skoll centre for social entrepreneurship1 session 7 social entrepreneurship and social innovation

SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP1

Session 7Session 7

Social Social Entrepreneurship and Entrepreneurship and

Social InnovationSocial Innovation


Venture PhilanthropyVenture Philanthropy


OverviewOverview

• Creative philanthropy• Venture philanthropy• Case: Acumen and WaterHealth International


Creative PhilanthropyCreative Philanthropy


Key QuestionsKey Questions

• What do you think is the role of philanthropy?

• How effective is it?• What do you understand by foundation strategy?


The ‘Classic’ The ‘Classic’ FoundationFoundation• 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?


Purposes Of Purposes Of FoundationsFoundations

Fund services e.g. revenue grant

fund a support line for the elderly

Seed fund and capacity build around unmet societal needse.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


Grant StrategiesGrant Strategies

• React and negatively screen• Most foundations

• Research• New Philanthropy Capital

• Lead, innovate, collaborate• FB Heron


Asset StrategiesAsset Strategies

• Optimise income and capital growth • Unrelated to mission

• Invest in mission-aligned organisations• MRI• Risk funds


A Total Portfolio A Total Portfolio ApproachApproach

Fully commercial

assets

Negatively screenedassets

(SRI funds)

Positively screened

assets

Missionresonant

investments

Grantmaking

Programme related

investments

Purely Financial Return

Purely Social Return


Cash

Public

Equity

Fixed Income

Cash

Private

Equity

Guarantees

Senior Loans

Subordinated

Loans

Grant

Support

Market-Rate Investments

Below-Market Investments

Equity

Social Investment SpectrumSocial Investment Spectrum

Ragin (2005)Ragin (2005)


FB Heron FoundationFB 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


FB Heron FoundationFB 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


Cash

Cash

Market-Rate Market-Rate InvestmentsInvestments

Below-Market Below-Market InvestmentsInvestments

Below-market deposits in “low-income Below-market deposits in “low-income designated” credit unions to increase designated” credit unions to increase the capacity of these member-owned the capacity of these member-owned institutions to provide financial institutions to provide financial services to membersservices to members

FB Heron FoundationFB Heron Foundation




“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%

Sen

ior

Sen

ior

Loan

sLo

ans





Subordinated debt (with respect to right of Subordinated debt (with respect to right of repayment) may include secondary capital to a repayment) may include secondary capital to a credit union, trust preferred securities to a credit union, trust preferred securities to a

community development bank, or so-called community development bank, or so-called “equity-equivalent debt” (EQ2) to a CDFI or “equity-equivalent debt” (EQ2) to a CDFI or

CDCCDC


Subordinated

Subordinated

Loans

Loans




Includes limited partnership interests in Includes limited partnership interests in community development venture funds, clean community development venture funds, clean tech and environmental funds, microfinance tech and environmental funds, microfinance funds, and preferred or common stock funds, and preferred or common stock investments in community development banksinvestments in community development banks


Equity

Equity




The dual character of PRIs: charitable The dual character of PRIs: charitable distributions and asset management tooldistributions and asset management toolAre PRIs always part of the “grants budget”?Are PRIs always part of the “grants budget”?

FB Heron FoundationFB Heron FoundationGrant

Grant

Support

Support




Guarantees can enhance access to capital by Guarantees can enhance access to capital by lowering the actual or perceived risk of lowering the actual or perceived risk of lending by conventional lenderslending by conventional lenders


Guarantee

Guarantee

ss




Market-rate deposits in community development Market-rate deposits in community development credit unions and community development bankscredit unions and community development banks


Cash

Cash




Separate bond account consisting of fixed-Separate bond account consisting of fixed-income securities aligned with the income securities aligned with the Foundation’s programmatic interests. Foundation’s programmatic interests. Includes taxable municipal securities, Includes taxable municipal securities, targeted mortgage-backed securities, and targeted mortgage-backed securities, and asset-backed securitiesasset-backed securities


Fixed

Fixed

Income

Income




Long history of “socially-screened” stock investments and proxy activityMore than $2 trillion of such assets in the USANegative vs. positive screening


Public

Public

Equity

Equity




Since 1999, there has been a significant Since 1999, there has been a significant increase in community development venture increase in community development venture funds, as well as funds that target women- funds, as well as funds that target women- and minority-owned businessesand minority-owned businessesReal estate particularly promisingReal estate particularly promising


Private

Private

Equity

Equity


http://www.fbheron.org/documents/http://www.fbheron.org/documents/ar.2006.pdfar.2006.pdf

