This article by was originally published on the Latest from Alliance blog on 16 May 2013. The original article can be found here. For more information about Alliance magazine, please visit www.alliancemagazine.org.
By Ross Baird
The inaugural Asian Venture Philanthropy Network (AVPN) summit, more than any other gathering I’ve been to, provided concrete answers to the question: ‘how do business and philanthropy mix?’ Typically, they don’t. Kevin Jones, founder of the Social Capital Markets conference, often describes this as the ‘two pocket phenomenon’: ‘I do good with my philanthropy in one pocket; I make as much money as I can with my commercial pocket, and they don’t mix.’ Yet social entrepreneurship, impact investing and venture philanthropy broadly blur the ‘two pockets’ into one by solving social problems with business models. If business – primarily entrepreneurship – and philanthropy blur into one pocket, the conference addressed the question: what’s the role of each?
The consistent message: in social change, philanthropy provides opportunity; entrepreneurship turns opportunity into reality. I saw three core arguments throughout the conference:
1) Philanthropy and entrepreneurship are means; the problem you’re solving is the end.
Prashant Jhawar, CEO of Usha Martin Group, spoke on the final day about how his family thinks about venture philanthropy and impact investing. His take: don’t just do these things for the sake of doing them, or because you think ‘venture philanthropy’ or ‘impact investing’ is an interesting idea. First, identify the problems you want to solve, then use the appropriate tools to solve them. For Prashant, access to education for low-income families in India is a passion – grants are appropriate in some circumstances; investments in others. But staying grounded in what you are trying to do – and using money and structures as tools, not ends – keeps you from being all talk, no action.
2) Markets can solve the problem you identify, but not all markets are efficient; this is where philanthropy comes in.
Harvey Koh, co-author of the Monitor-Deloitte report From Blueprint to Scale, spoke in the initial plenary of the importance of solving the ‘Pioneer Gap’ – the stage in enterprise development where promising models are tested, receive customer feedback, and go to market. In the ‘two pocket’ world, business provides risk capital to enterprises in the Pioneer Gap. In Silicon Valley consumer technology, where markets are proven, hundreds of prior ventures have hit IPO, and the path to financial success is well trodden. Risk capital in the ‘Pioneer Gap’ typically comes from the ‘commercial pocket’; angel investors in traditional US venture capital provide 50 per cent of all start-up financing in the US.
Yet in the impact investment world, the ‘Pioneer Gap’ is not an efficient funding market: fewer than 5 of over 300 self-identified impact investors invest at less than $250,000 per deal. In a ‘one pocket’ world, philanthropy has a disproportionate role in businesses addressing social change. As an example, Harvey discussed the success of Husk Power, which operates micro-grid power stations in rural Bihar and seeks to bring power to 70 million people who currently live off-grid, and attributed its success to catalytic philanthropy. While Husk Power has received impact investment from Acumen Fund, Bamboo Finance, LGT Venture Philanthropy, and several other conference attendees, it was able to prove and validate its model through $2.3 million in grants from Shell Foundation – necessary to prove micro-grid as a technology and Bihar as a viable market, which traditional investors were unwilling to test. In inefficient markets, philanthropy can de-risk market conditions so that entrepreneurs have the opportunity to thrive.
3) Philanthropy’s primary value is to establish a baseline of opportunity; entrepreneurship provides a chance for growth.
I spoke on a panel where Chester Wooley, CEO of Unitus Impact and a founding board member of SKS Microfinance, and Happy Tan, CEO of Grameen Foundation Asia, reflected on the microfinance crisis in Andhra Pradesh, India, in 2010. The takeaway: one of the biggest risks with microfinance has been mismanaged expectations. Anyone who thinks that microfinance can ‘solve poverty’ is setting up for failure – microfinance can provide a very specific service (financial inclusion) that enables individuals to afford better goods and services at lower prices, but cannot, by itself, provide an income, an education/skills level to achieve that income, and a basic level of health to earn an income.
Financial inclusion, as an example, cannot solve poverty: worldwide, for the very poorest, much of the basics – health, education, social services, housing – are in fact being provided by government, with some input from philanthropy (in some places, very well – in some places, poorly). If those basic conditions are met, financial inclusion innovations have tremendous power to lift individuals out of poverty. Antony Bugg-Levine, CEO of the Nonprofit Finance Fund (who literally wrote the book on impact investing as a former managing director of the Rockefeller Foundation), sums it up this way in his article ‘Complete Capital’: philanthropy provides the safety net, while entrepreneurship and investing provide the chance for growth. In our organization, Village Capital, we see this as well: we operate business acceleration programmes for entrepreneurs – providing a basic level of financial and operational stability for ventures – supported by philanthropy, and we make investments in highest-growth ventures, backed by investors looking for a return on capital.
In three days of intense discussions around how to solve complicated problems, I saw some clarity. And when we’re solving the largest problems of our lifetime – an unprecedented number of wealthy living alongside an unprecedented number of desperately poor, and an increasingly resource-constrained world – with the very powerful tool of business and the critically helpful supplement of philanthropy, we need all the clarity we can get.
Ross Baird is the executive director of Village Capital. For more AVPN Conference highlights, see Victor Kuo’s article here.