Finding the holy grail in Budapest?

Why does a venture capitalist back into a room? Because he wants to see the exit before going in? Is the move from venture capitalism to venture philanthropy the answer to the problem of non-profit sustainability? No, but perhaps an answer. The Nonprofit Enterprise and Self-sustainability Team (NESsT), the organizers of the first-ever International Venture Philanthropy Forum in Budapest in October, see venture philanthropy as complementing rather than replacing more traditional grantmaking.

In any case, venture philanthropy (VP) was only one of the many approaches to non-profit financing featured at the NESsT Forum. Many participants had far-reaching visions for the future. ‘Creating a global social capital market’ was an expression that came up frequently. Klaus Schwab, founder of the World Economic Forum, envisages a social capital market with all the flexibility of the for-profit markets and quoted in the Wall Street Journal. What all participants did have in common was an interest in finding new ways to channel capital resources to social change and development.

What is venture philanthropy?

The terminology is certainly different from that used in the context of more traditional grantmaking. Instead of a foundation making a grant to a grantee, you have a venture philanthropist investing in a social entrepreneur.

VP has several instruments at its disposal. These include:
Venture grants – sometimes recoverable when the NGO can afford to pay it back.
Loans – generally at below-market interest rates.
Equity equivalent – payback only if and when the NGO is up and running.

In all cases further payments are conditional on performance targets being met.

Does the difference go beyond the vocabulary? The characteristics of VP are claimed to be long-term engagement, a focus on the organization rather than the project, emphasis on capacity-building, performance measurement (of financial and social return) and a clear exit strategy.

But the boundary lines are blurred. The VP investor may receive no financial return on an investment, and may not even get their money back if it is advanced in the form of a grant rather than a loan. Investors expect a ‘social return on investment’ – but how is this different from what foundations receive?

A presentation by Tamas Scsaurszki of the Mott Foundation was illuminating. He compared his own grants portfolio with the VP model:

• VP is said to be ‘for the long term’: the average length of commitment of grants in his portfolio is four and a half years.
• VP funds organizations not projects: 39 out of 63 of his grants are for the ‘general purposes’ of the organization funded.
• VP places a big emphasis on capacity-building: here a difference is apparent. VPs often provide capacity-building themselves; Mott recognizes the need but provides for it through grants, both to NGOs that need it and to those that provide it.
• Traditional grantmakers have too many grantees: this criticism Scsaurszki accepted. With a portfolio of 63, he doesn’t have enough time to spend with NGOs to help them improve their work.

But the precise degree of difference between VP and good grantmaking is not really the point. The point, as many speakers pointed out, is that – at least in the US and the UK – the VP model is bringing in new money, appealing to a different set of people, who are attracted by the more hands-on venture approach. Use of terms like ‘investor’ denotes what one speaker described as ‘a different mentality and set of behaviours’. (Businesspeople, venture capitalists and the like are not VP’s only supporters, however. In Central and Eastern Europe it is the traditional donors who are involved: the Mott Foundation, Rockefeller Brothers Fund and the Levi Strauss Foundation have all contributed to the NESsT Venture Fund. Alan Christie of Levis describes their decision to support the Fund in terms of the need to begin to move away from ‘transactional’ (project-based) to ‘transformational’ philanthropy. But local venture capitalists are clearly interested, forming part of NESsT’s Business Advisory Network if not yet actually contributing to the Fund.)

The other crucial point relates to types of funding. The for-profit capital market has a rich variety of mechanisms, but the social capital market traditionally has only grants. The NESsT Forum focused on a rich variety of new approaches to raising social capital, of which VP is only one.

Will the VP approach work across borders?

The potential difficulties are well rehearsed: how do you come up with workable performance measures, particularly for social return? What are the implications of infusing commercial values into the non-profit sector? Will VP involvement with a non-profit be directive rather than consultative, especially if the investor takes a seat on the non-profit’s board?

VP has developed largely in the US. One question that seems especially pertinent when you start to think about applying the model in developing and transitional countries is whether it is too resource-intensive in terms of both money and time in a situation where needs are great and resources limited. Another issue is the OIMBY (only in my back yard) one: the VP hands-on approach is ideally suited to support local non-profits. How will it work if the ‘investors’ are in one country and the ‘entrepreneurs’ in another?

One final comment: as a frequenter of international grantmaking conferences, I was struck by the lack of familiar faces in Budapest, despite the prevailing interest in VP at more traditional gatherings. Perhaps the newly formed International Network for Strategic Philanthropy (see p00) will provide a forum in which the two groups can begin to talk to each other?

The NESsT Venture Fund
NESsT’s CEE Venture Fund exists to support NGOs wishing to set up a commercial venture in order to generate income to meet their mission; 95 per cent of the funds come from the US and Europe. It has just taken its first two non-profits into its portfolio and given start-up grants to two more.

The process started with a call for tender 12 months ago. Seventy-five NGOs responded and 16 were selected to carry out feasibility studies. Seven of these were chosen to receive venture planning grants of $1,500-$2,000 to develop the feasibility studies into full business plans. Out of these, the Business Advisory Network selected just two for the NESsT portfolio, Energy Centre Bratislava from Slovakia and P-Centrum from the Czech Republic. These two organizations will receive ongoing capacity-building support and continued investment over the next three to five years. After that time NESsT will exit – and whether this exit is judged successful or not will depend on how performance measures up against precise, agreed targets and whether failures are corrected along the way. The first set of investments are all in the form of  non-recoverable grants; in the future the Fund will also consider using loans and equity equivalents. 
For more information, contact Lee Davis or Nicole Etchart on nesst@igc.apc.org or visit the website at www.nesst.org

EVENT
International Venture Philanthropy Forum
Date 1-3 October
Venue Budapest
Organizers Nonprofit Enterprise and Self-sustainability Team (NESsT)