In what follows, we provide a glossary of some of the key terms used in Venture Philanthropy and related areas.
The Balanced Scorecard was developed by Professor Robert Kaplan (Harvard Business School) and Dr David Norton in 1992 as a ‘performance management framework that added strategic nonfinancial performance measures to traditional financial metrics to give managers and executives a more “balanced” view of organisational performance… [it] transforms an organisation’s strategic planfrom an attractive but passive document into the “marching orders” for the organisation on a daily basis’, helping people to identify what should be done and measured.
New Profit Inc, based in Boston, MA, in partnership with Professor Kaplan has adapted the Scorecard for the nonprofit sector adding the ‘social impact’ perspective.
See also: www.newprofit.com
Base/Bottom of Pyramid (BoP)
An economic term referring to the largest but poorest socio-economic group, which in global terms refers to the 2.5 billion people who live on less than $2.50 (U.S.) per day. One of the earliest popular uses of the phrase “bottom of the pyramid” was by U.S. president Franklin D. Roosevelt in his 1932 radio address, The Forgotten Man, which referred to the plight of the American farmer and the importance of building economic power from the bottom up rather than the top down.
Base of Pyramid Entrepreneur (BoPreneur)
This is a catchy term for a Social Entrepreneur or someone who creates a new for-profit business with the mission of addressing a social and/or environmental problem and stimulating the economy at the base of the pyramid.
Below market return
Level of return on investment which is lower than the average level of return offered by the financial market, for an investment with the same risk profile.
As defined by Jed Emerson, who coined the term, ‘the Blended Value Proposition states that all organisations, whether for-profit or not, create value that consists of economic, social and environmental value components – all that investors (whether market-rate charitable or some mix of the two) simultaneously generate all three forms of value through providing capital to organisations. The outcome of all this activity is value creation and that value is itself non-divisible and, therefore, a blend of these elements’.
Document which describes an organisation’s goals and the operating model and financial resources which will be used in order to reach them.
Capacity-building / Organizational development
Approach aimed at strengthening organisations supported to increase their overall performance by developing skills or improving structures and processes.
Certified B Corporation (B Corp)
Certified B Corporations are philosophically the same as legally designated benefit corporations but have a few important differences. The B Corp certification is not conferred by a state but by Berwyn, Pa.-based B Lab, a nonprofit organization that promotes the power of business to solve social and environmental problems.B Lab certifies companies the same way TransFair certifies Fair Trade coffee or USGBC certifies LEED buildings. Certified B Corporations earn their designation by meeting a high standard of overall social and environmental performance. As a result, Certified B Corps have access to a portfolio of services and support from B Lab that benefit corporations do not. Unannounced audits are done on about 10 percent of all certified B Corps every year. B Lab supports and encourages legislative efforts and many legally chartered Benefit Corporations also have a B-Corp certification.
Co-investment (also known as Cofunding)
In private equity, co-investment is the syndication of a financing round or investment by other funders alongside a private equity fund. In venture philanthropy, it involves the syndication of an investment into a social purpose organisation (SPO), by other funders (e.g. grant-makers or individuals) alongside a venture philanthropy organisation.
Recurring expenses generated by the operation of an organisation which are not directly related to the level of activity, by opposition to project or programme costs.
Corporate Social Responsibility (CSR)
CSR is a form of corporate self-regulation that is integrated into the business model and takes into account not only shareholders but also stakeholders such as employees and customers. CSR efforts often include the entire value chain, including suppliers, buyers and the communities in which the company operates, when addressing issues of social and environmental impact. The term “corporate social responsibility” came into common use in the late 1960s and early 1970s after many multinational corporations formed the term to describe any group that is impacted by a company’s activities. Annual CSR reports are now published, using a framework such as GRI to increase awareness and transparency around CSR and sustainability progress.
Deal flow refers to the number and/or rate of new proposals presented to the investor. This term is used with respect to venture capital/private equity funds, venture philanthropy funds, and has also been borrowed and used by philanthropists in reference to ‘deals’ or potential projects to be awarded grants.
Debt financing (also see Loan)
Debt financing is borrowed money used to finance a business, either traditional or social enterprise. Usually, debt is divided into two categories: short-term debt for funding day-to-day operations, and long-term debt to finance the assets of the business. The repayment of short term loans usually takes place in less than one year. Long-term debt is repaid over a longer period.