Annual Report 2006Annual Report 2006


VC v FoundationsVC v Foundations

Venture Capital Foundation

Risk Management

High risk/detailed analysisPortfolio diversification

Low risk/little analysis

Performance Metrics

Investment based on agreed projectionsClosely monitored

Investments based on social missionLightly monitored

Investor Relationship

Close partnershipOffers range of support

Distant oversightLittle direct intervention

Amount of Funding

Large per ventureIncremental stages

Small per ventureLump sum grant

Length of Relationship

Typically 5-7 years Typically 1-2 years

Exit Strategy Sell stake/IPO/new finance

No path to new finance


BBuussiinneessss

CChhaarriittyy

Hands-Hands-offoff

Hands-onHands-on

VCVC

BanksBanksTrusts &Trusts & FoundationsFoundations

VPVP

Social EquitySocial Equity

Venture FundingVenture Funding


HighHigh Venture Venture PhilanthroPhilanthropypy

Community Community DevelopmenDevelopment Financet Finance

Venture Venture CapitalCapital

‘‘RecyclablRecyclable’ Loanse’ Loans

Programme Programme Related Related InvestmentInvestment

Mezzanine Mezzanine FinanceFinance

LowLow

TraditionaTraditional Grant-l Grant-Making Making TrustsTrusts

Charity Charity BankBank

BankBank

SocialSocial Social and Social and FinancialFinancial

FinancialFinancial

Risk/Risk/InvolvementInvolvement

ReturnReturn

Risk/Return OptionsRisk/Return Options


• For Social Purpose Organisations: For Social Purpose Organisations: • Long-term core funding Long-term core funding • Stronger organisational capacity Stronger organisational capacity • Business expertiseBusiness expertise

• For Donors: For Donors: • Value for money and max social Value for money and max social impactimpact

• Transparency and accountabilityTransparency and accountability• For Society:For Society:

• Transfer business skills into the Transfer business skills into the voluntary sector for greater voluntary sector for greater efficiency and effectivenessefficiency and effectiveness




Venture philanthropy is the Venture philanthropy is the philanthropic application of philanthropic application of

venture capital principles and venture capital principles and practice…In addition to grants, practice…In addition to grants, venture philanthropists provide venture philanthropists provide networking, management advice networking, management advice and an array of other supports and an array of other supports to organizations within a given to organizations within a given

portfolio of charitable portfolio of charitable investmentsinvestments REDFREDF



Venture philanthropy involves a Venture philanthropy involves a high engagement over many years high engagement over many years

with fixed milestones and with fixed milestones and tangible returns and exit tangible returns and exit achieved by developing achieved by developing

alternative, sustainable incomealternative, sustainable income

Tranquada and Pepin (2005)Tranquada and Pepin (2005)


‘‘Three Pillars of VP’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)John (2006)


Long Term FundingLong Term Funding

• c 5% of philanthropic grants for c 5% of philanthropic grants for more than one yearmore than one year

• Most grants ‘buy’ a social objective Most grants ‘buy’ a social objective rather than ‘invest’ in target rather than ‘invest’ in target organisationorganisation

• Often no link between success and Often no link between success and fundingfunding

• High cost of capital of philanthropyHigh cost of capital of philanthropy• VP provides a package of performance VP provides a package of performance related investment-minded funding related investment-minded funding over timeover time John John

(2007)(2007)


Capacity And Capacity And InfrastructureInfrastructure• SEs often operate under-capacitySEs often operate under-capacity• Many have under-developed Many have under-developed systemssystems

• Few resources for HR developmentFew resources for HR development• Lack of key skills in strategy etcLack of key skills in strategy etc

• VP focuses on building stronger VP focuses on building stronger more sustainable organisationsmore sustainable organisations

John John (2007)(2007)


Types of VP Services Types of VP Services OfferedOffered


Impact of Support Impact of Support ServicesServices


Focus On OutcomesFocus On Outcomes

• Easier to measure inputs, Easier to measure inputs, outputs and activitiesoutputs and activities

• Short-term perspectiveShort-term perspective• Limits overall theory of changeLimits overall theory of change• VP helps organisations account VP helps organisations account for their social impact and to for their social impact and to capture outcomescapture outcomes

John John (2007)(2007)


Engaged RelationshipEngaged Relationship

• Transaction relationship > Transaction relationship > partnershippartnership• Tailored financeTailored finance

• Annual reporting > real time Annual reporting > real time involvementinvolvement

• Large portfolios/small engagement > Large portfolios/small engagement > small portfolios/high engagementsmall portfolios/high engagement

• Cheque only > ‘beyond the cheque’Cheque only > ‘beyond the cheque’• VP develops a close working VP develops a close working relationship with investees aiming to relationship with investees aiming to add real valueadd real value John John

(2007)(2007)


Investing In PeopleInvesting In People

• Capable leadership critical for Capable leadership critical for strong organisationsstrong organisations

• Leaders often unsupportedLeaders often unsupported• VP helps develop a strong board, VP helps develop a strong board, committing resources to committing resources to mentoring, team development and mentoring, team development and governancegovernance

John John (2007)(2007)


VP ExitVP 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)Alter et al (2001)


VP ExitsVP Exits

• Access new fundersAccess new funders• Build earned income opportunitiesBuild earned income opportunities• Strengthen social enterprise Strengthen social enterprise activityactivity

• Access new debt financing/APOAccess new debt financing/APO• Merge with a NFP or FP ventureMerge with a NFP or FP venture• Transfer programmes to another NFPTransfer programmes to another NFP• Spin off programme into new NFPSpin off programme into new NFP• Sell NFP to FPSell NFP to FP• Close programmeClose programme

Alter et al (2001)Alter et al (2001)


Venture FundingVenture Funding

• Historical examples over last Historical examples over last thirty yearsthirty years• ACT/WIN (Oxford)ACT/WIN (Oxford)

• 1990s US interest1990s US interest• 2000s European interest2000s European interest• 2007 Asia?2007 Asia?

