Philanthropy is conventionally defined as activity aimed at promoting human welfare of one kind or another, as any dictionary will tell you. Conspicuously absent from the definition is any mention of profit or for-profit business strategies which suggests that a growing number of today's philanthropic movers and shakers don't read dictionaries.
Talking about philanthropy, capitalism and investor-savvy principles in the same breath may sound oxymoronic-perhaps even offensive to some ears. But that hasn't stopped such thinking from capturing imaginations in the charitable-giving space. Using philanthropic pools of capital for investing in for-profit entities and viewing philanthropy through a venture capital-inspired prism are concepts that attract attention-and dollars-in the 21st century.
Consider so-called venture philanthropy. Yes, the term takes in a lot of territory and means different things to different people. For some, it's taking a page from traditional venture capital strategies and mixing it with philanthropy as a tool for engineering superior results in tackling social ills.
One example is the eight-year-old Venture Philanthropy Partners (VPP) in Washington, D.C. On the surface, it's one more foundation that's funding non-profit organizations. What's different is that VPP looks at the non-profit world through venture capital-tinted glasses by entering into "investment partnerships" with non profits, rather than simply donating money. VPP says its VC-oriented strategy enhances the odds of improving the efficiency and effectiveness of social organizations. VPP's agenda ranges from helping a non profit attract new sources of funding to recruiting and retaining talented employees. In turn, progress on these fronts helps the non profit achieve its primary goals.
There's also a new breed of non-profit organizations that are on the leading edge of blending conventional charitable work with aspects of for-profit investing. The nine-year-old Pacific Community Ventures is a San Francisco non profit that runs several venture funds that invest in private companies. The goal: To help low- and moderate-income communities while generating a "competitive" return for investors-so-called "double bottom-line" returns.
The inspiration for pushing the boundaries of philanthropy in recent years comes in part from a new wave of disillusionment with traditional strategies of organized giving. In 2004, multi-billionaire eBay founder Pierre Omidyar raised a few eyebrows when he closed his five-year-old foundation, citing frustration with the limitations of conventionally structured philanthropy. In its place, the French-born Iranian-American entrepreneur and his wife launched the Omidyar Network, a self-described philanthropic investment firm that's "uniquely structured" as both a non-profit charitable organization and a limited liability company. In line with its dual status, Omidyar Network makes grants through its non-profit channel and invests in for-profit ventures through its LLC division.
"We see philanthropy as more than a type of funding," Omidyar Network's Web site explains. "In its truest sense, philanthropy is about improving the lives of others, independent of the mechanism. Therefore, we use a wide range of tools in our work, embracing market-based systems and open, Web-enabled platforms as key means for making the world a better place."
Another milestone in publicizing the opportunities of fusing the for-profit world with the charitable space arrived in 2006, when that institutional paragon of 21st century innovation-Google-launched its own "hybrid foundation." Google.org contributes to both for-profit and non-profit projects in the course of its charitable work.
If nothing else, Google has sparked a larger debate on the nature of philanthropy-its possibilities, limitations and the prospects for improving results in the cause of solving society's assorted ills. Predictably, there's no shortage of skeptics who ask if it's practical to wed the seemingly conflicting realms of altruism and capitalism in a way that transcends something more than intriguing PR copy. Whatever the answer, the lines are blurring between for-profit and non-profit charitable work.
"The emergence of Google.org as a for-profit philanthropy, and its comparable organizations...may be bringing us to The End of Definitions in the philanthropic and non-profit worlds," Susan Raymond, managing director of the non-profit consultancy onPhilanthropy, wrote on her organization's blog in 2006.
The same year, two University of Chicago Law School professors co-authored a provocative paper that advocates extending the tax benefits of non-profit charities to the charitable efforts of for-profit firms. "There is no reason to condition the tax subsidy for charitable activities on organizational form," argue Anup Malani and Eric Posner in "The Case for For-Profit Charities." If charitable activity is deserving of public policy incentives via favorable tax treatments, the state should offer no less to other entities engaging in philanthropy. Results are all that matter, Malani and Posner assert, and so the goal should be a tax policy that promotes results-regardless of source or legal structure.
It's anyone's guess when, or if, Congress will take such advice to heart and rewrite the tax code. Meanwhile, pioneering philanthropists are doing what they can to reinvent charitable giving within the existing laws. But while it's easy to dream up fresh ideas, funding innovation is still as difficult as ever. That's especially true in philanthropy, where the bulk of capital funding tends to flow to what is loosely defined as traditional enterprises and foundations.
