Gates Ventures (?)

25Mar09

Maximizing the double bottom line – doing good and doing well financially. Not exactly a new business concept… it’s one that has been floating around for a long time  – but why exactly is it so difficult to achieve?

One way to look at the conundrum is to consider the perspective of the start-up enterprise with a product that primarily serves developing countries. 

Product: Global health product which will aid in HIV diagnosis and monitoring.  It will enable millions to gain access to therapy and treatment. 

However, who are the customers? Who is able to purchase the product? A primary key differentiator of developing country markets is that the ultimate end consumer/patient has very low buyer power. The primary customers will be in-country governments who see a healthy workforce as a key foundation for development. Along the same thought train, other primary customers will be private agencies (ie. large employers in developing countries) who run a in-house healthcare team/service to ensure stability and health of labour supply. 

Question: WHO WILL FUND PRODUCT DEVELOPMENT?

Medical devices for the developing world oftentimes require a unique product profile (robust, resistant to humidity, sand, not dependent upon constant power supply, mobile, etc.).  The rapid pace of new science and technology discovery has enabled solutions to many of these requirements in an academic/lab/small scale setting.  However, developing such products for the masses and passing regulatory and sales development hurdles takes time and resources. Where will the $$$ come from?

alternative 1) Obtain grants and develop product in academic institutions: viable on a small-scale. But universities are designed to conduct research and not conducive to the agility required of product development on tight time-lines. This product is needed, and it’s needed now.

alternative 2) Set up company and obtain Venture Capital (VC) funding: VCs have the resources and knowledge/network to make product development fast and efficient. Problem – they also demand a 3-5x exit strategy for the company to ensure they get a return on THEIR investment. But remember, the inherent core of the business is not to charge the highest price the market can accept (thereby limiting access to the extreme poor), but to disseminate the technology widely as possible to help the greatest # of people.  The VC business model pushes the company to concentrate primarily on the bottom line and make the largest quantitative monetary return possible. But what about the qualitative/impact/social responsibility return?

alternative 3) Make a version of the product for the developed world / middle income countries and charge a large enough margin to supplement losses in developing countries: This contradicts the fact that the target profile of this medical device is for developing countries and there are other alternatives already in existence in developed worlds (ie. where is stable supply of electricity, air conditioning, etc) Ultimately, we want an alternative that can prove business models centered on developing country needs can be sustainable.  

alternative 4) A investment from a non-traditional Venture Capital Fund. 

Characteristics:

– a fund that is interested in social impact as well as economic return (ideas: evergreen fund that caps at 10% return per year, or threshold of 3x return – with all excess returns generated back into fund)

– a fund with connections in early stage healthcare research (bench) as well as expertise in end-stage healthcare delivery (logistics and distribution channels in place with governments and private agencies, the key customers identified earlier) 

– a fund with a mission aligned with the goals and objectives of changing the world for better

– a fund which is not chained to the purely monetary financial return requirements of its large investors/limited partners – ie. a source of capital which is aligned with a the broader mission

–> So how about a mission statement that sounds like this? ALL LIVES HAVE EQUAL VALUE … “dedicated to bring innovations in health and learning to the global community”. 

What are your thoughts on if the Bill & Melinda Gates Foundation had a social venture arm? Gates Ventures? Is the idea so “out there”? Or does it actually hit so close to home one wonders why it does not? … 

Some preliminary thoughts:

  • Admittedly, I know not the Gates endowment investment policies – but I predict that it follows the mandate of creating the highest return on its invested capital so that the interest generated can fund more and more grant money for its programs
  • If the Gates Ventures arm provides a return just as good as its standard investments, would that not be the wiser choice?? It’s like compounding social returns because the social enterprises being invested in are creating good in alignment with the Foundation’s broader mandates
  • Legal issues? Tax issues? Because these are social enterprises and not other academic institutions, pure-play charities… But I think these issues can be debated, brainstormed, discussed and solved.  Please post your thoughts!! (all comments welcome and appreciated)
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5 Responses to “Gates Ventures (?)”

  1. 1 Carla Culos

    Hi Julia,

    Exceptional post/thoughts/ideas! There are some forward-thinking investors and social venture capital firms that are doing (or at least exploring) exactly the issues you are addressing. How do we support businesses/organizations that create incredible social and environmental impact but whose value must be realized over a longer investment horizon and whose real impact is not just a bottom line number but the economic, social, and environmental development these create?

    Some investors are building funds to invest as ‘patient capital’ they seek lower (sometimes above average, sometimes below) market returns then a traditional venture capitalist and expect to see these returns over a longer time horizon. These investors tend to understand the nature of the issues the businesses they are investing in are trying to solve and realize that they are not fast turn-around solutions.

    The difficulty (opportunity!) is to demonstrate to traditional investors or to investors of social venture funds the real, hard, numbers behind putting money towards these ventures. If a fund is measured on financial return and social return, how do you measure the latter?

