venture philanthropy: from operations to finance october 12, 2007 ubs philanthropy services dr....

Venture Philanthropy: From Operations to Finance

October 12, 2007

UBS Philanthropy Services Dr. Maximilian Martin

Table of Contents

Section 1 The Fundamentals

Section 2 The Finance Frontier

SECTION 1

The Fundamentals

Venture Philanthropy: Taking Off?Venture Philanthropy has become an ubiquitous term

Source: Google, New York Times, FT, EVPA, UBS Philanthropy Services

2007: Chris Hohn (TCI) £ 230m. Additionally, CIFF made £ 94m on its investments.

2007: Richard Branson (Virgin Group) pledged US$ 3bn to cleantech; created Entrepreneurs Unite, a “VP club” focused on Africa.

0

5000

10000

15000

20000

25000

30000

35000

40000

2000 2001 2002 2003 2004 2005 2006

Hit rates "Venture Philanthropy" (Google)

© 2007 UBS Philanthropy Services

Definitions of Venture PhilanthropyCompeting views

EVPA: Venture Philanthropy is an approach to charitable giving that applies venture capital principles, such as long-term investment and hands-on support, to the social economy. Venture philanthropists work in partnership with a wide range of organizations that have a clear social objective. These organizations may be charities, social enterprises or socially driven commercial businesses.

Sustainability Dictionary: Philanthropy that draws upon the traditional venture capital model to invest in nonprofits and socially entrepreneurial organizations to build their capacity, rather than to support discrete programs. Venture philanthropists typically assess progress and track the outcomes of their investments in terms of the social value produced. They often maintain a close and active relationship with grantees.

Source: CoP, EVPA, Sustainability Dictionary

John D. Rockefeller III (1969): “Private foundations often are established to engage in what has been described as ‘Venture Philanthropy,’ or the imaginative pursuit of less conventional charitable purposes than those normally undertaken by established public charitable organizations.”


A Step Back: What Are The Characteristics Of VC?

Source: FVF, NVCA, UBS Philanthropy Services

“DNA” of Venture Philanthropy

A keen sense of timing

Invest in a company at the right time

Investments must pay off within the fund's life span (6-7 years)

Cyclicality as a fact of life

Cyclical industry funding patterns

Absorption capacity of IPO market critical

Schematized investment

process Three-stage

sequential investment process (prototype, pipeline, growth)

Focus on measurable innovation

Improvements within an established frame of reference preferred to breakthrough innovations

Venture capital is: long term investments, 3-7 years, annual investment returns 25% - 100%.Venture capital is not: investment intermediary services such as merchant banking, investment banking or business brokerage services. It is also not consulting services, penny stock strategies, public shell merger strategies or any other fee income motivated financial services.


The Case for Venture Philanthropy

In order to create change in scale, philanthropy needs to draw on a whole toolbox of intervention mechanisms beyond pure grant-making.

Source: CoP, Sustainability Dictionary, UBS Philanthropy Services

Venture Philanthropy draws upon the traditional venture capital model to invest in nonprofits and socially entrepreneurial organizations to build their capacity, rather than supporting discrete programs.

Venture philanthropists assess progress and track the outcomes of their investments in terms of the social value produced.

They maintain a close and active relationship with grantees, providing ongoing strategic guidance in addition to financial capital.

Contribution

Need

The fundamental objective of venture philanthropy is to achieve higher social or financial return (or both) from non-profit organizations.

What's the “philanthropic IRR”?


Four core dimensions

Venture Philanthropy operates with different "curve shapes“ – "investors" must either be ready to operate with longer time horizons, or suboptimal topic selection.

Time

The TECC Is Different

Value creation in the social sector cannot always be measured by simple quantitative proxies. Moreover, exit funding does not follow automatically from performance.

Exit

Venture capital industry operates on a different scale than venture philanthropy investments. Absence of economies of scale.

Cost

Venture philanthropists coming from the venture capital world must adapt their language to the culture of the social sector.

Culture

Source: UBS Philanthropy Services© 2007 UBS Philanthropy Services

SECTION 2

The Finance Frontier

Today’s Venture Philanthropists: The G² ChallengeA European snapshot

Sources: EVPA, UBS Philanthropy Services

Venture philanthropists focus overwhelmingly on early or

expansion-stage CSOs

Investment topics* Type of financial support*

26%

83%

63%

43%

0% 20% 40% 60% 80% 100%

Grants

Loans

Equity

Mezzaninefinancing

46%

63%

86%

14%

0% 20% 40% 60% 80% 100%

Growth

Early stage

Establishedorganization

Mergers

Grant-making is the bread and butter financial intervention

* Survey of Venture Philanthropy providers in Europe, 2006, multiple priorities possible


Mapping the Investment Landscape

Example Sector Type of benefit

Investment solution

Inflection point

Category

Prime Cure

SMEs

Private good SEs

Public good SEs

MFIs

Aravind

IBJ

Acción

Real

Real

Real

Financial

E + S

E + S

S

E + S

Equity or loan deals

Loan deals +

TA

Grant + TA

Equity or loan deals

Theme funds

Loan funds (e.g. irrigation, housing)

Donor collaboratives

Second tier funds

Niches for financial innovations remain untaken. The task is to set up pilot vehicles with venture philanthropy funding that can be

adapted to the "retail" segment at a later stage


The Way Forward

High-leverage opportunities

Two vectors of innovation

1 2

Social innovations in operations:

professionalize, build institutions, fund step

change (scale and replication)

Social innovations in finance:

A lot of work to do

So far, innovation has been driven by MFIs and

PPPs

Legal structures to provide opportunities to take equity – L3C

Package loansSME fundsFoundation asset pooling


A Reminder: The Role of the Innovators

Source: UBS Philanthropy Services

?

• Look for relative advantage and latent demand

• Analyze compatibility

• Assess how complexity is mastered

• Focus on trialability

• Observability of an innovation is critical

Focus of discussion

Diffusion of innovation criteria

How can we draw in the early adopters?


DisclaimerThis publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. Although all information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and opinions as well as any prices indicated are subject to change without notice. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis.

venture philanthropy: from operations to finance october 12, 2007 ubs philanthropy services dr....

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