Nothing ventured, nothing gained
March 2010
Shaks Ghosh explains what is involved if charities want to tap into private equity industry resources
First and foremost, it’s private equity’s core expertise – its ‘toolkit’ of value creation – which gives it the potential to be a very different sort of funder. Its business skills, when applied appropriately, alongside a financial ‘investment’, have proved highly effective for charities ambitious to expand their impact.
The phenomenon has attracted a variety of labels such as ‘venture philanthropy’ and ‘intelligent giving’ but they all have in common the donors’ desire to help as much with their heads as with their hearts and hard cash.
Personally, I’ve been so impressed by private equity’s methodology that I have no hesitation in promoting it widely to the third sector as a way of creating more social good.
That said, this ‘new’ philanthropy isn’t for everyone. Some prefer to just take the money, and that’s understandable. And, there’s the obvious criticism that business, with its overriding focus on profit, can never truly understand charities which, with their compassion and commitment to social change, are driven by much more complex ‘bottom lines’.
However, experience has shown me how much the two worlds can offer each other and what strong friendships and partnerships can be created. It just sometimes requires ‘go betweens’ to make the introductions and to nurture the relationship in the early stages. After all, both donor and charity are likely to be motivated by the same social change agenda, even if they have different ideas regarding how best to get there.
Venture philanthropy funds, largely established by private equity and venture capital practitioners in the UK, but which often blend ‘know how’ from the charity sector, can serve as useful intermediary vehicles to bridge the divide.
Is venture philanthropy for me?
Venture philanthropy has blossomed over the last few years, so while one fund might not match what you’re looking for, another might be worth a look.
As the European Venture Philanthropy Association (EVPA) points out, the sector now works with a wide range of organisations that have a clear social objective, be they charities, social enterprises or socially driven commercial businesses. They can be used to assist with start-up operations, expansion of activities, mergers or restructuring and encompass different types of funding. The EVPA has a useful directory of members on its website
[1].
What they all share, however, is a distinct set of characteristics which charities contemplating both whether and how to attract funding should consider. I’ve borrowed the following headings from the EVPA.
- High engagement. Engagement is king. Charities need to be open to a ‘hands-on’ relationship, accepting close involvement at strategic and operational levels.
- Tailored financing. There’s now a broad spectrum of returns sought by venture philanthropists. Widely used financial termssuch as ‘investment’ can be misleading as some organisations, such as PEF, offer non-returnable grants and seek a purely social return. There’s no equity stake taken as in private equity. However, others use loan, mezzanine or quasi-equity finance to blend risk-adjusted financial and social returns.
- Multi-year support. As private equity professionals measure their investment in companies by years, so do venture philanthropists. Support typically lasts three to five years with the end aim of helping organisations achieve financial self-sufficiency as an exit strategy. You will need to pay more than homage to the holy grail of sustainability, it’s likely to become a central plank of your business plan.
- Organisational capacity-building. Rather than procure services for individuals, venture philanthropy tends to back whole organisations. It focuses on building infrastructure and
funding core operating costs to enable scaling up and growth of social impact.
- Non-financial support.Venture philanthropists actively provide strategic planning, marketing, legal and accounting expertise to support growth. Alongside this ‘intellectual capital’, they’re also likely to offer ‘social capital’ through access to new networks and potential funders, while some periodically bring their portfolio of charities together to share learning.
- Performance measurement. Focus is on the outcomes of giving rather than the giving itself. Although the science is in development, charities still need to be committed to
achieving results and to measuring those results. Venture philanthropists hold organisations accountable and reward them for reaching pre-agreed mile stones. However, there’s no ‘one-size-fits-all’ approach. We work with our charities to help them find their own way of measuring – one that is meaningful, practicable and useful to them.
I would also add two other attributes to the check list: ambitious management and leadership with a business mindset.
Each proven charity or intervention we back has to have both the will and the potential to be transformed by the money and expertise we put in. The best ‘investments’ are when a charity not only embraces the venture philanthropy philosophy but seizes the opportunity to work together towards a common goal, fully utilising the support, relationships and expertise that funds can bring to the table to ensure that more people benefit from the intervention.
For that reason, activity is often with relatively small turnover organisations which, according to research, tend to have an annual income of between £250,000m and £5m [2]. That said, PEF goes up to £10m.
