Impact investing and venture philanthropy might appear the same, but there are several differences.
Venture philanthropy has been around much longer, as the phrase was coined by John D. Rockefeller III in 1969. His idea of venture philanthropy was as follows: “An adventurous approach to funding unpopular social causes.” Venture philanthropy peaked in popularity in the mid- to late-1990s.
Impact investing became a reality in 2007, when the phrase was coined at The Rockefeller Foundation. The given definition of impact investing at that time: “Mobilizing large pools of private capital from new sources to address the world’s most critical problems.”
Notice that venture philanthropy specifically focuses on social causes while impact investing has the broader remit of social and environmental causes. Both generally aim for a financial return while making a positive impact on the world, but not all venture philanthropy features the financial return piece.
Impact investing, with the dual goal of making a profit and causing positive social and/or environmental improvements, can take place in a developed or emerging market. In emerging economies, microfinance projects are a popular approach, but impact investing also funds improving employment and education opportunities, supporting sustainable agriculture, making healthcare or housing affordable, and developing clean technology. It often is done through private equity, debt or fixed-income securities.
Many large corporations — including Apple Inc. (AAPL), Tesla Motors Inc. (TSLA), General Electric Co. (GE), and First Solar Inc. (FSLR) — have stepped up to the plate to reduce the carbon footprint in their supply chain. When you see that a private or public company is taking this approach, putting some money behind that company would be a form of impact investing. You can also start impact investing through a variety of ETFs and Mutual Funds.
Impact investing is experiencing explosive growth. Assets in the sector are expected to grow to $500 billion by 2019, from $50 billion in 2009, and some predict assets ultimately will hit as high as $3 trillion.
Venture philanthropy is more focused on capital building than general operating expenses, and there is a lot of involvement with the grantees to help drive innovation. There also is a lot of emphasis on performance measurement, with the primary goal of improving systems and sectors as opposed to promoting individual organizations and funding individual projects.
The engagement period for venture philanthropy is a minimum of three years and an average of five to seven years. With impact investing, there is no time frame. It’s more of a “as long as it takes” approach. Most venture philanthropy investments are done through a foundation or a private equity firm.
The Bottom Line
With impact investing, the investor is looking to make a profit while also having a positive impact on the world in a social or environmental sense. With venture philanthropy, the goal is usually (but not always) to make a profit while having a positive social impact on the world. Impact investing is on the rise while venture philanthropy seems to have passed its peak.