Third-sector organisations and venture capitalists are unlikely bedfellows but a new fund could change all that. Mathew Little reports.
A venture capital fund for the voluntary sector appears so incongruous it could be classified as an oxymoron. The epitome of 80s capitalism as a panacea for a sector that prides itself on representing those left behind by economic prosperity. Gordon Gekko meets William Booth.
But according to Rod Schwartz, chief executive of venture capital firm Catalyst, the lion can lie down with the lamb to the mutual benefit of both.
This week he begins raising investments from banks, companies and charitable foundations for a proposed £50 million venture capital social sector fund.
It is uncharted territory, but Schwartz believes it could match or equal returns achieved by conventional venture capital funds in the private sector.
Investment in social businesses, public-sector companies and the trading subsidiaries of charities will be made to achieve rapid growth over a five- to six-year period. The venture capitalists will then exit, cashing in their stake through a sale to another company or a buyout by the management team they have nurtured.
Bridges Community Ventures runs a similar fund investing in deprived communities and it is rumoured that other venture capital firms are considering the third sector as ripe for investment.
Ironically their interest comes at a time when the reputation of venture capitalists with conventional private-sector entrepreneurs has sunk to an all-time low.
"Most entrepreneurs hate venture capitalists with that intense loathing only found in people who have been locked into one-sided, exploitative relationships," says Chris West, co-author of The Beermat Entrepreneur, a guide to business start-ups.
"Entrepreneurs and venture capitalists have a very different approach to life," says West. "Entrepreneurs want to change the world, whereas venture capitalists just want to make money."
The methodology of venture capitalism, he says, is to invest in a spread of companies - most are allowed to go the wall, but one or two take off and make a fortune for investors.
According to West, venture capitalists want huge shares of profits and push the business into growing faster than it should in order to achieve this. They promise help with finding customers, marketing and HR but often this assistance does not materialise. "The general perception among entrepreneurs is that they are unhelpful and don't care about the business," he says.
West is sceptical that a venture capitalist approach is compatible with the aims of voluntary organisations. "You are getting into bed with ruthless people," he warns. "Even if venture capitalists are personally nice people, they have not very nice investors breathing down their neck demanding 15 per cent returns per annum."
Schwartz agrees that many venture capitalists are not going to win any popularity contests. "Most venture capital firms are too nasty to companies generally and confuse being commercial with being objectionable," he says.
"The senior people beat the hell out of the junior people and then they beat up the company and make them suffer. This sort of thinking destroys the relationships we want to build. That doesn't mean we aren't hard but we are co-operative."
Schwartz promises a hands-on approach to the social sector organisations that the Catalyst fund will invest in. The relationship will begin with the psychometric testing of managers and measurement of their skill sets.
The firm will then do an analysis of "team dynamics" which will be made available to the management team. As the investment progresses, Catalyst will introduce the business to new customers and potential partners and make appointments to the board.
But what happens if despite Catalyst's solicitous approach, the business fails to produce the profits envisaged by investors?
"If a company doesn't produce the necessary returns, we will work as hard as we can with the management team, but if it isn't commercially viable, in the end we will close it down," says Schwartz. But he points out that the charity will understand from the start that those are the rules.
Schwartz will not specify the percentage returns that Catalyst is looking for, other than they will at least match returns for conventional venture capital funds.
But according to charity consultant John Pepin, who has worked with a number of charities seeking venture capital investment, there is no reason to assume that the voluntary sector cannot attain the "stellar returns" desired by venture capital funds.
"I am working with charities on business plans that could generate 30 per cent returns over the course of the investment," he says.
"Given the amount of intellectual capital in the voluntary sector there is all kinds of room for business development."
But there needs to be a clear distinction between the kinds of voluntary-sector activity appropriate for venture capital investment and those that aren't, says Pepin. Essentially services to beneficiaries should remain funded by conventional means, but the expertise developed by the charity in providing these services, could be sold on to other customers, fuelled by venture capital investment.
"You could be an organisation that provides counselling to people on low incomes as your core mission. You could then sell your expertise to provide counselling to public-sector employees. Or an environmental charity could take its knowledge and expertise and sell its services as a consultant to local developers," says Pepin.