In recent years, there has been a growing interest in impact investing and venture philanthropy – two approaches that aim to generate both financial returns and positive social or environmental impact. Though the terms are sometimes used interchangeably, there are important differences between venture philanthropy and impact investing. This article will examine the core concepts, objectives, strategies, and key players of venture philanthropy and impact investing, analyzing their similarities and differences. By understanding the nuances between these two impact-driven models, investors and entrepreneurs can better identify which approach aligns with their values, capabilities, and desired outcomes.
Venture philanthropy aims for social impact first while impact investing prioritizes financial returns
The core difference between venture philanthropy and impact investing lies in their primary objectives. Venture philanthropy, as the name suggests, adapts concepts from venture capital to philanthropy. It views the nonprofits and social enterprises it supports as “investments”, providing multi-year financial and non-financial support to help scale their social impact. However, venture philanthropy ultimately prioritizes social returns over financial ones. Its goal is to create deep social or environmental change. On the other hand, impact investing aims to generate market-rate or close to market-rate financial returns while creating positive impact. Though impact is an explicit goal, financial returns are the priority. Investors expect to at least get their money back, if not earn a profit.
Venture philanthropy provides grants and extensive non-monetary support while impact investing uses various investment instruments
Venture philanthropy provides two forms of support – grants as well as substantial hands-on non-monetary assistance such as strategic advice, capacity building and networking support. Grants come without any expectation of financial returns. In contrast, impact investing uses various investment instruments, from debt to equity, to achieve impact. Capital is expected to be paid back with returns. Additionally, while venture philanthropy takes an engaged, hands-on role in guiding the organizations it supports, impact investors play a more limited advisory role focused on ensuring financial discipline.
Venture philanthropy targets earlier stage non-profit organizations while impact investing funds more established for-profit social enterprises
Venture philanthropy focuses on empowering promising early-stage nonprofits and social enterprises, helping them validate and refine their model, then scale up. Most organizations supported are less than five years old. Impact investors conversely target more mature social enterprises with proven business models capable of absorbing larger amounts of capital and generating consistent financial returns. The expectation is to build enterprises achieving commercial sustainability and growth.
Venture philanthropy is funded by philanthropic donations while impact investing utilizes investor capital
Venture philanthropy is funded through philanthropic grants from foundations, corporations, high net-worth individuals and development agencies. These stakeholders provide patient grant capital without requiring financial returns. Impact investing, on the other hand, is funded through investor capital from asset owners and asset managers seeking both financial returns and social impact. Capital comes from institutional investors, banks, pension funds, insurance companies, family offices, development finance institutions, individual investors and more.
While venture philanthropy and impact investing adopt a similar philosophy of using private capital to drive social good, they utilize different tools and target different organizational stages to fulfill distinct primary objectives of prioritizing either social impact or financial returns. By understanding their nuanced differences, both grant-makers and investors can align themselves with the approach that best fits their goals and capabilities.