Venture philanthropy: investing for stronger Australian communities

Australia, 23 May 2016

Social Ventures Australia acts as an intermediary between private investors and the social sector, providing venture philanthropy funding, impact investing and advice.

Rob Koczkar is its CEO and the following interview is an edited transcript of Macquarie’s conversation with him.

The Macquarie Group Foundation was a founding supporter of SVA and has provided several multi-year grants to it since 2004 in support of SVA Consulting.

Q. What does social innovation mean to you?

When we speak about social innovation, I’d start with the premise that we have a lot of problems in Australia that divide our community into ‘haves’ and ‘have-nots’. These problems have existed for a very long time. As a community, we’ve been trying to address these, but we know that over the last 10-30 years, the divide has actually grown. The reality of intergenerational disadvantage has not dissipated at all.

Clearly, the solutions to that issue we’re pursuing haven’t worked. So we need to find different solutions, if we’re truly going to solve that problem. Social innovation is finding new ways to address these stubborn problems that face us as a community.

Q. How has SVA supported innovation in the sector?

The innovation that SVA has generated in the social sector is at two levels. One is that we’ve identified and sponsored a lot of organisations to come up with better practice around specific social issues, for example, the Beacon Foundation in their school-to-work transition work; Ganbina in the way they’ve worked with the Indigenous community in Shepparton to better help their kids at high school; or the work AIME has done with Indigenous kids in getting them to attain their Year 12 results.

I think that sustainable innovation that addresses this issue of taking those ideas to scale is around impact investing. - Rob Koczkar

But I think that sustainable innovation that addresses this issue of taking those ideas to scale is around impact investing. That covers a few different things, but it’s about taking capital to organisations with commercial business models like Goodstart, and helping them scale while remaining focused on a social purpose.

It’s about taking capital and helping government shift their contracting from an inputs to an outcomes basis, like we’re doing with the social impact bonds initiative – the bond raises private capital to fund the expansion of a successful program.

It’s about taking capital and helping organisations shift when the funding basis changes from block funding to consumer driven funding, as we’re seeing in the National Disability Insurance Scheme.

It’s about getting more capital to reinvigorate social infrastructure, like affordable and social housing, like schools and hospitals.

This is an innovation that SVA has pioneered over the last 10 years, in many of these different forms. And it’s the platform that is vital for taking the on-the-ground pieces of work and rolling them through the whole community.

Q. What factors influence who SVA works with?

Our starting point is that we have a clear vision of what we’re here to achieve, which is making sure that those most in need in Australia have the opportunity to have a
better life.

We view the practice of our venture partners in the context of an overarching system change strategy, which describes the solutions we see to the biggest barriers that people face at the moment. These are in education, employment, housing, lack of support to manage health and disability issues, and communities that don’t actually provide the right support for the people who live in them.

So we have a perspective on what each of the biggest barriers are in those places. For example, in employment, there are insufficient supported employment places for the long-term unemployed that allow them to connect pre-employment training with post-employment support, so that people can build the work and personal skills that they don’t yet have to be successful employees.

Organisations that are working on those types of issues fit with our employment strategy, and are ones that we would then say, ‘OK, that’s great. We understand what you’re doing. We agree with the system change agenda that you’re trying to pursue. How do we help you through the transformation of trying to grow and scale, or prove this model, and how can we help you lift that up at a policy level, and affect the system level outcome?’.

We work with organisations that have a clear vision about what they’re trying to achieve. They have a clear program or focus of their activities, and a connection between their activities, the resources that are required to do that and the outcomes that are achieved.

That logic is supported by an evaluation and measurement framework that allows people to understand the progress of their idea, and whether or not the resource is actually delivering the outcome. You’ve also got to have the appropriate governance and leadership framework in place; you’ve got to make sure that you’re surrounding those organisations with the right non-financial and financial resources to get the job done.

There have been many organisations that we’ve looked at and haven’t funded, because they don’t have evidence that their practice actually delivers results; they don’t have a sustainable governance model or a sustainable funding model that will actually allow them to grow and scale.

