Social venture funds and their affiliate, venture philanthropy, are making rapid inroads into financing innovation - technological or social - on India's Non Government Organisation (NGO) territory. Venture philanthropy is an important arm of any community primarily because non-profit institutions are chronically undercapitalised.
Non-profit organisations concentrate on re-distributing wealth, rather than creating new wealth, and so they end up fighting for their share of the charity pie, but not making it grow.
Given the scale of the problems they seek to address, charity alone will not be enough. It will take creating new wealth or 'community wealth'. This requires a deeper understanding of the organisation's assets and how those assets can be more fully leveraged to generate revenues. Most non- profit organisations have assets that can be deployed to begin profitable ventures, create cause-related marketing partnerships, or position them for licensing and merchandising deals.
Social venture funds are funds that primarily invest in projects promoting a social cause. In most cases, this funding is given with an expected rate of return on the investment and a social return , removing the tag of a 'grant' from it.
But with a professionalised approach and the need to quantify returns, the scope of these funds seems to get narrower and narrower. With certainty of returns still being uncertain, it seems that social funds and/or venture philanthropy would be a case of killing two birds with the same stone - appeasing the conscience and ensuring something in return.
An article in the Harvard Business Review suggested that many people in the non-profit field are reporting a growing frustration that their programme goals, although valuable, are not being achieved. Many non-profit organisation leaders find that, despite their best efforts, social problems persist and may even be worsening. So the call of the hour seems to be more participation in this field of entrepreneurship, by the entrepreneurs.
Traditionally, foundations and trusts have made grants to non-profit organisations for specific programs, encouraging innovation. Involvement of foundations with the non-profit sector can be as limited as simply writing a cheque - or it can extend to providing technical assistance and advice on program management.
This is the newer form of philanthropy or venture philanthropy. Whatever the level of involvement, foundations typically did not intervene in the daily operations of the non-profits they funded This would seem to be changing. As venture philanthropy grows, a proactive management approach is being favoured with long-term, large-scale financial commitments.
The value an experienced investor can bring to a non profit organisation is quite apparent. Venture philanthropy helps minimise instability through management assistance, technical assistance, and infrastructure building services.
But now with tighter spaces to fill, firms are increasingly looking for a definitive outline for their investments and want to be a active part of the process where the money is spent. Says chief executive officer (CEO) of Passionfund.com, Mahesh Murthy, "I dont see myself investing in anything where we do not play a direct role in shaping the outcome. If the funds involved in the nature of investing, work with a model that has sound commercial principles where no one is doing charity and all involved get a sound financial payoff - the concept of social funds can work. Charity will not."
The idea of venture philanthropy has prompted many questions concerning its viability in the non-profit sector alongside the need for the non profit sector to streamline and professionalise itself. Laura Parkin, the executive director of the Wadhwani Foundation says that despite the beginnings of change in philanthropy, the capital markets for the social sector remain essentially non-existent.
Ultimately, donors expect their money to produce significant social returns and prefer their money to be invested in low-risk projects. To address donors who care deeply about the use of their funds, an "industry" should form around a "best practice" program. As foundations enter the market by supporting innovative programs, others will leave and move on to another project.
Venture philanthropists generally have a strong business background. Their talent and experiences can greatly benefit a nonprofit by applying business principles that enable it to be more efficient and effective.
A close relationship between the investor and the non-profit organisation marks the major difference between traditional and venture philanthropy. Venture philanthropy is much harder work for both the funder and the non-profit organisation. It is important in venture philanthropy that the funder and recipient become engaged in order to achieve mutual success.
A longer-term relationship also allows the funder and recipient to move from the tactical to the strategic.
The thrust also in changing from plain economic return to 'societal returns' or even ' blended returns' which include a combination of social and economic returns. Most funds that Business Standard got in touch with indicated that only social impact and not economic returns was a basis for deciding which project to invest in.
But these projects are, in fact, run on a 'profit only ' basis, with an impact of society factored in.Adds Parkin, "The funds investing for purely social returns -- in other words, funds that aim to create lasting positive value in society, not to make money -- these funds are still at an embryonic stage. The basic question in the case of each social investment remains: 'how on earth should one measure the returns?' "This question has also been raised by academia which finds it difficult to quantify returns within rigid structures, especially when the social innovator has only his ideas as his collateral. "Most funds are looking at very specific models for revenue streams and sustainability patterns. It becomes a difficult meeting ground for funds and these initiatives.
It is even more difficult if the innovation is from the field of arts," said Professor Anil Gupta, professor of entrepreneurship at the Indian Institute of Management, Ahmedabad (IIMA) and the vice chairman of the National Innovation Foundation (NIF) According to Professor Gupta, there are immense opportunities that can use funding but because most of these funds operate on a rigid model, it becomes difficult to access these funds. "There are lots of people in India who are looking for projects and innovations but do not know where to go.
The progress in field of funding has been slower than expected as it has not received the required response from corporate India," he added.
The current operating funds are mostly based out of the United States of America and United Kingdom, as this form of philanthropy is more developed there . "To be a successful social VC the global network is all important, because without that it is almost impossible to find and support the truly innovative projects that are happening around the world," says Rustom Masalawala, portfolio manager, Health Technologies Changing Lives, Acumen Fund.
This fund invests currently in projects to improve the health on various counts and also plans to invest in projects that will empower people from developing nations to augment their economic power. There are also some innovative groups investing directly in early stage social organisations including Ashoka which was started in India and now has a global presence.
"Our strategy (for the Wadhwani Foundation) is to accelerate entrepreneurship, as we consider successful entrepreneurship a key driver of economic growth. Our initial geographic focus is India, but our work will extend to all emerging economies," adds Parkin.
