On the heels of the dot-com bubble, the intersection of private and public interests (and capital) resulted in a movement loosely defined as ‘venture philanthropy’ — a particular kind of aggressive investment strategy applied to solving social impact challenges. How well has this model translated from Silicon Valley to Silicon Savannah, and what movements did it birth in the protean world of investing for impact at the last mile? This week’s Insight explores what problems catalyzed the convergence of market logic and social impact through the venture philanthropy movement, takes stock of where it moved the needle, and where it left us.
Quo Vadis, Development?
If economic growth is the engine, then development finance is the fuel. But just as the buggy gave way to the Model-T and to the Tesla in turn, the fuel itself evolves. As the global economy limps back to the pre-pandemic starting line, developing nations continue to face an enormous shortfall not only in the amount of “fuel” needed to power growth and more efficient means to deliver it, but also in the types of development finance required. After all, everything has its advantages and disadvantages: the internal combustion engine removed “horse-exhaust” that once posed a pressing urban challenge, only for cars to now represent almost 10% of global direct CO2 emissions.
So what are the different types of fuel that have evolved in powering the engines of economic growth in developing markets? No accounting could be complete without due consideration to the “multilaterals:” the World Bank and alphabet soup of international and regional finance institutions like the ADB, AfDB, EIB. Collectively, these institutions manage over 1.8 trillion dollars in assets, which, along with bilateral aid provided directly nation to nation, constitute Official Development Assistance (ODA).
But ODA has never been the only fuel in stock. Industrialists like Carnegie and Rockefeller brought a certain attitude to philanthropy that marked a step-change in the way giving for impact was done — setting the course for changes decades later when it comes to financing the last-mile of service delivery in emerging markets.
Source: GSMA (2023)
At the turn of the 21st century, a new crop of ultra-wealthy givers like Windows’s Gates and PayPal’s Omidyar emerged with the digital age. Rather than “let not thy left hand know what thy right hand doeth,” the maxim might rather be “synced hands maximize bands.” The new class of philanthropists were increasingly coming from corporate business and finance, and their principles carried over in pursuit of optimizing inputs to maximize outputs — combining the principles of venture capitalism with the aims of traditional philanthropy.
Philanthropic giving — despite representing a drop in the bucket compared to official development assistance, and indeed, public spending — has fundamentally altered the development finance landscape. The Gates Foundation alone has reshaped how private and public actors tackle global health problems, creating the need for further harmonization across disparate actors and methods of achieving impact. Though efforts to quantify the flow of philanthropic development assistance put it at only 5% of ODA between 2013-2015 — to the tune of $23 billion — philanthropic giving growth has outpaced that of traditional assistance, growing to almost 10% of ODA in 2021.
Impact as Venture
What does it look like to apply venture principles to achieving impact? The first key element is to have an appetite for risk that other types of financiers just don’t have. As the presumptive “stewards of the highest risk capital in the world,” venture philanthropists’s risk tolerance should enable them to invest in projects that would be unbankable for traditional financiers. And while there is an argument to be made that it is in fact the public sector that is often the prime mover for taking market-making risks, a key value-add of the venture approach is the long-term, collaborative, and savvy business support that is so critical to achieving financial sustainability and scale for early-stage companies.
Venture philanthropy constitutes but a single flavor amongst a constellation of new forms of capital with extra-fiduciary objectives. And as the line between charitable giving and ‘impact return thinking’ has blurred between grant-making institutions and those seeking a degree of financial return, so has the vocabulary. Witness the dizzying array of terms and metrics in the impact investing world, including angel philanthropy, social impact investing, socially conscious investing, sustainable and responsible investing (SRI), as well as a slew of metrics for standardizing impact quantification like IRIS, GIIN and environmental, social and governance (ESG).
All have different themes and variations — and notably employ different instruments. One thing they have in common, however, is having to negotiate the delicate balance between claiming social impact while chasing returns. Acumen, for example, is a non-profit impact investment fund that pioneered the use of investment as a tool to address poverty-related challenges. In 2001, only eight such “impact investing” funds existed, a tiny fraction of today’s more than 1,300. But in contrast to Acumen’s internal estimate of a 0.91x financial return over their total track record of activities, not all such funds are as transparent about the challenges inherent to achieving both impact and return.
Indeed, for those interested in investing for impact in emerging markets in particular, the line between venture philanthropy and venture capital becomes ever thinner, as generic investments could be considered socially-oriented in low-resource contexts — and also raises the specter of “SDG-washing.” Of the whopping $30 trillion in assets labeled as ‘sustainable finance,’ there is no universal yardstick for comparing the different measurement standards utilized by different actors, leading to a new spectrum of options for private capital to chase returns, however defined.
At the end of the day, a huge part of modern giving seeks to crowd-in private sector finance at the different stages it is needed, and in this way, one could observe, for better or for worse, the troubling ‘marketization’ of altruism. This has perhaps best been encapsulated by the “effective altruism” movement, whose adherents take an economics-heavy approach to comparing apples to oranges when it comes to wading through the opportunities and pitfalls of philanthrocapitalism. The obsession with tracking and transparency that is largely a legacy of corporate management practices offers the promise of radically improving the efficiency of financing impact.
