Venturesome – social purpose finance Paul Cheng Investment Manager, Venturesome

2 Agenda  Introduction to Venturesome  Funding needs and financial mechanisms  Future challenges  Case studies

Venturesome: filling a funding gap  Charities are undercapitalised  few charities are able to create a surplus that they can transfer to their balance sheet  funding is primarily available in the form of revenue funding; there is very little capital investment available to charities  Our vision is that, by 2012, lack of access to capital is no longer a major barrier to charities achieving their social impact

Our track record  Since 2002, we have offered over £10m to 150 charities  Default rate is very low: <5%  We are currently managing a fund of £8m  In 2007, we were awarded Most Innovative Charity at Britain’s Most Admired Charities awards  We learn from our investment in charities, and share this learning with the wider social investment market, encouraging a more efficient use of capital

The spectrum of venture capital involvement COMMERCIAL DRIVERS SOCIAL / PHILANTHROPIC DRIVERS Commercial Investment in Social / Environmenta l Sectors Community Development Venture Capital Social Enterprise Investment / Social Venture Capital Venture Philanthropy / Charitable Initiatives VC / SocialSpecialist VCSocial / VCPhilanthropyMainstream VC Environmenta l sustainability, CSR and SRI consideration s for Mainstream VC Investors

The spectrum of venture capital involvement COMMERCIAL DRIVERS SOCIAL / PHILANTHROPIC DRIVERS Commercial Investment in Social / Environmenta l Sectors Community Development Venture Capital Social Enterprise Investment / Social Venture Capital Venture Philanthropy / Charitable Initiatives VC / SocialSpecialist VCSocial / VCPhilanthropyMainstream VC Environmenta l sustainability, CSR and SRI consideration s for Mainstream VC Investors Venturesome

Helping individual charities – what we offer 1.Working capital to cover cash flow fluctuations, e.g. when paid in arrears for services rendered. ‘Open’ working capital tides an organisation over before it has raised all the money it needs to meet its costs. ‘Closed’ working capital is used where the funding is already committed. 2.Development capital can be ‘hard’, for the resources needed to carry out operations (e.g. property, vehicles, equipment), or ‘soft’, to support growth and innovation (e.g. the development of a new product) 3.Pre-funding of fundraising, for example where an organisation is fundraising for a new building, and requires a bridging loan to enable it to proceed where it wishes to take advantage of a fixed contract price for building work

Main financial mechanisms used by Venturesome  Underwriting / standby facilities  undertaking to provide financing for a particular project if budgeted income does not materialise  Unsecured loans  not taking security on the charity’s assets  Equity and quasi-equity  the return the funder receives is linked to the financial success of the venture

Matching financial mechanisms to funding needs

HIGH CHANCE OF REPAYMENT LOW CHANCE OF REPAYMENT Secured loan Standby Facility Overdraft Unsecured Loan Patient Capital Quasi-equity Equity Grant

Matching financial mechanisms to funding needs LOW RISK Hard Development Capital Working Capital (closed) Pre-funding Capital Fundraising Working Capital (open) Soft Development Capital HIGH RISK HIGH CHANCE OF REPAYMENT LOW CHANCE OF REPAYMENT Secured loan Standby Facility Overdraft Unsecured Loan Patient Capital Quasi-equity Equity Grant

Matching financial mechanisms to funding needs LOW RISK Hard Development Capital Working Capital (closed) Pre-funding Capital Fundraising Working Capital (open) Soft Development Capital HIGH RISK HIGH CHANCE OF REPAYMENT LOW CHANCE OF REPAYMENT Secured loan Standby Facility Overdraft Unsecured Loan Patient Capital Quasi-equity Equity Grant

Matching financial mechanisms to funding needs LOW RISK Hard Development Capital Working Capital (closed) Pre-funding Capital Fundraising Working Capital (open) Soft Development Capital HIGH RISK INCREASING SUPPLY LITTLE SUPPLY HIGH CHANCE OF REPAYMENT LOW CHANCE OF REPAYMENT Secured loan Standby Facility Overdraft Unsecured Loan Patient Capital Quasi-equity Equity Grant

14 Matching financial mechanisms to funding needs

15 Who funds what? Unsecured Loan Overdraft Quasi-equity Equity Grant Pre-funding Capital Fundraising Working Capital (open) Soft Development Capital Standby Facility LOW RISKHIGH RISK Hard Development Capital Increasing evidence of commercial finance available Patient Capital Secured loan Working Capital (closed) LOW CHANCE OF REPAYMENT HIGH CHANCE OF REPAYMENT Need for further supply of capital and development of financial instruments

Charity or business?

Social enterprise What is “social enterprise”?

Model 1 “Cash Generator”

Model 2 “Trade off financial and social returns”

Model 3 “Lock-step”

The investor universe + 8%

The investor universe + 8% Market-rate return

The investor universe + 8%0% Market-rate return

The investor universe + 8%0% Market-rate returnCapital-protected

The investor universe - 100%+ 8%0% Capital-protectedMarket-rate return

The investor universe - 100%+ 8%0% Capital-protectedMarket-rate returnGrant-makers

The investor universe - 100%+ 8%0% Capital-protectedMarket-rate returnGrant-makers - 15%

The investor universe - 100%+ 8%0% Capital-protectedMarket-rate returnGrant-makers - 15% ?

Future challenges  Changing the grant-making mindset

Future challenges  Changing the grant-making mindset  Creating a guarantee fund

Future challenges  Changing the grant-making mindset  Creating a guarantee fund  Using subordinated debt

Future challenges  Changing the grant-making mindset  Creating a guarantee fund  Using subordinated debt  Creating a social stock exchange

Future challenges  Changing the grant-making mindset  Creating a guarantee fund  Using subordinated debt  Creating a social stock exchange  Doing social investment banking deals

Future challenges  Changing the grant-making mindset  Creating a guarantee fund  Using subordinated debt  Creating a social stock exchange  Doing social investment banking deals The emergence of a new financial services industry around social enterprises

“Not everything that counts can be counted. And not everything that can be counted, counts.” Albert Einstein

Case studies – working capital  Mental Health Media (2006)  low reserves but refocusing of activities required unrestricted funds to meet expenditure  open working capital needed  standby facility of £50,000  remains undrawn as funds were raised as expected  Questscope (2004)  grants from World Bank and EU up to 14 months late, resulting in significant working capital problems  closed working capital needed  unsecured loan of £60,000  repaid in full once grant payment was received

Case studies – development capital  Women Like Us (2005)  budget shortfall plus a cashflow difficulty arising from committed funding being paid in arrears  open working capital and soft development capital needed  £25,000 standby facility and £25,000 unsecured loan  £20,000 drawn down, being repaid monthly  Facility extended in 2007; £50,000 standby facility offered  Charity Technology Trust (2007)  transitioning from grant-dependency to a more commercial model  soft development capital needed  £50,000 in the form of a Revenue Participation Right  first payment expected April 2008

Case studies – pre-funding of fundraising  St. Cuthbert’s Church (2003)  third phase of extensive redevelopment project required building contracts to be signed, but fundraising was not 100% committed  pre-funding of fundraising  £80,000 standby facility  undrawn, facility ‘recycled’  facility renewed 2007  £50,000 underwriting ahead of BLF grant  undrawn, facility recently recycled

Contact details: Paul Cheng