Then, we need to measure the growth in terms of sales, employment, innovation, or even amount of taxes paid.
But what if the numbers were looking great because the economy was booming? Would I be measuring correctly the impact of the venture capital and private equity in the economy? Clearly not. We needed to compare the results to a similar group of companies that were financing their growth with traditional sources and then analyse the differences.
The results were dramatic in terms of the economic impact of VC and PE on the economy. My PhD dissertation became the basis for an annual study that has strengthened the argument better for legislation and in the medium term boosted investment into the sector.
Risk and impact investing
Another topic of research that caught my interest in 2007 was the then-emerging field of what is now known as ‘impact investing’.
I wanted to understand the business models and the motivations of these new venture capitalists who were willing to take lots of risks without expecting a financial return. These investors were applying the same techniques in VC financing but to social enterprises.
The main issue in VC investing is ‘moral hazard’ and ‘agency theory’, or how to protect the investor from an unscrupulous entrepreneur’s deeper knowledge.
But, in the case of philanthropic venture capital, we are referring to investors who are in the search for social impact. They are interested in supporting high-growth social enterprises until they are self-sustaining.
From studying these investors for more than 10 years now, I have some findings that have some wider implications. For example, agency theory (the idea that the entrepreneur/management team might want to steal my money) does not apply. Here, rather, it is stewardship theory, where the investor becomes a steward to the social enterprise.
The main implication of this finding is the type of instruments and contracts used between the parties are very different and have to be adjusted to the different goal.
Currently, I’m researching the influence of human capital on the risk profile of venture philanthropy investors. The preliminary results are very intriguing, and we are now in the process of explaining them.