Alliance Extra - November 2005

From venture capital to venture philanthropy
Interview with Brian Wardrop

On 13 October, NESsT presented its third ‘Golden Egg Award’ for excellence in international venture philanthropy to Brian Wardrop of DBG Eastern Europe, a CEE-focused private equity firm with offices in Budapest, Bucharest, Prague and Warsaw. The award recognizes Wardrop’s leadership as one of the most active advisers, donors and volunteers to the NESsT Venture Fund in Central Europe. Why did he first become interested in NESsT? Alliance asked Wardrop. Does he feel there is a natural affinity between a venture philanthropy fund such as NESsT and a venture capitalist like himself? And how does working with NESsT’s portfolio of social enterprises differ from working with his own portfolio companies?

I was approached about three years ago by one of the other NESsT Business Advisory Network members, whom I know very well, and who is also in the private equity industry, and he strongly urged me to take a look at NESsT and to learn more about what they were doing.

What’s the difference between a private equity firm and a venture capital firm?

None, really. Venture capital firms tend to invest in earlier stage, developmental companies, whereas private equity firms tend to invest in slightly more mature companies. But for all intents and purposes you can use the terms interchangeably. Private equity tends to be more of a European term, venture capital more of a US term, that’s all.

What form has your support for NESsT taken?

It’s developed incrementally over time. Initially, I joined their Business Advisory Network, which essentially involves reviewing the business plans of some of the social enterprises that are proposed to NESsT. I’ve also been able to make a few introductions to people within my network that were useful to NESsT. Subsequently, I became a financial donor –not huge numbers, but I supported them financially none the less. Since then I’ve joined the Supervisory Board of NESsT Europe – their office in Europe is here in Budapest where I’m based.

What’s the role of the Supervisory Board?

A non-profit in Hungary is required to have an independent Supervisory Board, which basically monitors the non-profit’s activities, signs off on the accounts, etc. What it does is very similar to what a board of directors might do in a UK PLC, but obviously on a much, much smaller scale. So it’s basically the governing body to which the management team of the non-profit reports. The Business Advisory Network at NESsT is more analogous to a private equity advisory board. It’s there to give advice – ad hoc advice case by case.

Have you found working with NESsT a rewarding experience?

Absolutely. From the perspective of someone in the private equity industry, the work that NESsT does is very easy to relate to – and my personal belief is you have to feel some sort of affinity with the non-profit that you choose to support. So it’s very easy for me to understand what NESsT is doing, what the objectives are, and so on. Also, the NESsT network of supporters, as well as the NESsT team, tend to be fairly business oriented. So most of the discussion revolves around questions like: is a particular social enterprise, concept or idea viable? Can it be profitable? What are the management issues? Where are the potential risks and pitfalls? So intellectually, from a private equity standpoint, it’s fairly stimulating, interesting work to be involved in.

When you say it’s important to find a non-profit that you feel an affinity with, are you talking about the way that it works as well as the actual work it does?

Yes, certainly for me personally. For example, there’s a NESsT Supervisory Board meeting this afternoon here in Budapest, and I’m really quite looking forward to going and hearing how things are going. Furthermore, many of the other members of the Supervisory Board are people from my peer group in Hungary, people that I know well and don’t necessarily see that often, so it’s a good chance to catch up with them. So in my case it’s substantially more interesting than being involved as a simple donor to a non-profit that is doing good work, but I may not feel a particular intellectual interest in what they’re doing.

If you feel there is a natural affinity between venture philanthropy funds such as NESsT and private equity/venture capital firms, would you recommend others in your industry to get involved?

Absolutely. In the private equity industry in Central Europe we face many of the same challenges with the companies that we invest in as NESsT faces with the social enterprises that they support. I can take a social enterprise business plan home and review it in my own time. That doesn’t take a lot of time, but the input we can provide to NESsT is extremely valuable. So when I’m encouraging my colleagues in the industry to get involved and support NESsT, part of the pitch so to speak is that they don’t really have to spend much time on this, and the time they do spend is ad hoc, when they have a spare 30 minutes or so.

How would you compare the work you do with your portfolio companies in your day job with the work you do with NESsT’s social enterprise portfolio?

Well, with NESsT most of what I do is desk based. So I’m not out meeting the social enterprises very often, it’s more a case of providing introductions, finding industry experts, reviewing plans and commenting on their financial viability. Whereas we tend to meet our portfolio companies a minimum of once a month, more likely every two or three weeks.

Most of what I and my colleagues in the industry who are involved with NESsT do is advising Eva Varga, NESsT Enterprise Development Manager, who’s based here in Budapest. For example, she might come to a group of us and say, ‘I’ve got a management issue, I’ve got someone in this social enterprise who just doesn’t get it, or there’s a series of problems and I just can’t get my message across, what sort of communication tactics might be workable?’ I’d say the Business Advisory Network at NESsT plays more or less the role of a private equity firm’s advisory board. I would go to my advisory board to seek advice about how to deal with one of my portfolio companies on a particular matter. Then it’s Eva herself, or somebody else on the NESsT staff, who makes the regular visits to the social enterprises.

