There are easier ways to get money – the ups and downs of the venture philanthropy experience

Ravinol Chambers

Ravinol ChambersIn recent years, venture philanthropy (VP) has attracted much hype. It has been touted as a means of making ‘giving’ more effective and has sought to attract a generation of the self-made wealthy, particularly those from private equity and venture capital backgrounds, as engaged donors. The term has been used loosely in connection with the pledges of vast fortunes by the likes of Warren Buffet, Bill Gates and Tom Hunter for charitable purposes.

Charities could be excused for thinking there are huge amounts of money readily available from these exciting new donors. However, some notes of caution need to be sounded. Based on the reflections and advice of ten charity CEOs who have been through the VP experience, this article attempts to establish both the advantages and the drawbacks.

In the UK at present, there are a small number of VP funders. They tend to have specific areas of focus and very strict selection criteria, and until recently did not accept unsolicited proposals. VP funding as a percentage of overall funding available is still very small. As one charity CEO put it, ‘There are easier ways to get money.’ But he went on to say, ‘VP is about change, you have to realize this and be ready for it.’ Another charity reported that they would be horrified if all funders used the VP approach. ‘Not all charities would be able to deal with that level of engagement,’ they stated. ‘It will be right for particular organizations at particular stages in their growth but certainly not for everyone.’

So what are the benefits and the challenges of VP for charities and when might such an approach be right?

The pros for charities

Charities found the VP funder brings ‘value beyond money’, and that ‘there is a knock-on effect’, making it easier to attract other funding. One charity described VP as ‘like a stamp of approval because other funders know you have been through the rigorous checks and business planning. It brings status and a confidence to take risks we wouldn’t have taken before.’

For one charity it meant ‘a full-time fundraiser and a deputy director’, and for another ‘an excellent new management team’. They said: ‘It brought experience around the table that we wouldn’t have had and an outside perspective.’ One charity said: ‘There is value in the close relationship because the funder gets to understand the charity and its challenges better than a normal funder would.’

Another charity CEO who found the experience ‘brilliant’ said: ‘The benefits and impact will be better than you ever thought they could be as a charity and were more helpful than anything I had received from the voluntary sector.’ The management consultancy that charities reported receiving is estimated as being on average worth an additional £50,000 per charity. As one charity said, ‘It is something we would have wanted but not been able to pay for.’

Support consisted of multi-year (3-5 years) funding packages ranging between £300,000 and £400,000 along with consultancy support, business advisory networks, management support, partner networks, steering group support, and great encouragement and belief in them. The CEOs found the experience personally ‘very empowering’ and felt ‘tremendously supported’. One charity reported being told of the VP funder, ‘They won’t let you fail.’

However, the value beyond the money was not clear at first. For example, one charity said: ‘We almost fell out in the beginning. The funder seemed overly demanding for the small amount of financial support and it was difficult to see the value.’ Another said, ‘About half way through due diligence we understood the package better and started to see beyond the money.’

Charities said they had wanted to grow but had encountered various obstacles that had stopped them doing it on their own. With help from the VP funder, some of them had scaled up considerably, almost quadrupling their staff and increasing their turnover sixfold.

The challenges for charities

Confusion surrounding the term
The term VP is so loosely used that it now means very little. Funders sometimes use it to suggest they are results-oriented, businesslike, entrepreneurial or all of these. A number of funders have stopped using the VP term because of the confusion surrounding it, preferring to stress the ‘engaged’ nature of the approach. This can be confusing for charities.

Strict selection criteria of VP funders
Funders’ selection criteria are very similar: charities must be able to demonstrate an impressive track record with tangible outcomes and a level of distinctiveness. Most importantly, funders are looking for ‘organizations that are ready to scale up’ and ‘that have a strong desire to do so’. They generally have a particular area of focus and do not support start-ups.

Making the connection
Many fundraisers are unsure how to find VP funders, and unsolicited proposals are generally not accepted or encouraged. As one funder said, ‘It is difficult for charities to go looking for VP.’ The charities interviewed had been introduced to their VP funder through a friend, a trustee or an existing funder who had a connection with the VP funder.

Opportunity cost – time, stress and energy
The charities said that the commitment was ‘more than we expected’. They had monthly meetings with the VP funder where they would go through everything. In the case of one charity, ‘in the beginning the meetings were weekly’. The due diligence stage had been particularly intense and it ‘soaked up a lot of management time and energy’. One charity remembers: ‘They wanted to meet people at all levels of the organization, including board members, and asked a lot of difficult questions.’

‘There is a clear opportunity cost to working with us,’ said one funder, and another explained: ‘Our biggest challenge has been charities’ capacity to keep up with the process and stay inspired and engaged to invest time and energy.’

For charity CEOs who felt a particular responsibility to carry the whole change process through, the continuous pressure was at times ‘all-consuming’ and ‘seemed relentless’. Another CEO who had found the experience ‘rewarding’ said: ‘If I had known from the beginning what it would entail, I don’t know if I would have been so enthusiastic.’

Coping with change

A clear message that came out of the interviews was that VP involves a lot of change. One funder said: ‘For organizations who feel they are on top of their game and just want cash with a bit of plus, VP is not suitable. They need to have room for real change.’

Charities said the main change management challenges are around people
management and dealing with increased demand. Staff were ‘nervous and worried’ and resistant to change at first. They were not used to the business approach and the language was alien to many of them.

One charity remembered that ‘getting alignment between a huge change process and actually being able to deliver was a real challenge … It felt like a huge risk at the time and it would have been easier to just work on delivering good programmes.’ But they needed to build capacity to cope with the growing organization they now had.

