Venture phil­an­thropy is guided by entre­pre­neu­rial principles

The Philanthropist: What role does venture phil­an­thropy play at the Jacobs Foundation?

Fabio Segura: The Jacobs Foun­da­tion has always belie­ved in the power of entre­pre­neu­rial approa­ches to create lear­ning and deve­lo­p­ment oppor­tu­ni­ties for child­ren and youth.

We have been funding and provi­ding tail­o­red support to market-based orga­niza­ti­ons for deca­des. In 2015, we crea­ted an expe­ri­men­tal venture phil­an­thropy port­fo­lio, which was initi­ally limi­ted to provi­ding support for educa­tio­nal start­ups in West Africa. 

In 2021, we intro­du­ced a sub-asset class for educa­tion ventures throug­hout the world, which we called ‘scien­ti­fic capi­tal,’ in an effort to encou­rage the gene­ra­tion and adop­tion of rigo­rous scien­ti­fic evidence in these ventures’ products and services, with an empha­sis on results. Our next chall­enge is to scale up the scien­ti­fic-capi­tal approach through main­stream invest­ment funds and multi­la­te­ral funding. 

To what kinds of enga­ge­ment is venture phil­an­thropy best suited?

The use of equity, debt, and conver­ti­ble notes in phil­an­thropy should be limi­ted to the finan­cing of sustainable market-based ventures that offer inves­tors reali­stic exit opti­ons. When paired with an impact manage­ment stra­tegy, and given the right market condi­ti­ons, such invest­ments can be mana­ged to increase impact by growing the business. 

There is no hier­ar­chy or agreed frame­work for compa­ring impact effi­cacy across sectors, as impact is a value-laden concept and depen­dent on the context.

Jacobs Foun­da­tion Co-CEO Fabio Segura

Venture phil­an­thropy funders, howe­ver, also have other exit opti­ons for their enga­ge­ment, inclu­ding policy adop­tion, commu­nity adop­tion, the crea­tion of public goods, or ecosys­tem-buil­ding – which are often best achie­ved through stra­te­gic grant-making (grants, payment by results, outcome funding, etc.) owing to lower risk and higher capi­tal efficiency. 

Accor­ding to EVPA (Euro­pean Venture Phil­an­thropy Asso­cia­tion), Venture Phil­an­thropy covers a range of acti­vi­ties, from dona­ti­ons coupled with addi­tio­nal enga­ge­ment to impact inves­t­ing. Can venture phil­an­thropy be clearly defi­ned in just a few words?

The term venture phil­an­thropy refers to the use of invest­ments to pursue phil­an­thro­pic objec­ti­ves. Typi­cally, this includes support­ing orga­niza­ti­ons (rather than finan­cing projects), making use of a broad range of finan­cing instru­ments (e.g. inclu­ding debt, equity, conver­ti­bles, as well as grants), provi­ding tail­o­red post-invest­ment support, such as social and intellec­tual capi­tal, and mana­ging impact syste­ma­ti­cally and over a long invest­ment horizon. 

Is there a hier­ar­chy in terms of impact? For exam­ple, is it accu­rate to say that compared with tradi­tio­nal phil­an­thropy, venture phil­an­thropy achie­ves an impact prima­rily through non-finan­cial support, or because it is more flexi­ble in terms of funding?

There is no hier­ar­chy or agreed frame­work for compa­ring impact effi­cacy across sectors, as impact is a value-laden concept and depen­dent on the context. 

In fact, orga­niza­ti­ons that receive finan­cial capi­tal along­side other forms of support, such as exper­tise or access to rele­vant networks, tend to be more respon­sive to the funder’s agenda than are orga­niza­ti­ons that simply receive money. Howe­ver, trans­la­ting this respon­si­ve­ness into grea­ter impact requi­res considera­ble capa­city on the part of the funder, inclu­ding solid core compe­ten­ces, a strong desire to achieve an impact, a profound under­stan­ding of the respec­tive context, effec­tive influence, and sophisti­ca­ted impact manage­ment systems. 

Is venture phil­an­thropy more accu­ra­tely descri­bed as an invest­ment cate­gory or a funding commitment?

As in capi­tal markets, venture phil­an­thropy offers funders a variety of invest­ment hori­zons, with the possi­bi­lity of follow-up funding and a wide variety of risk/return profiles in each indus­try, in keeping with diverse expec­ta­ti­ons with respect to finan­cial returns. 

Venture phil­an­thropy is indeed guided by entre­pre­neu­rial prin­ci­ples such as inno­va­tion, effi­ci­ency in imple­men­ta­tion, results-orien­ted manage­ment, and growth intent.

Jacobs Foun­da­tion Co-CEO Fabio Segura

Accor­ding to the Global Impact Inves­t­ing Network (GIIN), 88 percent of respond­ents to its 2020 survey met or excee­ded their finan­cial expec­ta­ti­ons. While many funders inten­tio­nally invest to achieve below-market-rate returns, in line with their impact objec­ti­ves, most of GIIN’s members pursue compe­ti­tive returns that outper­form the market, some­thing that may be requi­red by fidu­ciary responsibility. 

On the down­side, venture-phil­an­thropy assets in nascent indus­tries or under­de­ve­lo­ped markets require more pati­ent capi­tal, as they often offer lower liqui­dity and longer exit hori­zons than compa­ra­tive indus­try peers. 

