CategoryFinance

Venture Capital for Profit and Purpose

Here’s a simple hypothesis: startups that deliver positive environmental and social benefits with every dollar of revenue will have a market advantage. They will attract better talent, experience lower customer acquisition costs, and demonstrate greater customer lifetime value.

Fascinating. Worth following this.

The strategic philanthropist

“Surplus wealth is a sacred trust which its possessor is bound to administer in his lifetime for the good of the community” – Andrew Carnegie

Image Courtesy, Wikipedia

Strategy and innovation is not just for the organisations that create new products and services focused on social change. It is for the philanthropist too.

Giving money is not an easy thing. Especially, if you are serious about outcomes. If you don’t believe me, ask Warren Buffet, one of the richest people in the world.

In 2006, Buffet pledged most of his fortune to the Bill & Melinda Gates foundation.

Why?

If you think about it – if your goal is to return the money to society by attacking truly major problems that don’t have a commensurate funding base – what could you find that’s better than turning to a couple of people who are young, who are ungodly bright, whose ideas have been proven, who already have shown an ability to scale it up and do it right?

[…]

What can be more logical, in whatever you want done, than finding someone better equipped than you are to do it? Who wouldn’t select Tiger Woods to take his place in a high-stakes golf game? That’s how I feel about this decision about my money.

If Buffet, who was very good at making money, turning his $15 million investment in Berkshire Hathaway into $65 billion, thinks that there are better people than him to spend it, what chance do you have as a millionaire?

We need to think carefully about giving money; in fact; as much care as we would take about making it.

The world is getting complex. Decades of investment in welfare in the developed world has not solved the social problems. Some of them have become worse than before and we have new ones which are intractable. In this space, money by itself will not work. We need to get clever at the way we spend that money.

We need a perspective.

A strategy.

Lets look at Andreessen Horowitz, the VC firm that is taking silicon valley by storm. The first perspective they have is that “software is eating the world”. The world of the future in every industry will be disrupted and dominated by software. Whether right or wrong, that is a powerful perspective to have. The second perspective they have is more powerful. They believe that the technology business is the innovation business. Technology changes and that means there is a need to be continually innovative. In their experience, the innovators are founders of companies.

These innovations are product cycles. Professional CEOs are effective at maximizing, but not finding, product cycles. Conversely, founding CEOs are excellent at finding, but not maximizing, product cycles. Our experience shows—and the data supports—that teaching a founding CEO how to maximize the product cycle is easier than teaching the professional CEO how to find the new product cycle.

These perspectives drive the VC business for them. They have built their team around these perspectives.

Bill Gates has a different perspective and a different strategy.

Gates seems to relish nothing more than challenging business as usual, often by applying a dose of more ambitious thinking. It was the same impetus that led him to rethink familiar approaches to philanthropy, throwing his money into the urgent pursuit of solutions to big problems rather than attempting a drip-feed of donations that would amount to little more than a Band-Aid. While the foundations started by the likes of Howard Hughes and pharmaceuticals boss Sir Henry Wellcome are still among the handful of the world’s richest decades after their founders’ deaths, the Gates Foundation has been programmed to dole out all its cash and wind itself up 20 years after their deaths.

What is common between the VC firm of Andreessen Horowitz and the Gates Foundation? They are both investing for innovation. They have perspectives that help them make decisions through that lens and they are creating outcomes that matter in their particular sectors.

In the same way, a philanthropist needs a strategy. You need to know why and how the money you have is going to create change.

What are your values? How do you see the world? What do you see as the biggest challenges worth solving? What are you good at? Are you a good steward who will keep the foundation alive for 100 years? Are you a innovator who is going to take the challenge of solving some of the toughest challenges?

You need to have what strategy guru, Roger Martin says –  a “where we play- how to win” option. Once you decide on a strategy, you need to follow through on the actions with a innovative approach.

What are some of the perspectives that are needed?

Builder or Buyer?

Most governments are buyers, are you a builder? That’s a novel perspective.

Simply put, builders and buyers think differently. “If you invest in Starbucks, what you care about is Starbucks being healthy over time and lots of people buying the coffee and, in fact, you want the coffee to be high priced,” explains Craig Reigel, current managing director of N.F.F. Capital Partners “But if you buy from Starbucks, you care about getting the best cup of coffee for the lowest price. The way you think about success is completely different.”

Building Capability

As a innovator you knew how to create value to customers and create a sustainable business model. How can you help the NFPs and social enterprises to do the same?

Place Based

Can you be a catalyst for a community?

 

a16z Podcast: Demystifying Venture Capital

A great podcast about three women, their journey to be a venture capitalist and how venture capital works.

