Deal structuring in philanthropic venture capital investments: Financing instrument, valuation and covenants

Philanthropic venture capital is a financing option available for social enterprises that, like traditional venture capital, provides capital and value added services to portfolio organizations. Differently from venture capital, philanthropic venture capital has an ethical dimension as it aims at maximizing the social return on the investment. This paper examines the deal structuring phase of philanthropic venture capital investments in terms of instrument used (from equity to grant), valuation, and covenants included in the contractual agreement. By content analyzing a set of semi-structured interviews and thereafter surveying the entire population of philanthropic venture capital funds active in Europe and in the United States, findings indicate that the non-distribution constraint holding for nonprofit social enterprises is an effective tool to align the interests of both investor and investee. This makes the investor behaving as a steward rather than as a principal. Conversely, while backing non-profit social ventures, philanthropic venture capitalists structure their deal similarly than traditional venture capital, as the absence of the non-distribution constraint makes such investments subject to moral hazard risk both in terms of perks and stealing and social impact focus.