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.

Some Thoughts on Venture Gapital

My bleeps know I have been grappling with the idea of Venture Gapital for some time. Moving forward, in addition to covering BOPreneurs in this blog, I will also start to highlight Venture Gapitalists of note. In effect, to try to look at both sides of the table in this evolving dialog to build a healthier ecosystem of human, financial, social and natural capital. As always, bleeps, I'd appreciate your suggestions, nominations, props and criticisms. And I look forward to learning more at SoCap10 in a few weeks.

To kick it off, I'd encourage you to read Jonathan Lewis' remarks from last week, where he shares six operating principles for fighting poverty from a market perspective. More importantly for this post, he concisely unwraps some major differences between functioning financial markets and those in which the poor live. Venture gapitalists should ponder these before taking action.

In functioning markets, a distinction is made between public and private goods, between street cleaners and vacuum cleaners.

• Where the poor live, private investment is often the only investment. The market, quite literally, becomes the sole provider of the common good.

In functioning markets, survival of the economic fittest is a necessary consequence of progress. Some businesses succeed, some fail.

• Where the poor live, the only ethical economic policy is not creative destruction, but creative opportunity.

As we cannot bomb our way to peace and prosperity, we cannot finance our way to economic justice. In the end, the poor must have the power to speak up, speak out and speak for themselves.

No economic theory and no marketplace, whether functioning or failing, can change a basic truth. As individuals, we are each blessed, and burdened, with a moral compass. Free markets mean each one of us has the freedom to make ethical choices.

Is social entrepreneurship about creating a viable asset class to make money in developing markets or about building a social movement for economic justice? Are we advocates for the poor or advisers to the well-off? (emphasis added).

Jacqueline Novogratz, founder of Acumen Fund, was recently interviewed by David Bornstein of Dowser on "Investing to Change the World." Acumen sees a need for "patient capital" that is, I guess, a bit less relentless in seeking returns (their view/my view). I think she does a great job of outlining the challenge of venture gapital:

I said, 'You are very comfortable with charity, seeing a 100% loss, send the money out and you never see it again, and you justify the good it’s doing in the world even if your metrics are fuzzy. Or you’re comfortable seeing 20% returns on your investments with no social impact, and potentially some harm. But you are so uncomfortable in this middle section, where you might get the money back, might not, or you might lose 20%.’ And he said, ‘Yeah, because you’re playing the game of business but you’re not taking it seriously.’

And I said, ‘I never said we were playing the game of business. We’re playing the game of creating change and we are using business as a tool. We are incredibly serious about these businesses succeeding, but we never forget that these businesses are about tackling poverty.' (emphasis added)

Empowerment or Autonomy?

I am reading Dan Pink's book "Drive." It discusses how people are motivated and inspired (or not) by what they do. While it doesn't explicitly address entrepreneurship, it does have some interesting applications to BOPreneurs.

Where this came home to me was when the author bashes "empowerment" as being an empty phrase, based on old methods of motivation having little to do with creativity or purpose. In my experience, "planners" seem to talk more of empowerment (as though power is a gift from the developed world to the BOP) while "searchers" look for local input and approaches. Instead of empowerment, Pink believes motivation comes from having "autonomy." This means work is more motivating if it is self-directed in terms of the four T's of "time, task, technique and team."

If you plan to use people to sell your product or provide your service to BOP markets, do you talk about empowering women or micro-entrepreneurs? Perhaps it is time to take breath and reexamine your assumptions. The next time you hear a proposal to empower some group or community, it may be useful to take the perspective of respecting their autonomy instead.