This dissertation is a first exploratory study on philanthropic venture capital, a new and particular financing form available for social entrepreneurs that unites the profit-seeking investment principles characterizing the traditional venture capital investment model with social aims. The provision of capital and non-financial services to social enterprises are considered of key importance towards the maximizations of social impact as both elements are needs to enable social enterprises in becoming self-financially sustainable and thus able to successfully play in the marketplace. The main assumption underlying the philanthropic venture capital's value proposition is that size matters: funding growing social organizations is a sign of social success and relevance. The basic commitments are grounded in the belief that philanthropic funds need to be applied to important social problems and that funders must strive to maximize the social impact of their investment and only through growth the aim can be achieved. Philanthropic venture capitalists believe sustainability can be the link between growth and social impact maximization: if social enterprises are able to become self-financially sufficient, they can focus on their social mission. However, since the value proposition of the venture capital and philanthropic venture capital investment models are different, the key issue is understanding how the practices used in the former are modified by the latter. Grounded in an asymmetric information and stewardship theory framework and using a two step research design, I build on and contribute to previous work on venture capital and social entrepreneurship showing how adverse selection is mitigated in the deal flow and selection stages of the investment model. In addition to this, I also analyze how moral hazard issues shape the deal structuring and post-investment phases. Results indicate that philanthropic venture capital investments are indeed characterized by adverse selection which is managed through a proactive search of new deals which are then selected based on the human capital of the social entrepreneur. On the contrary, moral hazard tends to be a marginal issue in the deal structuring and post-investment phased of the investment, with investors acting as stewards of the organizations they back rather than principals.

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Scarlata, Maria Rosa Giovanna

Inside the philanthropic venture capital investment model: An exploratory comparative study

09/2010
itemDefault This dissertation is a first exploratory study on philanthropic venture capital, a new and particular financing form available for social entrepreneurs that unites the profit-seeking investment principles characterizing the traditional venture capital investment model with social aims. The provision of capital and non-financial services to social enterprises are considered of key importance towards the maximizations of social impact as both elements are needs to enable social enterprises in becoming self-financially sustainable and thus able to successfully play in the marketplace. The main assumption underlying the philanthropic venture capital's value proposition is that size matters: funding growing social organizations is a sign of social success and relevance. The basic commitments are grounded in the belief that philanthropic funds need to be applied to important social problems and that funders must strive to maximize the social impact of their investment and only through growth the aim can be achieved. Philanthropic venture capitalists believe sustainability can be the link between growth and social impact maximization: if social enterprises are able to become self-financially sufficient, they can focus on their social mission. However, since the value proposition of the venture capital and philanthropic venture capital investment models are different, the key issue is understanding how the practices used in the former are modified by the latter. Grounded in an asymmetric information and stewardship theory framework and using a two step research design, I build on and contribute to previous work on venture capital and social entrepreneurship showing how adverse selection is mitigated in the deal flow and selection stages of the investment model. In addition to this, I also analyze how moral hazard issues shape the deal structuring and post-investment phases. Results indicate that philanthropic venture capital investments are indeed characterized by adverse selection which is managed through a proactive search of new deals which are then selected based on the human capital of the social entrepreneur. On the contrary, moral hazard tends to be a marginal issue in the deal structuring and post-investment phased of the investment, with investors acting as stewards of the organizations they back rather than principals.
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Inside the philanthropic venture capital investment model: An exploratory comparative study
Scarlata, Maria Rosa Giovanna
Universitat Ramon Llull (URL). ESADE

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