By Dhana Sabanathan
“The Sunday Times Rich List has commented that “just 5.7 percent of the year’s list represent wealth passed from one generation to the next.” This fact is very much reflected in my own experience with entrepreneurs who are increasingly outperforming inherited wealth by generating significant wealth at an earlier age, and having multiple successful ventures over their lifetime.
As a result, entrepreneurs are now increasingly facing the challenges of how to pass on wealth, with philanthropy often as important (and in some cases even more important) to these clients as the passing of wealth to their children.
But the traditional approach to philanthropy is sometimes incompatible with entrepreneurs. Having earned, rather than inherited, their wealth, the idea of simply handing over large sums to established charities can be unappealing. Often, they are keen for the opportunity to donate not just their wealth but their skills and ideas. These are individuals that thrive on coming up with solutions to difficult problems, and why should the philanthropic sphere be any different?
A decade ago it was more unusual to create new charities or philanthropic organisations for clients; the prevailing view being that donating to an established charity would be the most effective use of their funds. However, entrepreneurs have driven significant change in finding new ways of helping people and wanting to take an active role in how their donations are used.
We have seen foundations created to train and then seed fund aspiring technology entrepreneurs in developing countries. The ethos behind these initiatives is that every country has amazing talent to offer, but not the opportunity to utilise it. Technology offers enables individuals to launch a product at little cost, but then attract substantial investment to scale the business effectively. This journey from idea to fund raising to exit is getting shorter, and now has the potential to lift aspiring entrepreneurs and their communities out of poverty.
The Giving Pledge, an initiative by Bill and Melinda Gates, is a commitment to donate the majority of an individual’s wealth to philanthropy. It has proven popular with entrepreneurs who feel an affinity to Bill Gate’s own entrepreneurial success, as well as his analytical approach to philanthropy. The Giving Pledge (and other similar pledges) have been criticised for being too vague – the individuals can donate during or after their lifetime, are not restricted to donating to registered charities, and there is no penalty for not honouring the commitment. But my view is that this flexibility is its greatest strength, empowering entrepreneurs to give back in new ways and encouraging them to think about their personal legacy. The lack of restrictions also means that tax incentives can be utilised to increase the size of the donations.
Being part of these types of pledges enables wealthy individuals to share and learn from each other’s philanthropic endeavours, which should only be encouraged. Entrepreneurs are often not fazed by failure, instead seeing it as an opportunity to learn. However for larger charities, the fear of failure can prevent them from making significant changes. More established charities can therefore learn from the experiences of these new foundations, and there can be exciting opportunities to work together on projects.
A final positive consequence of entrepreneurs disrupting philanthropy is one that will benefit all of us – charities being forced to adapt to the more demanding nature of these donors; such as the desire to be able to track the impact of their donations. It is certainly not just the very wealthy who want to see this transparency and accountability from the organisations we donate to.
Dhana Sabanathan is a private client partner at Winckworth Sherwood.
Originally published in Alliance; reprinted with permission.