Do aid agencies need venture capital?
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)