Deal Structuring in Philanthropic Venture Capital Investments: Financing Instrument, Valuation and Covenants

34 Pages Posted: 6 Jul 2010 Last revised: 16 Dec 2010

See all articles by Mariarosa Scarlata

Mariarosa Scarlata

ESADE Business School; University of Surrey - Surrey Business School; London School of Economics & Political Science (LSE); University of Newcastle - Business School

Luisa Alemany

London Business School

Date Written: July 6, 2010

Abstract

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.

Keywords: venture philanthropy, social entrepreneurship, venture capital, stewardship, socially responsible investment, trust, covenants

JEL Classification: M13, G24

Suggested Citation

Scarlata, Mariarosa and Scarlata, Mariarosa and Alemany, Luisa, Deal Structuring in Philanthropic Venture Capital Investments: Financing Instrument, Valuation and Covenants (July 6, 2010). Available at SSRN: https://ssrn.com/abstract=1635307 or http://dx.doi.org/10.2139/ssrn.1635307

Mariarosa Scarlata (Contact Author)

ESADE Business School ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

University of Surrey - Surrey Business School ( email )

Guildford, Surrey GU2 8DN
United Kingdom

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

University of Newcastle - Business School ( email )

5 Barrack Road
Newcastle upon Tyne, NE1 4SE
United Kingdom

Luisa Alemany

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
457
Abstract Views
2,850
Rank
124,255
PlumX Metrics