One charity CEO reported: ‘I had to replace half my board and build a new senior management team.’ Another was told by the funder that they would back the CEO but not the chair.

Building trust

Funders stressed that it was in charities’ interest to be ‘honest and open in the relationship’ and to be ‘clear about expectations from the start’, so they could help them appropriately. One funder commented: ‘In the venture capital model there is ownership in the form of equity, in VP there is no ownership. The only recourse is influencing, therefore the relationship is everything.’ They added: ‘Theory and strategy are great, but achieving a workable partnership is crucial.’

Charities reported that it took time to build up trust. One charity said: ‘I had
reservations at first – will they try and take over the charity? Will we be dragged into their agenda? Will they try to control us?’ Another felt that business models were being forced on them and wondered whether it was ‘really a partnership’. Another warned: ‘It is important that very candid conversations are had at the beginning and expectations are clear as to what to do if there is a problem and there is the opportunity to say no.’

One funder reflected: ‘There needs to be more two-way learning … there is still a lot to be learned from charities, everything is not figured out yet.’

Perceived superiority of the business model

One charity CEO said that ‘at times it felt that business models were being forced on a sector where there are different sensitivities’. Another charity CEO sounded a strong note of caution: ‘It is important to have people involved who don’t have business as their goal, to balance the charity’s direction and make sure that the next move is the right one for the charity, and to consider the value side as well as the business side.’

As one funder said: ‘Often there is a feeling that the business model is superior and this can be very damaging. To make charities more businesslike is not what this is about … the main thing is to bring greater value to the organization. We must see beyond the business models and adapt them to focus on solving the problem. They are the means to an end, not the end itself.’

Charities reported that consultants sent by the VP funder ‘do not always have a good understanding of the sector’, and one charity reported them as being ‘mismatched’. Funders acknowledged that ‘VP is still a new field, there are still lots of questions and uncharted territory’, and reported offering quarterly ‘peer-learning’ opportunities for charities, stressing the ‘need for more stories to come out from both sides’ to demystify VP.

Keeping focus

Charities said that just because the support is free does not mean they can not say ‘no’ or challenge the funder. One charity which was successful in this regard told the funder: ‘It is important that the charity drives the direction’ and that investors realize that ‘the charity is also accountable to its own governance structure’. ‘It is very important that charities are very clear what they are about,’ they said, ‘otherwise they may find that they get pulled into other agendas.’

There is also pressure on VP funders to demonstrate impact. Often this means helping the charity to scale up, though one funder did not agree that scaling up is always appropriate: ‘Each charity has its optimum size and bigger is not always better. The long-term security of the charity’s work and values and their essence may be lost in growing them beyond their optimal size.’

One charity that had gone through a huge step change and had grown so much that
It was almost ready to go through another step up was not sure it was the right move: ‘I don’t think growth for the sake of growth is necessarily a good thing. The quality focus can get lost.’

Exit

Funders reported reinvesting in their portfolio charities for a further period but using co-investments as a move towards exit. Charities said that ‘the funder brought in consultants to help us develop review reports to attract and secure future funding as we came towards exit.’ In many cases, the funder had also helped them develop their own earned income, although, as one funder cautioned, ‘this should be balanced so that it supports their real work and doesn’t become a distraction.’ Another said that ‘exit and sustainability still remain difficult. More work needs to be done on this.’

Funders also raised the issue of early exit if things were to go wrong. While they were clear that in some extreme cases this might be necessary, it still remains difficult due to the nature of the sector and the fact that people’s lives would be affected.

Recommendations for charities

All in all, though the benefits of VP can be considerable, as one charity CEO remarked, ‘there are easier ways to find money. VP is about change, you have to realize this and be ready for it.’ The following eight recommendations are based on the advice of the charities interviewed for those thinking of engaging with a VP funder.

  • To avoid the risk of mission drift, be very clear about your mission and what it is you want to achieve.
  • Research VP thoroughly and consider carefully if it is suitable for your organization.
  • Consider VP funders’ selection criteria carefully as most have a particular area of focus.
  • Use your organization’s networks as most VP funders do not accept unsolicited proposals.
  • The process consumes much time and energy. You will need a champion from within the organization to push through the process.
  • Set out clear expectations from the start and address funders in their own ‘language’ so as to ensure a good fit.
  • Most charities are unprepared for the VP process. Manage the expectations of your staff and plan ahead.
  • Make sure you build time into the process for reflection to ensure that the organization’s focus and values do not become compromised.

Recommendations for VP funders

  • Be clear on your definition of VP and your area of focus. This will help attract charities and donors that are a suitable fit and that have similar values.
  • Be clear about the expectations of commitment from the start.
  • The process puts great pressure on charity CEOs. Consider providing a full-time management assistant to the CEO as part of the model.
  • Be open to learning from the charity sector and demonstrate the adaptability of business models to suit the needs of the sector.
  • Develop methods of demonstrating impact that do not always involve scaling up.
  • Each charity has its optimum size, and growth for the sake of growth can be damaging.
  • Look to develop local funding relationships for charities supported from the outset as a means of working towards exit.
  • There is a need for greater clarity, coordination and shared learning among organizations involved in the VP and social investment marketplace. Try to promote this.

Ravinol Chambers is founder of Be Inspired Consulting and Be Inspired Films, which specialize in new project development, interim project management, and promotion for social purpose organizations. Email ravinol@beinspiredconsulting.com

For more information
This article was based on the author’s MBA research dissertation. View the full research.
http://www.beinspiredfilms.com
http://www.beinspiredconsulting.com


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