Timing denial

Theo Jansen, artist and creator of Strandbeesten explained in a TV-documentary about his work that in his creative flow every problem that presents itself immediately comes with the dream to solve it.  I so admire optimists!

Seeing in a crisis the opportunity as the famous saying goes requires you – at least temporarily – ignore the pain of failure and problems, and be a dreamer. But what if the problems are existential? Existential as in exit.

“Look on every exit as being an entrance somewhere else.” – Tom StoppardRosencrantz and Guildenstern Are Dead

Exits, transformations and radical cut-backs in not for profit organizations are profoundly painful processes for all those who are affected. Yet some degree of denial of the pain may allow you to see the opportunities. But productive denial requires good timing. In the world of funders and not-for-profits I also see a lot of denial of organisational pains that allows crucial problems to fester and lead to crises. So how do you time your denial well?

Over the next months I expect to be immersed in issues faced by not-for-profits from which funders exit.  None of the NGO’s involved has been part of a formally planned exit by a funder(s). Questions like: How long do you keep on trying? What did we miss, should we have seen this coming? What about the future of the paid staff and (unpaid) volunteers? Do we scale back? Liquidate?  Go dormant?

Funders of not-for profits have serious problems with exits, planned entrance in a country or field on the basis of an entrance and an exit strategy. I wrote about exits for funders in a GrantCraft publication.  Emulating venture capital practices, the venture philanthropist are very keen on preparing for exits and sustainability and EVPA also collected lessons learned and provided guidance to their members through and EVPA guide on planning and executing an exit.  Many funders circumvent the exit problem by suggesting from their side there is not real entrance: they provide funding on a project by project basis and do not really strategize about the field or sustainability of the continuity of the capacities and organizations that implement the projects they support.  It is an opportunistic approach, but unless a complete field collapses none of the crises that exits cause will affect them.

But awareness and commitment does not provide guarantees. What if NGO’s and their funders both underestimate or even deny the financial fragility of the causes and organizations they support. Problems of financial fragility are rarely a crisis that hits out of the blue. The problems tend to creep-in very slowly: how to manage growing budgets changes into making ends meet, into chronic deficits. After a bad year, if there is a financial reserves, extensive discussions about their use to stop-gap ensue. And a lot of effort and dedicated capacity will be invested in gettin fundraising back on track, but do you revisit your fundamental strategy?  Or do you delay that discussion until the next year. Will doubt vis a vis the fundamentals undermine the effort to get back on track?

Ironically, denial of structural problems can also be fed by unexpected large gifts that hide more strategic issues.  And another factor that allows for financial fragility to remain unaddressed is the urgency of the cause as it stimulates a focus on fixing things instead of managing with a long term perspective.

So how do you manage to balance optimism and realism? The guides for funders referred above encourage funders and charities to work together and face financial sustainability at every stage of their relationship. But equally important is  how the management and board members of NGO’s can support each other to face this issues at the right moment and see the opportunities, the new spaces opened by the exit doors.

Serious deal screening to find an evergreen with a locked-in mission – venture philanthropists on exits.

When doing research for the GrantCraft guide on Moving On – Ending Programmes and Funding Relationships we found that venture philanthropists are often very deliberate about exits and that they have a wealth of practical experience in this field. Venture philanthropy claims to “match the soul of philanthropy with the spirit of investing” and in the for profit world, venture capital comes-in-to-go-out. Maybe that background makes it more obvious to plan for about exits and ending financial relationships between the funder and the social venture…..

Over the past year, EVPA – the European Venture Philanthropy Association – has been working on a practical guide for exits.  It was very exciting to participate in the EVPA Workshop last week, discussing a draft of that guide and to be invited to contribute and provide comments. EVPA proposes a five step process that takes place simultaneously with the core venture philanthropy process that starts with developing an investment strategy, followed by deal screening, the due diligence process and deal structuring, followed by the Investment management and ending with the exit.

To prepare for an exit, EVPA recommends that during the first step – when you have actually not yet identified who you will possibly partner with (or invest in as they say) – you reflect on some key considerations that will influence your exit. While screening deals, doing due diligence and as part of the deal structuring you actually develop the exit plan. During the investment as part of the process of investment management you monitor and determine exit readiness. The final step of investment coincides with step 4 in the exit process. Post-investment follow-up is formally not part of the investment process.

exit process

In some of the steps all responsibility and decision-making power rests with the funder, for example when it comes to establishing the key exit considerations, or the exit readiness, which ultimately is the decision of the funder. But for example the exit plan has to be developed and “ owned”  jointly and it has to establish who is responsible for what during and after the exit.  The actual cases that were presented and reflected upon at the workshop showed that the five steps make sense. But the experience participants shared also underlines that realities are quite a bit messier than models and SmartArt.

The multiple funding instruments of venture philanthropists (grants, loans, equity and everything in between) provide enormous opportunities to tailor the funding to the needs of the social venture/project. But they can also make exits complicated. When you give a grant and stipulate in the beginning that it will be a one-off grant disbursed over a certain period, the “ ending’  is a sort of built-in. Similar with loans. Making another grants, extending a loan’s grace periods etc. are obviously always an option but when you take an equity share in a venture, you can only exit when you find a buyer – or you can give your share away, i.e. convert it into a grant but that may not square with your investment strategy….. So thinking ahead makes sense!

During the exchange at the EVPA workshop it emerged that, as with ordinary philanthropists, the rationality of talking about exits upfront seems to conflict with the positive feelings involved in starting a relationship. Pre-nuptial arrangements work in business and even in a family context, but in philanthropy they are often felt to be awkward. Yet, we saw from the examples discussed in the workshop that every exit did benefit (or in some cases could have benefited) from some sort of a planning up front!

And there is more. Every good exit plan needs a plan B, the group at the EVPA workshop also rapidly concluded. Such a Plan B (and C to Z for that matter) again benefits from the rich toolbox of the venture philanthropists. The authors of the draft EVPA guide on exits had identified quite a number of possible exit scenarios using a variety of funding instruments and non-financial contributions,  but the group came-up with many more. All drawing on their concrete experiences.

For those of us without the MBA, the venture philanthropy lingo may be a bit of a complicated read and the exit process and the examples in venture philanthropy are very focussed on exits from one-to-one relationship, not from a field of work or a country.  Also, until now, the ultimate beneficiaries are somewhat missing from the entire process, and personally I find it sometimes hard to connect with the whole venture philanthropy narrative…….. yet, if you want to be a responsible funder, do not let any of this dissuade you and learn.  If you follow this blog, I will let you know when the final document is out, which should be in November this year! Or check for yourself at the site of EVPA