Interview – Stephen Dawson: An ambitious venture?

Stephen Dawson has recently announced his intention of stepping down from the chair of the Impetus Trust, the venture philanthropy fund he co-founded six years ago, to launch Jacana Venture Partnership, an organization that will support emerging venture capital funds in Africa. Why now? Why is he forsaking the venture philanthropy approach and apparently returning to his venture capital roots? What will he take from his Impetus experience into the new venture? Caroline Hartnell finds out …

You’ve picked the big gap in African development as being the lack of support for small and medium enterprises (SMEs), but Jacana isn’t going to invest directly in SMEs, is it?

If I can take a step back, it all started with a conversation between Lord Joel Joffe and me about poverty reduction in sub-Saharan African – Joel has a history of supporting small charities as well as his work with Oxfam. He was a little frustrated by the impact that he was having with non-profit organizations, and wondering whether working with for-profit organizations would be more sustainable, so he started investing in small, start-up venture capital funds in Africa, and he was encouraged by that.

My starting point, coming from Impetus, was a venture philanthropy approach, so we said let’s talk to people about which of these models is most likely to have a sustainable impact on poverty and concluded fairly early on that a venture capital model was more likely to have more of a long-term impact than venture philanthropy – which was a bit of a shock to me!

Then we had to decide where we could have the most impact as new players in this market. We considered investing directly in small businesses and decided that was not a good idea. We are in the UK and we’re not connected to the local community; we don’t understand how business is done.

We also looked at the root causes of the lack of investment and they’re pretty similar to the UK 30-odd years ago when I started in venture capital here. There’s a lack of management experience, of funding, of role models, of an entrepreneurial culture, and there aren’t places where people can learn – business schools or big companies. In terms of solving the management experience problem, you could do something like set up a business school, but that is all very long term.

What venture capital is good at is providing a channel for funding and for building the capacity of the businesses it invests in, so we decided that was the point at which you could have the greatest leverage. Rather than investing in one business, if we could help a venture capital manager to get established and be successful, he or she would invest in five businesses a year, or 20 businesses over the life of a particular fund, which would have a greater impact on numbers of companies, and therefore on employment and prosperity.

So you’re supporting start-up venture capital funds, rather than small businesses directly?

Exactly. It’s very similar to the Impetus model. It’s about long-term funding and capacity-building support. It will depend on individual circumstances, but we will typically invest in their management company because one of the problems about the venture capital model is that you get a fee that is a percentage of the fund. So if you’re managing a billion dollars of funds, even if it’s a 2 per cent fee, you can make large amounts of money, which is what happens in Europe and the US. If you are managing a $5 million or $10 million fund, which is what people would be doing as a first-time fund in Africa, you can’t afford to employ enough people to manage it effectively, so you don’t develop a good enough record to raise the next fund and become sustainable. So one of the things we will do is invest in their management company, which will help them to recruit maybe just one or two people a year or two earlier than they otherwise would have done. We’re not talking about huge amounts of money, but it can make a big difference.

We’ll also help them with our own experience and our network. Venture capital is like technology, it’s a worldwide phenomenon and you have to adapt it to a particular market, but there are some very broad principles and some quite detailed ways of looking at things that are universal. We’ll also help them raise funds. If they can raise funds locally that’s great, and will make them sustainable in the long term, but in the short term not much money is available locally so most of it will come from international investors. Many of them are keen to invest but nervous, particularly when dealing with inexperienced managers who haven’t got a clear record. The fact that we’ve checked them out and selected them will help here.

So we’ll spend a lot of time developing relationships with investors, trying to understand what they’re looking for and which countries they’re interested in, so when we come across an opportunity we’ll be able to map it on to the investor interest.

So when you’ve found a good potential manager you could link them up with an investor?

With groups of investors, yes – typically it might be ten investors in a particular fund. Hopefully we’ll know the sort of people who would be interested in, say, agriculture in Tanzania. We will also put a token amount of money in, enough to show other investors we’re serious.

The final element is working with the individual small businesses, connecting them to sources of technical assistance, which might be for very generic things like accounting systems or governance, or it might be quite specialist expertise in agricultural value chains or IT services.

Will you be providing that directly to them or helping them source it?

