Can venture capital help improve society?

Andrew Muirhead is reflecting on his recent and, he admits, reluctant adoption of social media; about how some of the discussion online can be negative towards young people. He finds that ironic, being part of a generation that he says has not done particularly well by the economy, the environment or international relations.

“That’s my generation. It’s almost been like a scorched earth policy to those coming next, and yet we demonise youth. In fact, there is a lot of talent out there, a lot of ability.” Muirhead is chief executive of Inspiring Scotland, a unique partnership of the private, pubic and not-for-profit sectors which uses venture philanthropy – applying the business principles of venture capital to the voluntary sector – to support charities in tackling social issues.

A banker by trade who went on to work in the third sector for 12 years, Muirhead offers his collective mea culpa in the context of one of his organisation’s funds. Recently launched, ‘Link Up’ is an asset-based programme which focuses on individuals’ abilities, rather than their deficits, and how they can be harnessed to address community needs.

“People have increasingly come to see themselves for what they are not good at; that’s not healthy,” said Muirhead. “We aim to support communities in understanding the assets they have, either physical or people, and use those as part of the solution.” Link Up is the most recent of four funds launched by Inspiring Scotland since its founding in 2008. The organisation secures funding and invests it in a selected portfolio of charitable ventures. The work is around particular themes, tackling issues to change the social landscape; work is funded around issues as opposed to funding activities regardless of their focus.

The approach enables charities to realise long term plans, work towards achieving financial self sufficiency and achieve maximum impact and deliver a social return. Rigorous performance monitoring ensures maximum return, just like any commercial investment fund.

Inspiring Scotland principles include: high engagement, it actively participates in helping organisations to succeed; long-term support and investment, both financial and non-financial; funding core costs of voluntary organisations as well as delivery of their services; capacity building, including funding charities to grow the scale of their operations; defining clear, measurable social benefits; rigorous evaluation and performance measurement; holding organisations accountable for results; and rewarding success and planning to help achieve financial self-efficiency.

Charities are carefully selected; an extensive period of due diligence is undertaken to ensure the charities selected are best placed to engage with the venture philanthropy approach, as opposed to conventional grant-making. It’s not just about the funding, says the organisation; charities must want the venture philanthropy relationship as well as the financial investment.

Investment is from a range of funders, all driven by a desire for social change, including the Scottish Government, trusts and foundations, corporate and leading business people. Inspiring Scotland is independent from the Government but its funding and support is key to the partnership and to achieving lasting social change.

Vital to the model is the development support or capacity building. It comes in the form of Inspiring Scotland performance advisers and the pool of 120 individuals and businesses who have pledged to provide free or reduced fee services and expertise to the charities involved. It is this fusion of government, not-for-profit and the private sector that underpins Inspiring Scotland. This is reflected in the role of David Hardie, who splits his time as the charity’s head of venture philanthropy with his role as chairman of legal firm Dundas and Wilson.

Although the philosophy of the organisation is to take a ‘long view’ of how positive social impacts are achieved, the flexibility in the way it works reflects how the landscape has changed in the last few years.

Its first fund, called 14:19, concentrates on young people struggling to make the transition from school into employment, education or training. Since 2009, it has invested £16.3m in 22 ventures which has resulted in the charities attracting £11.7m in matched funding. Its second, Go Play, is smaller scale financially – £4m from the Scottish Government – but broad in its reach; supporting the many small playbased activities for 5 to 13 year-olds. And its Early Years Early Action fund, based on £6.8m from the Government, began investing in 24 ventures last month.

Calman Trust is a 1419 venture which provides a crucial stepping stone into independent employment for young people

Those three also demonstrate the tension that exists between addressing immediate problems – young people disconnected from society – with spending to prevent costly problems building up in the future. “A reduction in funding combined with changing demographics creating extra demand creates the perfect storm,” said Muirhead.

“When you still have to build schools and hospitals, the bit that gets squeezed is preventative spend. But early intervention is vital and I think we have to move in that direction.” After a career in banking, Muirhead became chief executive of the Lloyds TSB Foundation for Scotland. It was here that his interest in philanthropy met a growing demand for charitable giving to have greater social impact.

Muirhead studied venture philanthropy models in the US, Australia and Europe, arriving at an amalgam of what was considered their best features. Supported by the foundation, Inspiring Scotland became independent in 2009.

“Venture philanthropy is a bit of a clunky term, but two things about it stand out; its focus and the timescale,” he said. “Rather than spread money thinly to little effect, it aims to focus on a few ventures that can have a real impact and invest heavily in those. And rather than the timescale being dictated by the donor, it’s dictated by the organisation’s plan for tackling an issue.”

The wilderness acts as an alternative learning environment for young people who have struggled to engage with traditional classroom-based education

Applying business principles to tackling social issues might seem anathema to some, but Muirhead points out an important distinction: “It’s not a market driven approach, it’s an outcome-driven approach. There’s ‘what you do’ and ‘how you do it’. The ‘how we do it’ is very business-based. The ‘what you do’ is based on experts, social research from around the world and the propositions we receive from the charities. Our role is to help make what they do as effective as possible.

“So much of the money going in to charities has been fragmented and short-term. You would go around Scotland visiting projects, meeting inspirational people who have remarkable skills and can transform lives – and yet they spent 30 per cent of their time doing their job and 70 per cent filling in forms. Also, the culture had become competitive and there was a lack of collaboration between organisations.

“We believe that by understanding the landscape and funding the organisations that can work together over a sustained period of time to make a difference, the social return on investment will be that much greater.”