Stars or strategies – who to back? The impact investment dilemma
Great investments are about backing great people with fantastic ideas – right? Or does the best impact come from clear planning and a touch of realism and humility? In the wonderful but messy world of social change, investors reveal their different approaches and philosophies around risk and judgement, in this latest article in partnership with EVPA
Tim Draper is a US billionaire and one of the world’s most successful venture capitalists. When he invests he is looking for “the start-up hero,” he told an interviewer earlier this year, an inspiring individual who will drive a project forward and get results.
“Sometimes the entrepreneur overrules everything else,” Draper said, “because they’ll figure it out.”
Finding and funding brilliant individuals is central to this vision of making more money. But what about when we are trying to do more good?
The venture philanthropy movement – which is modelled on venture capitalism and includes measuring impact, giving business support and using loans or equity, alongside traditional grantmaking – is growing. So are Europe's foundations also starting to move away from basing their decisions on spreadsheets and project plans to focus more on inspirational social entrepreneurs? And if they are not – why not?
‘The new new’
One funder proud of its reputation for finding and backing leaders with big ideas is the Rank Foundation, based in London.
When looking at which ideas to fund, explains deputy CEO Caroline Broadhurst, “our main interest – what drives us – is who is doing it and how they are doing it. For us that translates into leadership and enterprise”.
Naturally, she stresses, due diligence and data are important parts of any decision to invest. But the Rank Foundation is always interested in applicants who have an extra spark, people who “have that passion for the social cause. We are backing them to deliver on that. Otherwise we would be doing it ourselves”.
Unsurprisingly, the Rank Foundation often finds that it is the first funder to back these individuals and teams.
This is a “riskier approach”, says Broadhurst. Maybe that person hasn’t been supported [by other funders] because they haven’t fitted into other criteria. Yet they might just have that thing about them, so that with support they can really make a difference.”
The risk is worth it, Broadhurst says proudly. “Someone puts forward a compelling case and we want to be part of that story.”
She gives the example of The Food Train, an enterprise tackling food poverty in Scotland. In its earliest days the organisation was run from “a tiny, tiny room full of boxes with one or two full-time workers,” remembers Broadhurst of her first meeting with the chief executive, Michelle Curruthers. Impressed by Curruthers, who talked the funder through her work while juggling calls from beneficiaries and local businesses, the Rank Foundation made a small grant to make sure The Food Train could start to scale up its work. This helped give them “the infrastructure and the confidence to move forward. Michelle is still the CEO and it has expanded right across Scotland. She is a great advocate and speaker on food poverty for older people and has expanded the franchise model to England.”
As in this case, the road to success can be a winding one: “It’s never a straightforward trajectory, it’s got lots of ups and downs. What we find is that people get there but it takes a bit longer.”
The Rank Foundation is not alone. Idriss Nor, the executive director for impact investments at the DOEN Foundation in the Netherlands, argues that funders should make themselves available to social entrepreneurs with big, bold ideas – even if the business plan isn’t fully formed.
“People will come to us even if the idea is just in their mind,” he says. “They know we will not laugh at them. They know we will take them seriously.”
DOEN will generally want to see that a project has at least been piloted before considering investment, but taking a risk by backing impressive individuals is the best way to unlock what Nor calls “the new new,” original and ground-breaking solutions to enduring problems. He gives the example of Fairphone, the ethical mobile phone manufacturer in which DOEN was one early investor (see photo).
Céline Yvon, head of programmes at the Trafigura Foundation in Switzerland, agrees that when social entrepreneurs stand out from the crowd, funders should take notice. To her, this means individuals who are “mission-driven, persistent, charismatic in order to take other people with her, dedicated, and also obsessed about measuring and tracking impact”.
Yvon adds: “For too much time we have tended to underestimate the power of individuals who catalyse change, and the need to support these individuals.”
Yvon also sounds a note of caution, however. For all the attraction of inspiring leaders, foundations should not lose sight of the systems within which funders and social entrepreneurs work.
“We need to remind ourselves that social change is very complex and messy,” she says. “If it was enough to have one talented visionary person to do things, we would know that by now.” Visionary leadership is a part of the puzzle, but Yvon cites as one example the challenge of bringing down the number of women worldwide who die during pregnancy: “Yyou need not only individuals, you need governments to act, you need values to change, you need knowledge to be enhanced, you need solutions to be brought to scale.”
This is why, for now at least, foundations seem not to be shifting their funding models away from project-based decisions. The stakes are just too high.
The European Venture Philanthropy Association recognises the caution foundations are taking when looking at funding a project,” explains Jamy Goewie, Community Director at the EVPA. “There are still many foundations that do not take the team-composition into account because this was traditionally not part of the project-approvals. When they look at staff they look at FTE [full time equivalent] assigned rather than at the people behind those FTE’s. From a traditional logframe model this makes a lot of sense. But when investing in early stage innovations, the (wo)man behind the plan becomes more relevant as she or he is not easily replaced and thus crucial for success.”
And foundations can certainly be dazzled by charismatic figures with big ideas, according to Gen Maitland Hudson, a UK-based expert in social programmes.
“The risk is that money goes towards much more speculative, less well-run programmes,” Maitland Hudson says. “There’s room for that, it can be very important to have experimentation, but it is also the case that you can be a highly charismatic leader who just isn’t very good at seeing things through.”
The solution for some foundations is to find social entrepreneurs who provide this balance.
Backing the ‘boring’
“Absolutely you want someone who has the ability to inspire, to lead, to influence, to bring people along with their vision,” says Elisabeth Paulson, portfolio director at London venture philanthropists Impetus PEF. “But we are also keen on the more structural elements, which mean they are able to prioritise sequence and strategy and make sure that they can actually be delivered in a way which doesn’t exhaust or drive the organisation into the ground.”
As a result, Impetus PEF is looking for leaders who combine confidence with self-awareness. “Sometimes it’s about being deliberate and a bit boring and committed to getting things right before you accelerate what you want to do,” Paulson says.
But Nor and the DOEN Foundation are keenly aware that funders lose sight of innovative but relatively untested leaders at their peril.
“I think there could be more risk when we think about social impact, because we have the possibility to do that,” he says. “We are founded to support risk-taking pioneers.”
Hear more from pioneering foundations and their role in financing innovations at the EVPA's 15th Annual Conference, Celebrating Impact, taking place in The Hague, 5-7 November.