What is venture philanthropy? (With models and benefits)
By Indeed Editorial Team
Published 14 November 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Venture philanthropy (VP) refers to when a venture capitalist shifts their funds or resources to a charitable venture. The assumption of VP is that if the investor is successful and earns profits, they can also influence positive philanthropic results. Learning about the importance of this approach can help you better understand how society can benefit from it. In this article, we explain what venture philanthropy is, explore common activities in VP and share the benefits of this form of philanthropy.
What is venture philanthropy?
Venture philanthropy (VP) is a high-engagement approach that investors undertake to provide long-term support to social purpose organisations (SPO). VP is a subset of traditional philanthropy. The difference is that when investors choose the VP approach, they expect to not only make a positive change in the world but also a return on their investment. Depending on their area of specialisation and available resources, venture philanthropists can invest money, skills, knowledge or time.
Types of activities in VP
VP goes beyond just giving organisations money. In many cases, venture capitalists and their companies want to actively engage in helping non-profits and startups to inspire a real change in the world. In addition to giving to them financially, here's how investors engage in VP:
Philanthropists can give organisations full autonomy in allocating funds they receive from them. In VP, this partnership often involves the exchange of knowledge. Venture philanthropists use their experience and expertise to guide charities and help them make financial decisions that have the biggest impact on an industry or the society. In this scenario, an investor acts as a mentor or key stakeholder.
Venture capitalist firms that support charities often use their own marketing resources to promote those non-profit organisations. This is beneficial for both parties. Firstly, it helps the non-profit reach more people. Secondly, it presents the firm as a socially aware organisation and its executives as empathetic and caring leaders.
In many instances, investors also share their management resources with organisations they support financially. This allows them to make sure the right people lead charities. Many supporting organisations provide non-profits with attractive training opportunities, which strengthen their management.
Benefits of VP
As a part of their VP approach, venture capital firms often invest in socially responsible startups or non-profit organisations. Here are some benefits of VP:
Building long-term solutions
There are a few different ways in which investors can approach VP. For some, it makes sense to make a large one-time donation. Others prefer supporting organisations with smaller grants, which they pay every couple of months or annually. Thanks to this ongoing relationship, non-profits and startups have better financial security and can safely engage in building long-term solutions without worrying that they run out of money.
Strengthening the non-profit network
Many venture capitalists invest in organisations that align with their values and personal experiences. For example, many investors share funds with medical organisations after experiencing a loss or seeing someone close to them suffer from a specific illness. Thanks to their donations, more influential people can hear about the non-profits, which strengthens their network. As a result, their investor pool may grow, allowing them to engage in more research projects or pay for more expensive social campaigns.
Inspiring radical change
Grants and funds that venture capitalists invest in startups and non-profits often outweigh the money that those organisations have. They also rarely have the resources to raise that much from one campaign. VP approach provides them with the money they can use almost instantly and their projects can develop rapidly.
VP can positively impact non-profit organisations and the society. Investors who support charities by giving them money also experience various benefits, including financial ones. A significant advantage of giving to charity is that it allows venture capitalists to deduct their investment from their tax base. In some instances, this can even be 50% of the total amount they donated.
Developing stronger leadership
The success of many organisations depends on the skills and knowledge of their leaders. Because many non-profits struggle to raise enough funds to cover their day-to-day activities, there's no budget for training their management and leadership staff. Thanks to the help that they get from VP practices, they can invest in professional development. In addition to giving money, many investors also engage in creating mentorship programmes within those organisations to inspire and guide leaders.
Since VP is essentially giving to charity, investors don't expect organisations to pay them back. This can be especially beneficial for startups, which are companies that often explore and invest in innovative ideas that sometimes fail. Knowing that there's a venture capitalist supporting their ideas and work gives startup founders the freedom to explore various business or technological approaches. It also gives them access to more advanced resources, which they can use without worrying about repayment.
Examples of VP
Venture philanthropy can take different forms, depending on what the investor wants to accomplish or how important a cause is to them. These forms include:
creating a private foundation
funding college or university grants
encouraging other businesses to give to charity
developing a business plan that helps others while earning a profit
Different philanthropists may choose varying approaches to guide their business decisions. A few of the most common VP models include:
Performance evaluation model
Also known as the social return on investment (SROI) approach, this model uses metrics to measure the impact of philanthropic support. It helps investors to assign a measurable, usually monetary value to the change that their help generates. Although it's a complex process, it provides organisations and philanthropists with valuable data that they can analyse immediately and then store to monitor how the charity is developing.
High engagement model
In this model, an investor actively participates in the decisions that the organisation makes. They build and maintain a close relationship that allows them to exchange information on a regular basis. In this model, the investor is likely to get a seat on the board of the organisation they support.
Giving circles model
The giving circles model concentrates on the idea that multiple investors combine their money to make a bigger impact on the community through supporting a specific organisation. There are three ways in which this can happen. These funds can come from several high-net-worth individuals, a group of companies or both individuals and companies. This model frequently has a large investment pool, so the group of investors is likely to make decisions collaboratively to help the non-profit allocate funds.
A hybrid model refers to an approach that combines multiple models. For example, a group may use a giving circle model where all investors pool funds, but only a few are active in making the decisions of the philanthropy. Another group may choose to use a framework that mixes aspects of the performance evaluation model with high engagement.
Difference between VP and impact investing
Although some people use these terms interchangeably, venture philanthropy and impact investing are two different approaches. While both practices include investing in projects or organisations that have the potential to create a positive social impact, they have different end goals. Venture philanthropists usually earn something from investing in socially responsible operations, but their end goal is to build a long-term and high-engaging relationship that inspires change. To do that, they offer grants, which also serve as a tax deduction. With impact investing, a strong financial return is the primary goal.
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