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. (For related reading, see: The Christmas Saints of Wall Street.)
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.” (For more, see: Impact Investing: The Ethical Choice.)
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. (For related reading, see: Five Good Reasons to Build a Career in Nonprofits.)
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. (For more, see: An Introduction to Microfinance.)
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. (For related reading, see: Five Companies Leading the Green Charge.)
If you’re interested in impact investing in a more traditional sense, consider conducting further research on RSF Social Finance, Calvert Foundation, Mosaic, Microplace and HIP Investor. (For more, see: Impact Investing: Making a Difference and a Profit.)
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. (For more, see: How Social Impact Investing Works.)
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. (For related reading, see: Top Trends in Corporate Social Responsibility.)
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. If you’re interesting in venture philanthropy, consider conducting further research on European Venture Philanthropy Association, LGT Venture Philanthropy, BonVenture, CAN Breakthrough Fund, Good Deed Foundation, Oltre Venture, Social Venture Partners, Asian Venture Philanthropy Network, Silicon Valley Social Venture Fund, and Social Venture Partners International. (For related reading, see: ‘Value’ Investments: Social, Faith & Eco-Investing.)
Venture philanthropy appears to be past its peak, which might relate to the advent of impact investing.
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. (For related reading, see: Socially Responsible Investing vs. Green Investing.)