Recycling Capital

There is a buzz around venture philanthropy these days. It is an idea which, although developed almost a century ago, has only taken shape and obtained a structure over the last two to three decades, primarily in the West. It is now finally taking root in Asia, although it is still at a nascent stage.

There is an increasing focus on alternative models of development and an increasing acknowledgement of a few facts. The first is that most governments have neither the capabilities nor the means to meet social and economic development challenges on their own and hence, any help is beneficial.

Second, doling money out in the form of grants is not always helpful as is evident from the case of Nepal. Despite a few performance targets being put in place, the problem with grants still lies around the idea of accountability. Enterprises receiving grants are almost not accountable to donors. When there is a shortage of capital flowing into the lower end of the economy, there needs to be some degree of accountability to ensure that resources are effectively utilised.

Third, the other approach towards development has been that of loans. While bringing in a semblance of accountability, the issue with loans is that they often place a huge burden on the recipients who can struggle with the repayment terms.

In this light, venture philanthropy has the potential to play an important role. For starters, it brings greater participation of private capital. It is the idea that capital can be invested for philanthropic purposes, debunking the notion that only selfless giving can make a difference to the lives of others. Philanthropic investors also seek financial returns from their investment, but the capital they put to use will necessarily need to bring about some positive social impact. By actually investing in a business, investors retain a say in the management of the enterprise and hence, enterprises are made more accountable for the money they receive. Investors can also contribute to the success of domestic enterprises though providing technical assistance and helping train human capital.

For a nation as heavily dependent on aid as Nepal is, social venture capital funds or venture philanthropy funds can play a very important role in ensuring that small enterprises get access to capital they need. Gazaab Social Ventures, for instance, is one such organisation. The organisation seeks to create social entrepreneurs and to empower them economically such that they can help solve problems in their communities. There are other similar organisations in the country and the proliferation of the same could potentially reduce dependence on aid as it would bring more private capital into play.

The big challenge with venture philanthropy is finding the right opportunities to back, and subsequently, the right channels to exit enterprises once they have scaled. It is not as if there is no capital in Nepal – the big issue is not the unavailability of funds. Rather, it is that there are budding entrepreneurs cannot make use of capital markets to further their businesses. This is a gap that venture philanthropy and social investing can successfully fill.

Nepal already has a thriving non-profit sector focused on social activities. It is about time the pushed for something similar to focus on economic development. There will always be skeptics who will question the ethics of earning profits off social causes, but the importance here lies in scaling solutions and that is something that requires capital. What better way to do it than to have a model in place though which capital can be recycled?

(This was a column published in the Himalayan Times on 12 May 2013).