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Reprinted from Crain’s New York. Original article here.
By Anne Fisher
A couple of years ago, LinkedIn co-founder Reid Hoffman and Nick Beim, a venture capitalist with Matrix Partners, sat down and started brainstorming with Linda Rottenberg, co-founder and CEO of the Manhattan-based nonprofit Endeavor. The nonprofit, where the two men are board members, provides mentorship, networking opportunities and strategic advice to entrepreneurs. What if it could design a new kind of financing vehicle that would work, in some respects, like a for-profit investment fund?
The result of their blue-sky thinking, dubbed Catalyst, debuted in 2011. To date, the fund has attracted about $10 million in new donations, turbocharging Endeavor’s financial backing of entrepreneurs in emerging markets around the world—443 startups in 17 countries so far, including Argentina, Lebanon, South Africa and Indonesia.
“Catalyst operates just like any investment fund, except that we’re ‘investing’ in high-growth startups in developing countries, rather than in the stock market,” Ms. Rottenberg explained. “Donations are tax-deductible, as with any nonprofit, but we treat the donors like limited partners. They can track the return on their donations, of which 80% is ‘reinvested’ to fuel more startups’ growth, and the other 20% goes to cover Endeavor’s operating costs and make us self-sustaining.”
In a recent conversation, Ms. Rottenberg talked about Endeavor’s mission, the organization’s plan for the year ahead, and why its unique funding mechanism makes some people cringe.
What gave you the idea to start Endeavor, back in 1998?
[Co-founder] Peter [Kellner], who founded and runs venture capital firm Richmond Global, had just come back from China, where he witnessed the tremendous boom in entrepreneurship there, and I had seen the same growth potential in my travels in Latin America and the Middle East. We started talking about the fact that there was no ecosystem of entrepreneurship in those countries, the way there is in the U.S.—no mentors, no venture capital.
So we wanted to bring that whole support system to startups in developing parts of the world. And we decided to make Endeavor a nonprofit because we wanted to encourage other [for-profit] investors, not compete with them or crowd them out.
How do you choose which enterprises to invest in?
The whole search-and-selection process takes from a year to 18 months, leading up to events we call International Selection Panels or ISPs. Each one is two-and-a-half days of interviews and meetings between entrepreneurs and our network of global business leaders. We’re having one of these in Miami in December, followed by one in Athens next March and another in Buenos Aires in May.
Since 1998, we’ve screened about 30,000 startups. Fewer than 3% of them are accepted to receive funding and mentoring, so we’re very selective. And the companies Endeavor has chosen to support have done really well. Last year they generated a total of $5 billion in revenues and created 200,000 jobs.
What are your plans for 2013?
Well, this year we launched in Indonesia, Greece and Saudi Arabia, and right now we’re talking with people in Poland, Spain, Morocco, Malaysia and the United Arab Emirates. We’ll expand next year to at least three of those countries.
We’re also planning events in 2013 in New York, Silicon Valley and Miami, where U.S. entrepreneurs and investors can meet with entrepreneurs from around the world. These kinds of connections are really exciting because some of the businesses we fund can [grow to a significant] scale across borders, so we’ve even seen partnerships develop between U.S. and overseas companies. Another goal for the year is for Catalyst to raise another $10 million in donations.
Has Catalyst gotten any reaction from the rest of the nonprofit community? Do people understand the thinking behind it?
Well, Endeavor’s whole approach makes some people uncomfortable because it seems too much like a business. Starting about a dozen years ago, we’ve done annual impact reports that analyze the return on donations, which tends to attract a certain kind of donor—hardheaded financial types who want to see exactly how their money is being put to work—and Catalyst is just a logical extension of that. Peter and I are from the for-profit world, so we’re big into metrics. We’re not the feel-good, warm-and-fuzzy kind of nonprofit.
But, even though we don’t give directly to the poorest of the poor, and we’re far more selective than nonprofits that provide microfinancing generally are, we do help create jobs. On average, our entrepreneurs have a job growth rate of 80% in their first two years with us, and that helps entire local economies in these very poor countries. For example, in South Africa, 61% of Endeavor entrepreneurs’ employees have access to private health care, which is [more than] three times the national average of 18%. It’s a matter of fighting poverty by helping to create economic growth that is self-sustaining over time.
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