Venture philanthropy - the UK experience

This article by Andrew Bibby, in a slightly different form, was first published in the Financial Times, 2004

The homelessness charity St Giles Trust is about to open itself up to the sort of financial partnership much more familiar to commercial companies seeking venture capital. St Giles will shortly [Jan 2005] announce that it is to be the beneficiary of £330,000 from the Impetus Trust, an unusual grant-making body which describes its role as ‘venture philanthropy'.

Stephen Dawson, Impetus Trust's Chairman and the inspiration behind its establishment in 2002, comes from a venture capital background (he retired recently from ECI), and Impetus's objective is to bring VC techniques and experience to the voluntary sector. This means that the money it makes available to a charity (what it calls its ‘investment') is contributed only after an intensive process of analysis of all aspects of the organisation, including strategic and business planning, the calibre of senior management, operating systems and marketing strength. “We're looking for charities that want to make a step change in their performance,” Stephen Dawson says. “We do a due diligence exercise, a process pretty similar to that in the commercial world.”

As he appreciates, not every organisation in the voluntary sector is necessarily prepared to submit to this level of forensic enquiry. “It is quite an intrusive process, and it does take quite a lot of time. We make it clear that it's not right for everyone,” he admits. But, despite this, Impetus has had no shortage of approaches from charities looking for a share of the £2m or so it has already raised in donations, primarily from individuals in the venture capital industry. Of the more than fifty charities who have been in touch, Impetus has so far selected just three. St Giles follows the lead of Speaking Up!, an organisation working with people with learning difficulties whose partnership with Impetus was announced last August. An arrangement with a third charity, the Eating Disorders Association, is also about to be announced.

For St Giles, the relationship with Impetus ties in directly with the charity's plans to change its strategic direction, from general work around homelessness towards working increasingly with offenders. The charity is also growing rapidly, with its annual income of £1.8m more than double the turnover four years ago. As its director Daniel Currie explains, this means that St Giles has an urgent need to strengthen its management structures and to professionalise its ways of operating.

The ‘due diligence' exercise conducted by Impetus has, he feels, had a positive effect on the charity's own thinking. “They came in and asked questions which were difficult for us to answer – and that was useful,” he says, “They also asked us to do things, such as preparing three year financial projections, which we wouldn't otherwise have done. This helped highlight cash flow problems in a couple of year's time, which we might have sleepwalked into.”

Stephen Dawson began developing the idea behind Impetus partly from a feeling that his own charitable donations weren't necessarily being particularly well used. “I had no real idea what was being done with my money. In fact, I was pretty confident my money wasn't doing anything useful,” he says. What he says he now understands from closer involvement with the voluntary sector is that, for many charities, a dependency on project funding leaves them starved of the finance needed to develop core infrastructure. As a consequence, Impetus identifies three areas where it makes finance available, these being long-term financing, capacity building and management support. In St Giles's case, the first year's £145,000 will be spent on, among other things, business planning, management development and performance measurement. Whilst the bulk of its ‘investment' is in grant form, Impetus also looks where appropriate to share profits with charities which are developing new income-generating streams, so that an element of its capital is recycled.

The relationship between the private sector and the charity world is one where a certain sensitivity is clearly necessary on both sides. Venture philanthropy first emerged as a concept in the United States where, according to John Kingston, director of the Charity Aid Foundation's Venturesome investment fund, it has sometimes struck an arrogant note. “Some of the early venture capitalists involved had the approach, We've sorted out the commercial world, now we're going to sort out philanthropy. This was both offensive and naïve,” he asserts. He says he has detected a more sophisticated approach in recent years, in particular in the way the idea has been introduced into Britain .

It is a point taken up by Toby Eccles, head of research at Absolute Return for Kids (ARK), another venture philanthropy organisation which has close links to the hedge fund and alternative investment sectors. He accepts that the grant-funding culture can encourage bureaucratic and unentrepreneurial attitudes in charities, but he also believes that charities can teach the private sector when it comes to motivating staff. “The voluntary sector is good at getting huge amounts of work out of people because they feel valued and appreciated,” he says.

The answer, he believes, is to look for a meeting of minds. “There is a definite need for active investment in the voluntary sector. Where venture philanthropy falls down on occasions is when people come in with a private sector knowledge base, and expect to be able to change people's minds with money. You do have to get people comfortable with the fact that you are trying to improve what they're doing – that you're not a threat,” he says.