Vue du marché e Insights
How do venture philanthropists pick the organizations in which they invest? LGT Venture Philanthropy’s investment manager Nava Anvari explains the Foundation’s due diligence process.
Ms. Anvari, could you explain what venture philanthropy is?
Impact-oriented organizations can offer effective solutions to tackle societal and environmental issues, but often lack the resources to operate at scale. Venture philanthropy not only provides access to funding, but also helps to build organizations’ strategic, operational and management capacity, enabling organizations to scale and replicate their model more effectively.
And how do you discover potential portfolio organizations in which you want to invest?
It’s important to take a step back and look at the concept of a target portfolio, a very common concept in private equity, but less so in the philanthropy investing space. To define a target portfolio, you identify what impact you want to achieve in a specific theme. You then define what you want your portfolio to include in say five years’ time with regards to the geographic spread, sector spread, the size of the business, or the growth stage. At LGT Venture Philanthropy (LGT VP), after years of learning and exploring and trying different approaches, we landed on our two regions, India and Africa and the three sectors on which we now focus – education, health and environment. In each sector for each region, we have constructed a target portfolio with specific impact outcomes and a general picture of the solutions we want to drive forward.
So you already have a good overview of the types of organizations in each sector and how they relate to each other in the ecosystem. Do you have a recent example of how you first sourced an organization?
Yes. In our education sector, for example, our target portfolio includes finding an Early Childhood Development (ECD) operator at scale that can extend ECD services to rural and urban settings. To find this operator, relationships and partnerships are one of the most critical components of our work. We don’t accept unsolicited proposals. Instead, we try to immerse ourselves in the ecosystem in which we’re operating, which means often we’ll know about an organization before we have the first formal conversation about partnership. SmartStart, an organization focused on expanding ECD services in South Africa, is a great example of this approach. LGT VP has had a longstanding relationship with Yellowwoods Capital Holdings, one of SmartStart’s main founders. Yellowwoods had set up Harambee, one of our portfolio organizations, as well as SmartStart, and when we finished our first investment in Harambee in the first quarter of 2019, we transitioned to doing diligence on SmartStart.
Why did you pick SmartStart in this case?
SmartStart has developed a scalable, high-quality ECD service delivery model in South Africa where one million children aged three to five currently do not have access to ECD services. Through the organization, children in remote, low-income areas of South Africa have access to physical, psychological, cognitive and social development which prepares them for primary school and lays the foundation for their life. SmartStart implements a "social franchise model". It partners with 14 NGOs as Franchisors, each of which has a network of Franchisees, women who identify children to enroll in their programs and provide ECD lessons to them. SmartStart itself thoroughly trains the Franchisees and, beyond that, pays the Franchisors to engage a coach to support the women.
And are these women, the Franchisees, from the local communities?
Yes, they are, and their understanding of local realities and their commitment to their communities are the keys to SmartStart’s success, in addition to their highly effective approach to the delivery of ECD services. To circle back to our discussion about our due diligence process, it simply wouldn’t be possible to assess the viability of an organization’s proposed solution without understanding the local environment and thoroughly getting to know the people, their commitments and their approach.
Das Due-Diligence-Verfahren von LGT VP: Wie läuft es ab?
The duration of the due diligence process varies per organization, but typically takes approximately six to eight months and comprises three steps. First, we want to understand the organization in its essence – who is this organization, how long have they been around, what problem are they trying to solve and with what solution? In this stage, we create a three-page summary of our findings, a “Factsheet” as we call it, and present it to our entire team, who ask us hard questions, help us probe deeper and test our understanding of the solution and thereby set in motion the process of thorough diligence.
So, the entire LGT VP investment team is part of the initial screening of the organization. What is the next step?
The second stage, the "Preliminary Review", is the most comprehensive and resource-intensive part of the due diligence process, as we are getting to the core of understanding the solution and the people we want to support. The key question of “who are the people/team we’re backing” always reminds me of a venture capital approach in which you’re investing in the people driving a solution. We get to know the people’s backgrounds, skills, visions and plans for the organizations, and, very importantly, we begin to build a relationship with them. This is the part that I find most exciting about a new deal.
What else do you do at this second stage apart from understanding the people?
This stage is also dedicated to thoroughly analyzing the solution and impact, as well as the organization’s core areas, such as their financial budget, operational setup and long-term strategy, to name a few. We also want to understand who their key funders and external partners are, and conduct detailed market analyses, evaluate risks associated with our investment and develop possible exit strategies. The organizations are sometimes surprised by the number of questions and the level of detail, but afterwards acknowledge how it makes us a more valuable partner.
What follows the preliminary review stage?
If we receive full support from the IC, we engage in the third and last part of the process, final diligence, which usually takes another month or two. In a pre-Covid world, final diligence consisted of spending time in the field to immerse ourselves in the communities in which the organization is operating. This is the most valuable part of the process for me because we’re spending time in the country, visiting the organization’s sites, talking to their partners and connecting with them beyond the ‘boardroom’ setup. During Covid we would do most of this remotely, including getting digital ‘walk throughs’ of the IT systems, for example, and conducting over 20 interviews with various members of management, other funders, stakeholders and partners.
And then, I assume, you present the final findings to the Board?
Exactly. Once we have presented our final investment memo to the IC, have another in-depth conversation and the IC gives us a green light, they will make a recommendation to the Board for final approval. Even though we have a long-term mindset and plan to work with our organizations for at least four years, we usually start with a one-year partnership to test our hypothesis. We then provide a three-year follow-on funding proposal, ideally tied to a clear multi-year strategy if the organization progresses as planned.
Why conduct such a thorough due diligence process?
There are three main reasons.
This again ties into your strategy focused on long-term, systemic change.
Precisely. Because after the due diligence process, we understand the organization and the ecosystem in which it operates so well, we can add value in key areas for the organizations, their partners and stakeholders. And, thanks to the comprehensive due diligence, we can trust that our support will be put to the best use possible.