Venture philanthropy is often compared to impact investing. While the two are similar, venture philanthropy precedes the new investment trend. The term was coined in 1969 by John D Rockefeller III in a speech before the US congressional committee.
In defending the tax benefits of philanthropy, Rockefeller argued that it played a massive role in helping society solve some social problems that governments could not address. He believed that philanthropy should support the exploration of new areas, take calculated risks, and identify emerging needs in society. In essence, philanthropy should act as venture capital for tackling societal issues.
Fast forward a few decades, and the need for venture philanthropy still persists. This insight explores venture philanthropy, why it’s important for family offices and how they can navigate the space for success.
What is venture philanthropy?
Venture philanthropy involves using traditional venture capital principles to support philanthropic initiatives. In other words, it approaches charitable giving from the lens of a professional investor. Typically, venture capitalists search for start-ups and rigorously conduct due diligence before finally investing to maximise financial returns. Venture philanthropists, on the other hand, select organisations with similar rigour. However, their primary concern is how much social impact the organisation will have in the future.
For example, the Draper Richards Kaplan Foundation funds companies that tackle complex social issues worldwide. They measure their investment success by ensuring that the organisations they support directly impact at least 10,000 lives. The firm was founded in 1994 and, up to date, has touched the lives of over 300 million people.
Why is venture philanthropy valuable to family offices?
Venture philanthropy allows family offices to invest in causes that align with their philanthropic objectives and create positive social change in areas that are important to them. That makes it a powerful tool for families to make a significant and sustainable impact on society. Here are some of the benefits:
Family engagement
Venture philanthropy can facilitate a meaningful way for the engagement and involvement of multiple generations within a family office. It provides a platform for younger family members to participate in philanthropic decision-making and learn about responsible investing.
A recent Campden Wealth report found that next-gens are driving the impact movement within their families and are making decisions based on sustainable investment. In addition, many are also starting social entrepreneurial ventures and impact funds.
A perfect example is Lukas Walton, heir of the Walton empire, who created Builder’s Vision and shifted its $1 billion endowment into what it calls “impact investments,” leading a broader shift in family offices to connect their investing and giving.
Legacy building
For family offices, venture philanthropy presents an unparalleled approach to creating a lasting legacy and making a positive impact. And foundations that carry the family’s name have a significant advantage since they are intimately connected with the business’s image.
Active participation in venture philanthropy can enhance their reputation and significantly bolster their standing in the community and among their peers. Notable examples include the Rockefeller Foundation, which has been around for over 100 years, and the Ford Foundation, which has been operating for the past eight decades.
Collaboration and partnerships
Venture philanthropy presents an excellent opportunity for family offices to collaborate and partner with other individuals and institutions to make a difference. Doing good is infectious and is the fertile breeding ground for building key relationships and sharing expertise, resources, and networks.
Warren Buffett’s pledge to the Bill and Melinda Gates Foundation is a good example. In 2006, Buffett pledged to donate a significant portion of his wealth to the foundation, creating the Giving Pledge. Soon after, dozens of other billionaires followed suit in committing to donating the majority of their wealth to philanthropy.
Navigating venture philanthropy with success
While engaging in philanthropic activities may evoke warm feelings, family offices should approach the process as they would an investment. Ensuring that all activities align with the family’s specific goals and values is crucial.
Investing in venture philanthropy is about empowering communities through investments and opportunities rather than solely providing aid. It aims to create pathways to wealth and self-sufficiency. And its goal is to invest in projects that can ultimately sustain themselves.
Whether you opt for direct investments, program-related investments (PRIs), or capacity building and technical assistance, two key elements are essential: due diligence and measuring impact.
Due diligence
When making venture philanthropic investment decisions, family offices should prioritise the commercial viability of organisations and not overlook legal services. Accessing financial and legal experts and conducting a thorough analysis and due diligence as part of the investment process is crucial.
Impact measurement
Family offices, like venture capitalists, must plan exit strategies prior to making investments. They should establish a clear objective for the impact they want to achieve and consistently monitor it.
A better way to think of venture philanthropy is as a bridge between traditional charity and impact investing. Supporting social entrepreneurs in the early stages of their start-ups is not just a matter of investing significant capital but also demands a commitment to mentoring and skill-building that can be time-consuming.
While deeply rewarding, family offices should consider venture philanthropy as a nontraditional investment model that requires persistence and flexibility. It requires tenacity and patience, and firms must be prepared to face resistance when tackling society’s most challenging problems.
“In my judgement, a foundation that never makes mistakes is not worth very much, for this is a sure sign that it never attempts to deal with the really tough problems,” – John D Rockefeller III.