Next steps
If this resonates with your thinking, a partnership with venture philanthropy could be a sensible development option for your organisation. So, how do you go about making it match fit for a venture philanthropy investment and what hoops will you have to jump through on application?
Each fund will inevitably have its own approach but if it says it applies business principles, try and put yourself in a businessman’s shoes. They’ll be approaching their ‘investment’ as they do any other, except that this time they’ll be looking for the best social return they can achieve on the money and skills they put in, rather than financial return.
Private equity professionals are successful because they back winners and that requires homework. Rest assured they will be doing their homework on you – they want to find out whether your organisation is the one most likely to deliver the social change they believe in. They’ll have read the research, tracked government policy and understood the context before coming to a decision.
It can be a rigorous process but forewarned is forearmed.
Here at PEF we actively seek out and screen prospective charities, identifying a number for initial research, when charities will be asked for access to detailed information as well as a management meeting and a project visit.
If the charity is shortlisted as a candidate for investment, the next step is due diligence, with much more detailed questions about the work of the charity, results achieved, the leadership team, the organisation, financials and future strategy and plans. There would also be more meetings with both the senior management team and trustees. At the same time, the candidate charity would typically be working on their medium-term business plan and drawing up an investment proposal.
All this might sound daunting but support is often provided. For example, teams of private equity professionals and advisers would typically offer help for candidates to refine their plans and proposals.
In terms of tips, remember venture philanthropists’ preoccupation with results. You will need clear evidence of the effectiveness of your work and success at driving high levels of performance from your organisation. And your proposal should clearly spell out what eventual social impact your charity is aiming for, and clearly link all other parts of the proposal – activities, processes, staff and finances – to this social impact goal.
In addition, although venture philanthropy funds tend to offer substantial amounts of funding, charities may need to think about other sources they might be able to leverage with the investment, should their application be successful. As I’ve already mentioned, the end game is sustainability, so a high level description on how you intend to achieve it is essential.
Venture philanthropy isn’t part of the endless merry-go-round of funders, giving annually or in three-year cycles. It’s about helping you to get off that merry-go-round.
Finally, as venture philanthropy backs whole organisations rather than services, any proposal must be championed and owned by the executive and trustee leadership of your organisation.
To summarise, applicants need to think about:
- track record of impact and scalability;
- ambition and readiness for a step change in impact;
- sustainability of the step change;
- ability of the organisation to deliver on the step-change plan; and
- likely value added by the fund’s non-financial support.
Is it worth it?
For certain types of charities, open to engagement, interested in effectiveness, with the ambition to realise their potential and the leadership to drive that step change, I would give a resounding yes. And, I say that as someone who has sat on the other side of the fence as a charity CEO for nine years. Debbie Scott, CEO of Tomorrow’s People, a national employment charity founded in 1984 which has helped over 400,000,000 in their journey back into the workplace confirmed: ‘I have no doubt that this has put us in the best possible position to raise further funds and scale up the Working It Out programme, and taken us closer to our ambition of embedding the programme as one of the primary support initiatives for the NEET
[3]. ’
The funding spectrum
For the purpose of this article, I have concentrated on venture philanthropy but I don’t want to leave you with the impression that that’s the only way that private equity works with charities.
For example, many individual firms’ foundations are grant-makers, in the traditional sense, while at the other end of the scale Social Finance
[4], whose development has benefited from the input of private equity luminaries, is a social investment bank, which aims to bridge the gap between 100 per cent subsidy grants and fully commercial loans for the social sector.
However, venture philanthropy provides a useful model to help highlight what makes the industry tick. There are common traits which I encounter again and again; a will to make a difference by marrying their money with an opportunity to give their expertise to help grow the most effective interventions and achieve real social change.
So, whatever your subsequent involvement with private equity, I hope this has provided an insight into how to approach this little understood sector of the financial world - to think about the business behind the ‘suits’ and how their business, as well as their money, might help develop your charity’s business. PEF’s mission is all about unlocking full potential and, just maybe, venture philanthropy is the key you’re looking for.
[1] www.evpa.eu.com
[2] Venture Philanthropy: the evolution of high engagement philanthropy in Europe, Rob John. Oxford: Skoll Centre for Social Entrepreneurship, June 2006. Downloadable from: www.philanthropyuk.org/Resources/Venturephilanthropy/Relatedpublications
[3] Not in education, employment or training
[4] www.socialfinance.org.uk
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