Understand what venture philanthropy is and the commitment required from both ventures and philanthropists to make it work.

‘Venture philanthropy’ is an approach to supporting the social purpose sector that is gaining increasing attention around the world. But what exactly is venture philanthropy? What do venture philanthropists seek in a funding relationship? And to be successful, what relationships should venture philanthropy managers develop with their ventures (investee organisations)?

Inspiring Scotland defines venture philanthropy as ‘a field of philanthropic activity where private equity/venture capital models are applied in the non-profit and charitable sectors’.

Venture philanthropy is an active, hands-on approach to building the capacity of an organisation and its people to increase its social impact. Its differentiating characteristics are long term funding and business support that often requires multiple and multi-dimensional relationships.

This article explores successful venture partnerships. It is based on SVA’s experience over the past 13 years as a venture philanthropy manager (‘manager’) working to build stronger social purpose organisations. By providing a combination of funding and support, SVA actively helps build the capacity of supported ventures to increase their social impact.

Leveraged long term investments

For venture philanthropy to work, a multi-year partnership between manager and venture supported by long term investors provides a stable base for the relationship.

A venture philanthropist typically has different motivations compared to more ‘traditional’ donors.

Venture philanthropists see value in pooled funding that allows a manager to target a social issue in a more significant way than the philanthropist could individually. Ventures benefit from larger amounts of capital from a single source, while the philanthropist gains leverage for their investment and greater social impact.

…the support that a manager offers ventures mitigates much of the risk involved in funding ‘unproven’ approaches.

The philanthropist may be interested in funding innovative, but untested, solutions and so value partnering with a manager that has conducted due diligence on the organisations best positioned to work in their interest area. In addition, the support that a manager offers ventures mitigates much of the risk involved in funding unproven approaches (risk which might otherwise deter an individual funder if they went alone.)

Venture philanthropists also make investment decisions based on evidence that their funding will have an impact in the long-term, rather than focusing on short-term outputs. A manager may provide this evidence drawing on their knowledge of the sector, work with other ventures and through research. The evidence-based approach helps ensure the funding is applied to the most impactful solution.

… a venture philanthropist is willing to commit for an extended period.

Venture philanthropists are less concerned with tying their dollars to a particular project, but instead see the merit in un-restricted funding. This supports the venture’s infrastructure needs and allows its team to focus on growing its impact rather than worrying about the balance sheet.

Finally, the tailored business support provided by the manager helps ventures achieve their goals. But this takes time.

For these reasons, a venture philanthropist is willing to commit for an extended period.

A long-term, patient relationship between all three parties is necessary to solve long standing social issues.

Setting up for success – building an honest, trusting and strategically aligned relationship

A venture partnership is very different from a traditional funding relationship. To be successful, the venture philanthropy manager and venture must invest time to understand each other and build trust right from the start of the partnership

Due diligence plays an important role. By developing a deep understanding of the venture’s ‘end game’^[1] (to become commercially sustainable, for example, or bring about systems change through influencing government policy) and the strategy to achieve it, the manager can identify from the outset what support will be most useful.

The manager and venture will each have their own strategic goals. By conducting detailed due diligence, the manager will identify exactly how these goals align.

Importantly, due diligence is not a one-way process. A venture should also conduct due diligence on the manager, asking the question ‘is this the best partner to help us achieve our goals?’ A successful partnership occurs when both partners recognise the benefit of sharing their knowledge, expertise and experience to assist the other to achieve their aims.

 

SVA first identified STREAT as a strategically aligned organisation shortly after it was established in 2010. “We were intrigued by the organisation and got to know it by conducting STREAT’s first forecast Social Return on Investment analysis that year which highlighted the potential impact STREAT could have on the lives of Melbourne’s homeless youth,” says Kevin Robbie, Executive Director, SVA.

“In 2011 both organisations were keen to explore what a partnership could look like so detailed due diligence commenced,” says Robbie. “This laid the foundations for a strong partnership that has focused on the key areas where SVA can assist STREAT to grow. And by working with STREAT, we know even more about the challenges a dynamic, entrepreneurial and growing venture faces.”

Finally, developing a partnership based on trust is vital. It is much easier for both partners to have the hard conversations that may arise if they are confident that their partner is motivated by mutual respect.

…each venture will usually require tailored support to help it achieve its goals.

The importance of business support

Business support alongside the cash investment is one of the most critical differences between venture philanthropy and other types of giving. It develops the capacity of the venture to have a sustainable and long term impact.

Every venture is unique and a one-size-fits-all approach does not work. Rather, each venture will usually require tailored support to help it achieve its goals. An effective partnership will align the expectations of both parties around what is needed, is available and, importantly, wanted.

Successful partnerships emerge when a venture philanthropy manager understands the specific needs of a venture and structures its support package accordingly.

Over the course of a partnership a flexible approach to business support is necessary. The support package needs to adapt to best suit circumstances at that point in time, with the venture’s strategic goals always in mind.

“SVA’s strengths are in helping ventures develop their business models, reach sustainability and achieve measurable impact on the issue they are addressing,” says Louise Caseley, Director, SVA.

“We help improve their access to capital (through building a sustainable funding base), and access to talent (recruiting and retaining a strong team and board to drive the organisation). We work with the venture to build a strong evidence base to prove the outcomes of their work and introduce (often pro bono) networks and expertise to support them in their growth.”

Ending and the ‘end game’

An agreed end to a partnership when a venture no longer wants or needs support from the venture philanthropy manager is important. Money (the investment) is almost always appreciated so any decision to end a partnership will be more focused on whether there is further value in the relationship. Managers (and ventures) must have a clear framework to make this assessment and have an honest conversation with each other to assess the partnership as well.

If the investment of time and resources by the manager is successful and a venture is clear on its end game,^[2] there will be a point in time where the partnership in its original form is no longer needed.

Alternatively, if either partner’s strategy changes, it will be necessary to take stock of the partnership to ensure there is still value in it for both parties.

Frequent reviews of the partnership with an open and honest conversation about any support needed in future helps to identify when the relationship has reached its natural conclusion.

Three way partnership

The three way partnership for successful venture philanthropy brings together the skills, experience and interests of the investor, the manager and the venture. In SVA’s experience, when these are clearly aligned in a strong, open relationship the potential impact on intractable social problems is powerful. Henry Ford could have been referring to venture philanthropy relationships when he said ‘coming together is a beginning, keeping together is progress, working together is success’.

About SVA

In Australia, SVA has pioneered the venture philanthropy approach since 2002, working closely with investors to distribute more than $51 million of funding and support to over 88 social ventures. The supported ventures have been innovative, high potential social purpose organisations and enterprises that have had the capacity to grow and scale their impact to improve the lives of people in disadvantaged circumstances across Australia. For more information, see SVA’s venture philanthropy.

Endnotes

[1] ‘What’s your End Game?’, Alice Gugelev and Andrew Stern, The Global Development Incubator, January 2014

[2] ‘What’s your End Game?’, Alice Gugelev and Andrew Stern, The Global Development Incubator, January 2014

If you’d like to know more, contact SVA on info@socialventures.com.au