In September 2007, LGT Venture Philanthropy, funded by the LGT Bank and the Princely house of Liechtenstein, was launched. Based in Zurich, the fund will invest around $10 million over the next two years in Africa, Latin America and Asia. What kind of organizations will the new fund support and how will venture philanthropy’s high-engagement approach operate at such a distance? What are the main challenges to applying business precepts to the non-profit sector? Wolfgang Hafenmayer, the fund’s managing partner, explains its approach and outlines its crucial feature – the fund will support organizations, not projects.
‘As soon as we have a track record of 10 to 20 portfolio organizations, we’re going to approach LGT clients and invite them to engage with these selected organizations alongside the Princely family. This is the philosophy applied in our wealth management operation as well,’ says Hafenmayer. The Princely family does the initial spadework and ‘once everything is up and running we will offer the foundation’s services to our clients and to interested third parties’.
Local teams with global reach
One of the characteristics of venture philanthropy funds is that they take what they call a ‘high-engagement’ approach to investments – that’s to say, they are very closely involved with the organizations they support, giving advice and providing expertise, and even at times sitting on their board. Since it is operating across different continents, how will LGT Venture Philanthropy do this over the distances involved?
According to Hafenmayer, it won’t. It will establish local teams in Latin America, Africa, India and China, with a small presence in Zurich. This will enable it to retain strong links with the fund’s investors, once bank clients join in. Eventually, he says, LGT Venture Philanthropy will have ‘a growing global team exchanging knowledge on a global scale, while being active locally with local people’.
These local teams will do the due diligence on investments, establish local networks, and carry out evaluations of high potential organizations. Provision of financial support is only one aspect of what the fund can offer. LGT Venture Philanthropy will also provide intellectual capital, Hafenmayer explains, ‘which in our case means especially business know-how. This cannot be provided from a distance. One has to know the local circumstances and cultural background to be able to really provide intellectual capital.’
The global-local link will operate both ways: ‘When you can observe which models work in certain places and when you can find the right partners to implement these models in other places, these activities will become more global.’
Initially, the organizations will get to LGT Venture Philanthropy by recommendation, since ‘we and our cooperation partners are part of a large network of contacts’. Beyond that, says Hafenmayer, ‘we don’t divide the world into non-profit and for-profit, but ask instead, “are these organizations or companies increasing the sustainable quality of life for disadvantaged people?” This is LGT Venture Philanthropy’s mission and we only consider supporting models and organizations that fit this approach.’
An intensive investigation phase results, if successful, in a site visit. ‘While visiting the organization on-site,’ says Hafenmayer, ‘we try to analyse the current situation of the organization and the way we could work together over the next three to five years to increase their positive impact.’ The kind of financial support LGT Venture Philanthropy will provide is decided on a case-by-case basis. It depends on whether the organization can reach a level of self-sustainability and generate income or not. If it can, they will consider a loan or an equity investment. If it can’t, a grant would be the most common option.
The sustainable quality of life criterion has three overarching themes which will guide the fund’s investments: relief of human suffering, education, and creation of sustainable livelihoods. These, says Hafenmayer, are deliberately defined very broadly. ‘Rather than being specialists in particular thematic areas, we want to be specialists in managing process, in making sure that we do a very thorough analysis of these organizations, that we know how to handle different ways of supporting and financing organizations and of contributing intellectual and social capital, that we monitor and measure impact on a constant basis.’
LGT Venture Philanthropy is in constant contact with its portfolio organizations, since, he argues, ‘only a constant flow of information from and to the organizations allows us to really support and add value to them.’
The first engagements
The fund is now in the closing stages of setting up its local infrastructure – recruiting its local teams, getting its investment processes up and running, and establishing its measurement and reporting systems. Also the first ‘engagements’ are on the point of being made.
‘Out of the approximately 150 organizations we have looked at,’ Hafenmayer says, ‘we will engage with about three or four, and the first investments/grants will flow in within the next few weeks.’ Though he cannot be categorical at this stage, the most likely locations for these first engagements are Colombia and South Africa.
The need for professional management
One of the reasons why the initial process is very time-consuming is the fact that the process and approach are new to most of the organizations. This has its merits, too: even if it takes a little longer, while doing it you are helping to educate the organization so it is in effect capacity-building.
The overall aim, and the greatest challenge, he thinks, is ‘to manage the organizations we select as professionally as you would manage any other business’. This professionalism is something which he feels should be much more focused on in the non-profit sector. ‘Through the past months, our main challenge was that the quality of the management team is often not good enough to really grow these organizations in an efficient way. Managing a non-profit organization, as in any other professional company, starts with having a plan of where you want to go in the next few years and how you want to get there.’
This is rarely found in the non-profit sector, he says. ‘It’s not enough just to have a great vision and great idealism.’
You also need a system for continuous measurement, Hafenmayer insists, if you are to know whether you are achieving your aims or not. Also, you need accurate market research. ‘If you don’t know who your clients are and what they really need, you can’t provide them with the best service possible.’
The organization, not its activity
Critics of the venture philanthropy approach often point to areas where its insistence on measurement cannot be applied, such as advocacy or where long-term social change is involved. For Hafenmayer, this criticism is to some extent beside the point. For him, the principal focus is on the organization and the main limitation is its size and type, not its area of activity. ‘We are not talking about the next project within an organization, we are talking about the organization as such, and we try to bring this whole organization to the next level of creating impact. But I would never say that the venture philanthropy model can be used to support all kinds of organizations.’
So what kind of organization is he talking about? ‘With the amount of money we’re investing, our model can’t really be used to support very large organizations.’ The ‘right’ size might be somewhere between 10 and 70 employees and between $1 million and $10 million in revenue. LGT Venture Philanthropy does not, he explains, finance start-ups or pilots because ‘we strongly believe that there are enough very good solutions out there which we want to help to grow. Our basic idea is that we should help organizations that already have a proven model, and really support them in replicating or scaling their model.’
This is not a limitation, he argues, it’s a matter of being focused, and marks a growing sophistication in the financing of non-profits. ‘In business, you have the venture capitalists focusing on one part of the pie, the private equity people and buyout funds focusing on another part, and then you have the normal financing which is done by banks. I think that the more sophisticated the non-profit area becomes, the more different players will focus on different stages of financing.’
Wolfgang Hafenmayer is Managing Partner of LGT Venture Philanthropy. Email Wolfgang.Hafenmayer@lgt.com
Global Philanthropy Forum hosts discussion of philanthrocapitalism
For a lively discussion of philanthrocapitalism, hosted by the Global Philanthropy Forum in July, with opening posts by Michael Edwards and Matthew Bishop, go to http://www.philanthropyforum.org and click on ‘Discussion Forum’ under ‘About Us’.