Q. How has the social sector landscape changed over the last 15 years?

At the top down, this venture philanthropy approach that we’re talking about – where you expose yourself to a large number of organisations, and find ones which are actually executing extremely effectively against a particular goal – that approach has been adopted to varying degrees by many more philanthropists than had been when we started in 2002.

We were one of the first organisations to pioneer that approach. We were founded by organisations operating in the sector that felt that that approach was missing.

Fifteen years ago, if you were a philanthropist, you could invest in the large, well-established charities that had operated for 50-150 years, and support them. But if you were interested in smaller, innovative solutions on the ground then you had two choices.

You could either talk to a small number of people and find some charismatic leaders and support them, on the basis of backing the person, or you could come to an organisation like SVA which has the resources and the context to see the market of opportunities and do the research and diligence, have the strategic perspective about how that fits in and how effective that solution is likely to be, and who can then manage your investment diligently for you.

Q. Tell us more about this venture philanthropy approach.

There are some challenges that stand in the way of widespread adoption of this approach. There’s a frequent pull between ‘head’ and ‘heart’; a lot of people are involved in philanthropy for ‘heart’ reasons. They do it because they like it. They do it because they feel an emotional connection with the organisation or with the people involved, or with the community that’s being served by them. And that’s fantastic. That’s an absolutely valid way of directing philanthropic money.

But if you want to take a slightly more ‘head’ perspective, and say, ‘We don’t want to perpetuate these issues which have been endemic over generations; we need to find different solutions because we observe the current ones aren’t working’ - then I think you need to be a bit more methodical about the way you do it, and invest upfront in those processes to have a clear strategy around what the system change agenda is, to find organisations that are working on those issues. Then you are able to help those on-the-ground service providers scale and grow and amplify both their message, in a policy sense, and their practice, in a spread sense, so that you can get that change.

That involves funding things that sometimes don’t have a great emotional connection. Somebody still has to pay for the office space. Somebody still has to pay for the photocopier. It’s not all about the program costs, which are absolutely critical, but who’s going to run it? Who’s going to do the next lot of R&D? Who’s going to come up with the next idea? How are we actually going to advocate for rolling those ideas out? All of those things are critically important to creating change. But a lot of philanthropists don’t see the connection to these other parts of the system that need to work as well.

Q. How does philanthropy and government work together?

At SVA, we have a particular perspective on what being a catalytic philanthropist is. I love the quote from Vicki Phillips, who runs the education program – the only US domestic program – for the Gates Foundation. She would say, ‘If you took the entire Gates Foundation’s $35 billion, and liquidated it all, and sold off all of that, you would fund the Californian public education system for a term’.

For me, it’s a helpful encapsulation of this dilemma that every philanthropist faces, which is that in developed economies, the government is the major funder of social service delivery. It’s all very well to identify innovative solutions to social problems, but if you can’t get the major funder to buy it, then it won’t work, and you’ll never get that spread.

As opposed to the corporate sector, where you have a separation of the product innovation and the product specification and the consumer, in the social sector, a lot of the time the government is the proxy for all of those things. So you haven’t got situations where a person in disadvantaged circumstances has the choice of support they would like in order to get a job, or to manage their disability, or to get better education or training. They only get access to what the government funds. Even if we, as SVA – or Macquarie, through the Foundation – identify some fantastic programs that exist on a philanthropically funded basis, you can’t scale that to all of Australia without getting the government on board.

The upskilling of organisations in the social sector to prepare themselves for this [scaling] change will come over time – in the same way as you think about 30 years ago, the IT monoliths like IBM and Hewlett Packard. Where was Google? Where was Facebook? Where was Nokia? The advent of venture capital, particularly in the software space, enabling people to have a great idea, develop software and completely disrupt the business system – that didn’t really exist before the ’70s and ’80s. And you see the enormous rate of innovation that that has driven over time. It has taken a generation to get there. But look at how much more consumer-focused, efficient and effective the products are today. The same thing will happen in social service delivery.

One of the curious things about social service provision is that it is the government who decides who gets the money, not the consumer of the product. That’s why the NDIS is such a profound and positive idea, because it’s saying, ‘I’m going to give the money to the people who need the service and get them to decide what they want’ – it’s consumer-directed. In a sense, that’s the most radical unpicking of an outcomes-based contract. And that’s fantastic for that sector, and facilitated by the fact that not all, but many of the services that are required are actually provided by a mix of non-profit and for-profit players already. So the capacity of the sector broadly to respond to the demand is much better. Although, there will be significant challenges for operators who don’t have the sophistication to adapt to the new model.

