Here, Julie King writes about venture philanthropy and how many foundations are considering alternatives in the social investment space.

Here is a guest feature by Julie King of the The Galileo Agency, a boutique firm which represents both for-profit companies and not-for-profit organizations in the entertainment, water and energy technology sectors.

The term venture philanthropy relates to the concepts and techniques from venture capital finance and business management, which are used with the aim of achieving philanthropic goals - an increasingly important consideration in the world of wealth management.

Opinions are of the various contributors therein but Family Wealth Report is grateful for the right to publish them, and, as always, welcomes reader responses.

Charitable foundations are increasingly looking for investment opportunities with for-profit companies to achieve both impact and a financial return. While the traditional approach of endowed foundations has been to invest for financial returns and then donate a proportion of those returns, “we're now seeing alternatives to consider in the social investment space,” says Charles Peacock, director of philanthropy services at SandAire, a global multi-family office.

“For philanthropists and foundations, these investments may represent a better and more sustainable way of achieving their objectives,” Peacock adds.

The OECD definition of venture philanthropy is “an entrepreneurial approach to philanthropy, that combines a variety of financial and non-financial resources to identify, analyze, co-ordinate and support self-sustaining, systematic and scalable (for- and not-for profit) solutions to development challenges aimed at achieving greater impact.”

Social Innovator maintains that VP is not only a business model, it is instrumental in “diversifying capital markets for non-profits and social purpose organizations.”

The key characteristics of VP, says Kurt Peleman, chief executive of the European Venture Philanthropy Association (EVPA), “include both long-term financial and non-financial support and performance and impact measurements. It also includes recognizing the need to invest in building strong organizations, as an investor would do in a company.”

In a personal statement published in the Harvard Business Review, entrepreneurial founder of eBay, Pierre Omidyar, outlined his reasoning for starting a venture philanthropy-oriented investment firm, the Omidyar Network.

“By the early 2000s I’d realized what a profound social impact eBay was having as part of its business. It had about 100 million users, and it...was providing people with new careers and livelihoods. This was large-scale impact. I began to wonder: If I had created a non-profit organization and set a 10-year goal to build a trusted network of 100 million people with a start-up grant of $10,000 and no additional grants, would it have succeeded? Probably not. But somehow a business had been able to reach this level of social impact in less time, using less outside capital.”

Impact investment continuum

Sir Ronald Cohen, chairman of the G8 Taskforce on Impact Investing, held a global webinar in early July to present the Taskforce’s findings. During the presentation, Sir Ronald shared the scope of investment opportunities in impact investing – a phenomenon he now calls a “social revolution” akin to the breadth of change over the past 30-years resulting from new technologies.

“On one end of the impact continuum, there are corporations pursuing socially responsible decision-making,” explained Sir Ronald. “On the other end are investors in foundations, which pursue a specific social mandate. [In between] there are companies with ‘profit with a purpose’... and not-for profits with an eye towards innovation, scaling and access to capital markets. So on one end there is philanthropy and not-for profits moving towards markets, [on the other end] business is moving towards more social [and environmental] outcomes.”

Meanwhile, the JP Morgan 2014 Spotlight on the Market: The Impact Investor Survey shows that, collectively, family offices, high net worth individuals and foundations account for a quarter of the impact investments of $12.7 billion projected for 2014 from the 125 firms surveyed.

Peacock adds a first-hand perspective of the family office and foundations sectors:

“Clients have shown an interest in learning more about impact investing,” he said. “Some have now made a start while others are still going up the learning curve and assessing the changes that it would require of them and the way they have approached their philanthropy. An important part of this is addressing the question of how explicit they wish to be on the expected social return. This is particularly so, where there is judged to be a give-up of some financial return. Nonetheless, quantifying the social return in this equation can be a challenge.”

He continues: “Governments might be seeing impact investment as a means of stimulating innovation in addressing social problems but they are surely also attracted by the ability to defer expenditure and, by linking it to results, transfer risk to the investor. The question for investors then is how much risk they are willing to assume and for what prospective returns, both financial and in impact.”

Progress in quantifying impact

As Peleman of EVPA noted, one of the core elements of VP is measuring the social impact of the financial investments. Recently, the UK government took a pioneering step towards better quantifying social returns for impact investments by posting actual social costs on its website: for example, costs related to crime, health and social services.

Governments taking initiative such as publishing the cost of social programs is “...a means for cost calculations and return on investment of social impact,” said Sir Ronald. “This does not include the non-economic value of addressing social problems, such as the impact on individual lives, homes and families. Social issues can be quantified, which in turn is creating an ‘impact accounting system’ where the mix of social and financial returns can be based around measured interventions, wherever it lies on the impact continuum.”

Traditional philanthropy versus venture philanthropy

Two observations are common in the VP space: “It is still early days,” and “there is a shift occurring” in philanthropy towards VP. With this in mind, is there still a role for traditional philanthropy?

“The aim of VP is to complement traditional philanthropy,” Peleman from EVPA explains. “VP is one tool in the tool box... it achieves different things than traditional philanthropy. What is clear is that if it is your objective to invest in sustainable, systemic social impact, then VP is more effective.”

Godfrey Mwindaare, director of Acumen (Fund) West Africa, agrees: “There are initiatives...[where] aid workers are moving from an aid-driven model to venture philanthropy. This does not mean aid and charity have no place. There is a need, for example, in emergency situations. But the aid model is not really relevant for lasting solutions to social issues.”

Conclusions

There are multiple layers of viewpoints, interests and extremes on the impact investing continuum. What does seem promising, however, is that the disparate needs and viewpoints, as well as the continuum itself, are firmly rooted in the shared objective of effecting positive societal outcomes.

And as with anything growing as rapidly as VP, there is significant scope for confusion, misunderstanding and misinformation in the market.

Peleman of EVPA encourages as much patience with the process as is required with the impact investment:

“VP and social impact and the increased importance of social change – as a society, we are in a ‘pioneering phase’ of social change. So everyone needs to understand that events are dynamic; it is very much a learning process... It is our mission to help speed up the learning cycle with VP so that mistakes aren’t made and remade...But we are not 100 per cent successful. We are still learning. Venture philanthropy may have been around for ten years and there has been a stronger increase in the last four years. But we are still learning what instruments are applicable and when and in what contexts.”

As Farshad Rastegar, principal of Global Impact Investment Partners and former CEO of Relief International, suggests: “It is clear that a shift is in progress. Are we where we could be? Certainly not. For example, the majority of foundations still have the vast bulk of their assets in traditional investments. Even if the goal of 20 per cent of foundation assets [were] invested in impact or program-related investment that would be a milestone to celebrate.”