Venture Philanthropy
/There are some terms in the charitable sector that are applied to widely varying circumstances that may confuse donors and nonprofits alike, but perhaps none more than “venture philanthropy.” Sometimes, it’s used in a generic way to refer to any giving associated with people whose wealth derives from finance or tech industries. Often, it’s used to refer to any giving where the funder takes an especially hands-on approach as they donate a particularly large sum to a nonprofit. Sometimes, people even attach the term to the efforts of investment funds that create joint ventures in for-profit businesses that have a social purpose and might provide significant returns to the fund if the risk pays off — but this usage is a bit of an outlier.
Venture philanthropy, most experts agree, is rooted in the idea that the practices and principles employed by venture capital firms to identify small but promising companies to grow into massively profitable businesses can also be applied to the nonprofit sector. The core element of venture philanthropy, advocates say, is a years-long commitment of large infusions of capital by the funder that comes with high levels of engagement by the investor. The funding is given in ostensibly “unrestricted” support, but it is provided on the condition of having the funder become extraordinarily immersed in the day-to-day operations of the nonprofit. The funder usually takes a seat on the nonprofit’s board of directors and deeply engages in its strategy development, finances, growth planning and program operations. The donor may provide coaching to executives, as well as loans, grants or other funding mechanisms to scale up the nonprofit’s operations.
What are the elements of venture philanthropy?
Venture philanthropy doesn't just bring the ideas and tactics of venture capital funding to philanthropy, it also aims to “break the mold” and make “game-changing impacts” on issues from education to medical research. It’s as much a worldview as it is a cohesive set of practices. And it also represents a giving philosophy that is probably the polar opposite of trust-based philanthropy. Every venture philanthropy initiative starts with the promise of an exceptionally large infusion of funding that will take the nonprofit’s work “to the next level,” on the condition that the nonprofit brings in business experts and their management strategies to get them there.
The core elements of venture philanthropy include:
Significant funder involvement beyond the financial contribution. Venture philanthropists give more than money. They tend to be highly engaged with initiatives and organizations they fund, and in addition to cash contributions, they give their time and expertise, including executive coaching, serving on nonprofit boards and sharing access to their networks. This support beyond the financial contribution is intended to increase the nonprofit’s capacity to advance their mission.
Long-term, unrestricted funding. Providing unrestricted general operating support is the norm in venture philanthropy — because it’s the norm in private investing. VC firms give startups a lot of money over a number of years to experiment, take risks and go big in their efforts to disrupt an industry and do something new and impactful. Venture philanthropists bring this model to philanthropy, making unrestricted, multi-year gifts to nonprofits so they have the resources and flexibility to try new things, be ambitious, scale up, innovate, and possibly make a game-changing difference on the issue they’re working on.
Early stage or growth funding. Venture philanthropists give to new and emerging nonprofits or to nonprofits that have the potential to scale if given the resources. Usually the nonprofits are established enough in what they are doing to have a promising track record in a particular location or a model that has shown some proof points in demonstration projects. But sometimes, venture philanthropy investors give to nonprofits simply because they have an exciting idea.
Exit strategies. Another common element that venture philanthropy investors bring with them from the VC world is being clear at the beginning about how long they will stick with the investment. On the one hand, a five-year commitment of large sums of unrestricted funding can be a godsend for organizations that are used to small, one-year grants. But knowing you’re being funded to scale up massively while knowing that the funding is going to end in five to 10 years might be cause for concern for many nonprofit leaders.
A high-risk, high-reward mentality. Advocates for venture philanthropy say that conventional philanthropy doesn’t give nonprofits a lot of support to take risks, that the typical proposal and reporting process encourages safe bets and incremental progress. For example, nonprofits are often required to state in a proposal exactly what they plan to accomplish with a given project and then to report in a year that they have hit those targets. Venture philanthropy brings the ethos that bigger risks can lead to bigger rewards. In philanthropy, the potential reward isn’t a financial windfall — it’s making a major positive difference in the world.
Emphasis on measurable outcomes. Venture philanthropy’s embrace of risk-taking and experiment doesn’t mean there isn’t a focus on results. In fact, venture philanthropy places a high value on measurable outcomes as a way to prove the effectiveness of the approach. The VC model insists on measuring and monitoring the change created by an organization’s activities and using this information/data to refine activities. And as with all evaluation efforts, what can be most easily measured is often what gets the most attention.
