SEATTLE — In 2014, the Organization of Economic Cooperation and Development (OECD) published a report that seemingly illustrates movement away from public loan markets, marking a new era in global economic development.
The report detailed innovative attempts by preeminent philanthropic foundations to increase the scale of their social impact. As their annual reviews and websites tout, these organizations—the Rockefeller Foundation, the Emirates Foundation, the JP Morgan Chase Foundation, to name a few—have improved millions of lives around the world. While of great value, their effect on individuals and communities is not the only reason the OECD has flagged private foundations (and high net-worth individuals) as key actors in development, even forming the subsidiary Global Network of Foundations Working for Development in 2012 to help direct policy. The rise of “venture philanthropy” over the past decade, as evidenced by the growth of foundation-led development initiatives, have changed the very strategies, operations and philosophies underpinning the development field as a whole.
What is Venture Philanthropy?
As it encompasses a broad range of efforts, the exact definition of “venture philanthropy” seems to elude even venture philanthropists themselves. In seeking to provide a constructive guidebook of sorts for social organizations and institutions, however, the OECD highlighted several characteristics that distinguish venture philanthropy from traditional nonprofit and foundation models. Rather than target specific initiatives with localized effects, venture philanthropy aims to address “systems and sectors,” a goal that immediately drives venture philanthropists to the center of the development world.
Accordingly, venture philanthropy unites governments, nonprofit organizations and the private sector with a shared social purpose. Common initiatives within venture philanthropy include improving access to healthcare and education, both investments in human capital; developing small businesses and the “knowledge economy;” building sustainable infrastructure; and increasing green energy use. These all seek to impact economic development by removing systemic obstacles and require coordination between several actors: foundations, for example, may support small business development by facilitating contact with investors.
Ventures to replace kerosene lamps with solar technology typify a collaborative approach by relying on both investors to provide both micro- and macro-loans, as well as on local distributors and social enterprises to expand their reach. Like venture capital, venture philanthropy favor initiatives with high economic and social returns. Increasing solar energy use in developing countries, for example, affects systemic change by helping households avoid the high costs of traditional energy sources, such as kerosene lamps. By lowering costs, solar technology opens the door for small business development and household wealth accumulation. Financial instruments in general promise positive feedback by allowing businesses and governments to improve their credit rating, which is a precondition for future development.
This aim of affecting development at a systemic level, along with venture philanthropists’ unique approach to operations, engages venture philanthropists more deeply and for a longer period than traditional fundraising. Rather than abide by an exclusively grant-making model in which philanthropists fund smaller organizations for specific projects, venture philanthropy follows a business model with the aim of increasing the scope of their social impact. They issue “blended finance,” a mix of grants, equity investments and soft loans (whose conditions favor the borrower, a major plus that addresses some of the inequities in development politics) to target development initiatives. Their funding portfolios are oftentimes more diverse, including trade income which is then reinvested towards a social cause. Also like venture capital, venture philanthropy issues finance based on an outcome-oriented evaluation of an initiative, which measures both its expected social and financial returns.
Because venture philanthropists have a financial stake in the success of the initiatives, they assume a more direct role in shaping development strategies, mirroring that of say, a World Bank economist guiding a recipient ministry’s use of a loan. Incentivized by more than mere altruism, philanthropists are often engaged with their investees for an average of five to ten years, and sometimes, even go on to serve on social purpose organizations’ boards of directors. Social Venture Partners based in Seattle consult their “investees”on organizational management to ensure their operations have the most sizable and sustainable impact. They maintain this financial and managerial relationship with investees for three to five years (on the shorter end for venture philanthropists, but longer than a traditional venture capitalist-investee relationship). A testament to the level of engagement and influence foundations now seek over development initiatives, the Rothschild Foundation even operates its own in-house social entrepreneur training program, Scale Up, in France.
While foundations such as the Rockefeller Foundation have existed for over a century, recent global economic trends brought venture philanthropy to the helm. As the OECD report explains, the 2008-2009 global economic crisis slashed traditional development funding, known as official development assistance. In fact, in 2011, President Obama proposed eliminating ODA from USAID’s budget altogether.
During the recession, however, some of least developed countries (LDCs) in the world experienced a reverse trend: some, like India and South Africa, rose to the status of middle-income countries (MICs). Their overall higher economic standing may disqualify them as aid recipients, yet, due to widening economic inequality, poverty continues in these countries. The current proportion of the world’s “bottom billion” in middle-income countries is proof that global poverty ensued: whereas 93% of the world’s bottom billion resided in LDCs in the 1990s, 75% now live in MICs. So, while a need for funding persists, both the recession and the former terms of official assistance prevents poor communities from accessing it. Together, these trends have created a funding vacuum, which venture philanthropy has begun filling in a completely new form, in part because it can leverage the established resources and influence of private institutions to achieve innovative goals.
Changing the Field of International Development
The influx of business sector grads looking for outlets for “social investment” and mid-career professionals entering nonprofit management is a symptom of the public private cross-over that venture philanthropy has helped bridge. Collaboration between sectors signals a notable discursive shift in global economic development—one in which the market is central nodal point.
Outcome-related indicators abound on philanthropic websites. Instead of simply advertising the size of their funding portfolios, the Novartis Foundation trumpets “3.5 million [people]reached,” and the JP Morgan Foundation cites a 5% reduction in child mortality from malaria due to its ACCESS program, described as a “supply-demand healthcare market intervention” (contrasted with a more traditional sponsorship of anti-malarial medication for a local public health organization to distribute).
Observers note the power of these statistics to demonstrate the proven success of market-based solutions to issues in international development: they motivate organizations to transition to the venture model (the OECD report was itself written to facilitate this shift). By providing the initial investment, which is by nature, the riskiest, venture philanthropy firms also pave the way for future private investments seeking to advance a social good (also known as impact investments), further “marketizing” economic development.
However, “market solutions” must be qualified; after all, venture philanthropy represents the intersection between both the private and public sectors. More precisely, it is guided market solutions that now serve as models for development. Nonetheless, as Eileen Cunniffe observed in Nonprofit Quarterly, venture philanthropy is challenging a commonly held view in the public sector that private markets are development’s demon. Furthermore, by making governments, corporations and foundations themselves accountable to one another, venture philanthropy is leading to more efficient and transparent institutional governance. In orchestrating collaboration and consequently changing attitudes, venture philanthropy is altering the entire landscape of international development and unlocking a new realm of future possibilities.
– Jacqueline Fedida