How do we create a new way of investing in the social space? What can philanthropists, foundations, and PAFs in Australia.

A new model of social capital investing which understands innovation, the need to support new ways of creating programs and startups and taking the initiative through the journey.

SunGrid

SunFunder is a crowdsourcing platform for solar project. One interesting one in india

SunFunder Light and Information Access for Sitapur District

Microgrids are a powerful and decentralised way to solve some of the energy crisis. 

Learning to manage Cash like Costco

Cash is king. That is the old saying in investment circles. Not profitability, not return on investment, not any other operational metrics. Cash in some sense is the real thing and everything else is accounting.

Whether you are a startup or a not for profit, managing cash is key to your organisation. The benefits include a decrease in mental stress, paying payroll on time or adapting to market challenges. Bill Gates was so conservative in managing Microsoft that he always ensured he a years worth of cash to pay his staff in advance. That’s billions of dollars.

Verne Harnish provides some good ideas in this Fortune article.

Every business can learn an important lesson from Costco. The fast-growing warehouse retailer did $103 billion in sales in the fiscal year ending in September, with pre-tax earnings of $3 billion. Membership fees brought in $2.3 billion — equal to about 75% of its profit.

[…]

1. Shorten the sales cycle. It can cost you a lot of money to go after customers. Most companies don’t think about the fact that the faster you can land a sale, the quicker you can get a return on that investment (and the more likely you are to block competitors from getting there first). Get off email and pick up the phone or meet your customer face to face. Spending 20 minutes this way will bring you closer to a sale more quickly than going back and forth by email for three days.

 

2. Eliminate errors. 

Many entrepreneurial companies get sloppy about sending out invoices. They’re so busy making and selling things that their paperwork starts to slip. Even something as simple as using the wrong format for an invoice can delay your payment for weeks or months at a big company.

3. Rethink your business model. There may be ways you are doing business that are slowing the cash conversion cycle. For instance, many companies send out invoices every 30 days. Speeding that up to every 15 days will get cash into your company more quickly.

Why business models trump technology?

Karan Girotra, who  is a professor at Insead in Fontainebleau, France and  Serguei Netessine, who is the Timken Chaired Professor of Global Technology and Innovation at Insead writing in HBR about Drip Irrigation and why it did’nt catch on for a long time until a business model innovation:

The reason is a problem common to almost all new technology adoptions. The developer of the new technology has the best information on the performance of the technology and on the benefits it could deliver to the adopter. But the incentives of the adopter and the technology developer are typically not aligned: while the technology developer has all the incentive to sell as many units as possible, the adopter would only like to make investments with the highest rates of return.

To achieve this alignment and to reduce risks for the farmers, Netafim started providing a new offering, called IrriWise Crop Management System. IrriWise was an integrated proposition that included the system design, all the required hardware, installation and regular service of the system. Most importantly, farmers often did not have to buy the system. The system would be installed at Netafim’s expense (essentially costs would be reallocated to Netafim), but Netafim would get a further payment tied directly to the increase in crop yields.

With more skin in the crop-yields game, Netafim was now incentivized to modify service, adapt and maintain the equipment, to get the best possible outcome. Netafim went so far as to change into mission statement from “making the best drip irrigation equipment for customers” to “helping the world grow more with less”, an objective far more aligned with the objectives of its customers, the farmers. This allowed it to dramatically grow revenues, increasing its market share, all while making a life-changing impact on some of the most impoverished of the world’s citizens.

 

Michigan plans to enlist private investors to finance a public social program, becoming the latest state government to try an experimental “pay-for-success” approach in tackling persistent problems such as homelessness or criminal recidivism.

Michigan is the seventh state chosen through a national competition to receive technical assistance from Harvard University for a social impact bond

From Fox.

Social impact bonds should offer lower risks or higher returns, says report | Third Sector

This is going to be an interesting arena to keep tabs on.

Social impact bonds are unlikely to attract commercial investors unless they offer lower risks or higher returns, according to a report published today by the think tank the Social Market Foundation.

The report, Risky Business, says there is a “huge gulf” between what commissioners are prepared to pay and the return investors will accept.

It says commissioners are keen to pay for results only when they can be sure that those are down to an intervention, and this requires a high level of risk to be taken by investors, who will lose their money if the SIB does not hit commissioners’ targets.

To make an investment worth the risk, this means that investors must be extremely well rewarded if the SIB succeeds. But commissioners are reluctant to pay this level of return, it says.

via Social impact bonds should offer lower risks or higher returns, says report | Third Sector.

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