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How to set up a venture philanthropy organisation or social impact investment fund

 

December 05, 2016

Non-profits are increasingly interested in the venture philanthropy and social (impact) investment approach. Taking EVPA's Guide on setting up a venture philanthropy organisation or social (impact) investment fund as a basis, we explain how they can effectively engage with it.

A shorter version of this article was published in Fundraiser Magazine Germany earlier this year.

A word on terminology for those new to VP

EVPA promotes the Venture Philanthropy approach. VP provides tailored financing, organisational support and impact management to social enterprises and organisations with a social purpose in order to increase their societal impact. 

18  The Evpa Spectrum

Venture philanthropy includes both grant funding and social impact investment. By grant funding we refer to the provision of non-repayable donations to the social purpose organisation.  In contrast, social impact investment is the provision and use of capital to generate social and financial returns; its main aim  to generate social impact, with the expectation of some financial return (or preservation of capital).  

What to think about when you are getting into VP/SII?

Non-profits have different ways that they are currently engaging in the VP/SI space.  

Though early in its development, research, such as Amplify’s recently lanched report on the impact investing landscape among international non-governmental organisations, has found that social (impact) investing is larger than traditionally reported, and growing. It reports that INGO-managed or -founded impact investing funds are encompassing more than $545 million in assets.

For bigger, international non-profits

Focused on becoming more impactful, bigger international non-profits are exploring and implementing social impact investing solutions across a wide range of geographies, programme areas and return expectations.

 In this case, they either tend to invest directly in social enterprises or through a fund. EVPA members that have gone down this route include Cordaid and Oxfam.

 Below are some tips and considerations if you are seeking to launch your own fund. 

The funding model

In many European countries, tax and legal regulations distinguish between grant funding, and instruments that establish ownership titles, and the legal structure of your organisation or fund has to take such constraints into account. 

Grant funding can usually be done from organisations with a charitable status. However, other types of funding could in various countries conflict with a charitable status despite the fact that the primary goal for those instruments, might be social. The choice of instruments made will in many cases impact the legal and tax structure of the VPO, and it is recommended to seek specialist advice before incorporation.

In general, when the primary activity of the VPO is to provide grants, it tends to be set up as a foundation. If you mainly invest in social enterprises, it is usual to set up as a fund (or fund like structure)  as to accommodate a mix of financial and social objectives. You may find here more about specific funding instruments.  Funds can be limited in time or evergreen, meaning that they do not have a limited life. Which timeframe you choose will be heavily dependent on when your investors will want or expect to see a financial return.  

Some organisations go for mixed structures that include both funds and foundations. Noaber Foundation in the Netherlands and BonVenture in Germany, for example, have foundations providing grants and funds making investment, thus offering a greater degree of flexibility. 

Recruiting a CEO & Management Team

The guide recommends to start with a small team, typically one to four people. If your staff has-background in civil society and/or NGO work, they will already have a strong knowledge of the social issue at hand – in which caset is recommended to recruit team members with a strong business or financial background. Conversely, if the team comes with more of a business background, it will be important that it develops an understanding of the social market and the issues at play, ie  usually by specialising in a specific social sector, and its funding sources and instruments and the legal and regulatory environment.  

Board

At start-up, the role and composition of the Board will be heavily influenced by the needs of the organisation. Board members are expected to help in PR or fundraising or to offer specific skills, expertise and knowledge that can help investee organisations grow. In the longer term, Boards will take on the more traditional governance and oversight roles seen in mature companies or organisations.

Overall, the engagement of the Board will be a key driver of your success in setting up: make sure you select Board members with the necessary time and personal commitment to the organisation and with a proper mix of for-profit vs. social sector experience. 

Governance

Making investment decisions can be done by the Board or the investment committee or by a mix of both. This is largely dependent on the skillset and background of the two groups. Generally, during the start-up phase, when your organisation as a whole is in learning mode with respect to investment decision-making, the Board is likely to act as the investment committee for final investment approval. That way, you are sure to align on the overall objectives and impact you seek. However, as the fund matures, more sophisticated investment committee alternatives can be developed.

Raising capital

In the social sector, the providers of capital are driven by a combination of heart and head. They will be motivated to support you by heart (the impact you are seeking) but also strongly influenced by the head – the plausibility of your plan and whether you are likely to achieve the agreed objectives.

