Imagine a world where grant funders thought more like venture capitalists

In 2018, $15 billion was invested globally into startups that were yet to generate any meaningful revenues, let alone turn a profit. The venture capitalists (VCs) who funded these businesses, across 21,000 angel and seed investment rounds, have honed an approach over many decades to making early-stage investments that delivered them an average annualised return of 22% in 2016 (or 2.5x their original investment). This approach centres on two key characteristics:

• A high appetite for risk — Seven out of ten early stage investments return less than the original stake invested and often nothing. The overall returns for investors are typically generated by one in ten of their investments which returns at least 10x their original stake. Most investments come to nothing and early-stage investors need to be comfortable with that.
• An eye for long-term value creation — Despite the fact that most investments fail, investors need to believe that every single one of their investments has the potential to be the one in ten that will return 10x. Which is why their due diligence activity focuses on identifying the startups that have the right combination of ingredients to maximise that chance.

What has this got to do with charitable funding? Well, in my funding utopia, I’d like us all to imagine a world where trusts and foundations thought more like early stage equity investors — that’s more like VCs of the commercial world — when they fund charities and social enterprises. Thinking like a VC would mean:

1. Looking for big transformative ideas that significantly disrupt the status quo and play a differentiated role in the market. 10x financial return on a single investment is only possible when there is a truly ambitious business model that can deliver significant value to customers and users, in a way that represents a real step change to the existing market.
2. Focusing on the people, rather than the product or intervention as it is when they invest. VCs know that execution is everything — it doesn’t matter how great the idea is unless it can be delivered, and it’s the tenacity and skill of the entrepreneurs who overcome the myriad challenges that come up, fighting to turn an idea into a reality.
3. Knowing that the context is always changing and propositions need to adapt and pivot to seek out the greatest value. Rigid models and dogmatic approaches rarely win out in the face of ever changing user/customer needs and the inevitable emergence of new innovative competitive approaches.
4. Understanding that their money is the first of a many step journey, which means shorter term milestones need to be defined, and achieved, in order to convince other investors to part with their capital, so that the business can piece together the support it needs to achieve its long term ambitions.
5. Having a long term, patient mindset, knowing that it can sometimes take 10 years or more for their investments to have scaled sufficiently to deliver their return and they will likely have to trade-off short term profits to maximise long term value.

VCs do all this because they know it will maximise their financial return. Charitable trusts and foundations should think the same way for the same reason — to maximise the impact return of their funding.

By altering their mindset to better focus on long-term social value, no matter what the form of capital they deploy, trusts and foundations can start working more collectively with other funders to better steward exciting new ideas through the many milestones on their journey to eventually delivering meaningful impact in the world. This means they’d get more comfortable with the fact that the impact probably won’t be delivered on their watch, and focus their attention on making sure the best possible foundation is laid to maximise the chances of the next stage of funding and support being secured.

One way for charitable trusts and foundations to start thinking more like VCs is to do more equity-like investing in mission focused social enterprises. Of the top UK 300 foundations only 34 are deploying capital through social investment — just 4% of all the funding they provide — and only a small proportion of this is genuinely equity-like investment as opposed to payment by results style financing (e.g. social investment bonds). Increasing the allocation of equity-like investing would mean that funders will have to adapt their due diligence process to better mirror that of VCs, which gives them first hand experience in that VC mindset.

Institutional charitable giving is booming. In 2017 the top 300 UK charitable foundations made grants totalling £3.2bn, an 11% increase on the previous year and 45% higher than 4 years ago. Imagine a world where less of that funding was deployed using traditional models of grant giving, which focus on shorter term delivery of tangible outcomes, and instead better focused on genuinely laying the foundation for maximising long term sustainable impact.