Philanthropic Capital Needs To Take More Risks

Philanthropy is meant to support programs and organizations that contribute to social change. The "return" it seeks is social, not financial, gain. Yet most institutional philanthropy is slow-moving and risk-averse, slowing the pace of innovation in the field as a whole.

There was an interesting article published on tech blog TechCrunch yesterday about how the shift away from Initial Public Offerings to Acquisitions as the main type of exit for startups was threatening the financial model of institutional venture capital, which relies on "home runs" to enable it to continue to make high-risk investments and sustain the overall rate of financial return. The point is that even in the ostensibly risky venture field, investors are constrained by the nature of financial exits, and it's quiet plausible that the field could see a reduction in risky seed investments.

The philanthropic world faces none of those financial risk constraints, except frankly, those imposed by its own institutional desire to survive. Foundations could, in theory, pour all of their endowment into a ten year attempt to entirely end a particular problem. Or they could put together a seed network for high risk social ventures.

Mostly, though, they don't. Instead, foundations tend to hew pretty closely to the 5% minimum spending the government mandates, rely on complex request for proposals to generate new funding, and mostly stick with established players.

On some level, this makes sense. If you want maximum impact, it might seem logical to go with established organizations where there is (theoretically) some more knowable way to quantify and track their results. If you believe you're dealing with an intractable problems, you may believe that it's important to preserve yourself institutionally.

But I tend to think with the important exception of arts-focused groups (who provide patronage for creatives regardless of the vagaries of society's mood) and community foundations (who provide steady support for local civic engagement), there could be a lot more spending - and a lot more risky investments.

First, more spending. I think that when a foundation is trying to solve a specific problem, there's a lot to be said for going all in. No, money is not the answer to every problem, but I think that, in some cases, it would make more sense foundation that chose to spend down it's endowment over 20-30 years (or even 10) and give multiples of well leveraged, well coordinated grants to putting a serious dent in the problem as it exists. Self-preservation should never be the goal for it's own sake when it comes to foundations.

Second, riskier spending. This is perhaps an even bigger point for me. The reality is that with many of our most intractable problems, a totally different, stupid-seeming idea may be the disruption of tomorrow.

I think social sector leaders need to be thinking in terms of 200% better not 20% better solutions. Similarly, I don't think that dedicated social entrepreneurship or venture philanthropy funds should be the only seed funders for social innovation.

Foundations with big endowments, who frankly, have so little to lose, should be making investments in startup social ventures. What is the cost? Money? Well a) that's likely somewhat minimal at early pre-scale stages and b) as mentioned above, there's that whole 95% that's just going to institutional preservation at the moment. Time and vetting? Sure, that's a new cost to be borne, but not one where foundations would be so unduly burned that they couldn't function. Plus, the host of existing seed stage funders could do a whole lot of teaching about identifying disruptive founders and innovations.

Perhaps a bigger 'cost' is the perception of failure. Foundations want to fund projects that will be successful. Indeed, they - like all social sector organizations - are caught in the cycle of telling the story of success in order to a big brand and new resources.

What if we recognized that in the high stakes came of global health, ending human trafficking, and all these other issues, big bold plays are the order of the day. Maintenance to slight improvement of deplorable inequality can be honored for doing no harm, but it can't be lauded as success, either. As I've said before, I think for many of these issues, it's go big or go home time.

So where will the risk capital come from? I don't think big foundations are going to change fast, unfortunately. I'm looking to two main areas: family foundations and new wealth as the vehicles for change here.

Small family foundations often have the ability to be more nimble than their highly institutionalized counterpart, and I think there are huge opportunities for consortium of family foundations to build mobile, dynamic funding networks that can hit organizations at all stages of the funding food change and really shephard innovation.

When it comes to new wealth, I just have some hope that people who made their money in entrepreneurial ways are going to be interested in new forms of philanthropy that embrace the same sort of fast adapting, swing for the fences mentality. The web 1.0 money that went into social entrepreneurship philanthropy in the 2000s seems to bear some of that out.

What are examples of foundations that "get it" and are taking bigger risks, making different types of bets, and generally going all in on the problems they're trying to solve?

(Photo: lumaxart)