Want Social Change With Donations? Act Like Venture Capitalists

  • Philanthropists need to vet ideas, make big bets, report says
  • Robin Hood cited as model for data-driven investments

Philanthropists who want to help change the world need to act more like venture capitalists -- carefully vetting, then betting on organizations with big ideas, according to a new report.

That would help close the gap between what philanthropists want to do and where their money actually goes, according to a paper by Bridgespan Group, a Boston-based philanthropic advisory. Among public mission statements of 100 large donors, almost 80 percent featured social change as a prominent goal, the researchers said.

Yet reported gifts of $10 million or more between 2000 and 2012 in the U.S. typically went to universities, hospitals and cultural halls, totaling an average of $8 billion annually. Just $1.6 billion a year was directed at social change, according to the report published Thursday.

Real Change

“The only way we’ve seen real social change happen is through donors investing time to find the right deals, getting that deal flow going and doing that due diligence,” Chris Addy, a Bridgespan partner and co-author of the report, said in a telephone interview.

Silicon Valley investors accustomed to startup ventures are good examples of this kind of giving, he said. The approach may come naturally to high net worth individuals who have founded their own company or run a hedge fund and consider themselves “builders,” he said.

“A reason to take a venture capital approach with your philanthropy is that it can be very high leverage,” Addy said. “You can support early stage interventions and ‘prove out the model’ so that others can grow them massively: IPO in VC, public funders in social impact.”

Tracks Metrics

One way to start is through an intermediary such as the Robin Hood Foundation, according to the paper. The New York-based group, which fights poverty in New York, creates and tracks metrics that would tell donors “if their gift was making a difference,” according to the report. It also invests in research to “find the kind of solutions that might be hard for individual donors to discover on their own,” the authors wrote. Robin Hood’s gala last May in New York raised more than $101 million.

“If you’re a venture capitalist, data is critically important to everything you do,” Addy said. “Robin Hood takes data to a new level in a lot of ways for the social sector.”

Robin Hood also has a brand, prestige and a social network. “They are a recipient of so many big bets -- there are so many finance people sending them checks of $10 million plus -- because of their approach but also in part because their peers are doing it,” he said.

Home Run

The decision to back an organization is also a bet on a leader, Addy said. Stan Druckenmiller found that in Geoffrey Canada, who started Harlem Children’s Zone to alleviate poverty, according to the report. Druckenmiller has stuck with him and Harlem Children’s Zone for many years to see boarded-up vacant co-ops become homes for families who send their children to college for the first time. Druckenmiller has called the progress a “massive home-run.”

What’s holding donors back from such activism? The paper notes that traditional modes of philanthropy have sophisticated machines behind them that put easy-to-grasp price tags on gifts that generate results: a physical building in the donor’s name, for instance.

Donors to hospitals and universities have years of personal experiences with these institutions, building trust -- which helps when writing a check for tens of millions of dollars, according to the report.

Waiting Years

Projects involving social change usually lack all of the above. There’s often no track record, and donors may have to wait years to see if the investment pans out, the report’s authors wrote.

The paper, published in the Stanford Social Innovation Review, defined social change donations as gifts to human services, the environment, and international development. The analysis of how money was spent excluded the gifts Warren Buffett and Bill and Melinda Gates made to the Bill and Melinda Gates Foundation because of its large size and “its slant to both big bets and social-change causes” that would have distorted the trends in the dataset.

Closing the “aspiration gap” between what donors want to achieve and how they spend will lead to billions of more dollars flowing to the world’s most challenging problems, the authors said.

“There are tons of forces pulling your money,” Addy said. “You have to be that force and rebalance your portfolio if you want to make sure it’s oriented toward your aspirations.”

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