High Risk, High Reward

I’ve mentioned in previous posts on The Changebase that, in many ways, my MBA experience has made me feel a bit like a fish out of water. With my non-profit background and change-the-world goals, it’s not surprising that I have had some serious growing pains associated with learning new ways of thinking about and solving business problems.

Funny enough, my favorite learning experiences in school have been when I could relate what I was learning about business with what I knew to be true from my work in the social sector.

Here’s a good, albeit slightly roundabout, example: over the last couple of months a number of my classes have delved into the topic of venture capital – both from an investor and entrepreneur perspective. Now, as someone who practically grew up on Sand Hill Road, the venture capital culture of Silicon Valley is one that I am very familiar with. Still, beyond a very superficial understanding of what VCs do, I didn’t know much about the field before this semester.

Forgive me if this is incredibly naïve of me to say, but it turns out that venture capital is all about making money. I mean, REALLY BIG MONEY.

And how do these VCs make this money? They take risks. Nowhere is the saying “high risk, high reward” more applicable than in VC country.

I've also learned in class that the relationship venture capitalists have with entrepreneurs is an interesting, and some would say, delicate one. On the one hand, the two parties presumably should partner together to execute a winning business strategy and deliver an innovative product or service to the market.

On the other hand, as new majority-stake owners (which is what VCs become when they fund an entrepreneur’s company), the VC has little interest in anything beyond a successful exit strategy that will make him or her millions (if not billions, if you’re lucky enough to invest in the next Google or eBay).

All of this really hit home for me recently when I participated in a venture capital simulation for my entrepreneurial management class.

Picture this: me and my classmate, sitting in a small, windowless room with a “real” venture capitalist trying to negotiate a fake $30M term sheet for a new start-up we’d just created. Let me repeat: the money was fake but everything else was real: real VC, real term sheet, and a very tough, very real negotiation. In fact, at each stage of the negotiation he forced us to fight tooth and nail for any concessions we wanted him to make. Why was he so tough on us?  

Because – just as I’ve learned in class – there was money to be made in the deal and he wanted to make sure that, in the end, his slice of the pie was as big as possible. Remember, high risks and high rewards.

Ok, so you’re probably asking yourself – what’s the point? Why are we talking about venture capital on The Changebase?

Here’s the deal: it's perhaps a silly analogy but just like bees, cross-pollination between the for-profit and nonprofit sectors is happening everywhere. As businesses become more concerned with social responsibility and corporate citizenship, nonprofits are also warming up to the idea of creating revenue-generating models to ensure sustainability of their programs and operations. The social is becoming the financial, so to speak. And nowhere is this cross-pollination more obvious than in the area of Venture Philanthropy (seriously, even the name is a hybrid!).

More and more funders today are providing “VC-themed grantmaking” to social entrepreneurs looking for capital. Organizations like Echoing Green serve as “angels” to social enterprise leaders; Ashoka and Skoll Foundation provide early-stage funds to change-oriented start-ups; and New Profit assists more mature nonprofits and social ventures as they grow to scale. Each one has taken its cues from the venture capital world while tweaking its strategies and funding models to meet the needs of the social enterprise sector.

When I first heard about it, I thought this whole concept of venture philanthropy was pretty cool – and I still do. After all, it’s a no-brainer that social entrepreneurs need the same access to funding, support, and guidance that regular entrepreneurs have, and these organizations provide those services.

But if I go back to what I’ve learned in class about venture capital, that’s when I start getting confused. If venture capital is about taking risks and making money, doesn’t it seem a little backwards to look to that industry for cues on how to fund a sector whose primary goal has never been just financial?

Moreover, when I think about my experience at the negotiating table, I wonder: how do these social enterprise funders treat their entrepreneurs? Is it an adversarial relationship, like I experienced in the simulation? Or a more collaborative partnership?

Interestingly, the organizations that fund social enterprise start-ups may not be buying equity like VCs, but they certainly are taking risks. In fact, one might argue that they’re taking even more risks than traditional venture capitalists, given that they’re investing in people and organizations with truly revolutionary, world-changing ideas.

Maybe for these funders it’s more about “high risk, high social reward”?

What do you think about the world of venture capital being applied to social enterprise? Does the same language apply? And do organizations like Echoing Green actually take on more risk when they bet on entrepreneurs whose ideas can have an impact on people, and not just on the balance sheet?

I don’t have the answer, so I’d love to know what you think.