For Profit Philanthropy

1
For Profit Philanthropy
Fall 2006 Venture Capital and Private Equity
Victor Fleischer ASSOCIATE PROFESSOR OF LAW
2
For Profit Philanthropy?
Fall 2006 Venture Capital and Private Equity

• Innovation may generate positive social
  externalities
• Clean Tech
• Schools
• Angel Investing
• All entrepreneurship?

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
3
Why For-profits?
Fall 2006 Venture Capital and Private Equity

• For-Profit Ownership
• Cost of market contracting for most inputs and
  outputs is low
• Residual stakeholders have strongest incentive to
  make good decisions w/r/t behavior thats
  difficult to monitor
• For standard corporation, common stockholders are
  residual stakeholders
• market contracting with employees, debtholders,
  suppliers, customers

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
4
Why Non-profits?
Fall 2006 Venture Capital and Private Equity

• No Ownership
• For some enterprises, better to have no owners at
  all (non profit non-distribution constraint)
• Cost of market contracting is high
• Agency Costs
• Non-profits have lower risk of opportunism
• lower costs of collective decision making

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
5
Google.org (For profit philanthropy)
Fall 2006 Venture Capital and Private Equity

• Increase production of public goods
• Agency costs
• Agency costs remain high whatever the structure
• Maybe non-distribution constraint is unnecessary
• Improved accountability?
• Key question in the non-profit sector is
  collective decision-making, not opportunism?

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
6
Edison Schools
Fall 2006 Venture Capital and Private Equity

• Must public schools (i.e. schools available to
  all at no cost to the student) be owned by the
  government?

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
7
Edison Schools
Fall 2006 Venture Capital and Private Equity

• Yes, should be non-profit
• High Cost of Market Contracting
• Government purchases product, but difficult to
  assess quality
• Testing results hard to interpret
• Selection bias

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
8
Edison Schools
Fall 2006 Venture Capital and Private Equity

• No, should be private
• High Cost of Collective Decision-Making
• Bureaucracy of government
• Lack of accountability
• Need a residual stakeholder
• (Theory suggests a local parent co-operative a
  better structure, at least where population is
  homogenous?)

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
9
Edison Schools
Fall 2006 Venture Capital and Private Equity

• IPO in 1999
• (18 / share)
• Nearly bankrupt in 2002
• (0.14 / share)
• MBO in 2003
• (1.76 / share)
• Conflict of interest?

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
10
LP Social Responsibility?
Fall 2006 Venture Capital and Private Equity

• Liberty Partners
• Florida state retirement system (cops, public
  school teachers, firemen, etc.)
• If you are a trustee for the LP, should you try
  to block the investment?

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
11
Edison Schools Conclusion
Fall 2006 Venture Capital and Private Equity

• Evolving towards management company model
• Like Hilton, Ritz-Carlton
• If Edison owns the entire enterprise, risk of
  appropriation by the government
• If Edison is only a management company, then the
  worst the government can do is terminate the
  contract

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
12
New Schools Venture Fund
Fall 2006 Venture Capital and Private Equity

• Can we apply VC model to philanthropy?
• Need for innovation
• Whats so great about the VC model?
• Source of investment capital (LPs)
• Reputation market
• accountability
• Human capital of VC, E

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
13
New Schools Venture Fund
Fall 2006 Venture Capital and Private Equity

• Do we need an intermediary?
• Are VCs or Foundations better monitors?
• Who can better adapt to change?

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
14
Fall 2006 Venture Capital and Private Equity
Public Shareholders
Social Networking
Search
Google.Org
Hybrid Cars
Global Poverty
Clean Tech
Victor Fleischer ASSOCIATE PROFESSOR OF LAW
15
Conclusion
Fall 2006 Venture Capital and Private Equity

• We can import some lessons from VC into the world
  of philanthropy
• Repeat Play can provide accountability
• Intermediaries useful where they have an
  institutional comparative advantage

Victor Fleischer ASSOCIATE PROFESSOR OF LAW