Are there aspects of the venture philanthropy approach that you found difficult to adjust to initially, for example the fact that there’s no real exit? How far can you really push the venture capital/venture philanthropy analogy?

I don’t think the issue is exit. I think it’s quite clear when a social enterprise is available to swim or fly on its own, and that’s an exit. I think that’s easy for venture capitalists to understand. Where I come to a stumbling block occasionally, when I’m approaching my colleagues in the industry and trying to get them involved with NESsT, is around the relative size of the financial investment and the management fee.

The private equity industry has scale. If you look at our management fees as a percentage of the total capital we invest in our portfolio companies, it’s relatively modest. A typical private equity question is what’s the percentage of your capital or your annual budget that actually goes to the portfolio in cash versus management fee. I think some venture capitalists have a hard time grasping the idea that NESsT is not actually investing very much cash in the social enterprises, though they are certainly doing a lot more consulting, portfolio management, advice giving – investing time and energy as opposed to capital. So I think some venture capitalists look at the venture philanthropy model and say, ‘OK, I prefer to get involved with a “charity” or a non-profit where the management fee is a smaller percentage of the capital that goes to the particular non-profit or cause.’ My very limited involvement in the non-profit sector suggests that this is an important metric. You know, I give €100 here, and how much of that actually ends up supporting the underlying cause?

Yes, but isn’t it different with NESsT? Normally, the management fee or admin cost is simply how much it costs to get the grant to the recipient and monitor it and so on, whereas with NESsT it’s probably the main part of what they offer.

Yes, I fully agree, and I’ve come to understand this quite well. But I do think it takes a little bit of digesting for a venture capitalist to accept the notion. Once they understand it, I think they accept if very well, but I have to get someone to focus for a couple of hours before they understand NESsT’s particular model, and that what we’re talking about is not the same as a typical charity’s management fee. You can explain it if you’ve got enough time, but in a ten-minute cocktail party discussion it’s really quite difficult to do.

Can you see any future for loans within the NESsT structure? Either for NESsT itself to take loans, so as to attract the market of social investors who might at some point want their money back, even if the return is very low, or for NESsT to lend rather than give to its portfolio enterprises?

I think it’s worth looking at very seriously. I tend to think of it less in terms of the ‘investors’ that may want capital back at some stage and more in terms of imposing financial discipline on the social enterprises. The analogy in the private equity industry might be a leverage buyer for a private equity firm buying a company and borrowing part of the money and pushing that loan down to the company’s balance sheet. That tends to impose quite a bit of financial discipline on the company, provided the loan is in reasonable range – not too much debt or too much leverage. So I think the idea of having a loan fund, a sort of microfinance loan-type product, could be quite interesting, because then the social enterprises will understand the cost of capital and hopefully start to be more disciplined in the way they run their operations.

But you’re not so interested in NESsT itself taking loans?

Well, I think the NESsT team is reasonably business-minded and reasonably financially oriented. I think they do understand the cost of capital so they don’t really need that kind of discipline. Frankly, I haven’t really thought a lot about it, I’ve thought more about the social enterprises themselves.

Finally, when you accepted your award last week, you described NESsT’s work as critically important. How do you see NESsT’s work of supporting social enterprises fitting into the wider economic development of countries in Central Europe?

My observation, primarily anecdotal, would be that the region has experienced tremendous economic growth since the transition from a controlled economy in the early 1990s. There’s been quite a lot of wealth created, enormous amounts of foreign direct investment, GDP growth, growth in real wages. Inflation has risen dramatically and come down dramatically. The financial services sector has become reasonably well developed. So all the macro indicators have pointed strongly in the right direction more or less throughout the last 10 to 15 years. But the culture of giving and the culture of philanthropy – again, this is primarily anecdotal – seems to be taking more time to gain a foothold in the region. I don’t think it comes as naturally to people in this region to give as perhaps it does in the UK or the US or some other places in the world.

On the flip side, my perception is that some of the international donors that were operating in the region seem to be exiting into what are seen to be more difficult and more needy areas of the world, and Central Europe, particularly the core accession countries like Czech Republic, Poland and Hungary, is seen as less of a priority. But there’s a lack of indigenous philanthropic cash to come in and fill that gap.

To exacerbate the problem, there is a general lack of management talent in the region. Because these were planned economies, you don’t have a natural generation-to-generation development of management. It is getting dramatically better in the private sector, but in the non-profit sector the problem is worse. This means that non-profits have a hard time developing viable social enterprises.

So this is where I see NESsT filling an important gap. Basically they are coaching, teaching, introducing management discipline to the social enterprises in order to hopefully give them a shot at being self-sustaining. That’s where I see them fitting in.

Brian Wardrop is a Partner in DBG Eastern Europe. He can be contacted at wardrop@dbgee.com

For more information on NESsT, see http://www.nesst.org/

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