KM on a dollar a day

Musing on knowledge management, aid and development with limited resources

Do aid agencies need venture capital?

with 12 comments

 

William Savedoff from the Center for Global Development recently wrote an interesting blog post on “What can development agencies learn from venture capital firms” where he looks at what might be learned from venture capital firms in terms of how they manage their investments versus how aid agencies manage the projects they “invest” in.

But there’s another key area of venture capital I’d be interested to explore. What is the possible role of venture capital itself in funding development startups or new aid technologies.

When I shared my recent blog post “failure without borders” internally one interesting comment was that donors generally feel more comfortable funding things that are “tried and tested” and are reluctant to put money into new approaches, especially where there is a high chance of failure, even when the payoff could be great. It is possible to get funding for some pilots, but rarely for something that hasn’t already been tried elsewhere or by someone else.

One interesting solution might be to set up a kind of “venture capital” fund for development i.e. a set aside funding source that would be specifically designed to invest in high risk – potentially high payoff innovations and pilot projects that  are otherwise unlikely to be funded. This would be different from regular venture capital of course in that the projects themselves might not result in a financial profit for the investors, but rather public good in terms of new and better ways to deliver aid or promote development.

For this to work a few things would be needed:

i) a method for selecting investment projects that is transparent, robust but also quick and fairly non-bureaucratic. This should seek to identify ideas with high potential benefits and good management plans while not discounting ideas just because they are difficult or risky. It might be good to include actual venture capital experts and entrepreneurs in reviewing proposals to help avoid this being a more typical grant selection process.

ii) projects would need to have some form of clear monitoring and evaluation framework so that progress and results can be tracked. This should include monitoring of impacts both intended and unintended as far as feasible, and some sort of end of project assessment.

iii) there would need to be some kind of exit strategy so that the venture funding is restricted to a certain time period after which the project is picked up for financial support through the regular agency funding mechanisms or by government or another investor  (as a tried and tested, or at least highly promising approach), OR if the project did not realize its promise a failure or lessons learned report is produced and the project is closed.

A few other things might be desirable:

i) given the high risk and high potential failure rate of these projects it might be good to seek private philanthropic funding rather than public funding (For example New York City adopted this approach by securing private funding to test out new initiatives such as the now abandoned conditional cash transfer programme Opportunity NYC).

ii) As Savedoff mentions, venture capitalists often provide quite a bit of advice and support to the startups they fund. This would also be desirable for aid startup projects, and perhaps the type of advice and advisor needed is not your typical aid project manager, but instead someone experienced in startups or successful aid pilots who can provide practical advice to the project managers.

iii) It would also be good if some of the standard aid project management requirements could be relaxed for the duration of the pilot – in particular allowing the project freedom not to use a standard logframe or results matrix, but rather allow them to be more flexible to evolve the workplan and  targets as they learn from experience.

So anyone got a few spare million to spare for me to try out this new (high risk potentially high return)  idea?

(P.S. I’d like to give a quick shout out to Dennis Whittle since a lot of the ideas in this post comes from a very stimulating conversation I had with him over coffee a few months ago)

Written by Ian Thorpe

January 25, 2011 at 8:32 pm

12 Responses

Subscribe to comments with RSS.

  1. […] This post was mentioned on Twitter by Ian Thorpe, Smart Aid Initiative. Smart Aid Initiative said: RT @ithorpe [new post] Do aid agencies need venture capital?: http://wp.me/p110pY-7n ^SS […]

    • Ian,

      I think your blog is veering in the right direction, but still very far from the mark, because, in my opinion, it is misses the reality and nature of Venture Capital and Aid agencies, as they currently exist.

      Curiously, I hear Venture Capitalists referred to a lot in the Aid Circles, but I believe that there is a fundamental misunderstanding on who they are and what they do.

      From my experience, VC are aggressive profiteers who engage in high risk, high reward ventures that require a minimum 20% Return on Investment in 5 years (aka 20/5). Unless, you know a different bred of VC, their motives and Aid agency motives could not be more diametrically opposed. VC’s interest is purely – high rate of return… and they would never consider largely bureaucratic organizations, but perhaps, you know a higher class of VC than I do…

      However, it is important to note that the beauty of Venture Capitalists is that they are drawn to what does not exist and has never been done before… which I believe is what strikes at your interest in them…. and mine

      Accordingly, I have thought a lot about how it could work with VC’s and Aid. And, very briefly, here is my perspective…

      Aid agencies could never do this, because they are, as mentioned previously, bureaucratic and bureaucracy leads to the eventual death of entrepreneurship.

      So, you would first need to establish a new fire brand Aid agency – a boutique, non-profit business development firm that specializes in identifying, make the case and successfully brokering deals between socially motivated VCs and budding entrepreneurs with high risk, high reward business models.

      Most importantly, this business would need to live off a percentage of the spoils of success in order to survive and grow, just like entrepreneurs and VCs do. In other words, if you can’t hunt, you don’t eat. It is very animal, but then again, that’s the reality of business. Here is part of rub, because many in the development sector have never had to live with that type of reality.

      Unless, someone has stayed awake night after night, worrying about feeding your family and paying your bills, while chasing a consumer, it is almost impossible to understand. It is that reality of sink or swim that injects “real-world market reality” very quickly into one’s strategies and tactics. In fact, many in the developing world already live with this reality which is why I am so often amazed by the entrepreneurial spirit how many people eek out a living daily and actually grow small businesses with almost no resources at all. It is quite stunning… and leads to me wonder what would happen, if they had more access to capital.

