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On Philanthropy: Philanthropy is the ultimate 'risk capital'

Bruce DeBoskey, Tribune News Service on

Published in Business News

The definition of "risk capital" varies greatly depending on context.

In the world of private equity, risk capital refers to the funds used for speculative, high-risk, high-reward investments. Depending on the success of the investment, it can either earn spectacular returns or dwindle to a fraction of the initial amount.

In the charitable world, venture philanthropy applies the same concepts of high risks and high rewards to social (rather than financial) returns on investment. For a number of reasons, philanthropy can be the optimal place for taking speculative "moonshots."

Two other primary tools for effecting social and environmental change are government and business -- both of which are inherently limited in their ability to take big risks. When it comes to performance, government is ultimately accountable to the electorate and business to the shareholders. Taking huge risks to tackle huge problems is not usually part of their DNA.

"Philanthropy should be taking much bigger risks than business," said Bill Gates. "If these are easy problems, business and government can come in and solve them."

Optimal place for "moonshots"

 

As opposed to government or business, philanthropy is uniquely unaccountable for the performance of donated funds. This means that donors have tremendous freedom to take big risks in experimenting to find solutions to the world's most difficult problems.

(Recently, much has been written about how this lack of accountability has led to greater income inequality and the misuse of philanthropy to achieve private goals. Nonetheless, for better and worse, grant-making is essentially accountable to no one.)

Usually, philanthropic capital is money that is no longer owned by the donor, having been transferred to a separate 501c(3) nonprofit organization that actually owns the funds – such as a foundation or donor-advised fund.

In making such a contribution, the donor has already determined that the funds are not needed to support personal, family or lifestyle goals. The funds will never return to the donor's balance sheet. This is a perfect category of funds with which to take risks.

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