by Bruce DeBoskey

Venture capital takes financial capital and expertise and provides them to high-potential, high-risk, startup businesses. Venture philanthropy uses the same approach and applies it to philanthropic donations in the nonprofit or social enterprise sector. Both VC and VP involve a commitment of time and resources, carry a high degree of risk and can produce outsized returns.

Many people think of charitable donations as social investments. Just like business investments, charitable social investments come in different varieties for different types of investors. Some donations to nonprofit organizations are like investing in bonds: They involve low risk and generate more conservative social returns. Many charitable organizations do excellent and important work, and such donations produce meaningful and largely predictable results.

Venture philanthropy, on the other hand, is more like investing in hedge funds: The risks are greater and the potential for outsized social returns and impact from the donation is enormous. As a philanthropist, you can evaluate your risk tolerance and determine which types of philanthropy work best for you.

There are many examples of successful VP. The Growald Family Fund, with others, made a relatively small donation to a startup nonprofit initiative called Beyond Coal that recently received a $50 million grant from New York City Mayor Michael Bloomberg to help the U.S. create a clean-energy future. The Draper Richards Kaplan Foundation has generated big social returns by providing funding and business mentoring to 38 early-stage, high-impact nonprofits.

In 1997, George Roberts, the founder of leveraged buyout firm KKR, established the nonprofit VP fund REDF generating thousands of jobs and producing millions of dollars of social-enterprise income for nonprofits. The Acumen Fund is a global nonprofit VP fund that uses entrepreneurial approaches to solve the problems of global poverty. In its first decade, Acumen invested $73 million in 65 enterprises that serve the poor. Social Venture Partners, with 25 nonprofit affiliates across the U.S., Canada and Japan, combines financial contributions and professional skills to strengthen the capacity and effectiveness of local nonprofits. New Profit Inc.  is a nonprofit VP fund that invests in innovative nonprofit organizations with the potential to create significant, long-term impact on the social mobility of low-income Americans.

Venture philanthropy often involves:

• More due diligence than typical charitable donations.
• An emphasis on capacity building for the nonprofit recipient.
• The potential that a small social investment will allow the nonprofit to scale its impact to reach a much larger group of beneficiaries and attract much larger donations.
• Heavier involvement by the venture philanthropist, more akin to a partnership and often including board service.
• Specific goals, benchmarks and metrics for the nonprofit to achieve.
• An exit strategy for the venture philanthropist when sustainability and scale have been attained.

Joanna Messing, president of Positive Ventures, a VP advisory firm, cautions that there are several pitfalls for the VP investor to be aware of:

• The risks are greater than traditional philanthropy, and there might not be any return on the social investment. In other words, the donation could produce lackluster results or even fail in achieving its goals.
• VP is potentially more time-consuming than traditional philanthropy.
• Unless you are comfortable taking high risk with your philanthropy, VP should be part of a broader and diversified social-investment portfolio, to balance risk and continue to sustain proven nonprofits.

Messing observes: “Through a focused, researched and strategic approach, it is possible for VP to create real leverage and social change along with a deep sense of satisfaction and passion.”

You don’t need to be wealthy to be a venture philanthropist. Rather, by making strategic social investments on your own, or by pooling your resources with others by donating to venture-philanthropy funds, you can have an enormous impact on our nation’s and the world’s most-challenging social problems.

Bruce DeBoskey, former ADL Regional Director of the Mountain States Region, is a Colorado-based philanthropic adviser. You can contact him at bruce@deboskeygroup.com.