The innovative, market-oriented but yet not yield-oriented model of social businesses makes a good match for the distinctive approach of venture philanthropy funds.
The term social business was coined by the Nobel Peace Prize laureate Muhammad Yunus. He founded the Grameen Bank, a community development bank in Bangladesh, which awarded microloans for micro-entrepreneurs and enterprises. Today, social businesses like the Grameen Bank represent 10% of all European businesses with over 11 million paid employees, according to the European Commission. It is therefore an important and growing sector in Europe.
The nature of a social business
The purpose of a social business is not to maximize profits but to solve social and environmental problems. In contrast to non-profit organizations, a social business is financially self-sustainable and not dependent upon donations. Whereas a non-profit organization is tax exempt, a social business is taxed like every other similar organization. If a social business realises profits, the profits are not distributed as dividends, but they are reinvested in the business itself or in other social businesses. The investors or owners of a social business can recoup their investment after a period of time, but they do not earn anything. Rather than for profits, those investors act philanthropically.
The initiative for a social business can be generally traced to a social entrepreneur who is the initiator and the face of the business. Spinoffs from non-profit organizations or for-profit companies are also possible. In general, social businesses have an innovative business model.
Venture philanthropy as a driving force behind a social business
One possible source of funds for a social business is venture philanthropy. Venture philanthropy investments are similar to venture capital investments. They differ, however, insofar as that an investor in venture capital is profit-oriented, whereas an investment in venture philanthropy aims for the biggest social impact.
A venture philanthropy fund provides financial and non-financial support to social businesses. Most commonly it is less about financing specific projects, but more about setting up the business. That is why venture philanthropy investments frequently help younger businesses to establish a structure and a network, to provide training for staff and to develop a strategy and a marketing concept.
Depending on the concept of the fund, the investor can get involved beyond his or her ordinary financial contribution. To ensure the success of the investment, the results are constantly analysed. For control purposes, a target agreement between the social business and the investing fund is an option.
The partnership may be limited in time, i.e. that the fund retires after a specified period. In order to avoid damage to the supported business, however, such a withdrawal should be carefully planned.
The targets of venture philanthropy funds
The targets of a venture philanthropy fund may be both non-profit organizations and social businesses which are engaged in non-economic activities (e.g. environmental, educational or social) without being considered as non-profit for tax purposes.
Examples of venture philanthropy funds in Europe are BonVenture in Germany, Ashoka in the United Kingdom or Fondazione Oltre Onlus in Italy. The European Venture Philanthropy Association (EVPA) aims to support networking among the protagonists.
The Regulation (EU) No 346/2013 of 17 April 2013 on European Social Entrepreneurship Funds sets out a new label for funds which focus on investments in European social businesses. In order to be labelled as a European Social Entrepreneurship Fund, a fund has to prove that at least 70% of the capital received from investors are invested in social businesses. This shall assist potential investors in the identification of funds appropriate for their purposes.
Foundations and venture philanthropy
Foundations are also able to pursue venture philanthropy. A foundation is not limited to the passive role of a donor, but it can play an active role by sharing its know-how and network with the organizations it supports, so to generate the maximal effect.
In fulfilment of its purposes, a non-profit foundation may only support other non-profit organizations. The support of for-profit organizations and individuals is permitted only in exceptional cases. An example for such an exception is the award of microloans for micro-entrepreneurs and enterprises.
Venture philanthropy thus offers an interesting possibility to non-profit foundations to promote the professionalization of the “third sector”, as it has been called by many who work in development aid. It has to be remembered, however, that the support of social businesses is reserved to non tax exempt venture philanthropy funds only.
Dr. Andreas Richter, LL.M. (Yale)
Company: P+P Pöllath + Partners