The scale of development challenges in Asia is vast. Innovative solutions are necessary to address these challenges. Yet, such innovations come with risks – financial or otherwise. Governments generally hesitate to fund unproven initiatives because they fear being accused of wasting taxpayer money. Markets generally don’t fund projects that lack a clear path to return. And often, the costs of demonstrating a solution’s viability are too high for innovators in developing Asian economies to fund themselves.
Philanthropic capital can underwrite some of these risks and help innovative impact initiatives demonstrate proof of concept, scalability, or market viability, thereby helping secure subsequent funding or government adoption. A recent report by the Centre for Asian Philanthropy and Society (CAPS), commissioned by the Philanthropy Asia Alliance (PAA), spotlights ten examples of Asian philanthropy being deployed successfully as risk capital.
What motivates funders?
Asian philanthropy has long played a role in meeting developmental needs. However, our research suggests that deploying philanthropy as risk capital is uncommon among Asian funders. What motivates Asian philanthropists to do something different? We identified three broad motivations: personal conviction and experiences, specifically designed institutional mandates, and alignment with government policy.
These motivations are not mutually exclusive, as is common in Asia, where individual and corporate philanthropic decisions often overlap and closely align with government priorities.
An example of personal conviction and experience motivating philanthropic risk capital use is in Indonesia, where the Tahija Foundation supported a randomized controlled trial to test the effectiveness of the Wolbachia method in preventing dengue. Seeing members of their own family and community suffer from dengue, the Tahija family was personally motivated to prevent the spread of the disease, which affects over 7 million people in Indonesia each year. They invested more than US$17 million of risk capital over a decade in the World Mosquito Program’s (WMP) efforts to test the Wolbachia method in the city of Yogyakarta. The trial demonstrated a 77% reduction in mosquito-borne dengue and a 86% reduction in hospitalizations. The program has since been piloted by other local governments and incorporated into Indonesia’s national health strategy, drawing interest from global multilateral and philanthropic funders.
Meanwhile, several examples from Asia showcase how the mandates of philanthropic foundations, funds and other entities drive the deployment of philanthropic risk capital to early-stage social innovators. In Hong Kong SAR, a member of a high-net-worth family was appalled by the amount of single-use plastic waste they encountered during their regular hikes. This prompted them to set up a purpose-driven organization named WYNG 43 Social Investments to invest in and incubate social innovators to help solve the problem. This entity has been set up to operate separately from their foundation and the family’s traditional investment arm, and seeded Urban Spring, a social enterprise that has developed water filtration machines and helped avoid the use of an estimated 25 million plastic bottles in the city.
Alignment with government policies is another key motivation in deploying philanthropy as risk capital. For example, in 2015, Tata Trusts, the philanthropic trusts endowed by the Tata family in India, developed a new digital vertical to pilot and support initiatives in alignment with the government’s Digital India program, which is a flagship initiative to “transform India into a digitally empowered society and knowledge economy.” Tata Trusts subsequently provided early-stage funding and ecosystem support to Haqdarshak, an Indian social enterprise that has now mapped over 5,000 welfare schemes onto a digital platform, increasing access to public services.
Fundamentally, whether it’s individual or institutional, Asian philanthropic funders who responded to the need for risk capital determined that existing approaches are insufficient, and that the risk of inaction is higher than other risks.
When and how can philanthropy be used as risk capital?
Our research highlighted ways that philanthropy can serve as risk capital through instruments other than traditional grants in Asia, leveraging tools more commonly associated with market capital. These include recyclable grants, concessional debt, and even equity. In some cases, funders can use a mix of these instruments depending on the initiative’s needs and stage of growth. Furthermore, grants can serve as an entry point, and once the relationship matures, the funders provide additional instruments. For example, the ECCA Family Foundation in Singapore initially provided philanthropic grants to Seven Clean Seas, an enterprise that has introduced a plastic credit program alongside its ocean plastic clean-up efforts. As the relationship matured, the Foundation’s relationship evolved into that of an equity investor.
Risk capital can also support an early-stage initiative at different stages. At the inception stage, this funding can help seed, prototype and pilot products. At these stages, the philanthropic risk capital helps demonstrate impact or market viability, which can then be leveraged for subsequent funds or government adoption. Further on, at a growth stage, the funding can help with organizational capacity development, covering the costs of scaling solutions, and more directly with fundraising. One such example is Agros, a social enterprise pioneering sustainable farming in Southeast Asia, which received concessional debt from Leap201 and Nexus for Development to fund inventory expansion during a period of cashflow challenges. This support helped bridge the enterprise across a crucial time period in its growth that subsequently helped it secure Series A financing.
Across the board, however, the role of the funders extended beyond just being a source of capital. Given the nature of early-stage initiatives and the risks involved, in addition to capital, funders also leverage their networks and relational capital as a means of mitigating risks and amplifying impact. For instance, funders align with governments to reduce barriers to entry for these early-stage innovations. And they draw on community trust and institutional networks they have built through their other work to help improve buy-in, reduce implementation risks and ensure long-term sustainability.
Influence of regulations
Regulations governing philanthropic giving in Asia influence the scale and scope of risk philanthropy in the region. This is because some economies in the region limit how (use of instruments) and to whom (type of beneficiary) philanthropic capital can be given, especially from philanthropic foundations and trusts. However, the regulatory ecosystems in Singapore and Hong Kong SAR afford philanthropists and philanthropic entities considerable flexibility, and therefore, a wider variety of instruments are used by funders based in these economies. Meanwhile, in China, foundations are allowed to make equity investments, provided that the investee’s business scope is related to the foundation’s purpose. For example, the Vanke Foundation, the philanthropic arm of a prominent real estate group in China, which has made community waste management a thematic priority, made an equity investment in INSPRO, a social enterprise that developed an innovative approach to recycling organic waste using insect-based bioconversion.
Looking Ahead
Although our research suggests that the use of philanthropy as risk capital is somewhat limited in Asia, it has the potential to drive outsized impact. The 10 examples featured in the report operate across 13 economies and have benefited more than 210 million lives, demonstrating the impact philanthropy as risk capital can generate. To fully leverage its potential, a more favorable ecosystem is needed – including supportive regulations, adequate technical expertise, and funders willing to account for the risk of inaction alongside financial and reputational risks.
Asian funders who deploy philanthropic risk capital see risk and impact as two sides of the same coin and have notably tailored this type of philanthropy to succeed within the region’s socio-cultural dynamics. In doing so, they have demonstrated the opportunity and pathway for other philanthropists to engage in conviction-led philanthropic spending that can bridge innovation to impact.
This article was first published in Korean in The Butter.