aid and venture capitalism

Ian has a thought-provoking post springboarding off William Savedoff at CGD about the role of a VC approach in aid. So provoked, here are some thoughts.

Firstly, why limit more venturous funding to new aid startups and aid technologies? Non-startups should (should!) have more experienced and better established control frameworks for undesirable and unhealthy risks (fraud, corruption, misallocation) which startups may need to teethe through.  These risks just get in the way of ensuring that the key area of innovation or risk – programme design – is the one being really tested. Obviously not all established aid actors have this going for them, and there’s no reason to include in venturous funding those that don’t. But there’s also no reason to exclude those that do.

So I’d go with something more general as a conclusion from looking at aid through a VC lens:

There ought to be more aid funding mechanisms with a higher tolerance of failure and a higher appetite for risk.

My key takeaway from the Savedoff piece is this:

Since aid agencies are mostly interested in disbursing, they have weak incentives to find out whether a project is really having an impact or not; the venture capital firms have strong incentives to gather such information.

Yes! But how do we tackle this? At the risk of setting up a strawman, I’d say the verrrry typical approach is for policy edicts to come down the mountain from within the donor agency (the board; the minister) that We Shalt Really Evaluate Impact and We Shalt Hath Greater Appetite For Risk.

I think that’s a weak approach that doesn’t change the incentives or rules of behaviour for the staff in the agency that have to put such edicts into practice. It demands the end state without the underlying mechanisms to create it. On that subject though, I’d love to see aid agencies set themselves a benchmark of a minimum failure rate on their projects – in other words, if we’re not failing enough, we’re not being ambitious enough. Obviously though, you need the right kinds of failure, not just garden-variety mismanagement.

No, I think the a necessary component of the fix is one that’s the bane of public agencies everywhere – the annual ‘use it or lose it’ cycle of expenditure based management. If you want aid agencies to act more like venture capitalists, you’ve got to give them actual capital, which they can drop into projects quickly, withhold if the quality of proposed technological or software interventions they’re seeing look completely crap, let it pile up in the treasury, invest counter-cyclically, all that. Not simply annual appropriations of resources tied to meeting annual expenditure forecasts.

This is the reason why Ian’s point (i) is quite correct – that this more naturally lies with philanthropic foundations perched atop their endowed mounds of capital, rather than public donor agencies with their annual appropriations and politically-charged environs. But to me, to have as your starting point that none of the billions of government funded aid interventions are within the remit of a more venturous approach, just leaves unasked the challenge to these agencies on whether their current tolerance for failure and appetite for risk are appropriate. And therefore, whether they’re being as effective in the long run as they could.

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2 Comments on “aid and venture capitalism”

  1. […] This post was mentioned on Twitter by Ian Thorpe, Cynan Houghton. Cynan Houghton said: [blog post] in reply http://bit.ly/hEnY7L @ithorpe [new post] Do aid agencies need venture capital? http://wp.me/p110pY-7n […]

  2. Ian Thorpe says:

    Cynan – great. Fully agree with you about the annual funding cycle. For venture aid capital to work it would need to be provided in the form of capital – to be spent as the project needs it, not allocated in annual use or lose cycles.

    Just to clarify though – what I’m suggesting is an experiment that should sit alongside existing mechanisms – not a replacement for it (at least for now). The idea would be to allow higher risk projects to be funded, and also of course to see if this idea itself is useful in developing new approaches to aid and aid funding.


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