In other parts of the sector, such as education, or housing or even if you think more at the community level, those organisations that are providing non scaleable services are the ones that could benefit from impact investing. I went to a fantastic Milk Crate Theatre production, similar to Melbourne’s Choir of Hope and Inspiration. In a way, both of those organisations serve the same purpose. They’re addressing needs of homeless people; they’re providing a sense of community, a sense of engagement, a creative outlet.

Both could be funded on an outcomes basis by the government, because they achieve similar outcomes. Mental health outcomes improve, homelessness outcomes and connection with the community improves. Why shouldn’t the government fund that on an outcomes basis? Wouldn’t that then promote other social entrepreneurs to go and develop their own, not scaleable, but replicable versions, addressing the same issue? And wouldn’t that then, in concert with other factors, reduce the incidence of mental health problems passing through the public health system? Wouldn’t it reduce the dislocation driven by homelessness?

Those are the sorts of outcomes that you could get very excited about seeing come to life. But how do we encourage the Milk Crate Theatre style of organisation, or the people who work with recently released offenders in a particular program, in a particular location, that actually reduces the reoffending rates? Or the people – like we did with the Newpin Social Benefit Bond, with Uniting Care Burnside – who are working with families whose children have been taken into care, to help give them parenting skills and the life skills so that those kids can be reunited with their families?

Those replicable but not scaleable initiatives – they are completely susceptible to social entrepreneurs coming in, building and establishing great programs, but they need sustainable funding. We all know the gorilla of funding is the government, but how is the government going to come up with a contract that on an activity basis says, ‘Do Milk Crate Theatre’? It’s never, ever going to happen.

That is why you’ve got to have this shift, and allow social capital to come in and say, ‘Yes, I’ve got confidence in the artistic director; they’ve got great connections in the local community. We will be able to, by running this program, reduce homelessness, or reduce the effect of mental illness in the community. And I’ll write a cheque to give them the capital to take that risk. And if it’s successful, government pays on an outcomes basis.’ That’s how that model works.

Q. What’s on the horizon for SVA at the moment?

We are about funding, investing and advice, within a strategic context of system change. So the big levers, or barriers, depending on which way you want to think about them, are education, employment, housing, health and disability, and this bucket of issues with non-scaleable solutions, which I call family and community issues.

In each of those, we have different key system change levers that we would point to.

In education, we need to get every four-, three- and two-year-old to have two days of structured early learning per week, so that they get neurological development in the same way that they drink milk to get bone development. We need to make sure that we’ve got evidence informing practice in schools, and we need to make sure that we have a more effective careers education system that allows kids to build their employability skills and make the right subject choices to connect what they’re doing in school with the world of work.

In terms of employment, which partly leads on from education – we need to make sure that kids are transitioning into work or other training. For those who are not, let’s make sure that there are supported employment and entrepreneur places, which actually help people with all of those life skills, work skills, the soft skills that they didn’t get along the way for whatever reason.

So I’d like to see 5000 supported employment places from national employers to sustainably be taking people back into the workforce, and building those skills. And the outcome I’d like to see is the youth unemployment rate going from 3-4 times the unemployment rate down to 1.5, which is close to what Germany has.

In housing, there are two sets of issues – one is that there’s not enough stock of socially affordable housing, but also a lot of the transitional programs which get people through from rough sleeping to crisis, crisis to social, social to affordable, affordable out into the private market need some work.

In the health area, funding for mental health is pretty unwieldy, and it’s not sufficiently graduated relative to the scale of the problem. One way to express it is that in the typical physical health world, you have a GP whom you can access pretty much as often as you want, because until they change the funding model, it’s effectively free. They then manage your exposure to specialists. In the mental health world, that doesn’t exist that way. You need to get that gradation. You can only get ten sessions per annum of clinical psychologist support. For some people, that’s ten times more than they need. For some people, it’s half of what they need.

