How do venture philanthropists pick the organizations in which they invest? Nava Anvari, LGT Venture Philanthropy’s investment manager, explains the Foundation’s due diligence process.

Nava Anvari, could you explain what venture philanthropy is?

Impact-oriented organizations can offer effective solutions to tackle societal and environmental issues, but often lack the resources to operate at scale. Venture philanthropy not only provides access to funding but also helps to build organizations’ strategic, operational and management capacity, enabling organizations to scale and replicate their model more effectively.

How do you discover potential portfolio organizations in which you want to invest?

It’s important to take a step back and look at the concept of a target portfolio, a very common concept in private equity, but less so in the philanthropy investing space. To define a target portfolio, you identify what impact you want to achieve in a specific theme. You then define what you want your portfolio to include in say five years’ time with regards to the geographic spread, sector spread, the size of the business, or the growth stage.

At LGT Venture Philanthropy (LGT VP), after years of learning and exploring and trying different approaches, we landed on our two regions, India and Africa and the three sectors on which we now focus – education, health and environment. In each sector for each region, we have constructed a target portfolio with specific impact outcomes and a general picture of the solutions we want to drive forward.

LGT VP’s due diligence process: how does it work?

The duration of the due diligence process varies per organization, but typically takes approximately six to eight months and comprises three steps. First, we want to understand the organization in its essence – who is this organization, how long have they been around, what problem are they trying to solve and with what solution?

In this stage, we create a three-page summary of our findings, a «Factsheet» as we call it, and present it to our entire team, who ask us hard questions, help us probe deeper and test our understanding of the solution and thereby set in motion the process of thorough diligence.

So, the entire LGT VP investment team is part of the initial screening of the organization. What is the next step?

The second stage, the «Preliminary Review», is the most comprehensive and resource-intensive part of the due diligence process, as we are getting to the core of understanding the solution and the people we want to support.

The key question of «who are the people/team we’re backing» always reminds me of a venture capital approach in which you’re investing in the people driving a solution. We get to know the people’s backgrounds, skills, visions and plans for the organizations, and, very importantly, we begin to build a relationship with them. This is the part that I find most exciting about a new deal.

What else do you do at this second stage apart from understanding the people?

This stage is also dedicated to thoroughly analyzing the solution and impact, as well as the organization’s core areas, such as its financial budget, operational setup and long-term strategy, to name a few. We also want to understand who their key funders and external partners are, and conduct detailed market analyses, evaluate risks associated with our investment and develop possible exit strategies. The organizations are sometimes surprised by the number of questions and the level of detail, but afterward, acknowledge how it makes us a more valuable partner.

What is the result of this second stage?

The deal team creates a preliminary investment memo, an approximately 20-page document, which we discuss with our Investment Committee (IC). The Investment Committee is made up of LGT VP’s partners, a couple of the Foundation’s Board members plus outside experts, all people from various backgrounds with a keen eye for what it takes to make organizations thrive and a passion for the problems we are trying to solve.

What follows the preliminary review stage?

If we receive full support from the IC, we engage in the third and last part of the process, final diligence, which usually takes another month or two. In a pre-Covid world, final diligence consisted of spending time in the field to immerse ourselves in the communities in which the organization is operating. This is the most valuable part of the process for me because we’re spending time in the country, visiting the organization’s sites, talking to their partners and connecting with them beyond the «boardroom» setup.

During Covid we would do most of this remotely, including getting digital «walk through» of the IT systems, for example, and conducting over 20 interviews with various members of management, other funders, stakeholders and partners.

Then, I assume, you present the final findings to the board?

Exactly. Once we have presented our final investment memo to the IC, have another in-depth conversation and the IC gives us a green light, they will make a recommendation to the Board for final approval. Even though we have a long-term mindset and plan to work with our organizations for at least four years, we usually start with a one-year partnership to test our hypothesis. We then provide a three-year follow-on funding proposal, ideally tied to a clear multi-year strategy if the organization progresses as planned.

Why conduct such a thorough due diligence process?

There are three main reasons.

  • Firstly, and most obviously, we have a responsibility to ensure that the generously donated funds are effectively deployed in high-impact areas according to the Princely Family’s wishes. We don’t take the responsibility as stewards of this capital lightly.
  • Secondly, it all ties back to our broader strategy of achieving long-term, large-scale, systemic impact. To achieve true systemic change, we have to find opportunities where we can add meaningful value through our partnership, ensuring the money isn’t just a «band-aid» or a mere commodity. We want to ensure that investing in a solution is the best «bang for our buck» so to speak and that the partnership will produce significant synergies. And, of course, we as a team are learning and gleaning tremendous insights which in turn can be used to help other portfolio organizations.
  • And lastly, we need to build a trusting relationship with our portfolio organization. Trust is the most important currency of our work.

This again ties into your strategy focused on long-term, systemic change.

Precisely. Because after the due diligence process, we understand the organization and the ecosystem in which it operates so well, we can add value in key areas for the organizations, their partners and stakeholders. And, thanks to the comprehensive due diligence, we can trust that our support will be put to the best use possible.

The LGT Venture Philanthropy Foundation (LGT VP) was founded in 2007 at the behest of H.S.H. Prince Max von und zu Liechtenstein. The aim of the foundation is to improve the quality of life of disadvantaged people, contribute to healthy ecosystems, and build resilient, inclusive, and prosperous communities. LGT VP deploys philanthropic capital to organizations with effective, innovative, and scalable solutions to social and environmental challenges, thus directly contributing to the «Sustainable Development Goals».

The foundation primarily supports organizations based in emerging markets, focusing on high-impact sectors, including education, health, and environment. This financial assistance really helps the organizations, but just as important are the transfer of knowledge and access to networks.