Venture capital, the investment in for-profit companies, has a counterpart focused on societal change. Venture Philanthropy aims to invest in non-profit agencies and organizations. It is akin to a charitable donation but with an eye on the organization’s overall success in spearheading societal change. Since it is an investment, in addition to the goodwill provided and the expanded efforts by the organization, you may earn returns.
The venture philanthropy model’s role in today’s society has taken on new significance, and determining if this is the right investment option for you requires due diligence.
The Societal Need for Venture Philanthropy
When done correctly, venture philanthropy can be a win-win for organizations and investors. The organization can secure capital for a cause or campaign, such as SPOs, without the expense of hosting major fundraising events. Investors can invest in organizations that are most important to them.
This alternative funding option for non-profit organizations is vital considering today’s economic climate. Inflation concerns, in particular, are making some people hesitant to donate vast amounts to charities, as in the past. However, since social venture philanthropy is about investing, not donating funds, it opens the door for more funding.
Issues Where Venture Philanthropy Can Make a Difference
The options for venture philanthropists are nearly as plentiful as there are agencies seeking funding. However, several leading causes historically tend to receive more social impact venture capital, such as:
- Provide Better Healthcare Opportunities
- Minimize the Impact of Climate Change
- Improve Public Safety
- End the Cycle of Poverty
- Fund Racial Justice
- Acceptance and Equality
- Community and Economic Development Projects
- Enhance Education Opportunities for Everyone
One of these venture philanthropy sectors that is expected to grow significantly in the upcoming years is climate change funding. While in 2020, climate change organizations only earned $1.4B in venture philanthropy, interest in this area could increase in the upcoming years. As the impact of climate change, such as global warming, becomes more widespread, investors will likely take an increased interest in this type of investment.
Influence of Venture Philanthropy on Nonprofit Funding
Until recently, many non-profit organizations and foundations have relied heavily on governmental grants, donations, and fundraisers. Today, however, with inflation concerns hindering fundraising efforts and government grants decreasing in size and volume, these organizations have found alternative funding through venture philanthropy. While effective at generating capital, the increase of venture philanthropy is impacting how these non-profits operate and manage their organizations.
First, venture philanthropy has impacted risk management. Before, organizations faced minimal risk because grants were guaranteed. However, with venture philanthropy, these organizations must answer to their investors, who are goal-oriented and looking for sustainability.
Secondly, many high-level investors would not prefer to invest and then sit back and see what happens. Instead, they want an active role in the agency, which frequently means serving on the organization’s board of directors. This practice gives investors direct access to influence the path these organizations take.
The Role of Impact Accountability
Venture philanthropy also holds these organizations and foundations accountable for meeting goals and producing innovative ideas. While accountability is not a new concept for non-profits, as they were required to show outcomes and meet goals to obtain and maintain grants, venture philanthropists want more. First, they want to know that the organization is meeting goals and developing new ideas. Still, they also want to see the precise impact on the world.
This expectation can be more difficult for non-profits to meet. Since there are no standardized methods for showing impact, even among non-profits, it is up to each organization to determine the best way to show potential investors the impact they are making.
Measuring the Effectiveness of Venture Philanthropy
While measuring impact can be difficult, it is possible. There are two standard methods non-profits use to help investors better understand and measure the organization’s goals and achievements. These are:
Evaluation Assessment is the most commonly used and well-known method for measuring outcomes and determining impact. With this method, the organization releases periodic reports with analytical data based on pre-determined metrics to measure results. This gives investors and other stakeholders a glimpse of how the organization performs.
While informative, these reports can be misleading by making the investor believe the results are better than they are.
Process evaluation is a unique assessment technique that allows investors to track the success and failure of the organization or project on an ongoing basis rather than simply providing data at the end of the project. This method is especially beneficial when raising capital for long-term project investors, this offers an excellent opportunity to evaluate the organization’s status at any time. It can also shed light on internal and external challenges that may impact results.
There is no denying that venture philanthropy changes how non-profit organizations and foundations obtain capital, measure results, and operate their agencies. This option also allows investors to make an impact in the world while maintaining more control over what investments fund. As an investor, it is essential to research each social purpose organization before investing in it to ensure it can live up to your specific expectations.