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Venture Philanthropy: A Strategic Approach to Social Impact Investing

For entrepreneurs, cash is king. To obtain cash, young businesses must prove their market potential and clearly explain how investors will see a return on their investment. Although the entrepreneur’s quest for the Holy Grail—aka cash—can make life seem miserable at times, this is how the relationship between venture capitalists and entrepreneurs should be. If young companies were not rigorously vetted, capital might be more accessible, but the money would ultimately be less effective. If venture capitalists’ investment strategies were based more on their hearts than on their brains, weak companies would have more access to wasted capital, and it would be difficult to measure if a dollar invested produced more than a dollar in value. Thankfully, this is not how sophisticated venture capitalists operate; firms are incredibly selective with their partner companies, and they spend copious resources on making sure that their investments will produce results.

If venture funds function this way, why don’t foundations, entities that also invest in organizations (though often with a social mission in mind), operate the same way? Fortunately for society, some do. Foundations across the country are increasingly acting as “venture philanthropists” that take strategic investment approaches and implement quantifiable metrics to measure the impact of philanthropic investments. Philanthropic capital should steer dollars towards generating the highest social return, and not simply towards a name painted on a building. The Robin Hood Foundation, based in New York City, is at the forefront of applying such private sector investment strategies to social causes. The organization’s mission is straightforward: to end poverty in New York City. A noble goal, but not a novel one. Instead, it is their investment approach that sets them apart. Grants given by The Robin Hood Foundation are driven not only by the heart, but also by the calculator—the foundation relies on a comprehensible metrics system (explained here) that emphasizes explicit results. This approach, similar to an investor that expects financial returns, holds the foundation’s grantees accountable. Most importantly, it works: in the past 25 years the organization has donated over $1.1 billion to fight poverty in NYC, and Robin Hood’s job training programs are twice as effective as others in the market (for more information on Robin Hood’s impact, click here). Philanthropic activity, in any form, is both admirable and critical to solving some of the world’s most pressing issues. Applying strategic investment principles to philanthropic activity enhances the efficacy of donated capital, and it is a rising trend that everybody can welcome.