Venture capitalism involves investment and funding of startup companies and ventures in emerging markets. As with any type of investment, the ultimate goal is to make money. Venture capitalists help finance these budding companies for equity or a stake of ownership, with the intention of seeing a good return on their investment. Whereas most private equity investors are concerned with the private good, philanthropy focuses on the good of the public. It usually aims to solve the root of a particular societal ill and should not be confused with charity, which is more concerned with alleviating the pain of a particular problem. One might think of philanthropy and venture capitalism being at odds, but the reality is that they don’t have to be.
The Call to Serve Others
One enduring line of wisdom says, “To whom much is given, much is expected.” This is commonly interpreted to mean that someone who has acquired much in terms of wealth, knowledge, wisdom and other gifts has a responsibility to use their resources to help others. The idea of philanthropy and venture capitalism aligning is not new. History provides examples of generous businesspersons who believed that their fortune and influence could be impactful in addressing certain problems in society. Philanthropic heavyweights such as Andrew Carnegie and John D. Rockefeller, as well as entities such as the Ford Foundation, have committed resources to initiatives designed to improve higher education, scientific research and advancements in medicine.
How Philanthropy and Venture Capitalism Connect
Often we hear of magnates and industry leaders funding initiatives that are near and dear to their heart, such as Oprah Winfrey’s Leadership Academy for Girls in South Africa or Mark Stevens charity to the University of Southern California’s Stevens Center for Innovation. Historically, venture capitalism and philanthropy have connected in various ways depending largely on the objectives and the outcomes of the vehicles for investment. Here are some of the ways in which the two concepts connect and intertwine.
The idea of venture philanthropy has been around for several decades. It involves taking venture capitalist techniques and principles and applying them to charitable pursuits. Initially coined by John D. Rockefeller III in 1969, it described financing social causes that were considered to be unpopular. This philanthropy tends to be focused on raising capital and active engagement with recipients to foster innovation. Most investments of this type are made through a foundation or a private equity firm. The engagement period for this type of investment ranges from 3 to 7 years. One example of this is the creation of the Chicago Public Education Fund to improve the hiring and retention of exceptional educators for public schools in Chicago.
Impact investments seek to provide funds to solve social and/or environmental issues. Some of the popular issues targeted by impact investing include renewable energy, healthcare, education and sustainable farming. This type of investment isn’t limited to one asset class. It can include debt and fixed income as well as private equity. It also isn’t limited to start-ups or emerging markets. Often, impact investors may accept below-market returns in service of improving a particular social issue. The term “impact investing” was coined in 2007 and it includes applying the same rigor to social and environmental performance as that of financial performance. A popular example of impact investing is when large corporations such as Apple create initiatives to reduce their carbon footprint.
Socially Responsible Investing
Socially responsible investing refers to investment strategies that value social and environmental “returns” as well as financial returns. SRI supports corporate practices that encourage ideas such as human rights, consumer protection, racial and/or gender diversity and inclusion and environmentalism. Some SRI is limited to screening portfolios for stockholding in businesses perceived to negatively impact society such as alcohol, tobacco and gambling. Impact investing is considered to be a subset of socially responsible investing. An example of SRI is The United Nations Environment Programme’s rollout of its Principles for Responsible Investment to guide investors in implementing social, environmental and governance criteria into the investing process.
Philanthrocapitalism refers to philanthropic approaches that mirror the approaches of for-profit businesses. Implementing business models into the charity operations has been around since the days of Carnegie and Rockefeller, but the phrase was officially introduced by the authors of the book, Philanthrocapitalism: How the Rich Can Save The World. Examples of philanthrocapitalism include increases in charity funding by such entities as the Bill & Melinda Gates Foundation and the Chan Zuckerberg Initiative.
Venture capitalism and philanthropy aren’t quite the oil and water that they might initially appear to be. Historically, we have several past and current examples of philanthropists whose efforts dovetail with or are driven by their investment strategies. The merging of investment and altruism is often driven by the notion that those who have accumulated wealth and wisdom should give back in some meaningful way. Venture philanthropy, impact investing, socially responsible investing and philanthrocapitalism are all concepts birthed at the intersection of generosity and altruistic investments.