Double Bottom Line
A business term used in socially responsible enterprise and investment to refer to both the conventional bottom line, a measure of fiscal performance, and the second bottom line, a measure of positive social impact.
Due Diligence is the process where an organisation or company’s strengths and weaknesses are assessed in detail by a potential investor with a view to investment.
Environmental Social and Corporate Governance (ESG)
ESG is a general catch all phrase that encompasses the major areas of concern for a business that strives to operate in a sustainable and ethical manner. In addition to financial factors, each of these areas is taken into consideration for anyone considering investment in a company.
Equity financing (see also Quasiequity)
Funding provided by an investor to an organisation that confers ownership rights on the investor. These rights allow the investor to share in the profits of the organisation, usually in the form of dividends. Equity investors are diverse, including the organisation’s founders, friends, family, institutions and angel investors. Venture philanthropy funds may provide a source of equity financing for social enterprises. Newer, and still experimental, means of ownership (e.g. a Community Interest Company in the UK) allow equity purchase but place a cap on the financial return.
The end of the relationship between the venture philanthropy investor and social purpose organisation (SPO). The nature of the exit will normally be agreed before the investment is completed. In the case of a charity, the venture philanthropy funder will ideally be replaced by a mix of other funders (see financial sustainability). The time scale for the exit can be agreed upon at the outset. In the case of a social enterprise, exit may require the repayment of a loan, for example, and the timing will depend on the commercial success of the enterprise.
Financial sustainability for a social enterprise is the degree to which it collects sufficient revenues from the sale of its services to cover the full costs of its activities. For charities, it involves achieving adequate and reliable financial resources, normally through a mix of income types.
Public-benefit foundations are assetbased and purpose-driven. They have no members or shareholders and are separately constituted non-profit bodies. Foundations focus on areas ranging from the environment, social services, health and education, to science, research, arts and culture. They each have an established and reliable income source, which allows them to plan and carry out work over a longer term than many other institutions such as governments and companies. In the context of VP, foundations are non-profit organisations that supports charitable activities either through grant-making or by operating programmes.
A fund is a vehicle created to enable pooled investment by a number of investors and which is usually managed by a dedicated organization.
Non-returnable money, property, services or anything else of value that is transferred to an organisation without conferring any form of ownership rights on the donor. Note that some VPOs and grant-makers do use “returnable grants” from time to time. This may involve the return of all or part of a grant, contingent upon an agreed event. For example, a grant might be given to enable fund-raising but if the fund-raising is successful or exceeds agreed levels, a portion of the grant may be returned
Grant-makers include institutions, public charities, private foundations, and giving circles, which award monetary aid or subsidies to organisations or individuals. Generally known as foundations in Continental Europe, grant makers also include certain types of trusts in the United Kingdom.
High-engagement funding, as defined in a seminal article by Letts and Ryan, ‘is first and foremost a performancecentred strategy where alignment, reliable money and strategic coaching are used together to convert a grant financing relationship into an accountability relationship that uses power to improve performance. Highengagement funders believe that improving the performance of nonprofit organisations is the best means of achieving their social goals’. Highengagement funding has many of the features of venture philanthropy.
Source: Letts, C. W. & Ryan, W.P. (2003) “Filling the performance gap. High-Engagement Philanthropy. What Grantees Say About Power, Performance, and Money”, Stanford Social Innovation Review.
Impact investing is a form of investment that aims at generating social impact as well as financial return.
Resources provided within the venture philanthropy organisation itself, through its staff members or volunteers, as opposed to people within the greater network of the venture philanthropists, service providers, or portfolio organisations.
The social purpose organisation that is the target of VPO activity and the recipient of financial and non-financial support. InvestmentAn investment is the use of money with the expectation of making favourable future returns. Returns could be financial, social, and/or environmental (See entry: Triple-bottom-line)
The investment phase is the period between the investment of monies into the project, organisation, or social entrepreneur, and the exit. Investment proposalThe investment proposal is the document prepared by the VPO to present a potential investment (including nature, goals and funding) to the investment committee.Key performance indicatorsKey performance indicators are financial and non-financial, quantifiable metrics used to measure the progress against the objectives of the project, organisation, or company.
Loan (see also Debt)
A loan is a sum of money lent at interest, where financial return is sought. (It is common for venture philanthropy organisations (VPOs) to provide loans at reduced interest rates or have other ‘softer’ features, i.e. on repayment terms.)