      This non-profit development business would need to uncover and select emerging market entrepreneurs with strong business ideas and a great team (NB: VCs invest principally in “the team,” not “the idea”) who have a reasonable chance at a profitable success in something that has not been done before and pair them with a special breed of VCs or Angel investors, all the while enjoying in the success or suffering in the failure of the new emerging market ventures…

      And, if you can do that, I think then there might be something to consider…

      Keith

      January 26, 2011 at 2:55 pm

      • Thanks for giving me a dose of reality and pointing out the wide gulf of perspectives between those working in aid “investment” versus those working in business investment. But I’m not prepared to give up on this idea yet!

        What I have in mind is to bring in some more entrepreneurial thinking to the aid business in order to foster greater innovation and risk taking. Many hard nosed capitalists also engage in many philanthropic activities but often of the more traditional sort. It would be great to tap into both their wealth, but perhaps more importantly their skills to help made aid more innovative.

        I fully agree with the need for more private capital for developing country entrepreneurs (and there are indeed organizations that are already exploring this – but not yet enough) but not all developing country problems are amenable to being solved by traditional entrepreneurship, or not that alone, so I still think there is a value in fostering innovations in aid agencies and in developing country governments by applying the type of funding ad project management models used successfully in the private sector.

        Ian Thorpe

        January 26, 2011 at 9:05 pm

  2. […] has a thought-provoking post springboarding off William Savedoff at CGD about the role of a VC approach in aid. So provoked, […]

  3. a method for selecting investment projects that is transparent, robust but also quick and fairly non-bureaucratic

    Why non-bureaucratic? Let’s face it, the risks in this sort of venture are very high (as are the possible pay-offs), so a bit of bureaucracy could help manage (note: manage, not minimise!) that risk.

    Which brings me straight round to one of my personal bugbears: how everybody seems to talk about bureaucracy as something inherently bad. Which it sin’t. But I’ll leave that for some other time.

    Michael Keizer

    January 26, 2011 at 8:20 am

    • Thanks for the reply Michael. My issue is not so much with bureaucracy in theory, but how it works in practice!

      Some kind of risk-aware review of a proposal is needed, but the systems I’ve sen in place to date for risk assessment in aid agencies certainly veer towards risk averse and complex form filling. The form filling aspect often means that proposal writers try to say the right things to get approval rather than making an honest assessment of risk.

      For a kind of aid venture capital I believe there needs to be a distinct bias towards higher risk higher potential gain projects than the norm. (Note: I’m not advocating that this replace existing aid funding mechanisms but that it sits alongside it).

      Ian Thorpe

      January 26, 2011 at 8:51 am

      • I think your reply shows a very common misunderstanding about the nature of bureaucracy. Bureaucracy is not about “form filling”, it’s a way (and, in fact the most efficient way in larger organisations) to coordinate and organise activities. When people talk about ‘bureaucracy’ and ‘form filling’ in one breath, they usually think of what Mintzberg called the ‘machine bureaucracy’, but this is just one form bureaucracy.

        In fact, used in the right way, bureaucracy can be an excellent tool to ensure “a distinct bias towards higher risk higher potential gain projects than the norm”. You will find that many VCs actually exhibit a fairly high level of bureaucracy. Historical examples like the Rockefellers and Warburgs as well as more modern ones like Atlas Venture and Bain Capital all worked within highly developed bureaucracies.

        Michael Keizer

        January 26, 2011 at 6:29 pm

      • Thanks. I’ve perhaps been a little imprecise inmy use of terminology. I wasn’t trying to say that rules and systems are not needed, but rather that the systems in place for preparing and reviewing proposals, monitoring progress and managing and accounting for budgets in the aid organizations I’m familiar with are not conducive to funding higher risk high gain projects nor fostering them to be successful.

        Ian Thorpe

        January 26, 2011 at 8:48 pm

      • I think that we totally agree on that one.

        Michael Keizer

        January 26, 2011 at 11:29 pm

  4. Ian,

    Perhaps i misunderstood the centrsl theme of your blog as i thought it hinged on VC investment. It’s the VC angle where i thought you strayed.

    Now talking about private sector funding… On that point, you and I agree 100% and it is the focus of my professional work. I build joint equity deals using private sector funding, expertise and resources to develop and execute innovative projects with rural communities.

    However, the biggest challenge here is not private side but social side. Most Aid Agencies, especially the larger ones, are too risk adverse… And “afraid to fail on a project,” (or should i say at least admit to it) which is the main problem because failure is an assurance while innovating and, in fact, it’s a very important poit of the process. This failure/donor expectations interplay is a complex one with historic roots so I understand Aid Agencies hesitation, but too often it is paralysis. Consequently, I do wish they were more courageous and worry about “the market” rather than “the Street”

    In other words, from my standpoint, you are on very much the right path, one which I believe will open into some of the most significant development evolutions to both economic advancement opportunities and improved quality of life for the poorest of the poor. In fact, I’m betting my life’s work on this endeavor. The rural poor will benefit more from capitalism than any other intervention or system if it is allowed to flourish and operate relatively unthethered. And this all begins with greater private sector engagement.

    Keith

    January 26, 2011 at 9:51 pm

  5. […] Invest in teams not just in projects. As a commenter remarked on my recent post on venture capital – angel investors usually invest in good teams as much as they do good ideas. Although this […]

  6. I am reminded of a conversation I had with a thoughtful UNICEF colleague who comes relatively late in career “from outside”! She was talking about how companies like Nokia form small semi-independent sub-companies to innovate and experience out of the run-of-the-mill work. Maybe we could do the same in UNICEF (to pick the example where Ian and I work) – a small sub-section of the organization working with greater private-sector rigour and understanding, willing to take risks and fail as a springboard to real innovation (and, of course, success and glory). It wouldn’t have to be big, or even massively expensive (at least to begin with).

    Mark Hereward

    February 18, 2011 at 4:55 am


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: