Journal of Business Ethics

, Volume 95, Supplement 2, pp 121–145 | Cite as

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

  • Mariarosa Scarlata
  • Luisa Alemany


Philanthropic venture capital (PhVC) 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, PhVC has an ethical dimension as it aims at maximizing the social return on the investment. This article examines the deal structuring phase of PhVC 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 PhVC funds that are active in Europe and in the United States, findings indicate that the non-distribution constraint holding for non-profit 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 as 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.

Key words

covenants social entrepreneurship socially responsible investment stewardship trust venture capital venture philanthropy 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Admati, A.R. and P. Pfleidere: 1994, ‘Robust Financial Contracting and the Role of Venture Capitalists’, Journal of Finance 49(2), 371-402.CrossRefGoogle Scholar
  2. Afrin, S., N. Islam and S.U. Ahmed: 2010, ‘Microcredit and Rural Women Entrepreneurship Development in Bangladesh: A Multivariate Model’, Journal of Business & Management 16(1), 9-36.Google Scholar
  3. Albert, S. and D. A. Whetten (1985) Organizational Identity. In: Cummings, L.L.; Staw, B.M. (eds.), Research in Organizational Behaviour. JAI Press, Greenwich, CT, pp. 263-295.Google Scholar
  4. Alemany, L. and M. R. Scarlata: 2009, ‘Philanthropic Venture Capital: A New Model of Financing for Social Entrepreneurs’, in D. Cumming (ed.), Companion to Venture Capital, Chapter 7 (Wiley Press).Google Scholar
  5. Allen, F.: 1985, ‘On the Fixed Nature of Sharecropping Contracts’, Economic Journal 95(377), 30-48.CrossRefGoogle Scholar
  6. American Association for Public Opinion Research: 2008, Standard Definitions: Final Dispositions of Case Codes and Outcome Rates for Surveys. 5th Edition (Lenexa, Kansas, AAPOR).Google Scholar
  7. Amit, R., J. Brander and C. Zott: 1998, ‘Why do Venture Capital Firms Exist? Theory and Canadian Evidence’, Journal of Business Venturing 13(6), 441-446.CrossRefGoogle Scholar
  8. Amit, R., L. Glosten and E. Muller: 1993, ‘Challenges to Theory Development in Entrepreneurship Research’, Journal of Management Studies 30(5), 815-834.CrossRefGoogle Scholar
  9. Argyris, C.: 1990, Integrating the Individual and the Organization, Rev. edition (Transaction Publishers, New Brunswick, USA).Google Scholar
  10. Austin, J., H. Stevenson and J. Wei-Skillern: 2006, ‘Social and Commercial Entrepreneurship: Same, Different, Or both?’, Entrepreneurship: Theory & Practice 30(1), 1-22.CrossRefGoogle Scholar
  11. Balbo, L., D. Mortell and P. Oostlander: 2008, ‘Establishing a Venture Philanthropy Fund in Europe’, EVPA Publications (Brussels, BE).Google Scholar
  12. Barboza, G. and S. Trejos: 2009, ‘Micro Credit in Chiapas, México: Poverty Reduction through Group Lending’, Journal of Business Ethics 88, 283-299.CrossRefGoogle Scholar
  13. Barney, J. B., L. W. Busenitz, J. O. Fiet and D. Moesel: 1989, The Structure of Venture Capital Governance: An Organizational Economic Analysis of Relations between Venture Capital Firms and New Ventures’, Academy of Management Proceedings 64, 64–68.Google Scholar
  14. Battle Anderson, B. and J.G. Dees: 2006, ‘Rhetoric, Reality, and Research: Building a Solid Foundation for the Practice of Social Entrepreneurship’, in A. Nicholls (ed.), Social Entrepreneurship: New Models of Sustainable Social Change, (Oxford, Oxford University Press), pp. 144-168.Google Scholar
  15. Bauer, R., K. Koedijk and R. Otten: 2005, ‘International Evidence on Ethical Mutual Fund Performance and Investment Style’, Journal of Banking & Finance 29(7), 1751-1767.CrossRefGoogle Scholar
  16. Bello, Z.: 2005, ‘Socially Responsible Investing and Portfolio Diversification’, Journal of Financial Research 28(1), 41-57.CrossRefGoogle Scholar
  17. Bhagat, S.: 1983, ‘The Effect of Pre-Emptive Right Amendments on Shareholder Wealth’, Journal of Financial Economics 12(3), 289-310.CrossRefGoogle Scholar
  18. Certo, S.T. and T. Miller: 2008, ‘Social Entrepreneurship: Key Issues and Concepts’, Business Horizons 51(4), 267-271.CrossRefGoogle Scholar
  19. Chan, Y.S., D. Siegel and A.V. Thakor: 1990, ‘Learning, Corporate Control and Performance Requirements in Venture Capital Contracts’, International Economic Review 31(2), 365.CrossRefGoogle Scholar
  20. Chemla, G., M.A. Habib and A. Ljungqvist: 2007, ‘An Analysis of Shareholder Agreements’, Journal of the European Economic Association 5(1), 93-121.CrossRefGoogle Scholar
  21. Cheng, P.: 2008, Quasi-Equity: A Venturesome Case Study in using Revenue Participation Agreements (Venturesome, London),
  22. Cooper, I.A. and W.T. Carleton: 1979, ‘Dynamics of Borrower-Lender Interaction: Partitioning Final Payoff in Venture Capital Finance’, Journal of Finance 34(2), 517-529.CrossRefGoogle Scholar
  23. Cumming, D.J.: 2005, ‘Agency Costs, Institutions, Learning, and Taxation in Venture Capital Contracting’, Journal of Business Venturing 20(5), 573-622.CrossRefGoogle Scholar
  24. Cumming, D.J.: 2005, ‘Capital Structure in Venture Finance’, Journal of Corporate Finance 11(3), 550-585.CrossRefGoogle Scholar
  25. Cumming, D.J.: 2006, ‘Adverse Selection and Capital Structure: Evidence from Venture Capital’, Entrepreneurship: Theory & Practice 30(2), 155-183.CrossRefGoogle Scholar
  26. Cumming, D.J. and S. Johan: 2007, ‘Socially Responsible Institutional Investment in Private Equity’, Journal of Business Ethics 75(4), 395-416.CrossRefGoogle Scholar
  27. Cumming, D.J. and S. Johan: 2008, ‘Preplanned Exit Strategies in Venture Capital’, European Economic Review 52(7), 1209-1241.CrossRefGoogle Scholar
  28. Davis, J.H., F.D. Schoorman and L. Donaldson: 1997, ‘Toward a Stewardship Theory of Management’, Academy of Management Review 22(1), 20-47.Google Scholar
  29. de Tocqueville, A.: 2009, Democracy in America (Boston, MA; Basingstoke, Bedford/St. Martin’s; Palgrave distributor), p. 184.Google Scholar
  30. Dees, J.G. and B.B. Anderson: 2003, ‘For Profit Social Ventures’, International Journal of Entrepreneurship Education (Special Issue on Social Entrepreneurship) 2, 1-26.Google Scholar
  31. Diamond, D.: 1991, ‘Debt Maturity Structure and Liquidity Risk’, Quarterly Journal of Economics 106(3), 709-737.CrossRefGoogle Scholar
  32. Dillenburg, S., T. Greene and H. Erekson: 2003, ‘Approaching Socially Responsible Investment with a Comprehensive Ratings Scheme: Total Social Impact’, Journal of Business Ethics 43(3), 167-177.CrossRefGoogle Scholar
  33. Donaldson, L. and J.H. Davis: 1991, ‘Stewardship Theory Or Agency Theory: CEO Governance and Shareholder Returns’, Australian Journal of Management 16(1), 49.CrossRefGoogle Scholar
  34. Duriau, V.J., R.K. Reger and M.D. Pfarrer: 2007, ‘A Content Analysis of the Content Analysis Literature in Organization Studies’, Organizational Research Methods 10(1), 5-34.CrossRefGoogle Scholar
  35. Eisenhardt, K.M.: 1989, ‘Agency Theory: An Assessment and Review’, Academy of Management Review 14(1), 57-74.Google Scholar
  36. Elango, B., V.H. Fried, R.D. Hisrich and A. Polonchek: 1995, ‘How Venture Capital Firms Differ’, Journal of Business Venturing 10(2), 157-179.CrossRefGoogle Scholar
  37. European Venture Philanthropy Association: 2008, EVPA Directory: 2008-2009 (EVPA Publications).Google Scholar
  38. Fama, E.F. and M.C. Jensen: 1983a, ‘Agency Problems and Residual Claims’, Journal of Law & Economics 26(2), 327-350.CrossRefGoogle Scholar
  39. Fama, E.F. and M.C. Jensen: 1983b, ‘Separation of Ownership and Control’, Journal of Law & Economics 26(2), 301-326.CrossRefGoogle Scholar
  40. Folkman, P., J. Froud, J. Sukhdev and K. Williams: 2006, ‘Working for Themselves? Capital Market Intermediaries and Present Day Capitalism’, Working Paper Series No. 25 (University of Manchester, Manchester).Google Scholar
  41. Fox, M.A. and R.T. Hamilton: 1994, ‘Ownership and Diversification: Agency Theory Or Stewardship Theory’, Journal of Management Studies 31(1), 69-81.CrossRefGoogle Scholar
  42. Gilson, R.J. and D.M. Schizer: 2003, ‘Understanding Venture Capital Structure: A Tax Explanation for Convertible Preferred Stock’, Harvard Law Review 116(3), 874.CrossRefGoogle Scholar
  43. Gompers, P. A. and Lerner, J.: 1999, ‘What Drives Venture Capital Fundraising?’, SSRN: or doi: 10.2139/ssrn.57935.
  44. Gompers, P. and J. Lerner: 2001, ‘The Venture Capital Revolution’, Journal of Economic Perspectives 15(2), 145-168.CrossRefGoogle Scholar
  45. Grossman, S.J. and O.D. Hart: 1986, ‘The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration’, Journal of Political Economy 94(4), 691-719.CrossRefGoogle Scholar
  46. Guay, T., J.P. Doh and G. Sinclair: 2004, ‘Non-Governmental Organizations, Shareholder Activism, and Socially Responsible Investments: Ethical, Strategic, and Governance Implications’, Journal of Business Ethics 52(1), 125-139.CrossRefGoogle Scholar
  47. Hansmann, H.: 1980, ‘The Role of Non-Profit Enterprise’, Yale Law Journal 89(5), 835-901.CrossRefGoogle Scholar
  48. Hart, O.D. and J. Moore: 1994, ‘A Theory of Debt Based on the Inalienability of Human Capital’, Quarterly Journal of Economics 109(4), 841-879.CrossRefGoogle Scholar
  49. Hartzell, J.: 2007, ‘Creating an Ethical Stock Exchange’, Said Business School Publications (Oxford).Google Scholar
  50. Hellmann, T.: 1998, ‘The Allocation of Control Rights in Venture Capital Contracts’, RAND Journal of Economics 29(1), 57-76.CrossRefGoogle Scholar
  51. Hickman, K.A. and W.R. Teets: 1999, ‘Social Investing and Modern Portfolio Theory’, American Business Review 17(1), 72.Google Scholar
  52. Hisrich, R.D. and A.D. Jankowicz: 1990, ‘Intuition in Venture Capital Decisions: An Exploratory Study using a New Technique’, Journal of Business Venturing 5(1), 49.CrossRefGoogle Scholar
  53. Holmstrom, B.: 1979, ‘Moral Hazard and Observability’, Bell Journal of Economics 10(1), 74-91.CrossRefGoogle Scholar
  54. Irvine, W.B.: 1987, ‘The Ethics of Investing’, Journal of Business Ethics 6(3), 233-242.CrossRefGoogle Scholar
  55. Jensen, M. and W. Meckling: 1976, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’, Journal of Financial Economics 3(4), 305-360.CrossRefGoogle Scholar
  56. John, R.: 2006, Venture Philanthropy: The Evolution of High Engagement Philanthropy in Europe, Skoll Centre for Social Entrepreneurship (Said Business School Publications, Oxford).Google Scholar
  57. John, R.: 2007, ‘Beyond the Cheque: How Venture Philanthropists Add Value’. Oxford: Said Business School Publications.Google Scholar
  58. Kaplan, S.N. and P. Stromberg: 2004, ‘Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses’, Journal of Finance 59(5), 2177-2210.CrossRefGoogle Scholar
  59. Kaplan, S.N. and P. Strömberg: 2001, ‘Venture Capitalists as Principals: Contracting, Screening, and Monitoring’, American Economic Review 91(2), 426-430.CrossRefGoogle Scholar
