Saturday, October 02, 2010

Venture Gapitalist Guide for SOCAP10

In anticipation of SoCap, I thought I'd share my thoughts on several types of venture gapitalists, where they may be observed next week, and share a few concerns I have as this social capital ecosystem evolves. I am excited by the opportunities to be around so many leaders, but am also a bit anxious about the size of the crowd and the many great sessions which often overlap. So this post is also a way for me to organize my tour of the SOCAP zoo this week.*

The early days of the social capital ecosystem started with venture philanthropy in the 1990's, which grew from the intersection of philanthropy and venture capital, and resulted from some frustration as a new type of wealth began looking to make an impact in communities. Mario Morino was (and is) prominent in articulating the goals of this approach, as well as putting his money behind his words, mostly in domestic organizations. A more global approach began with the emergence of Ashoka, followed later by Endeavor, the Skoll Foundation, Dasra and Acumen Fund. And more recently, the regional impact investing funds in developing and emerging markets, such as Omidyar Network, Gray Ghost family of ventures and Aavishkaar.

I am still in the early days of understanding this ecosystem and how the pieces fit (or don't), but I do see some different niches. Of course, there also may be some invasive species as well as some shape-shifters which defy categorization (intentionally or not). BOPreneur Tevis Howard recently observed that his screen is Impact-First and Finance-First investors, and while this is a good first cut, I think a few more distinctions can be made.

Herewith, my early notes (to be supplemented with more detailed sketch books from SoCap?) on classification**, as well as suggestions for where these might best be viewed at Fort Mason:

1) Philanthropic source/philanthropic approach. The Gates Foundation is a good example of this approach. Innovative approaches to impact, but grant based with an occasional PRI. These will be best observed in the Tactical Philanthropy track, where they may feel some evolutionary pressure from moderator Sean Stannard-Stockton. My concern about this niche is that metrics are being emphasized at the expense of impact. This is not a chicken and egg problem; it is cart before horse. IMOSHO*** impact must drive metrics, not the reverse.

2) Philanthropic source/investment approaches. Acumen Fund is a leader here. Money is donated to Acumen, which then makes investments in social enterprises. I think they would belong in Tevis's Impact-first category. If successful, they recycle the capital into a new round of enterprises. Other innovative approaches in this group include Lemelson Foundation (working capital) and Microcredit Enterprises (guarantees). Concerns here? Scale, pressure from new species that promise some return of (or even "on") capital, and continued ability to invest in portfolio companies as their capital needs grow. How patient will their capital be? Will anyone copy their model in other markets (Acumen invests in India, Pakistan and Kenya)? Is imitation not the sincerest form of flattery (not to mention a viable competitive strategy) in the impact investing space? Time will tell, of course. But time's a wasting. These species seem the most ubiquitous at SoCap, and they may be viewed in almost any of the tracks as well as many of the keynotes. The astute observer may notice different behaviors in these tracks, as well as different displays for potential mating opportunities.

3) Investment source/investment approaches: as this video of Aaviskaar shows, these funds raise money from commercial sources and provide commercial returns and exits, but with returns below those expected of traditional venture capital firms. As Tevis observed, these can fall into Impact-first investors, or Finance-first investors. The recent fracas over the SKS IPO did an excellent job of highlighting the concerns for this genus. The balance of greed and altruism can be a difficult one, and changes in ownership or leadership could result in dramatic and erratic behavior changes in these species. The differences between these species, and perhaps, some ritualistic and competitive displays of dominance, will best be seen in the Impact Investing tracks.

4) Hybrid sources and approaches. Within the Gray Ghost family, one can observe several mutualistic species. Village Capital is based on philanthropic capital to crowd source seed investments in social enterprises, Grey Ghost Ventures invested $10 million in private funds into 8 ICT firms focused on "goods, services and financial access to low income populations," and ISFC provided loan capital to affordable private schools in India. You are most likely to spot these species in the New Money track, and I can guarantee a sighting of several at the Seed Investing session on Tuesday afternoon.

And don't worry, it is safe to get close to these venture gapital species, and even feed them. In most cases, they are quite friendly.****
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* No disrespect intended. A zoo is a place where species are displayed out of their native environment, right? You just have to keep in mind that behavior is different in the zoo: polar bears are more dangerous in the wild, and monkeys throw a lot more poo when observed in confinement. Also, due to expense and distance, the full diversity of the social capital ecosystem won't be represented. Nonetheless, Socap is probably the best zoo of its type. I mean, I could have called it a circus. And I understand that I am part of this zoo, and will try to avoid poo-flinging at all costs.
**My classification is pretty basic. Source of funds and how those funds are then granted or invested in social enterprises. Apologies to both Darwin and Linnaeus.
***In My Oh So Humble Opinion ;-)
**** BOPreneurs are urged to approach them in an open and friendly way, and to avoid making the "ask" in the first 30 seconds of conversation. Too forceful a greeting has been known to provoke fight or flight responses.

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