Though venture philanthropy served to imbue a corporate sense of rigor in monitoring social impacts, it is perhaps ironic that the technology titans that led the charge have yet to fully leverage the power of mobile technologies for improved data collection.
Despite an explosion in new forms of data — like digital payment, social media, geospatial and call record data — most impact verification remains surprisingly analog. This is a pressing area of needed change if novel financial instruments are to continue finding creative ways to meet the needs of the organizations solving last-mile change at the scale and, critically, speed at which it’s needed. EnDev, for example, is a financing organization focused on energy access that has pioneered results-based finance mechanisms for over a decade. Yet its standard practice of verifying performance through the three steps of paper trail check, phone calls, and field checks is simply not scalable for the size of the challenge, as the need for lowered costs and increased verification quality becomes ever more pressing.
Luckily, a convergent set of challenges and innovations have the potential to unlock novel finance mechanisms. One such new source, perhaps surprisingly, is climate. Despite years of climate pledges by nations, foundations and even private sector financiers are stepping in to fill the gap, with several dedicated climate funds coming online in the past few years. Indeed, Africa’s climate tech startups netted a neat $860 million in equity last year, making climate Africa’s most funded sector after fintech. According to Marcus Watson, partner at climate tech-focused KawiSafi Ventures, guidelines set out by the Basel Committee on Banking Supervision regarding the management of climate-related financial risks have elevated the importance of impact reporting, helping to shift the mindset of international banks.
“In traditional VC/PE, as so many unknown variables can influence investment outcomes, this often limits the (perception of the) usefulness of frontier types of data analytics to inform and drive investment decisions. However, for innovations in carbon finance and nature-based solutions, data and technology are critical, as monitoring and verification is essential to unlock the capital flows. Technologies that harness satellite imagery, remote sensing, predictive analytics, and blockchain offer solutions, enabling us to analyse large data sets, track impacts, and gain critical insights that can inform where to invest climate dollars.”
Marcus Watson, Partner, KawiSafi Ventures
Though potentially unlocking new opportunities, Watson says the challenge remains selling the value of such data to investors and banks, especially in Africa.
Source: GSMA 2023
Critical to ensuring the growth and sustainability of ‘off-ramping’ these new sources of finance into viable organizations on the ground is more transparency and efficient monitoring across the value chain of a company’s (or its products’) lifecycle. In more mature sectors such as fintech and PAYGO solar, the leaders of the pack, like Paga, FlutterWave, M-Kopa and BBOXX, already provide investors of all stripes with industry benchmarks that can help regarding investment due diligence.
For frontier opportunities that build on the mobile money and fintech base-layer ecosystem, however, these metrics are still in development. For investors interested in developing a cross-sector portfolio, this can pose a significant ramp-up cost to understanding the different verticals with not only different economic fundamentals but regionally differentiated regulatory environments.
The Future of Innovative Financing
Along the contemporary spectrum of methods for achieving societal objectives through finance, venture philanthropy has perhaps been eclipsed by parallel movements — in particular through the umbrella term of impact investing.
Venture Philanthropy (blue) vs Impact Investing (red) search terms worldwide since 2004.
Source: Google Trends
But close observation of the genealogy of the space reveals the indelible fingerprints of the venture capitalists of philanthropy, not only in the DNA, language and metric-making that currently dominates how foundations and private investors track their activities, but also in how startups attract innovative finance to fuel their growth.
This comes at a critical time for startups in emerging markets, given the slowdown in financing. And in an era of higher interest rates, cautious lenders and a low baseline of available debt financing in Africa, startups have had to be creative in securing alternative financing arrangements like bridge loans, structured equity, convertible notes and even crowdfunding.
Venture philanthropists and their ilk are well-suited to come up with such creative instruments, given their special interest in achieving the social impacts that for-profit enterprises can achieve in low-resource contexts. Their thematic foci theoretically enables them to target finance for projects that require sector-specific expertise and knowledge. Amplio Ventures, for example, focuses on growth-stage venture capital for businesses that explicitly focus on improving employment outcomes for refugees, while WASH specific-funders can focus on tailoring their capital to the particularly thorny structural challenges of investing in urban waste systems. Such thematic sources of funding are able to make the extra case for investing along a spectrum of commercial viability; the electrification of transport, again, being a prime example of rapidly improving economic fundamentals intersecting with novel flavors and packages of climate-themed finance models.
In a recent roundtable hosted by the GSMA on enabling innovative financing to capture such opportunities, financiers reiterated a recurring challenge: “finance hates history and loves data.” Yet in an era where the development landscape has gone from data-scarcity to data-overload, the challenge has evolved from making decisions based on the best available assumptions to turning statistical noise into an investable signal. This will, undoubtedly, require new forms of collaboration between those who generate data, those who transform it, and those who ultimately act on it. And if data is the new oil, that means there is a pressing need for new data refineries — methods for turning the raw data into entirely new products.
Editor’s Note: Who is mining the new oil, and how are they refining the crude into the high-octane fuel needed to power the next generation of innovators delivering impact at the last-mile? Over the next few months, Mondato is partnering with the GSMA to convene leaders in the space in order to chart potential pathways for the next phase of innovation at the intersection of finance and technology in emerging markets. If you’re interested in participating, please reach out to firstname.lastname@example.org.
Image courtesy of Claudio Schwarz
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