Venture philanthropy is the application or redirection of principles of traditional venture capital (VC) financing to achieve philanthropic endeavors. Often, it is exercised in the context of charitable startups, green companies, or B corporations, as investors offering funding to these types of firms typically have extensive experience in these areas.
Key Takeaways
- Venture capitalists sometimes use their resources for philanthropic endeavors. This is called venture philanthropy.
- Such investors are in a unique position to inspire and direct change since transitioning their systems from capitalist pursuits to philanthropic endeavors is relatively easy.
- Besides direct investment, capitalists-turned-philanthropists may offer support in other ways, such as executive coaching or board management.
Understanding Venture Philanthropy
Venture philanthropy applies most of the same principles of venture capital funding to invest in start-up, growth, or risk-taking social ventures. The focus lies not on profit but on making investments that promote some sort of social good, akin to socially responsible investments (SRI) meeting environmental, social, and governance (ESG) criteria. Though they share similarities, venture philanthropy is distinct from impact investing, which places more emphasis on turning a profit while contributing to social causes.
Venture philanthropy is characterized by a high degree of investor oversight and engagement. Financing plans are specifically tailored to a company or organization’s capacity-building needs. Often, major donors sit on the boards of organizations they support, getting intimately involved in operational or managerial aspects of the business.
Enhancing Social Impact with Strategic Support
These philanthropists also offer non-financial support, such as executive advice, marketing initiatives using their platforms, and performance measurement. Strategically, many of these practices are drawn from successful venture capital initiatives but assess the efficacy of the organization based on standards like overall social impact, rather than focusing solely on economic profit.
Such investments take various forms, including private foundations supported by wealthy individuals, government or university grants for philanthropic endeavors, philanthropic investing arms of major institutions, or charities that encourage large or institutional donations. In the United States, most investment is grant-based, usually resulting in selective, multi-year grants known for encouraging innovation due to high competition.
Origins of Venture Philanthropy
The term “venture philosophy” often harkens back to John D. Rockefeller III in 1969, who described it as “an adventurous approach to funding unpopular social causes.” The Rockefeller Foundation remains a leading name in socially-attuned investing. Venture philanthropy emerged from the growing public sentiment that traditional financing mechanisms rarely helped non-profit organizations or other socially beneficial industries build capital.
Venture philanthropy has gained momentum, particularly as awareness of climate change and environmental degradation has heightened public concern. However, it shares space with impact investing, which seeks to blend profit with social responsibility. Efforts like cap and trade carbon emissions markets or subsidies for sustainable businesses aim to bridge the gap between profit-driven market forces and philanthropic concern for responsible business practices.
Related Terms: Venture Capital, Socially Responsible Investments, Impact Investing, Environmental, Social, and Governance (ESG), Grants.
References
- The Rockefeller Foundation. “Venture Philanthropy in Development”, Page 35.