Raising capital to finance a new generation of philanthropic strategies still faces a headwind. "Social enterprises are creating new and exciting solutions to society's problems," advises a recent study published by Oxford University's Said Business School. That's encouraging, but a new generation of social enterprises suffers a "common problem"-namely, a dearth of growth capital, reports the study titled "Nothing Ventured, Nothing Gained: Addressing the Critical Gaps in Risk-Taking Capital for Social Enterprise." Yes, financial support exists for innovation, but supply falls far short of demand.
Doing its part to close the gap is Good Capital, a young San Francisco firm intent on surveying the non-profit and for-profit terrain for social solutions while generating a profit for investors who sign on to the cause. Driving the firm's investment strategy are the unsatisfied financial demands of social enterprises in both the non-profit and for-profit spheres, says Deb Parsons, vice president of Good Capital's portfolio development and capital deployment. "Traditional venture capitalists often look at the business models [of social enterprises], and they don't understand what they see as complexity in the model when it has an embedded social good. They don't know how to value that."
Good Capital, by contrast, claims it can put a fair price on an embedded social good, along with other assets. With that in mind, the firm recently launched its Social Enterprise Expansion Fund (SEEF), a limited partnership that targets non-profit and for-profit social enterprises. While traditional VC funds steer clear of non profits, says Parsons, SEEF seeks them out, along with for-profit deals.
Investing in a non profit with the expectation that it will promote a greater good and produce a profit may strike some as improbable-if not impossible. But as Parsons explains, philanthropy and capitalism are not always and forever in conflict.
One of the misconceptions about non profits, Parsons says, is thinking that they routinely operate at a loss or break even. The truth is that some non profits belie their label and generate profits. Yes, it's true that any such profits are typically reinvested back into operations. Nonetheless, the profits are limited, and so access to additional capital sources suggests the potential for enhancing results at non profits.
The reality, however, is that funding choices above and beyond conventional lines of donor/grant money are usually the exception in the non-profit world. Good Capital is trying to lessen the mismatch and provide capital that traditional sources of financing and grant making will not or cannot.
A worthy cause, but should anyone expect to see a profit from such efforts? Absolutely, says Parsons, although success requires careful screening to find non profits that are well managed and have the potential to grow. For the relative few that pass muster, investments can be structured in several ways, Parsons explains. One example is a form of discounted subordinated debt that gives Good Capital a share on the non profit's upside if the bonds rise in value. She equates it with high-yield debt in that Good Capital would assume a degree of risk tied to the management of the enterprise. "But we haven't structured one of these investments [in non profits] yet, so I don't know how it will be executed," she notes. What's clear is that investing in this sector precludes equity stakes, which by law, non profits can't sell.
In fact, as of April 2008, Good Capital has yet to invest in a non profit in part because the firm's one-year-old fund has only recently raised $3 million-a fraction of its $30 million target. Its first investment was made in April, in Better World Books, an independent, for-profit online bookseller that supports literacy efforts around the world. Good Capital invested $2.5 million for preferred securities and took a seat on Better World's board.
Traditional VC funds showed an initial interest in Better World Books, but they preferred that the bookseller focus exclusively on turning a profit, reports Parsons. The fact that Good Capital's investment comes with more flexible terms is one example of how some are trying to integrate capitalism with philanthropy.
Good Capital's focus on investing in what it calls social enterprises may be novel, perhaps even experimental. Yet the strategy is arguably the latest in a long line of innovations in what some label as the capital market for good, as the graph at left suggests. Certainly Good Capital's strategy did not evolve in a vacuum. Parsons points out that her firm shares some features with community development venture capital funds, which invest in enterprises whose growth is expected to benefit a local economy through increased jobs and tax revenue.
If Good Capital represents a new front in philanthropy's evolution, it seems to have set an unusually high standard for doing good and turning a profit. By contrast, some earlier efforts at straddling capitalism and a quasi-philanthropic focus have erred on the side of for-profit businesses. Consider the so-called niche of LOHAS, or Lifestyles of Health and Sustainability. The label takes in a lot of territory, from recycling to alternative energy to organic farming. The focus is unsurprising for those looking to find common ground between charity and profits since the LOHAS marketplace is estimated at $209 billion for goods and services in the U.S., according to the National Marketing Institute.
What's different about Good Capital's fund, says Parsons, is that it focuses on businesses that "address the issues and symptoms of poverty." As a basis for a business, poverty solving "gets a little messy-there's not an easy answer," she adds.
Or easy profits-a reminder that a new age of philanthropy still comes with some risks from the old days.
James Picerno (jpicerno@highlinemedia.com) is senior writer at Wealth Manager.