How has venture phil­an­thropy deve­lo­ped over the past years? Are there things that have not worked?

Three short­co­mings of venture philanthropy/impact inves­t­ing come to mind. At the same time, each of these also repres­ents an oppor­tu­nity to achieve an impact: 

Very few orga­niza­ti­ons have scaled-up: While social and envi­ron­men­tal chal­lenges are vast, only a handful of orga­niza­ti­ons have been able to reach and main­tain meaningful scale. In response, venture-phil­an­thropy support focu­ses parti­cu­larly on indi­vi­dual ventures, and only to a lesser degree on the severe barriers to scale that persist outside any single orga­niza­tion, inclu­ding poor supply chains, insuf­fi­ci­ent public goods, and adverse regu­la­tory systems.

Lack of suffi­ci­ent evidence: There is a gene­ral defi­cit of scien­ti­fic evidence to support the impact claims of social inter­ven­ti­ons, inclu­ding those backed by venture phil­an­thropy. Too often, the causal links in an organization’s Theory of Change are weak and unques­tio­ned ‘leaps of faith,’ while rese­arch is broadly dismissed by inves­tors as too costly. As a result, too much capi­tal is wasted in funding models that fail to repli­cate desi­red outco­mes at scale or in a diffe­rent context. 

Low conver­sion rate: Venture-phil­an­thropy and impact-finance assets have grown expo­nen­ti­ally in the last few years, propel­led by the emer­gence of new funds and manda­tes, along with an incre­asingly wide range of inclu­sion crite­ria and defi­ni­ti­ons. Over­all, howe­ver, the amount of invest­ment capi­tal in venture phil­an­thropy remains minus­cule when compared with total Assets under Manage­ment (AuM). Accor­ding to the EVPA Annual Survey, inves­tors for impact provi­ded EUR 6.2 billion to support social purpose orga­niza­ti­ons in 2019, while GIIN esti­ma­ted that the over­all AuM of the impact-inves­t­ing indus­try amoun­ted to USD 502 billion at the end of 2018. Price­wa­ter­hous­e­Coo­pers (PwC), for its part, predicts that total global AuM will reach USD 145.4 tril­lion by 2025. From a phil­an­thro­pic perspec­tive, it appears that the asset-conver­sion para­digm should be reva­lua­ted in favor of models capa­ble of blen­ding, incen­ti­vi­zing, and further lever­aging non-impact capital. 

Venture phil­an­thropy is guided by entre­pre­neu­rial prin­ci­ples. Isn’t there a danger that the phil­an­thro­pic idea will be dimi­nis­hed or lost if the focus is on entre­pre­neu­rial prin­ci­ples? If a goal can be achie­ved by entre­pre­neu­rial means, is the phil­an­thro­pic approach still needed at all?

Venture phil­an­thropy is indeed guided by entre­pre­neu­rial prin­ci­ples such as inno­va­tion, effi­ci­ency in imple­men­ta­tion, results-orien­ted manage­ment, and growth intent. These prin­ci­ples can be used to amplify the impact of phil­an­thropy across funding instru­ments, inclu­ding grants to orga­niza­ti­ons that cannot be finan­ci­ally self-sustaining. 

Further­more, as noted above, solving the world’s most pres­sing chal­lenges at scale requi­res more capi­tal than is available to venture phil­an­thropy funders or impact inves­tors alone. One of the unique roles phil­an­thro­pic capi­tal can play is to assume the risk inher­ent in proving a policy or invest­ment case, and cata­lyze govern­ment and private-sector investment. 

One of the unique roles phil­an­thro­pic capi­tal can play is to assume the risk inher­ent in proving a policy or invest­ment case, and cata­lyze govern­ment and private-sector investment. 

Jacobs Foun­da­tion Co-CEO Fabio Segura

There can be signi­fi­cant tension between impact objec­ti­ves and returns in market-based social-purpose orga­niza­ti­ons, espe­ci­ally when funders have diver­gent objec­ti­ves. Accor­din­gly, it is important to put in place struc­tures and manage these multi-stake­hol­der rela­ti­onships in a way that prevents mission creep. 

Does current legis­la­tion in Switz­er­land meet the needs of venture phil­an­thropy, or do you believe that chan­ges should be made?

When it comes to private-sector deve­lo­p­ment finan­cing, Switz­er­land is the global leader in terms of invest­ment volume and number of funds mana­ged. The 2019 Swiss Micro­fi­nance & Impact Inves­t­ing Report esti­ma­tes a market share of 32 percent for Switz­er­land for impact assets under manage­ment. Govern­ment agen­cies such as SECO and SDC have played a pionee­ring role world­wide in posi­tio­ning deve­lo­p­ment finance, inclu­ding impact investment. 

On the other hand, venture-phil­an­thropy and impact-finance prac­tice has evol­ved rapidly, which leads to a need for more support­ive frame­works for phil­an­thro­pic foun­da­ti­ons that employ invest­ment approa­ches in Switz­er­land and abroad. 

We are encou­ra­ged by the ongo­ing discus­sions within the Fede­ral Coun­cil concer­ning sustainable finance and by the stake­hol­der consul­ta­ti­ons seeking to increase compe­ti­ti­vity and inno­va­tion in this area, and look forward to contri­bute our expe­ri­ence and lessons learned.

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