We’ve identified three success factors in fundraising:  

  • Ensure you have a clear vision of what you intend to achieve with the capital: ie being able to articulate clearly how the money will be invested; which areas will be prioritised; what the overall social impacts will be; and how you  will manage to achieve its goals.
  • Ensure a clear structure and investment strategy: you will need to consider how the fund will sustain itself over time, articulating early on the options for driving to financial sustainability.
  • Credibility and ability to deliver the vision: the founder’s personal track record will be critical here, as is the team you recruit.  

Non-profits as co-investors

With their programme expertise, insight into local and cultural context and a key understanding of the needs of beneficiaries, international non-profits are playing multiple roles in the overall VP ecosystem.

This makes them strong co-investors. Co-investment can be an important part of a Venture Philanthropy Organisation’s investment strategy. It represents an excellent way of raising funds for VP activities – and may be easier than raising funds for your fund itself.

Co-investing does prompt certain key considerations. Some organisations may wish to charge co-investors a fee for managing the investment – to share overheads. This can often be a difficult negotiation. Co-investing can also be risky in particular if the co-investors do not have similar objectives. There are several accounts in the sector of difficulties arising during the investment period when purely financial co-investors opted out of an investment that was doing well from a social impact perspective, but without generating the desired financial return – forcing the investee out of business and the social impact investor to fail.

For this reason, and even if non-profits and VPOS mostly share the social impact first approach, it is recommended that  before engaging with co-investors both parties should align on strategy and objectives, financial/impact trade-offs and exit plans. 

Non-profits as partners in delivering non-financial support

Delivering non-financial support is key to the VP model as it is absolutely crucial in helping organisations achieve and sustain effective societal impact. EVPA defines this as ‘support services to investees to increase their social impact, organisational resilience and financial sustainability’, also sometimes termed ‘capacity building.  This can be support such as strategy consulting, coaching, mentoring of the CEO or management team, offering access to networks or assistance with financial management, revenue strategy or governance.

Delivering (non-financial) programme support is a key opportunity and strength of non-profits. Bringing connections, experience in fundraising, sector and impact measurement expertise, non-profits are uniquely placed to assist social entrepreneurs and/or partner with social impact investors to deliver this key value-add.

In our Guide, EVPA has outlined some important basic tips. These include the importance of defining your Theory of Change (the social change you want to achieve through your investment strategy) to help you assess what types of non-financial support you can offer; making sure you have a team with the skills needed to deliver the core non-financial support; the importance of setting terms, milestones and objectives; considering the importance of networks and  ensuring you monitor and assess the non-financial support you offer.

You can find more here on this in our dedicated Guide on offering non-financial support. If you are interested in finding out more about impact measurement. EVPA’s Practical Guide on Impact Measurement is a comprehensive resource that distils best practice in impact measurement into five easy-to-understand steps and provides practical tips and recommendations on how to implement impact measurement at the level of the social investor and in the social sector organisations that they support. You can download it here

For those non-profits seeking to be supported by the growing number of VP organisations

For those non-profits seeking to understand the type of financial and non-financial support they can expect of a VP organisation (VPO), the EVPA guide offers a clear way into this growing sector, which has seen over EUR 6.5 billion invested since its start.

Snapshot 1 Png

A snapshot of the sector

Snapshot 2

The sector sees its budgets increase year on year – though slightly (+2%). However, the majority of European VPOs still have annual budgets lower than EUR 2.5m.

Snapshot 3

European VP/SI organisations invest across a spectrum of organisational types. Social enterprises and social businesses followed by non-profits without trading revenues are the main target of investment, receiving 37% and 35% of total funding respectively.

Snapshot 4

VP/SI organisations support a wide range of sectors and beneficiaries. In the fiscal year 2015, economic and social development attracted most funding at 24%, ahead of financial inclusion (19%), education (15%), environment (14%), health and culture & recreation (7% respectively). 

The main beneficiaries of VPOs are youth and children and people in poverty.  For more on the sector, have a look at EVPA’s Survey 2015-2016

Getting supported by a VPO

VP organisations can provide capital to fund immediate project needs, to ensure long-term sustainability of the organisations, or to scale impact or diversify funding sources.  VP however is focused on funding the core cost of your organisation: thinking of a financial and business model that could help you support yourself into the future, focusing on tailored financing that will ensure sustainability for your idea and your organisation into the future. 

VP organisations are also a business partner or a mentor to your enterprise, helping you with all aspects of building out your project, including the non-financial aspects.

To understand better what financial instruments are used, the Guide provides an overview of them.

To read more on these topics, consult EVPA’s Guide and easy to use online tool here to understand more. 

 

This article was written by

Priscilla Boiardi Priscilla Boiardi

 

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