A long-term investment is made over a period of five years or more.Mezzanine financing Mezzanine financing is a hybrid of debt and equity financing, usually used to fund the expansion stage or an organisation. Although it is similar to debt capital, it is normally treated like equity on the organisation’s balance sheet.
Low-profit Limited Liability Company (L3C)
L3C is a legal structure for businesses in the United States that bridges the gap between nonprofit and for-profit investing. L3Cs use their for-profit efficiencies along with fewer regulations from the IRS to achieve socially beneficial goals. L3Cs are taxed and operate with a stated goal of achieving social improvement, with profit as a secondary goal.
Non-financial services (value-added services)
In addition to financial support, venture philanthropists provide value-added services such as strategic planning, marketing and communications, executive coaching, human resources advice and access to other networks and potential funders. Non-financial support is offered by volunteers, VP staff, donors or third party consultants.
Outcomes are the ultimate changes to people’s lives that the social purpose organisation is trying to achieve, resulting in changes to the social system, or impact. This might include changes in attitude, behaviours, knowledge, skills, or status.
Outputs are results that a company, non-profit, or project manager can directly assess or measure.PortfolioA portfolio is a collection of projects and/or organisations that have received sponsorship from the investor. A distinction is often made between ‘active’ and ‘past’ portfolio, to distinguish between the organisations with which the investor is actively involved. Usually, however, all portfolio organisations are included in the greater network of the investor.
Portfolio (or investment) manager
A portfolio manager is given the responsibility of tracking the performance of and maintaining communications with the various organisations and/or projects within the investor’s portfolio.
The pre-investment stage is the process during which the investor examines the operations and leadership of the project or organisation with a view towards making an investment. This might include a detailed review of the financials, operations, or reference checks for organisational leaders. The term due diligence is also used, which has a legal definition as a measure of prudence. In other words, the investor is assessing if it is likely to get what it thinks it is paying for.
Ownership in a firm which is not publicly traded and which usually involves a hands-on approach and a long-term commitment for the investors.
Quasi-equity is a financial instrument that aims to reflect some of the characteristics of shares (preference or ordinary). However, it is neither debt nor equity, and is usually structured as an investment whereby repayment is linked to the investee’s financial performance (e.g. repayment is calculated as a percentage of the investee’s future revenue streams).
Source: Venturesome (Paul Cheng)
Return on Investment (ROI) (see also Social Return on Investment (SROI))
The Return on Investment (ROI) is the profit or loss resulting from an investment. This is usually expressed as an annual percentage return.
Processes of developing and growing the activities of an SPO to expand its social reach and increase its social impact.
Seed financing is money used for the initial investment in a start-up company, project, proof-of-concept, or initial product development.
A short-term investment is made over a one-year period less, or an investment that matures in one year or less.
Social (and ecological) sector
Social (and ecological) sector is an alternative term used in reference to the non-profit sector, non-governmental sector, voluntary sector, independent sector, or third sector.
Social capital market or social investment market
Financial market dedicated to social investment which aims at systematizing and facilitating social capital allocation.
Social enterprise is an organisation that focuses on achieving social impact, applying market-based solutions to address public sector and market failure in innovative ways. Social enterprise can take on a variety of legal forms.
Source: EVPA definition presented in Maretich, M and Bolton, M (2010).
Social enterprise: From definitions to developments in practice. EVPA
Social entrepreneur is defined by the Schwab Foundation as ‘a different kind of social leaders who: Identifies and applies practical solutions to social problems by combining innovation, resourcefulness and opportunity [and] Innovates by finding a new product, a new service, or a new approach to a social problem’.
Social finance (or investment)
Social finance ‘may be understood as a broad area wherein various forms of capital are structured in ways that consider and value both financial performance and social value creation’.
Source: Emerson, K. Freundlich, T. and Fruchterman, J. (2007), “Nothing Ventured, Nothing Gained: addressing the critical gaps in risk taking capital for social enterprise” Skoll Centre for Social Entrepreneurship, Said Business School, University of Oxford.
The social benefit derived from the activities of a social purpose organisation (SPO) or venture philanthropy organisation (VPO).
Social indicators (see Social Impact, SROI, Balanced Scorecard)
Key performance indicators specifically adapted to measuring the performance of social purpose organisations.
