PublicEquity Market-Rate Investments Long history of “socially-screened” stock investments and proxy activity More than $2 trillion of such assets in the USA Negative vs. positive screening SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  23. FB Heron Foundation Below-Market Investments Private Equity Market-Rate Investments Since 1999, there has been a significant increase in community development venture funds, as well as funds that target women- and minority-owned businesses Real estate particularly promising SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  24. Annual Report 2006 http://www.fbheron.org/documents/ar.2006.pdf SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  25. Annual Report 2006 http://www.fbheron.org/documents/ar.2006.pdf SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  26. Annual Report 2006 http://www.fbheron.org/documents/ar.2006.pdf SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  27. Annual Report 2006 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  28. Venture Philanthropy SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  29. VC v Foundations SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  30. Hands-on VC VP B u s i n e s s C h a r i t y Social Equity Banks Trusts & Foundations Hands-off Venture Funding SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  31. Risk/Return Options Risk/Involvement Return SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  32. Venture Philanthropy • For Social Purpose Organisations: • Long-term core funding • Stronger organisational capacity • Business expertise • For Donors: • Value for money and max social impact • Transparency and accountability • For Society: • Transfer business skills into the voluntary sector for greater efficiency and effectiveness SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  33. Venture Philanthropy Venture philanthropy is the philanthropic application of venture capital principles and practice…In addition to grants, venture philanthropists provide networking, management advice and an array of other supports to organizations within a given portfolio of charitable investments REDF SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  34. Venture Philanthropy Venture philanthropy involves a high engagement over many years with fixed milestones and tangible returns and exit achieved by developing alternative, sustainable income Tranquada and Pepin (2005) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  35. ‘Three Pillars of VP’ • Financial capital • Core funding/capacity building • Intellectual capital • Consulting • May involve board-level influence • Social capital • Networks and peers John (2006) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  36. Long Term Funding • c 5% of philanthropic grants for more than one year • Most grants ‘buy’ a social objective rather than ‘invest’ in target organisation • Often no link between success and funding • High cost of capital of philanthropy • VP provides a package of performance related investment-minded funding over time John (2007) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  37. Capacity And Infrastructure • SEs often operate under-capacity • Many have under-developed systems • Few resources for HR development • Lack of key skills in strategy etc • VP focuses on building stronger more sustainable organisations John (2007) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  38. Types of VP Services Offered SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  39. Impact of Support Services SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  40. Focus On Outcomes • Easier to measure inputs, outputs and activities • Short-term perspective • Limits overall theory of change • VP helps organisations account for their social impact and to capture outcomes John (2007) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  41. Engaged Relationship • Transaction relationship > partnership • Tailored finance • Annual reporting > real time involvement • Large portfolios/small engagement > small portfolios/high engagement • Cheque only > ‘beyond the cheque’ • VP develops a close working relationship with investees aiming to add real value John (2007) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  42. Investing In People • Capable leadership critical for strong organisations • Leaders often unsupported • VP helps develop a strong board, committing resources to mentoring, team development and governance John (2007) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  43. Venture Philanthropy SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  44. VP Exit • Investor’s role • Determine strategies for new funding to ensure sustainability post exit • Help build capacity to access new finance • Set up capacity milestones towards exit point Alter et al (2001) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  45. VP Exits • Access new funders • Build earned income opportunities • Strengthen social enterprise activity • Access new debt financing/APO • Merge with a NFP or FP venture • Transfer programmes to another NFP • Spin off programme into new NFP • Sell NFP to FP • Close programme Alter et al (2001) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  46. Venture Funding • Historical examples over last thirty years • ACT/WIN (Oxford) • 1990s US interest • 2000s European interest • 2007 Asia? Letts et al (1997) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  47. US Philanthropic Funds $18b 7% $12b 5% $27b 11% $184b 76% TOTAL: $241b Meehan et al (2004) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  48. VP USA (2004) • 40 VP funds • $100m total grants • c.0.4% of total philanthropic giving • 75% of funds founded since 1999 • $400m-$1b total assets • Average grants per annum: $2.5m • Average staff: 3-4 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  49. VP In Europe • Roots in VC/Private Equity • Impetus Trust (UK); Fondazione Oltre (Italy); Breakthrough (UK); One Foundation (Ireland); LGT (Lichtenstein); Rianta Capital (UK) • EVPA • Formed 2004 out of EVCA • 90 members, 18 countries • Peer networking • Research • Seed fund SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  50. VP In Europe There is a need and desire for greater collaboration between private equity and the third sector. In order to facilitate this collaboration, an annual BVCA-sponsored forum should be created to enable the two communities to meet and integrate BVCA (2008) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

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