CHOOSE THEIR PORTFOLIO COMPANIES?
Mariarosa Scarlata, ESADE Business School - URL, Spain (*)
Luisa Alemany, ESADE Business School - URL, Spain
This paper examines the deal origination and the selection process adopted by philanthropic venture capitalists when deciding which social organizations to include in the portfolio they manage. The origination and screening practices as well as the selection variables explicitly considered by philanthropic venture capitalists are then compared to those taken into account by traditional for-profit venture capitalists to understand whether or not the behaviour of the two investor categories is the same. The research is based on a sample representing 54% of the European and US population of philanthropic venture capitalists. Philanthropic venture capitalists appear to originate and select deals like traditional venture capitalists. However, they also adopt different deal origination criteria which are not traditionally used by venture capitalists, i.e., incubation and direct creation of an organization in the event of not finding a suitable organization. Furthermore, selection variables such as “deal terms” and “technology” are not considered to be as important as in the case of venture capital.
Keywords: Venture philanthropy, venture capital, social entrepreneurship.
In recent years, philanthropic venture capital (PhVC), also known as venture philanthropy, has developed as a new financing model for social entrepreneurship. First presented by Letts, Ryan, and Grossmann in 1997, PhVC is the application of venture capital
(VC) strategies and techniques to the financing of social enterprises (SE). As such, PhVC is an intermediate investment in small-medium SE with potentially high social impact .
Like their for-profit counterparts, i.e., the venture capitalists (VCs), philanthropic venture capitalists (PhVCs) have developed specialized abilities when selecting entrepreneurial projects. However, while VCs select deals in terms of creation and maximization of shareholder value (Amit et al., 1998), PhVCs engage in a partnership with
SE with the explicit purpose of maximizing social impact. Due to PhVCs’ philosophy of high engagement, a limited number of SE receive PhVC funding after a rigorous selection and due diligence process.
Despite the growing interest in PhVC, from both professional and academic circles, so far, no study has investigated the selection process of PhVC investments. More specifically,
Contact author: Mariarosa Scarlata; ESADE Business School - URL, Barcelona, Spain; (T)
The authors would like to thank the ESADE Institute for Social Innovation for their help and financial support towards this research.
there is no transparency in terms of deal origination sources used by PhVCs and the variables that are explicitly considered in the screening process. Furthermore, considering that the
PhVC approach stems from the for-profit VC model, the issue of the relationship between the
PhVC and VC selection process has not yet been investigated.
The aim of this paper is twofold. First, to identify the deal origination and deal selection criteria of PhVC investments. Second, we then compare the identified variables and approaches with those characterizing the traditional VC model. Additionally, the issue of the existence of differences in the selection process between US and European entities is investigated. The analysis is based on a web survey which was sent to the entire population of
PhVCs both in Europe and in the US.
The subsequent sections of the paper are structured as follows. First, the paper reviews the PhVC concept and the approach adopted by traditional VCs in their deal origination and deal screening phases. With respect to the deal origination phase, passive and proactive criteria adopted