    This is where much research is being done in response to the call for ‘Metrics’. What are the indicators being used to measure social impact and the social return on investment? In this area it is also tricky because it is seemingly comparing apples to oranges. How is it possible to say that ‘creating jobs for homeless men and women in the Vancouver downtown east side’ gleans a higher social return on investment then does ‘installing a water filtration system for a community in India’? Tricky questions, but I believe the point is not to compare apples and oranges but to educate investors and donors that the money invested is being monitored and measured, with benchmarks and milestones in place. What this also does (in a larger context beyond social businesses) is set best practices and standards for social investment funds, investments, social businesses, philanthropic and development foundations to demonstrate their accountability to their respective investor in how they plan to do well by doing good!

    Below are a few links to articles and investment companies and associations that are looking at developing the kinds of funds you are talking about above AND perhaps these can help frame the thinking around the possibility of developing venture arms in very cool and seemingly fitting foundations.

    Thanks Julia!

    Carla

    Investors Circle
    http://www.investorscircle.net

    Opportunity Finance
    http://www.opportunityfinance.net/

    Social Impact Metrics
    Jantzi Research
    http://www.jantziresearch.com

    HiP Investor
    http://www.hipinvestor.com
    (a few firms I have come across, but I know there must be more!)

    Social Edge.org : New Metrics for Today’s Social Entrepreneurs
    http://www.socialedge.org/discussions/success-metrics/new-metrics-for-today-s-social-entrepreneurs/

  2. 2 Ramona

    Hi Jules,

    Great question! Why is it so hard to pair up financial and social returns or, in this example, get financial backing for a project with great social returns?

    Broadly, I think the underlying problem is that social returns and costs are not priced in economic/financial systems. E.g. the environment is an ‘externality’ in economics, as the prices we pay for goods do not reflect the costs or the benefits to the environment from any product or service. Same goes for human welfare! But even if there was agreement that prices should reflect these welfare costs, how would you put a price on the environment or the social benefits of better HIV diagnosis? This problem is being tackled on an economic level by the Commision on the Measurement of Economic Performance and Social Progress (reporting in April on alternatives to GDP see http://www.stiglitz-sen-fitoussi.fr/en/documents.htm) and as Carla noted financial investors are developing metrics to measure social return.

    In terms of your example, I totally agree that new funding models are needed for socially responsible investments. There are companies out there that cater to this market (see list here: http://ecopreneurist.com/2008/04/10/eco-angels-venture-capital-for-socially-responsible-eco-businesses) and things are starting to move fast in the green investment market, so perhaps you could look at some of the business models and financing structures that have flourished / failed there?

    Keep posting!!!! Hope to see you soon, Ramona

  3. Hey Julia,

    Interesting post. I suppose I’d like to tackle this from two different angles: Morality and the Gates foundation, and why social VC in Africa won’t take off from North America.

    On the first subject, the Gates foundation is an odd organization. From the perspective of someone who’s been watching Microsoft’s business practices and legal tactics for a good decade and a half, I consider Bill Gates to be highly ethically challenged. Those activities have done well for Mr. Gates, his staff and their investors, but it’s come at a high price in the cost of other businesses destroyed, lives ruined and technology stifled simply to toe the Microsoft line. I can rant about the things that Microsoft did under Bill Gates’ watch for hours. It’s evil.

    Thus, the Gates foundation to me is not money I’d want to accept. (Although I did try once for a Gates Scholarship, and they rejected me, so apparently it’s not money they’d offer me anyhow.) I see it as a way for Bill Gates to try to atone for having gotten it at such a high ethical cost – so for him to turn that foundation into a VC corporation probably wouldn’t be so redeeming. Whether you believe in Hell or not, I think this is how Bill Gates is trying to keep himself from finding out if it really does exist.

    VC funds probably don’t have the same ability to cleanse the soul of the people funding the capital, in case some of your readers come from MBA backgrounds. (-;

    The second part is simply just a question of why VC from North America isn’t going to succeed in Africa: In summary, it’s because Africa needs investment where the profit stays in Africa. Anything less is just another form of colonialization, in which the profits are sucked back into the hands of Americans/Europeans/etc, leaving Africa no better off than it was before.

    Instead, if Ideas like the one you propose are really to take off, you need a foundation to donate the money to create an African VC corporation, which uses it’s money to keep money and talent in Africa, and is able to use the profit they gain to fund yet more development. They would need to be above the endemic corruption, be willing to accept far lower profits than a North American VC, and have a truly African viewpoint.

    There’s far more to this than simply injecting money or technology into a foreign company – you need people who truly care about the long term effects (environmental, social, etc), otherwise you end up with India-like problems, where large companies simply use the cheap labour, while polluting the environment, engaging in corrupt politics and returning the profits to foreigners who will only spend that money at home. Vast watersheds have been destroyed by companies that are more interested in producing compounds for European markets than producing long term stable communities in India.

    So, to summarize my point, I don’t think that the Gates foundation is the right place to start – You’ll need to look further and start developing the infrastructure for a market economy in Africa itself, where they can fund the good ideas, build the factories, and keep the profits engaged in the local communities. It’s only from that perspective that the African market will look attractive to investors, and for the long term trickle down effects to begin flowing.

    Anyhow, thanks for the fun discussion! I hope my comments aren’t way off base.

    Anthony

  4. great post and great replies
    @carla thanks for the links


  1. 1 Social Venture Capital for Health.. Two Years On (Mar2009-Mar2011) « BioBuzz Blog

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