Strategic philanthropy. Venture philanthropy. Impact investing. These are some of the trendiest buzzwords captivating the philanthropy world of late, but what do they actually mean? Even for the most seasoned donor, it can be difficult to understand the differences between these new and “sexy” funding approaches.
The common factor is that each model draws upon an overarching theme of impactful philanthropy, which eschews classic grantmaking programs in favor of innovative funding strategies that support data-driven programs. These programs must be proven to yield measurable results, through rigorous data collection and quantitative analyses of impact. For example, an entrepreneurial rehabilitation program which employs the formerly-incarcerated is able to calculate that their method reduces average recidivism rates by 40% annually – a far more attractive and compelling argument than flowery anecdotes.
Foundations in the impactful philanthropy field – including the Rockefeller Foundation, Bill & Melinda Gates Foundation, Edna McConnell Clark Foundation, W.K. Kellogg Foundation, and Robert Wood Johnson Foundation – have been leaders in homing the practice into various issue areas and applying it across sectors. Some foundations define the concept more liberally than others, experimenting with both factual and anecdotal ways to determine impact. Others put greater emphasis on creating scaleable solutions rather than systematic change. All put their own spin on how impactful philanthropy can be applied to advance their personal theories of change.
Here is a supremely informative article on these “new forms of philanthropy” and how each funding model is defined, written by Filipe Santos, the Academic Director of the INSEAD Social Entrepreneurship Initiative. My outline of Santos’s article helps define philanthropy’s buzziest concepts:
Instead of giving aid in spot treatments, strategic philanthropy tries to create systemic change by targeting the root of the problem. An example: rather than handing out condoms, philanthropists aim to bring widespread reproductive health education by engaging the afflicted, their communities, and their public officials to identify and break down cultural stigmas which limit sexual health understanding. This strategy requires the complex coordination of nonprofits, foundations, local communities, business, and governments to effectuate large-scale change.
Foundations using this model draw their lingo and practices from the business world of venture capital, fashioning themselves as “venture philanthropists”. Foundations make “investments” rather than grants into social good organizations. And like any stakeholder, they have a vested interest in helping the organizations thrive. To do so, foundations provide nonprofits with both the capital and organizational support necessary to firm up their capacity. A foundation staff may take a seat on the nonprofit’s board, or step in as staff. Like all venture capital firms, venture philanthropists look for organizations whose social impact can be definitively measured and which demonstrate the potential to grow.
Impact investors look for their funding to make a significant social ROI and generate a financial return. Foundations in this ecosystem can provide the risk capital necessary for a social enterprise to aggressively test its revenue model and become financially sustainable, thus helping it to attract subsequent rounds of funding from the more traditional and typically risk-adverse investors. A foundation may also play a major role in a cross-sector Social Impact Bond (SIB), also known as a pay-for-success plan. New York State recently announced the launch of the world’s largest SIB, a $13.5 million capital raise aiming to service 2,000 at-risk individuals and deliver payouts based on outcome success. The collaboration was forged between the state, nonprofits, foundations, and the Bank of America. The Robin Hood Foundation provided an initial $300,000 investment and the Rockefeller Foundation will provide an investor-protection guarantee of up to $1.3 million.
About the Author: Chloe Hwang is the creator of The New Nonprofit, a blog on the intersection of nonprofits, social entrepreneurship, and philanthropy. The New Nonprofit explores impactful social enterprises and the investors who believe in their social ROI. Chloe is a nonprofit fundraiser and currently resides in Washington, D.C. Follow Chloe on Twitter @thenewnonprofit.