Social Venture Capital: Harnessing Market Forces for Social Good

While the concept of social venture capital has been defined in various ways, two themes predominate: an interest in tapping market forces to help cure social ills and a commitment to supporting social entrepreneurs with the drive and imagination to develop innovative solutions to social problems. Just as Silicon Valley’s venture capitalists have shaken off the effects of the technology bubble and swung back into action, social venture capitalists are seeking out innovative new ways to transform relatively small amounts of capital into cutting-edge solutions to the world’s most intractable problems.

This innovative approach to philanthropy offers many potential rewards to donors. Because social venture capital organizations emphasize market-driven solutions, donors can potentially multiply the impact of a single charitable gift. Since these organizations focus on quantifiable results, donors can seek a higher level of engagement with their giving.

A Major Commitment to Microfinance
One sector of social venture capital, microfinance, received a huge boost in November 2005 when eBay founder Pierre Omidyar and his wife, Pam, donated $100 million to Tufts University, their alma mater, to establish the Omidyar-Tufts Microfinance Fund. Fueled by the largest gift in Tufts’ history, the Fund will invest exclusively in international microfinance initiatives consisting of loans to poor, predominantly female, heads of households who lack adequate income to provide their families with the basic necessities of food, shelter, and clothing. Microloans—which average $600 but are often as small as $40—enable borrowers to launch their own entrepreneurial ventures. “These can be a massive benefit to people in the developing world,” explains Sally Dungan, Tufts’ Chief Investment Officer.

Though these small loans serve a humanitarian purpose, they are also intended to create investment returns for Tufts, which underscores a major shift in thinking in the field of microfinance: To be sustainable, many experts have come to believe that microfinance must be profitable. “With the Microfinance Fund, we are unashamedly trying to earn a commercial rate of return that is competitive with our other endowment investments,” says Dungan. Indeed, one of the goals of the Fund is to demonstrate that microfinance is a commercially viable asset for institutional investors to add to their portfolios.

According to Dungan, 50 percent of earnings from the Fund will be reinvested in the original pool, and the remaining half will be used by Tufts for a variety of institutional purposes, including support for faculty and financial aid. If successful in its investments, Tufts will not only benefit financially, but will likely pave the way for further social entrepreneurship. “The free markets can be a force for good,” Dungan says. “If structural impediments are removed, capital will flow freely to where it is needed.”

A Marketplace for Social Change

Of course, donors don’t need to write a $100 million check to get started in venture philanthropy. For a minimum donation of just $10, they can direct funds to promising ventures anywhere in the world through GlobalGiving, an online marketplace where donors can find and fund specific projects. Rather than giving to large umbrella organizations that fund multiple initiatives, some individuals, corporations, and foundations prefer to support specific projects in particular locations. These are generally small-scale initiatives needing thousands of dollars (or a million at most) in assistance. GlobalGiving shares responsibility for due diligence with project sponsors and exercises strict quality control over the projects it lists.

“Throughout the world, there are amazing people with incredible ideas—and many have never had a chance to be heard,” says co-founder Dennis Whittle. He sees GlobalGiving as an important complement to large organizations like the World Bank, where he last worked. “At the World Bank, a small number of people in Washington allocate huge amounts of money,” he says. “That’s appropriate for large-scale infrastructure projects, but it lacks the perspective of a bottom-up approach.”
As an example, Whittle cites the Nepalese Youth Opportunity Foundation (NYOF), an organization that rescues Nepalese girls from bonded labor. Some very poor Nepalese families sell daughters as young as 7 to be shipped off to work in distant cities—a situation tailor-made for abuse. NYOF educates the families, pays for the daughters’ school costs, and provides the families with an animal to sell so they can end this practice. It also offers microloans. The equation for the donor is very simple and direct: A $1,000 gift rescues 10 girls.

Investing Intellectual Capital
Though funding is the primary engine of social venture capital, some promising enterprises in developing countries need managerial support as much as financial help. Like venture capital firms in the for-profit sector, Acumen Fund, based in New York City, provides intensive technical and managerial assistance, in addition to funding, to enterprises with the potential to reach the poor on a large scale. It targets organizations which use market-oriented approaches to deliver critical goods and services at affordable prices to the four billion people on earth living on less than $4 a day. According to Mariko Tada, a spokesperson, Acumen Fund is “agnostic” as to whether these organizations operate in the for-profit or not-for-profit sector. The important thing is that they have the potential to become self-sustaining.

A good example of an Acumen Fund-supported project is an initiative to provide long-lasting anti-malarial bednets in East Africa, says Tada. Standard bednets prevent mosquito transmission of malaria, but many users cannot afford to re-treat their nets with insecticide every six months, as required. In Tanzania, Acumen Fund invests in A to Z Textile Mills, which produces bednets treated with a long-lasting insecticide that is effective for five years. Acumen Fund worked to secure a public-private partnership with ExxonMobil, Sumitomo, the WHO, and UNICEF to help bring A to Z Textile Mills to scale, and it also researched innovative approaches to mass marketing and distribution. The company now produces 70,000 bednets a month. Since Acumen Fund’s first investment four years ago, 800,000 families in East Africa have acquired long-lasting, insecticide-treated anti-malarial bednets.

Acumen Fund supports health, housing, and water initiatives in India, Pakistan, Kenya, Tanzania, and Egypt. In October 2005, it formed a partnership with Google.org that will give both organizations the opportunity to build on Acumen Fund’s success in developing and delivering systems-changing solutions for the poor.
Maximize Charitable GivingAcumen Fund, GlobalGiving, and the Omidyar-Tufts Microfinance Fund are three examples of forward-thinking initiatives that leverage the power of social entrepreneurialism to address global problems at the local level. By incorporating market principles into social action, all of them expand on traditional ideas of philanthropy in the hopes of creating lasting change. Donors who participate in social venture capital may not always see financial returns on their investments—
as Tufts hopes to do—but they will be rewarded in the knowledge that they are supporting innovative programs around the world. Through ventures like these, donors can maximize the power of gifts large or small and help scores of people in need.

Further resources:
Omidyar-Tufts Microfinance Fund
GlobalGiving
Acumen Fund

Jonathan Goldman is a freelance writer based in Amherst, Massachusetts.
Copyright 2006 Community Foundations of America
Used with permission

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Posted at 12:24 PM, Oct 31, 2006 in High Net Worth Donors | Microfinance | Performance Measurement | Permalink | Comment