Letts et al (1997)Letts et al (1997)


US Philanthropic US Philanthropic FundsFunds

US Nonprofit Funding 2002

Individual Donors

Foundations

Corporations

Bequests

Meehan et al (2004)Meehan et al (2004)

$184b$184b

76%76%

$27b$27b

11%11%

$12b$12b

5%5%

$18b$18b

7%7%

TOTAL: $241bTOTAL: $241b


VP USA (2004)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


VP In EuropeVP 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


VP In EuropeVP In Europe

There is a need and desire for There is a need and desire for greater collaboration between greater collaboration between private equity and the third private equity and the third sector. In order to facilitate sector. In order to facilitate this collaboration, an annual this collaboration, an annual BVCA-sponsored forum should be BVCA-sponsored forum should be

created to enable the two created to enable the two communities to meet and communities to meet and

integrateintegrate BVCA BVCA (2008)(2008)


• Grew from Social Investment Task Grew from Social Investment Task Force (2000)Force (2000)• Community Development Venture Fund 1 Community Development Venture Fund 1 (2002)(2002)• £40m fund: Govt matching private sector £40m fund: Govt matching private sector investmentinvestment

• Ten year period Ten year period

• CDV Fund 2 (2007) CDV Fund 2 (2007) • £75m entirely from private sector£75m entirely from private sector


• Invests in:Invests in:• High growth potential businesses at High growth potential businesses at the early and expansion stages the early and expansion stages

• In the most under-invested parts of In the most under-invested parts of EnglandEngland

• For profitFor profit• Mission drivenMission driven• NOT exclusively SEsNOT exclusively SEs


• Investment in single business Investment in single business £100k-£2m£100k-£2m• Quasi-EquityQuasi-Equity

• Hands-on adviceHands-on advice• CDV Fund 1CDV Fund 1

• Taken equity in 24 businessesTaken equity in 24 businesses• 3 successful exits3 successful exits• Create employmentCreate employment• Regenerate communitiesRegenerate communities


• Strategic ObjectivesStrategic Objectives• To demonstrate that financial To demonstrate that financial returns can be made by backing returns can be made by backing entrepreneurs in these entrepreneurs in these communitiescommunities

• To attract increased private To attract increased private sector finance into under-sector finance into under-invested communitiesinvested communities

• Catalytic processCatalytic process


• Formed UK 2000Formed UK 2000• £100m Millennium Commission £100m Millennium Commission grantgrant

• Awards to social Awards to social entrepreneursentrepreneurs

• UK wide Fellowship of people UK wide Fellowship of people who have received awardswho have received awards

• ResearchResearch


• Levels of Award• Level 1: Awards of between £500 and £5,000 (expected average of £2,000)

• Level 2: Awards of between £10,000 and £20,000 (expected average of £15,000)


• Level 1 Awards: Risk Capital• Designed to help make new ideas become real projects

• 1,000 Level 1 Awards each year across the UK

• Aimed at individuals or informal groups of people who want to set up new projects in their spare time

www.AdamandEveit.netwww.AdamandEveit.net


• Level 2 Awards: Mezzanine Capital • To support projects that are already developed• Pay for the living expenses of award winners to help them devote more time to their projects

• Given out once in the spring and once in the winter

www.community-food-enterprise.org.ukwww.community-food-enterprise.org.uk


• UnLtd Ventures: Consultancy Support• Cats Club

• Broker resource relationships• Develop new funding proposals• Build management capacity• Create a template for Cats Club ‘in a box’ franchise strategy

www.schoolfriend.co.ukwww.schoolfriend.co.uk


• Funds from:Funds from:• IndividualsIndividuals• CorporationsCorporations• FoundationsFoundations

• US$26.5m invested in four US$26.5m invested in four portfolios (2007):portfolios (2007):• Water ($4.7m)Water ($4.7m)• Health ($16.6m)Health ($16.6m)• Housing ($5m)Housing ($5m)• Energy ($200k)Energy ($200k)


• Start upsStart ups• Social innovationsSocial innovations• New technologiesNew technologies

• Not-for-profit > for-profitNot-for-profit > for-profit• Grants > loans, (quasi) equity, Grants > loans, (quasi) equity, guaranteesguarantees

• Pooling investments Pooling investments • Scale economiesScale economies• Reduced costsReduced costs

• Risk management through Risk management through ‘portfolio’ approach‘portfolio’ approach


Acumen: WaterHealth Acumen: WaterHealth Int.Int.• Is Acumen a VP fund?Is Acumen a VP fund?• How has it changed?How has it changed?• How should it structure the deal How should it structure the deal with WHI?with WHI?

skoll centre for social entrepreneurship1 session 7 social entrepreneurship and social innovation

Documents

skoll centre

social return slide

social innovation slide

social entrepreneurship10

social entrepreneurship6

fb heron slide

revenue grant fund

direct investments