Investing, in social purpose organizations, that may generate a financial return, but whose primary purpose is to generate social impact.
Social Purpose Organisation (SPO)
The term SPO captures the entire spectrum of organisations whose primary purpose is to create social value (rather than shareholder value). The terminology for these different kinds of organisation varies enormously across countries and jurisdictions, and is therefore far from precise. The following types of organisation will fall under the banner of SPOs:
• Charity, non-profit, not for profit, foundation, association, company limited by guarantee, (having no trading activities, or where trading is of marginal importance)
• Social enterprise, Community Interest Company, (having trading as a significant or exclusive part of their operations). Some do not make any financial returns to investors (or cap returns) but reinvest surpluses into the organisation. Even within social enterprise there are several different models.
• Socially driven business – profit distributing businesses but with clear and stated social objectives.Social Return on Investment (SROI)The Social Return on Investment (SROI) analysis was developed by REDF in 1996 in the US, a non-profit enterprise that makes grants to a portfolio of non-profit agencies.
SROI places a dollar value on ventures in the portfolio with social as well as market objectives, combining tools for benefit-cost analysis (used by economists) and tools of financial analysis. SROI has also been used by other organisations in a modified form. Within EVPA, the social e-valuator and the SROI network focus on the SROI tool.
Socially Responsible Investing (SRI)
Also known as sustainable, socially conscious, “green” or ethical investing, this term defines any investment strategy seeking both financial return and social good. In its broadest usage, SRI refers to proactive practices such as impact investing, shareholder advocacy and community investing. Socially responsible investments encourage corporate practices that promote environmental stewardship, consumer protection, human rights and diversity.They can also represent the avoidance of investing in industries or products that can be socially harmful, including alcohol, tobacco, gambling, pornography, weapons and/or the military. The term dates back to the Quakers, who in 1758, prohibited members from participating in the slave trade.
Social Return on Investment (SROI)
The SROI concept, essentially a cost-benefit analysis, is used by charities, donors and nonprofit organizations to rate the results of their endeavors with firm evidence of impact and created value. The idea of social return on investment was pioneered in the 1990s by a U.S. venture fund calledREDF and has since caught on.
Social venture capital
Social venture capital is an enterprise approach to tackling social problems through investment to support the creation and expansion of commercially sustainable enterprises to maximise social and financial returns. In developing countries, this approach is used to create jobs and empower the poor.
Association of funders who jointly invest in a specific project or organisation.
Triple Bottom Line (TBL)
Coined by John Elkington, founder and chairman of SustainAbility, in his 1997 book Cannibals with Forks: the Triple Bottom Line of 21st Century Business, the term refers to the three prongs of financial, social and environmental accountability. While businesses of the past only had to be accountable for their financial performance, today’s enterprises are increasingly pressed to demonstrate concern for three bottom lines: financial, people/communities, and the environment.
Triple-bottom-line investment (see also Blended Value)
Triple-bottom-line investment is the simultaneous pursuit of beneficial returns along three dimensions: economic, social, and environmental.
A venture philanthropist is engaged in venture philanthropy, either as an individual or in conjunction with a venture philanthropy organisation.
Venture philanthropy works to build stronger social organisations by providing them with both financial and non-financial support in order to increase their social impact. The organisations supported may be charities, social enterprises or socially driven commercial businesses, with the precise organisational form subject to country-specific legal and cultural norms. As venture philanthropy spreads globally, specific practices may be adapted to local conditions, yet it maintains a set of widely accepted, key characteristics. These are:
• High engagement: hands-on relationships between the SPO management and the venture philanthropists.
•Involvement of networks: enabling access to networks that provide various and often complementing skill-sets and resources to investees.
•Tailored financing: using a range of financing mechanisms tailored to the needs of the suopported organization.
• Multi-year support: supporting a limited number of organizations for 3-5 years, then exiting when organizations are financially or operationally sustainable.
• Non-financial support: providing value added services such as strategic planning to strengthen management.
• Organisational capacity-building: building the operational capacity of the portfolio organizations, by funding core operating costs rather than individual projects.
• Performance measurement: placing emphasis on good business planning, measurable outcome, achievement of milestone and financial accountability and transparency.
Venture Philanthropy Organisation (VPO)
A venture philanthropy organisation provides long-term financing to social purpose organisations (SPOs) operating with the principles of venture philanthropy.