Wednesday, July 15, 2009

Why the World Bank Isn't a VC

Thanks all, for your comments on the World Bank post. A few comments from me:

First, if we really did what Carl proposes, this would be the largest Venture Capital fund in the world. By a huge margin (I think the largest is about $2 billion). Not sure that's a good thing. The nature of large funds is to invest in larger, later stage companies. Last year, VC's invested about $30 billion (a few billion more than WB's annual budget). Would a doubling in the size of VC be a good thing? Do VC's need a stimulus package?

Second, World Bank funds come largely from public sources, as I understand it. Very different from VC sources (private investors, pension funds), which are looking solely for financial returns. Would these WB sources be effective investors/limited partners? I am skeptical.

Third, VC's are picky. They are supposed to be (the same could be said for WB). Is there adequate deal flow for VCs, in terms of investable deals? VC's concentrate investments in certain industries (info technologies, biotechnology) with large capital needs and potential scale to sell off (an "exit strategy"). This would likely need to be modified for BOP. And VC's fund about 1 in 20,000 startups in USA. Not sure why this percentage would go up if BOP.

Fourth, there are some interesting proposals out there of combining private dollars and more socially oriented funding sources (foundations). This is intriguing in that it allows higher returns for the financial investors, and better leverage on social/environmental returns for the foundations. But not many examples, so far. For instance, Gates Foundation has not been doing a lot of Program Related Investments. If Gates isn't finding deals, will World Bank?

I think, however, that Carl is proposing more a change in attitude and approach to how WB money is invested. Wholesale elimination of the bank is unlikely, but experimenting with new approaches in their investments, and the economies of the developing world, seem worthy objectives. If they were a VC fund, it seems likely to me that they would have a hard time raising money based on their track record. Moving some of their portfolio to a new fund for companies that serve BOP customers, properly managed and incentivized, is worthy of consideration.


Joost Bonsen said...

Perhaps the WB as an strategic limited partner in more sectoral and geographically-focused VC funds?

Anonymous said...

The World Bank makes significant VC investments via the IFC. WB capital must span the range from 100% loss of capital (food relief programs) to market rate IRRs (30%+ returns. Increased VC in developing countries is an important part of the solution, but the fact of the matter is that we have massive short term needs (food, shelter, clothing) that can't be ignored.

Carl Hammerdorfer said...

Business is best able to meet people's basic needs (food, shelter and clothing)... not to mention secondary, consumer needs and the national need for value added export products. These mostly non-existant businesses may need capital to grow. It's not clear to me that the traditional development industry is having very much success stimulating this type of business growth.

Bopreneur said...

Thanks for chiming in, Joost.
Thanks Carl, I think, for stirring up this pot.
Anonymous- I understand there is a role for charity in emergency situations, and blogged about how I see the public/private tradeoffs last March.
Two questions- do you think the World Bank is doing the best job possible in investing its huge budget in order to reduce poverty? If not, what would you suggest?

Unknown said...

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Nora Kim