Venture Philanthropy

Venture philanthropy is an approach adopted by venture capitalists to invest their resources in charitable causes. It is mainly seen in venture capital funding, where investors use a different approach to philanthropy. They aim to help organizations maximize their social impact positively.

This concept of venture philanthropy funds has become popular lately with the rise of venture capitalists. The prime assumption here is that the investors are successful in their motives and wish to impact the organization socially. As a result, venture philanthropists provide financial support via mentoring and coaching, but in a non-monetary way. 

Venture philanthropy refers to the redirected route for venture capitalists in the field of philanthropy. It allows them to assist organizations in achieving a better social cause. They can do that through mentorship or guidance when achieving business objectives. However, they also look for positive social impact. Therefore, such philanthropic firms have a significant hand in contributing to ESG (environmental, social, and governance) practices.

The mechanism of the venture philanthropy model is built on five central pillars. It includes strategic investment, hands-on engagement, performance tracking, collaborative effort, and systemic change. Here, investors deploy their funds to companies that have the potential to drive social advancements. Likewise, providing expertise and guidance to firms is also included in this plan. It helps the company grow overall. Later, venture capitalists can use different data metrics and indicators to track performance, which will bring an overall transformation to the organization. However, the actual practice followed by such philanthropic firms has a different approach altogether.

Venture philanthropy models mainly involve three practices: customized financing, non-financial support, and impact management. Let us understand them in detail:

• Customized Financing: Here, the venture capitalists or philanthropists associate their resources with a charitable mission. In some cases, they may opt for loans or borrowing. However, investors try to reinvest their profitable funds in such missions. 
• Non-Financial Support: Apart from the financial help needed, venture philanthropists also provide mentorship to such organizations. They may also help with the coaching and guidance required for fundraising attempts. 
• Impact Measurement And Management: Investors try keep track of the performance of the ESG and charitable missions. They tend to overview the role of the venture board and make recommendations to maximize the overall social outcome. 

The pioneering of the venture philanthropy fund occurred in the late 1990s. It was the time that caused a massive boom in technology firms and the dotcom era. However, the term had already originated (or coined) in the late 1960s. In 1969, American philanthropist John D Rockefeller III gave this word before the Congress committee presenting the Tax Reform Act. Later, the term resurfaced in the annual report of the Peninsula Community Foundation in 1984. However, massive popularity occurred when an influential paper challenged venture capitalists to bring in their resources for a social purpose in the 1990s.

Some of the popular venture philanthropy organizations include the Mulago Foundation, Bill & Melinda Gates Foundation, New Profit Inc., Omidyar Network, and similar others. Different philanthropists employ a varied framework for social causes. It includes performance evaluation, having circles, high engagement, and hybrid models. Here, investors may use a social return on investment (SROI) to measure the yield rate on ESG investment. Although it's not monetary, they do look at the social impact of it. Likewise, in giving circles, the investors may club in their funds and decide on investment. But, in this case, the investment rate may be less than the actual capital provided for daily operations.

In the high engagement model, the investors have a close relationship within the group and stay active in their decisions. A combination or choice of the above-discussed models is what the hybrid model means. Here, they have the option to combine any model type as per their preferences.

Let us look at some examples of this philanthropy funding model to understand the concept in a better way:

Example #1 

Suppose John is a venture capitalist who has invested in more than eight firms. Every firm and investment made is yielding good returns for him. And most of them are also planning to bring sustainable methods to businesses. Therefore, John decided to join as a venture philanthropist to help such firms in return. As a result, he invested around 30% of his profits into this cause, which might be visible in three years. 

Out of 8 firms, John planned to invest in four. Along with the investment, he also agreed to mentor them on the latest technology that could drive more sustainability for the business. Also, the team got familiar with training and ways to boost their ESG impact. 

Example #2

According to a recent news update as of May 2024, the African Civil Society has requested grant applications for venture philanthropy funding from investors. The primary purpose of the fund is to support civil organizations and provide technical support for their businesses. In general, funding will be allocated to education, poverty, human rights, and health-related areas. Once the grantee is identified, they may receive funds for a period of two to four years, depending on performance indicators.

Following are some of the key benefits of this philanthropy in actual reality:

• Long-Lasting Impression Of Firms: One of the prime benefits of venture philanthropy funding is for the donor or venture capitalist. Since they provide funds to such organizations, their ESG score automatically increases. Also, it creates a positive impression of the brand in the customer's minds. 
• Developing Solid Connections And Relationships: Likewise, venture philanthropists also bond a strong relationship with the firm and team members. They take active participation in the decision-making process and ensure suitable input when required. 
• Increased Resources: In the eyes of firms, this philanthropy brings an ample yet limited number of resources for them. For them, it acts as a chance to incorporate new technology and tools, also increasing their social impact in the industry. 
• Long Term Sustainability: Another major pro of this philanthropy is visible in the sustainability score. With the help of proper guidance and mentorship, firms tend to be more sustainable in their code of conduct. 
• Enhanced Business Operations: Furthermore, non-profit organizations also see a significant increase in their daily operations and management. In short, there is the optimal use of resources, further causing savings. 

Although venture philanthropy is a merger of traditional philanthropy and impact investing, there is a vast difference between them. So, let us understand each in detail: