Supporting a charity or philanthropic organization, for many people, normally takes the form of a donation to a particular cause. While these acts of generosity enable countless good deeds in the name of worthy initiatives, this donation-driven model of philanthropy can lead to problems for organizations that seek to make the world a better place.
It’s not sustainable, for example, for a philanthropy to base its entire revenue on this type of fundraising because the income it generates is prone to fluctuation; in addition, donated funds can be earmarked for a specific purpose, leaving philanthropies scrambling to pay for other activities or general operating expenses. With this in mind, it quickly becomes apparent that philanthropies need a strategy to generate funds that goes beyond tearjerking infomercials and bell-ringing Santas soliciting donations.
Impact investing and venture philanthropy are two approaches that break the traditional mold of how to do good deeds and, more importantly, pay for them. They both draw on financial principles, but there are a number of differences between them.
The newcomer of the two strategies is impact investing, which seeks to commit funds to various philanthropic or business enterprises with the expectation of both financial return as well as achieving a socially- or environmentally-oriented goal. It links economic and social value and engages market actors, like investors and financial institutions, in philanthropic causes by giving them the opportunity to do well by doing good. Impact investing is also exploding in popularity, with billions of dollars in capital already deployed toward goals and various firms, like BlackRock and JPMorgan Chase, getting in the game.
Venture philanthropy, on the other hand, is a bit older; John D. Rockefeller III, describing “an adventurous approach to funding social causes,” coined the term in 1969. Rather than just a cash infusion, venture philanthropy aims to help organizations secure financial sustainability. Its other characteristics include tailored financing that lasts over the course of several years as well as non-financial support, such as strategic planning and marketing, to breathe life into the organizations. Venture philanthropy is also concerned with setting realistic, measurable goals and achieving milestones so that it’s always clear how the particular organization should be taking steps toward building a better world.
Philanthropy and business are generally seen as two ends on a spectrum, and in fact, by its very definition, philanthropy is explicitly distinguished from regular business activities. That’s part of the reason why impact investing and venture philanthropy are so exciting. Now, rather than being at odds, business and philanthropy can work together, combining market forces with a strong desire to make the world a better place. Thanks to this marriage between finance and philanthropy, there’s no limit to what activists and advocates for a brighter tomorrow can accomplish.