  60. Kihlstrom, R.E. and J. Laffont: 1979, ‘A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion’, Journal of Political Economy 87(4), 719-748.CrossRefGoogle Scholar
  61. Kingston, J. and M. Bolton: 2004, ‘New Approaches to Funding Not-for-Profit Organisations’, International Journal of Nonprofit & Voluntary Sector Marketing 9(2), 112-121.CrossRefGoogle Scholar
  62. Krippendorff, K.: 2004, Content Analysis: An Introduction to its Methodology, 2nd edition (Thousand Oaks, Sage Publications), pp. 413.Google Scholar
  63. Letts, C., W. Ryan and A. Grossman: 1997, ‘Virtuous Capital: What Foundations can Learn from Venture Capitalists’, Harvard Business Review 75(2), 36-44.Google Scholar
  64. Lynn, P., R. Beerten, J. Laih and J. Martin: 2001, ‘Recommended Standard Final Outcome Categories and Standard Definitions of Response Rate for Social Surveys’, ISER Working Papers Number 2001-23.Google Scholar
  65. MacIntosh, J. G.: 1994, Legal and Institutional Barriers to Financing Innovative Enterprise in Canada, Monograph Prepared for the Government and Competitiveness Project, School of Policy Studies (Queen’s University, Toronto, Canada).Google Scholar
  66. MacMillan, I., R. Siegel and P. Narasimha: 1985, ‘Criteria used by Venture Capitalists to Evaluate New Venture Proposals’, Journal of Business Venturing 1(1), 119-128.CrossRefGoogle Scholar
  67. Manigart, S., M. Wright, K. Robbie, P. Desbrières and K. De Waele: 1997, ‘Venture Capitalists’ Appraisal of Investment Projects: An Empirical European Study’, Entrepreneurship: Theory & Practice 21(4), 29-43.Google Scholar
  68. Meyskens, M. A.: 2009, The Role of Partnerships in Early Stage Green-Tech Ventures. 6th Annual Satter Conference on Social Entrepreneurs. Stern NYU, NY, November, 2010.Google Scholar
  69. Mill, G.A.: 2006, ‘The Financial Performance of a Socially Responsible Investment Over Time and a Possible Link with Corporate Social Responsibility’, Journal of Business Ethics 63(2), 131-148.CrossRefGoogle Scholar
  70. Morino Institute: 2000, ‘Venture Philanthropy 2000: Landscape and Expectations’, Washington, DC: VPP Publications.Google Scholar
  71. Morrell, K. and I. Clark: 2010, ‘Private Equity and the Public Good’, Journal of Business Ethics 96(2), 293-263.CrossRefGoogle Scholar
  72. Muth, M.M. and L. Donaldson: 1998, ‘Stewardship Theory and Board Structure: A Contingency Approach’, Corporate Governance: An International Review 6(1), 5-28.CrossRefGoogle Scholar
  73. National Venture Capital Association: 2009, Last access 09/2008.
  74. Neuendorf, K.A.: 2002, ‘The Content Analysis Guidebook’, (Thousand Oaks, Calif.; London, Sage), pp. 301.Google Scholar
  75. Nicholls, A.: 2010, ‘The Institutionalization of Social Investment: The Interplay of Investment Logics and Investor Rationalities’, Journal of Social Entrepreneurship 1(1), 70-100.CrossRefGoogle Scholar
  76. Nöldeke, G. and K.M. Schmidt: 1995, ‘Option Contracts and Renegotiation: A Solution to the Hold-Up Problem’, RAND Journal of Economics 26(2), 163-179.CrossRefGoogle Scholar
  77. O’Brien, T. W.: 2009, ‘Reconsidering the Common Good in a Business Context’, Journal of Business Ethics 85(1), 25–37.CrossRefGoogle Scholar
  78. Porter, M. and M. Kramer: 1999, ‘Philanthropy's New Agenda: Creating Value’, Harvard Business Review 77(6), 121–130.Google Scholar
  79. Ross, S.A.: 1977, ‘The Determination of Financial Structure: The Incentive-Signalling Approach’, Bell Journal of Economics 8(1), 23-40.CrossRefGoogle Scholar
  80. Rudd, A.: 1981, ‘Social Responsibility and Portfolio Performance’, California Management Review 23(4), 55-61.Google Scholar
  81. Ruhnka, J. and J.E. Young: 1987, ‘A Venture Capital Model of the Development Process for New Ventures’, Journal of Business Venturing 2(2), 167.CrossRefGoogle Scholar
  82. Sahlman, W.A.: 1990, ‘The Structure and Governance of Venture-Capital Organizations’, Journal of Financial Economics 27(2), 473-521.CrossRefGoogle Scholar
  83. Sahlman, W.A.: 1991, ‘Aspects of Financial Contracting in Venture Capital’, Journal of Applied Corporate Finance 1, 23-36.CrossRefGoogle Scholar
  84. Sapienza, H. and A.K. Gupta: 1994, ‘Impact of Agency Risks and Task Uncertainty on Venture Capitalist-CEO Interaction’, Academy of Management Journal 37(6), 1618-1632.CrossRefGoogle Scholar
  85. Saunders, M., P. Lewis and A. Thornhill: 2007, ‘Research Methods for Business Students’, 4th edition (Harlow, FT Prentice Hall), pp. 624.Google Scholar
  86. Scarlata, M.R. and L. Alemany: 2010, ‘Philanthropic Venture Capital from a Global Perspective: Definition and Investment Strategy’, in D. Cumming (ed.), Handbook of Entrepreneurial Finance, (Oxford, UK, Oxford University Press).Google Scholar
  87. Sethi, S.P.: 2005, ‘Investing in Socially Responsible Companies is a must for Public Pension Funds – because there is no Better Alternative’, Journal of Business Ethics 56(2), 99-129.CrossRefGoogle Scholar
  88. Smart, G.: 1999, ‘Management Assessment Methods in Venture Capital: An Empirical Analysis of Human Capital Valuation’, Venture Capital 1(1), 59-82.CrossRefGoogle Scholar
  89. Snow, D.R. and T.F. Buss: 2001, ‘Development and the Role of Microcredit’, Policy Studies Journal 29(2), 296.CrossRefGoogle Scholar
  90. Sparkes, R. and C.J. Cowton: 2004, ‘The Maturing of Socially Responsible Investment: A Review of the Developing Link with Corporate Social Responsibility’, Journal of Business Ethics 52(1), 45-57.CrossRefGoogle Scholar
  91. Trester, J.J.: 1998, ‘Venture Capital Contracting Under Asymmetric Information’, Journal of Banking & Finance 22(6-8), 675-699.CrossRefGoogle Scholar
  92. Tyebjee, T. and A. Bruno: 1984, ‘A Model of Venture Capitalist Investment Activity’, Management Science 30(9), 1051-1066.CrossRefGoogle Scholar
  93. Van Slyke, D. and H. Newman: 2006, ‘Venture Philanthropy and Social Entrepreneurship in Community Redevelopment’, Nonprofit Management & Leadership 16(3), 345-368.CrossRefGoogle Scholar
  94. Wedig, G.J., M. Hassan and M.A. Morrisey: 1996, ‘Tax-Exempt Debt and the Capital Structure of Nonprofit Organizations: An Application to Hospitals’, Journal of Finance 51(4), 1247-1283.CrossRefGoogle Scholar
  95. Wedig, G., F.A. Sloan, M. Hassan and M.A. Morrisey: 1988, ‘Capital Structure, Ownership, and Capital Payment Policy: The Case of Hospitals’, Journal of Finance 43(1), 21-40.CrossRefGoogle Scholar
  96. Williamson, O.E.: 1979, ‘Transaction-Cost Economics: The Governance of Contractual Relations’, Journal of Law & Economics 22(2), 233-261.CrossRefGoogle Scholar
  97. Woller, G.M. and W. Woodworth: 2001a, ‘Microcredit and Third World Development Policy’, Policy Studies Journal 29(2), 265.CrossRefGoogle Scholar
  98. Woller, G.M. and W. Woodworth: 2001b, ‘Microcredit as a Grass-Roots Policy for International Development’, Policy Studies Journal 29(2), 267.CrossRefGoogle Scholar
  99. Zacharakis, A., G.D. Meyer and J. DeCastro: 1999, ‘Differing Perceptions of New Venture Failure: A Matched Exploratory Study of Venture Capitalists and Entrepreneurs’, Journal of Small Business Management 37(3), 1-14.Google Scholar

Copyright information

© Springer Science+Business Media B.V. 2011

Authors and Affiliations

  1. 1.London School of Economics and Political ScienceLondonU.K.
  2. 2.ESADE Business School - URLBarcelonaSpain

Personalised recommendations