Changing-the-game solutions. Venture philanthropists give big and encourage nonprofits to go big because they are aiming for a big impact. Venture philanthropy tends not to be interested in, say, donating to a food bank for the cost of groceries, but rather funding a transformative solution to end hunger. Venture philanthropy has had a major hand in scaling up “game changing” organizations like Teach for America and Single Stop USA.
Resources to scale up a field. Venture philanthropists sometimes fund multiple nonprofits working on the same issue and encourage collaboration and growth to bring solutions to scale.
Access to more funders. Intermediaries and donor collaboratives play a big role in venture philanthropy, bringing multiple funders together to increase the total amount given for a venture while minimizing the risk borne by any single funder.
The term venture philanthropy is applied in a lot of ways, so not everything people call venture philanthropy will have all of these elements. And people sometimes use other terms to describe the common funder activities described above, so you may also see monikers like angel philanthropy, enterprise philanthropy, impact philanthropy, catalytic philanthropy, strategic philanthropy, and values-aligned investing applied to this kind of funder relationship.
Key considerations
Venture philanthropy presents nonprofits that have great ideas with something they really need: large infusions of capital in order to scale up their theory of change. For both the investor and the nonprofit, however, there are serious trade-offs to consider:
Donor control and power dynamics. The venture philanthropy model often gives donors a major role in charting a nonprofit’s growth and strategy — even if the donor has no hands-on experience with education, medicine or other topics central to the mission of the organization. That level of involvement may feel invasive to nonprofits and some critics question the wisdom of elevating business leaders and thinking within the social sector.
For the donor, it can be a major commitment of time. Because venture philanthropy entails providing both financial and hands-on support to organizations, it can require a big investment of time by donors. If you take on this role, make sure it’s compatible with your other obligations. One way for donors to support a venture philanthropy approach without making a major time commitment is by giving to a funding intermediary in this area, which is discussed below.
Exit strategy limitations. Setting a timeframe for involvement can make a lot of sense in the for-profit world — there should be a simple metric of profit within some reasonable timeframe. But social change happens on many complicated dimensions and progress takes place over decades. Time-limited investments in nonprofits may be arbitrary and may end up cutting off funding before real change can happen. The exit strategy factor also assumes that social change efforts should either be self-sustaining with some sort of revenue model or picked up by government or other funders who want to support this newly enlarged organization.
Taking Action
Venture philanthropy can be highly welcomed among some types of nonprofits at the right stage of development. There are a number of intermediaries such as New Profit, Blue Meridian, NewSchools Venture Fund and Venture Philanthropy Partners that bring venture philanthropists together, organize pooled funds, and offer opportunities for peer learning and collaboration. These can be great places to get started with venture philanthropy.
To explore possibilities in venture philanthropy, donors can:
Join together with other venture philanthropists. Get involved with a venture philanthropy intermediary to learn more about venture philanthropy and partner with other donors in pooled funds.
Think about what you have to offer beyond cash. Major financial resources are key, but there may be other things you can give, too. If you’re a seasoned business leader, consider offering leadership coaching or management advice to nonprofits. You might do this by joining the board or offering one-on-one support to nonprofit leaders. Another impactful way to help a nonprofit build capacity is to share access to your network.
Consider your risk tolerance. Think long and hard about how much risk you’re willing to take on. In this case (unlike with venture capital), the risk is not about losing money since you’re probably giving with no expectation of financial return, but rather, how will you feel if you support an experimental endeavor and it fails? Some funders are OK with that, knowing that some experiments lead to transformative new solutions and others don’t. And that’s part of the process of supporting new initiatives, creativity, and innovation. Others want to be more confident their giving is going to make a positive impact, every time. If that’s you, you might want to reflect on how much you want to devote to venture philanthropy versus more conventional philanthropy, or consider doing your venture philanthropy through pooled funds where you’re sharing the risk with other donors and have the benefit of an intermediary’s research and strategy.
Diversify your giving portfolio. There’s no need to move all of your giving to venture philanthropy. You can dip your toe into venture philanthropy with one project or gift while continuing your other giving, and potentially shift the balance over time as you feel out which types of philanthropy are right for you.
