Venture philanthropy

Most people have heard of venture capital, but what is venture philanthropy? And how can families choose the right charity to ‘invest’ in?

Venture capital is financial investment provided for the early stages of a company or for expansion or for a pilot program. The venture capital fund earns money by owning equity in the company or companies it invests in. The investments are usually for an innovative or novel technology or business model. Venture capital generally occurs after ‘seed’ funding to start a company. Venture capital is also associated with job creation, often called the knowledge economy.

Venture philanthropy is modelled on venture capitalism. Venture philanthropy offers a way to invest in charities that are testing new approaches to solving old or challenging problems. Some donor countries ask charities to submit innovative proposals for funding for a short period. If the idea is funded and implemented, it can be extended with additional funding if the innovation proves to be effective and efficient.

For example, in 2007 American households (families) gave about $60 billion annually to small local charities. This was more than rich donors, the millionaires in the country – hence families make a real difference. So how can families get involved in venture philanthropy? Choosing the right charity is important.

Venture philanthropy offers a way to invest in charities that are testing new approaches to solving old or challenging problems.

Choosing the right charity is definitely important. For example, one study in America calculated that the most effective health-focused charities did a thousand times more activities (doing good) than the least effective charities. The research used a measure called ‘quality-adjusted life-years’ – a standard unit that combines survival and quality of life.

However, researchers, evaluators or even families demanding proof of performance may only make charities conduct short-term activities, and not long-term ones. Or charities won’t try innovative or more challenging ideas in case they fail. So we don’t want charities doing only the ‘easy’ and ‘quick’ activities. And we want to encourage failures from experiments, rather than hiding or covering up failures.

So family donations or individual donations using the venture philanthropy model seek to fund projects that are innovative and imaginative that test a development hypothesis. Often, like businesses with venture capital, it’s the management that implements new ideas and models, monitors them, and reports on them to their donors. Venture philanthropy can direct funds to charities with managment structures that encourage new and different approaches, but that also work with their many donors to be accountable for their ideas and their outcomes.

When giving to charities, sometimes you might want to consider charities with innovative ideas rather than tried and true activities that might be producing steady results without testing the boundaries. You never know, some new idea might revolutionize the way a disadvantaged community evolves to become self-sustaining and empowered.