We’ll provide some connections, but it’ll be largely introducing the right expert for the right requirement for the individual SME. Some of it will be through international relationships, for example with firms of accountants that operate here and in Africa to help with book keeping or accounting systems, and there are some specialist providers of technical assistance like Technoserve, who are particularly strong in agricultural value chains.

You said you decided that the venture philanthropy approach was actually going to contribute less to development than the route you’re taking. Could you say a little more about that?

Yes. The Impetus model I think works well, but it can only work with an organization that has UK headquarters where most of the key people are. I’m very happy with it, but it’s a tiny portion of the need. In Africa, there isn’t a local philanthropic infrastructure. You get the international NGOs, the Oxfams and the Save the Childrens and so on, who typically work with relatively small local or regional NGOs, a lot of whom are very dependent on that big NGO. We don’t think we could add much value to what they’re already doing. Second, if you can get businesses to grow, by their nature they are sustainable, they will take on more people, they will create more wealth, they will pay more taxes as they grow.

So the SMEs that you want to see supported are not specifically social purpose enterprises?

No, there will be a sort of ethical filter to ensure they’re not doing harm to the environment or employing child labour or manufacturing arms, but we believe that basically any small business that is ethical will have a positive effect economically. The most important thing is that we invest in successful businesses because then the fund will be successful and investors will be happy and want to come back for more. There’s a sort of snowball effect that can really become important. And I’m sure some of the businesses will also have an extra social dimension.

Microfinance has attracted some criticism as encouraging informal sector employment, which is not in the long run perhaps the best development model. Would you see this sort of investment model as a good alternative, promoting more formal sector employment?

We don’t see ourselves as competing with microfinance. Microfinance is mainly about giving individuals a sustainable income, which is great, but it’s not scalable. There are some people who are trying to scale from microfinance to small businesses, but I’ve not seen any examples of where that’s been successful. We’d certainly like to talk to people in the microfinance world, because they may well be able to identify the 5 or 10 per cent or whatever it is of microfinance businesses that could go on to the next stage, but most of the people in the microfinance world that we’ve spoken to say there is a ceiling because of the nature of the people and of the business.

The other point about the formal economy is that if you’re a one-person microbusiness in the informal economy, you don’t pay taxes. Once you set up a formal business, you are registered and you do start paying taxes.

Which again feeds into the economy …

Yes. And without getting into the whole philosophy of democratic pressures, I think if you have a larger proportion of the population within the formal system, they have a stake in that system. You’re helping to develop a middle class where people are paying taxes, and are very concerned about how those taxes are spent. They therefore get more engaged politically and hopefully you create a positive cycle.

Will you be looking for commercial investors or social investors or foundations interested in mission-related investing, or all of these?

I think in the short term we will be looking for people who have some form of social element to their investing, so they could be foundations or high-net-worth individuals, some of the people who support Impetus and venture philanthropy around the world. The biggest amounts of money are likely to come from development finance institutions, which are typically government-owned institutions. They have the double bottom line mission of investing in developing countries and getting a reasonable financial return, so that’s a pretty good fit. I think foundations could be interested either in pure philanthropy, providing technical assistance grants, or in mission-related investment.

The longer-term goal is to attract local investors, but also commercial investors, like UK or US pension funds, for example. That then brings credibility to the whole investment class and shows they have sufficient track record for the fund to be sustainable without our involvement. If and when we get some returns, we would recycle them into a more difficult, newer emerging market.

Where will Jacana staff actually be based? Here and in Africa?

Yes, we’ve got the two faces. In the short term most of the investors, and some of the providers of technical assistance, will be from western or developed countries, but obviously the front line is out in Africa. At the moment one of our team is looking at relocating to east Africa, so it’s possible that we’ll have somebody based there soon, but that’s basically opportunistic. In the longer term, we would certainly see having some of the team out there so they can provide more immediate support to the people we’re working with.

Is east Africa your first target?

We’re looking equally at east and west Africa. We’re looking at the least developed countries on the UN definition so that rules out some of southern Africa and northern Africa. Leaving out particularly challenging countries like DRC or Zimbabwe, for example, you very quickly come down to a cluster of countries in east and west Africa.

West Africa is a very interesting block and is totally underdeveloped in this respect. We’re in two minds about Nigeria, but certainly it is a relatively developed, huge market. Then there’s Ghana – President Obama has got perhaps similar criteria in some ways, in terms of relatively strong governance and economic prospects.  In east Africa, Kenya, Uganda, Tanzania and Rwanda all look quite promising. So those are the top priority areas. It will then depend on finding the right partner, the right emerging venture capital manager who needs some help to get to that sustainable level.

You’ve been involved with Impetus for the last seven years and previously worked in venture capital. How much of each set of experiences do you see going into this new venture?

I see it as a sort of triangulation: you’ve got mainstream venture capital, you’ve got venture philanthropy and then you’ve got social venture capital – things like Bridges. Obviously VC is pure for-profit, venture philanthropy is pure non-profit, but with a business approach, and social venture capital is a mixture of the two, so I think there are some very interesting lessons from both.

Would you place yourself into social venture capital?

Yes. Achieving profitability is the key to long-term sustainability, but certainly the founders’ motivation is social – there are easier ways to make money if that was the only goal. We also believe that because the environment we’re working in is a for-profit one, it is very important we look commercial, otherwise people will take us for a ride or think we’re a soft touch. However, I expect we will be drawing on both for-profit and non-profit streams.

One of the things that Impetus has done successfully is bridge the non-profit and for-profit worlds. We’ve tried very hard to learn from the non-profit world and to work with foundations rather than saying venture philanthropy is better than traditional philanthropy. Similarly, I think Jacana will need to take that partnership approach, without any sense of patronage: you’ve got the local contacts, the local networks, the experience of how to do business in this country; we know about this thing called venture capital. If we put the two together, hopefully two and two can make five. So cultural sensitivity will be important.
The Jacana is a water bird. How did you come to choose that as a name?

It appears to walk on water, but actually it walks on lily pads. When we were thinking about names we looked at all the permutations and combinations of fairly obvious ones like Venture Investment Africa, African Development Investment, etc but decided it would be nice to have something that implies Africa without being too overtly, ‘we’re doing this for Africa’. So we started thinking of zebras and tigers and so on, all of which have of course been done, and then I remembered the jacana. The point of the analogy is that they are doing something that looks impossible, and we’re doing something that looks pretty challenging as well, and we’re going to have to be very ingenious to solve the problems we encounter.

This leads straight into my next question. I had just circled the word ‘ambitious’ …

Yes, I think that’s a good summary.

So why now? Is it the stage that Impetus has got to that made you feel you could move on or were you attracted to doing this anyway?

I think it was a mixture. There was the chance meeting with Joel at a conference on Africa about 16 months ago and it sort of followed a natural course from that. But I guess that I was open to the idea because it was the Impetus fifth anniversary last summer, and that’s a great time to look at the goals for the next five or ten years. I think it would be healthy to have someone new, with new ideas, new contacts, new energy. We started talking about succession planning and how to manage it about a year ago, and I said I thought we should talk about it seriously in early 2010. Then the African thing came up more rapidly than that time scale would fit, so I said let’s bring that forward six months or so. But I’m very comfortable from an Impetus point of view that things are in great shape. It has a great management team, a great board and a great opportunity to bring in somebody new to take it to the next stage.

Are you happy with what you’ve achieved in Impetus’s first five years?

Yes. As you’re doing it you tend to be dominated by the short-term challenges, the setbacks, the areas where you’re not achieving as much as you’d like to achieve, but five years is a great time to take a look back and ask how far have we come? The first few organizations we invested in have now gone all the way through the cycle, and we’re delighted with the progress and feel we can now demonstrate the model is working and there are loads of new challenges and new opportunities.

When Impetus started, I suppose there was a similarity with Jacana in that it was, in a sense, catalysing a field – venture philanthropy in Impetus’s case?

Yes. I’ve been involved in EVPA – which is explicitly catalysing the European venture philanthropy field – from the outset. I think the fact that I was able to talk about the experiences of Impetus, which I think is a good example of venture philanthropy, has helped EVPA, and the fact that we’ve been prepared to talk openly about what’s worked well and the lessons we’ve learned has encouraged other people to get involved.

Did you benefit from the lessons of North America where they did set themselves up as the best thing since sliced bread and got a lot of backs up?

David Carrington was my first mentor when I started in the charity world and he provided really good advice in the early years. He’d looked at what was going on in the States and kept sending me articles about some of those attitudes saying you’d better read this, there are some things here you need to worry about. So that was really helpful in trying to avoid some of those pitfalls.

Stephen Dawson is co-founder and chairman of the UK-based Impetus Trust. Email

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