Taking Venture Philanthropy to the Next Level: Nonprofits Incubating Businesses

On the surface, venture capital funds and nonprofit philanthropies appear to be as far apart in purpose as two types of organizations can be.

VCs pool assets from investors, then allocate those funds to unproven startup companies in hopes of reaping huge profits when those firms succeed by disrupting stale industries and capturing market share from stodgy competitors. Charities raise collections from donors, then allocate those funds to social causes they believe reflect their personal values and will make a positive impact on the world.

Over the last couple decades, the concept of venture philanthropy emerged to unite these seemingly divergent paths by applying VC principles to charitable causes. The theory is that investing in philanthropies and evaluating their progress based on businesslike performance metrics would yield strong social impact, while attracting funding from sources that have previously abstained from nonprofit activities. Examples of this form of venture philanthropy include Social Venture Partners, the Robin Hood Foundation, the Bill & Melinda Gates Foundation, and the Howard G. Buffett Foundation.

In recent years, venture philanthropy has evolved to encompass nonprofit efforts at cultivating young businesses as a way of improving communities and society as a whole. This approach uses venture capital methods such as investing in startups, supplying loans, connecting small business founders with each other and potential new team members, as well as providing crucial insights from experienced experts on how these companies can grow sustainably.

Four nonprofit entities embracing this next-level model of venture philanthropy are Pacific Community Ventures, the Dana-Farber Innovations Research Fund, the Indiana Philanthropic Venture Fund, and the American Journalism Project. While their structures and missions are quite distinct from one another, they all are 501(c)3 organizations that accept donations and arrange funding for promising young firms.

PACIFIC COMMUNITY VENTURES

Bud Colligan, a former partner at global venture capital firm Accel, co-founded Pacific Community Ventures (PCV) in 1998 along with the nonprofit’s former CEO, Penelope Douglas. Based in Oakland, California, Pacific Community Ventures has a staff of 15 people as well as a board of directors and an advisory council composed of corporate executives.

Its mission is to support local small business owners as they grow their firms and create solid jobs. PCV offers free advice and mentoring to entrepreneurs on marketing and sales, finance and accounting, operations, and more. It also provides loans of $10,000 to $200,000 to California business owners—with a special focus on women, minorities, and immigrants—who do not need to achieve a minimum credit score. In addition, PCV creates research and consulting solutions for impact investors, philanthropists, and policymakers seeking to benefit underserved communities.

PCV has a long list of well-known partner organizations, ranging from banks and e-commerce portals to charitable foundations and business associations. The small businesses it assists span various industry sectors including food, apparel, construction, education, and fitness. Some of these firms are sole proprietorships, and others employ dozens of workers.

DANA-FARBER INNOVATIONS RESEARCH FUND

Founded in 1947 as the Children’s Cancer Research Foundation, the Dana-Farber Cancer Institute has grown into a Boston-based health system affiliated with Harvard Medical School. It has more than 5,000 staffers and 1,000 annual hospital stays with over 1,100 open clinical trials. In February 2020, the Institute announced a partnership with the Cambridge, Massachusetts, healthcare investment firm MPM Capital to pursue interconnected commercial and philanthropic oncology breakthroughs.

The collaboration supports two new funds. The MPM Oncology Innovations Fund has raised more than $100 million in capital to invest in early-stage biotech firms pursuing oncology therapeutic technology, while the Dana-Farber Innovations Research Fund has generated over $26 million in pledged donations for early-stage oncology research at the Institute.

Qualified investors who donated to the Dana-Farber fund could then invest in the MPM fund, and MPM expects half the capital raised from its fund to go toward investments in startup firms that emerge from research at the Institute. Previous research from the Dana-Farber Cancer Institute and capital from MPM contributed to the 2012 founding of the firm CoStim Pharmaceuticals, which global healthcare company Novartis acquired in 2014.

“Both of the funds will advance cures and treatments for cancer patients around the world,” says Teresa Coffey-Gordon, Director of Innovation Funds, Principal & Major Gifts at the Institute. “Many investors are looking for an impact component in their investments. This unique model pairs philanthropic giving with investing in an established biotech venture capital firm. Donors to the program are excited about the opportunity to do well by doing good.”

INDIANA PHILANTHROPIC VENTURE FUND

As educational centers, major college campuses are a natural source of new ideas that can lead to new businesses. Indiana University has taken a systematic approach to linking students, alumni, faculty, and staff through entrepreneurial pursuits. IU Ventures, which began in 1997 as the Advanced Research and Technology Institute, is a multipronged initiative that has led to approximately 2,900 inventions and 1,100 patents issued worldwide.

Within IU Ventures, the Quarry enables faculty entrepreneurs to tap funding opportunities and paths to commercialization; the IU Angel Network enables accredited investors to access early-stage deals from an exclusive list of curated investment opportunities; and the IU Philanthropic Venture Fund enables university donors to put their tax-deductible contributions toward funding for startup and early-stage companies.

Launched in 2018, the IU Philanthropic Venture Fund aims to raise $50 million. The university has committed $15 million and seeks another $35 million from alumni and other supporters. Companies eligible to receive funding must meet criteria evaluated by the IU Ventures Investment Committee. These entail having a leadership team with strong ties to the school, operating in the science and technology sectors, making a positive impact on society, and having the potential to help the fund meet its overall asset-level performance goals.

AMERICAN JOURNALISM PROJECT

John Thornton, General Partner at the Texas VC firm Austin Ventures, co-founded the American Journalist Project (AJP) along with the nonprofit’s CEO, Elizabeth Green, in 2018. Its mission is to rally donations from philanthropists, family foundations, institutional funders, and corporate partners to support small civic news organizations around the country that report local news. The AJP also provides the news outlets with coaching and connections to experienced advisors.

As of March 2020, the AJP was supporting 11 news outlets in nine states and Puerto Rico. According to the AJP, civic news organizations are essential to democracy because they fulfill the public service of sharing needed information about how local issues in government, environment, education, health, as well as social and criminal justice, affect communities. Rather than continuously fund these news outlets, the AJP seeks to transition them to multiple sustainable revenue streams.

What sets the AJP apart from other venture philanthropy projects is the criteria that news outlets should meet in order to receive support. The AJP prefers to work with nonprofits producing news that is free to the public and editorially independent of advertiser control. The news must be high-quality, and the team producing it must endeavor to have a diverse and inclusive workforce. Plus, each news outlet needs multiple local financial backers as well as a plan to boost its revenue and overall offering.

VENTURE PHILANTHROPY 2.0

Although all the nonprofits featured here want the businesses they back to make money, profit itself is less of a motivator than societal betterment. These ventures also are daring for the enterprises they invest in, since relatively few businesses have ever achieved success by relying on a nonprofit for funding and expertise. That is why these four examples of second-generation venture philanthropy are taking charity, and capitalism, into new territory.