In the same way that business entrepreneurs see a gap in the market and jump into it, successful social entrepreneurs do exactly the same. - Rob Koczkar

So, how do you get more self-help? How do you get more graduated help and get a case management concept, similar to what a GP does, into that system, so that you begin taking money out of it, but get more equitable outcomes for people who need it?

In terms of disability - NDIS is the right mechanism. It’s just got to get worked through, but that will require funding changes to support those providers. And there’s another bucket – where you’ve got things like the out-of-home care system, recidivism programs and community support initiatives – which really need to be driven from an activity to an outcomes basis. So the government would contract for reduced offending from recently released prisoners, for the reunification rate of kids who’ve been separated through the Family Court process. They need to take that lens to it, and that’s what going to drive innovation in that replicable, non-scaleable model. That’s the major part of SVA’s agenda.

The one additional piece, which doesn’t fall neatly into that, is that in the Indigenous community, one of the most disadvantaged communities in Australia, all of those things are important. But the additional issue is that the normal structures for economic empowerment don’t exist in the Indigenous community.

If someone came up to me and took all of my assets away, and then completely trashed my reputation, and said, ‘OK. Now go and start a business and get on with it’ – I would find it pretty difficult. But in some sense, that’s what we’ve asked the Indigenous community to go and do, because we’ve displaced people from their land, we’ve said that they’re lazy and incapable, and we’ve said, ‘Get yourself off welfare’. And so there’s a lot of work on economic empowerment that’s needed to let Indigenous people take control of their own economic future.

So it’s that agenda that informs our choice of venture partners. And if as a philanthropist, you want to go and deal with overseas development, or the environment, great! There’s good stuff that needs to be done there. It’s just that our focus is on disadvantage in Australia and so we don’t focus on those other issues.

In the same way that business entrepreneurs see a gap in the market and jump into it, successful social entrepreneurs do exactly the same. They see an issue that needs addressing. They’ve got an idea how to fix it, and they just start. Then they backfill everything else after that; that’s how innovation works, and it’s how entrepreneurialism works. Find a problem, create a solution, and then just do it, and keep doing it.

Almost every person that I work closely with in the social sector is injecting a level of innovation and a level of efficiency into their practice that you don’t see in the corporate world in the same way. If you’re mission driven, and you’re clear about what you’re trying to achieve, then it forces you to think innovatively and broadly about all the different things at your disposal to make that happen. 

And it forces you to really think about this question of efficiency. Coming from the corporate world, it frankly doesn’t really make much difference to me whether I take a taxi to the airport or a hire car. One costs $10 more than the other. But when I know it’s $10 that I can otherwise recycle into something that will have a differential impact, versus $10 which comes out of some pocket somewhere that I never really see, the incentives are different. And the behaviours are different.

The fundamental approach of actually finding initiatives that really work and backing them in ways that other people won’t – that’s what will really make a difference.

In Australia, we’ve made a set of choices that have created the problems we’ve got. There must be a different set of choices that we as a community can make which will solve them. The notion that these issues of intergenerational disadvantage are insoluble is wrong. We just haven’t managed to bring together all of the thinking and the will required to change it yet.

I also think that one of the reasons we haven’t done that is that we’ve had, for the last 25 years, a period of economic expansion that the vast majority of Australians have benefited from very significantly. But we have 20-25% of our working age population either unemployed or underemployed, and we’ve got an ageing population. The working age population is going to have to support an even larger number of non-working-age population. If we don’t address that, the inexorable conclusion you draw is that per capita incomes are going down, and our standard of living is going down. And that’s not a circumstance I feel very comfortable about with regard to my kids, or setting them up for success with their kids.

So I think we’ve got to make enormous progress in the next 10-20 years on these issues. It’s not a 100-year vision. I’m not naïve enough to say we’re going to wave a wand and it’s all going to be done immediately – these are generational problems – but I think we’ve got to get the settings right over the next 5 to 10 years, and then allow the changes to work their way through.

Image caption: Rob Koczkar, Social Ventures Australia CEO.

This article is an excerpt from the Macquarie Group Foundation's book, Innovation big and small: How great ideas are strengthening our community, which was produced in 2015 in celebration of the Foundation's 30th anniversary.