VENTURE PHILANTHROPY Origins & Experiences Meeting of the Association of Fund Raising Professionals Austin, Texas July 14, 2005 Peter Cleaves DRG International, Inc. Austin, Texas pcleaves.drg@aidan.net
Outline of talk Definitions Who are Venture Philanthropists? VP Investment criteria Comparing VP to other traditional and innovative forms of philanthropy VP Challenges and Benefits AVINA Foundation / Glimmer of Hope Questions for Fund Raising Professionals
Definition VP is an investment and relationship strategy that combines practices of venture capital models of the for-profit sector with the principles and public-benefit benefit missions of the nonprofit sector.
Virtuous Capital March April 1997 HBR article by Christine Letts and William Ryan Précis of - What Foundations Can Learn from Venture Capitalists 90% of foundation grants are for one year, thinking that grantee should be self sufficient, attract other donors, or be replicated. Foundations fund only a small portion, often no or little operating infrastructure, meaning manager has to spend lots of time in fund raising. Foundations don t t worry about risk like a VC firm foundation officers bask in the successful projects with little risk of being tarnished by the weak
Classical vs. Venture Philanthropy Short-term term finance Grants & subsidies Maintenance Periodic monitoring Program project focus NonProfit s Risk Formalistic Reporting Expired grant Grants Grantees Multi-year finance Multiple Instruments Sustainability Engagement Engagement Organization focus Shared Risk Benchmarks & metrics Exit Strategy Investments Investees,, Partners
Long-term Investments 3 to 6 year time horizon Integrated business plan Upscaling Substantial financial commitment Major impact Sustainability
Full Engagement A managing partner relationship Board involvement Assistance in obtaining funds Provision of expertise (finance, marketing, communications, coaching) Shared risk Small number of organizations in portfolio
Accountability for Results Organizational targets Process targets Financial targets Output targets Achieving scale Continued financing dependent on achieving targets
Exit strategy Goal is sustainability without the VP investor Achieve financial diversification Engage other institutional & individual donors Independent income stream Declining schedule of VP contributions Most difficult component of VP philosophy
Who are Venture Philanthropists? Venture philanthropists tend to be creative persons from the private sector, experienced entrepreneurs, ethically and socially motivated, believers in the value of the non-profit sector, concerned by market inefficiencies, critical of traditional foundations, inspired by venture capital approaches, results oriented, and with capital to invest to test their ideas.
Examples of VP New Profit Inc. (Boston, USA) (30% growth) Center for Venture Philanthropy (Menlo Park, California) (first in 1984?) Acumen Fund (New York) (international) European Venture Philanthropy Assn. (London) (VC fund donors) Venture Philanthropy Partners (Washington, DC) Social Venture Partners (USA, Austin)
Investment criteria Leadership Management Social purpose Unique solution / Competitive position Vision of future Potential for upscaling and impact Evaluation and metrics Realism of financial plan Ability to use VP expertise and networks Exit strategy
Other Types of Investments VP investments are not o o o Program Related Investments (PRI) Socially Responsible Investments (SRI) Social Private Equity (SPE) VP is closer to Classical Grants than to others since typically VP does not earn a financial return on its investment
Program Related Investments Recipient s s charitable activities consistent with foundation s s tax exempt purposes Main objective is not increased revenue or capital appreciation Low interest loan, guarantee, letter of credit, equity investment Risk / return unattractive to for-profit investor Counts toward 5% payout (from grants budget) Income subject to foundation excise tax Few foundations have annual PRI programs
Program Related Investors Ford Foundation Rockefeller Foundation Robert Wood Johnson Foundation MacArthur Foundation David and Lucille Packard Foundation Charles Stuart Mott Foundation Kellogg Foundation Gordon and Betty Moore Foundation Weeden Foundation
Socially Responsible Investments Deliberate selection of portfolio (listed stock) investments with positive perceived social value Endowment objective is to maximize return while doing good in health care, housing, food, education, environment, employment, others Avoidance of investments with negative perceived social value like tobacco, inefficient energy, firearms Risk / return attractive to a for-profit investor Does not count toward 5% payout Income subject to foundation excise tax Many foundations invest endowments in SRIs
Socially Responsible Investment Funds Calvert Group, Inc. Domini Social Investment Fund Parnassus Equity Income Pax World Balanced Fund Green Century Funds Mennonite Mutual Aid New Alternative Funds Sierra Club Mutual Funds Walden Asset Management Women s s Equity Fund
Social Private Equity Investments (SPE) Investment targets high social impact for-profit firms Capital comes from individuals & institutions When from endowments, does not count toward 5% payout Equity investment, subordinated debt, board role E.g., environment, health, housing, micro finance General partnership, limited partners, investors Exit via sale of equity instrument Founders want to do good while doing well Debate between maximum return and blended return
Social Private Equity (SPE) Investors Global Environment Fund (Washington, DC) Calvert Social Investment Foundation (Bethesda, Va) Foursome Investment Ltd. (London) Sustainability Asset Management (Zurich) Legacy Ventures (Palo Alto) Acumen Fund (New York) Expansion Capital (San Francisco) Investors Circle (Brookline, Massachusetts) Soros Foundation (New York) ProVenEx (Rockefeller Foundation, NYC)
Staff Time Engagement LOW HIGH Socially Responsible Investment Program Related Investment, Classical Grant VP Investment Social Private Equity
Financial Capital at Risk LOW HIGH Classical Grant VP Investment Socially Responsible Investment Program Related Investment Social Private Equity
Impact Goal LOW HIGH Socially Responsible Investment Program Related Investment Classical Grant, SPE VP
Non Profit Maturity Stage LOW HIGH VP Investment VP and Classical Grant VP, SPE Program Related Investment
Multiple Sources of Cash Sales Revenue (sold goods & services) Grant & VP Investment (working capital) Commercial loan (from bank) Program Related Investment SPE Investment Endowment
Challenges for VP Small number of benefited non-profits Large financial commitment Need to bet on winners Maintaining enthusiasm of VP partners Lack of a capital market for continued financing Conflict between upscaling and exiting
Advantages of VP Professional engagement, guidance Vision, inspiration, ambition Metrics and accountability Organizational strengthening Long-term commitment based on results
Applying VP Principles to Classical Philanthropy New Philanthropy Accountability and Metrics Organizational support Concerned about sustainability Networking & mentoring Entrepreneurship
AVINA Foundation Basics Sustainable development in IberoAmerica Swiss industrialist founder $1 billion endowment of stock of social responsible companies $45 million approx. in yearly disbursements 23 offices in Latin America, Spain, Portugal 800+ projects since 1996, 480 active
AVINA Foundation Strategy Leadership talent is primary criteria Project features comes second Alliances promoted with local private sector Proposal is a mini business plan Legal agreement has specific targets Financial diversification is a constant goal Disbursements made upon meeting targets Organizational strengthening via services Networks fomented to maximize impact
A Glimmer of Hope Austin based entrepreneur family working in Austin, Ethiopia, London Invest in People where they are Water, health, education 1.5 million beneficiaries at $8 p.c. over five years Direct contact with grantees, minimal bureaucracy, fast decisions Local offices, regular monitoring Disbursements made upon meeting targets Social Impact = beneficiaries divided by time & money invested
Questions for Fund Raisers Is your organization in stable or slow growth? Does your non-profit leadership aspire to faster growth or much greater impact? Do you have a commercial product or service? Should you seek a classical grant, a PRI, SPE, or VP support? Can you improve your proposal by incorporating VP criteria and vocabulary? Can you profit from VP engagement? Do you want to? Are there VP procedures that could strengthen your organization even without a formal VP partnership?
Discussion