Over the past few years, venture capitalists’ involvement in social issues has greatly expanded. In its most recent Annual Impact Investor Survey, the Global Impact Investing Network found that impact investing — done for both financial and societal gains — has again picked up momentum over the past year. Assets under management grew to nearly $114 billion globally.
It appears that high returns are far from the only thing on investors’ minds. In fact, the survey found that about one-third of impact investors deliberately target below-market-rate returns with the goals of managing risk, testing new models or regions, and preparing businesses for scale investors. The report itself even attests, “there isn’t one single way to be an impact investor.”
In reality, venture capitalists have the opportunity to invest a lot more than just money when it comes to charities and social impact projects. Their expertise and connections are just as valuable as their money; perhaps even more so. They offer these organizations the chance to initiate even greater social change. Here are four key ways that can happen.
1. Treat charity projects like VC pitches
Charity and social projects often get a bad rep for being mismanaged, and not meeting basic goals and objectives. The Red Cross, for example, was found to have spent around 25 percent of Haiti donations on internal expenses after the 2010 earthquake. And at the end of the day, the organization only built six homes, and refused to disclose exactly how the $125 million was spent.
Running a charity — like any other organization — has operational costs, but many believe charities need to be more honest and efficient about spending their money. However, if venture capitalists are involved from an early stage and treat social projects the same way they treat startups looking for funding, it could lead to a lot more long-lasting, scalable, and successful projects.
Charities, like startups, could start with the minimum viable product approach that is endorsed by venture capitalists. This would require them to test projects on a smaller scale before full-fledged implementation, saving them time and money by quickly learning from successes and failures. Additionally, they could earn VC funding based on proven successes and the ability to show continued potential in the future.
The founder of tech nonprofit Watsi has implemented a similar approach that imitates the startup funding model, whereby the company asks for a set amount of money to fund a specific goal, in contrast to the traditional nonprofit model of continuous fundraising. The organization is also fully transparent, listing its monthly financial statement online, which details its various costs.
2. Achieve impact at scale
Venture capitalists possess unique knowledge and expertise that nonprofit organizations may not have when it comes to growing an enterprise. Employing the help of venture capitalists can therefore be an integral strategy for helping nonprofit organizations grow and scale to reach a maximum social benefit, in addition to remaining financially stable.
With this idea in mind, The International Centre For Social Franchising launched an accelerator program designed to help organizations scale up their most impactful projects. “Often solutions exist that can address some of our society’s greatest problems, but we need to unlock their potential to reach more people,” ICSF founder and CEO Dan Berelowitz told Charity Today.
In a report detailing the findings from its pilot accelerator program, the organization recommends that investors support scale-up projects by encouraging innovative thinking, looking beyond the impact, supporting the initial stages of replication, and enabling connections and knowledge sharing.
Venture capitalists, through collaboration and guidance, have the power to support these audacious “moonshot” social projects, just as they normally would with a promising Silicon Valley tech startup.
3. Connect with network and other startups
One of the most valuable things that venture capitalists bring to the table is their networks, which can sow the seeds for startups to find new funding opportunities, partnerships, and even clients. Likewise, charities and social impact projects can leverage venture capitalists’ networks to find the financial and human capital necessary to accomplish their missions.
A prime example of this is the impact venture fund Impact Engine, which started as a way to help build profitable companies that also tackle major social issues. And while impact Engine focuses its investments on for-profit companies, it serves a model of what can be done with nonprofit organizations as well. Moreover, venture capitalists, like those at Impact Engine, offer nonprofit organizations the chance to connect with the innovative startups in their portfolios to build partnerships that can help them scale together.
Partnerships between startups and nonprofits ultimately have a lot to offer. Charities and social impact projects that leverage partnerships with startups could gain potential donors, innovative ideas and a higher level of credibility. At the same time, startups would benefit from the angle of corporate social responsibility, as well as earn the opportunity to reach a new customer base. Given that venture capitalists often have such large company portfolios, there is abundant opportunity to make these connections a reality and benefit both parties.
4. Help charities invest their funds in the future
As partnerships between nonprofits and startups are a two-way street, nonprofits could benefit from investing in startups, just as startups benefit from donating to a nonprofit. Venture capitalists can help guide these investments.
Back in 2000, the Cystic Fibrosis Foundation started investing in a small biotech firm with the hope that it would uncover a new treatment for the disease. Not only did an effective treatment emerge, but the foundation was also able to earn a healthy return on its investment when it sold its royalty rights to the drug for $3.3 billion. This example, perhaps better than all others, exemplifies the potential benefit that charities have by acting like venture capitalists.
Granted, using donations for investment purposes could be criticized as an imprudent use of a charity’s funds, explains Bob Pozen, former chairman of MFS Investment Management and a Harvard Business School lecturer. “It somehow feels inconsistent with charitable work even though it really shouldn’t because it comes back to the foundation,” he told Fortune. “People have to really get over the fact that there’s no stigma attached to doing this and in fact this may be a better way.”
With these four areas in mind, it is clear that venture capitalists can help launch charities and social projects to the next level and achieve greater, widespread benefits. The growth of social impact investing has shown that there is a strong interest in tackling social issues — but providing money is not the only way to go about it. The other resources that venture capitalists can offer are equally as vital. And with the number of social issues around the globe, now is the time for venture capitalists to step in and take a more active role.
Read more Devex coverage on development finance.