Lexington, KY - Philanthropists inject vast amounts of capital into attempts to solve the problems facing our world. Foundations, corporations and individual donors have long given generously, albeit at a lower percentage over the last two years. Along with the giving, there has been a proliferation of nonprofits over recent years, addressing a plethora of societal needs.
However, old problems remain and new ones arise. Certainly there are success stories, but it is excruciatingly clear that traditional philanthropy falls short. There is not enough money, nor is there always an effective solution to fund. Simply throwing more money out without a strategic approach is like bailing out a bottomless boat. Donors are realizing that it is time for game-changing philanthropic methods.
Many new approaches to philanthropy have been taking root. The Bill & Melinda Gates Foundation recently announced a new emphasis on tools such as low-interest loans, guarantees and investments in equity funds to support the development of market-based solutions, seeding new innovations and helping ensure that solutions become sustainable and scalable. The foundation is increasing its use of program-related investments (PRIs) with a new pilot program and a $400 million pool. Essentially, PRIs focus on providing capital for social entities that find it difficult to obtain investment capital from private markets. The Gates Foundation specifically mentions the use of "debt investments" such as loans, "equity investments" such as investments in venture capital funds or stock purchases, and "guaranty investments" such as bond back-stops, credit guarantees or insurance.
Certainly the Gates Foundation is uniquely scaled up to lead the charge, but there are many innovations, both large and small. All are characterized by a more hands-on approach, a collaborative nature and a focus on outcomes.
Foundations are becoming increasingly vocal in flexing their power. Advocacy is on the rise where foundations once shied away from anything that hinted at lobbying. Even litigation on the issues is no longer off limits. Civic engagement strategies such as those funded by the John S. and James L. Knight Foundation over the last few years seek to activate people and communities to become informed and engaged. That foundation emphasizes that no less than transformation is their quest. This is a fundamental shift in thinking for many funders.
From the macro to the micro level, we see venture philanthropy, also known as philanthrocapitalism, popping up in communities across the globe. Venture philanthropy is typified by bringing together partners large and small to invest time, skills and capital into various nonprofit efforts. And yes, Silicon Valley produced many of the initial efforts in this field.
A frequent funding area for venture philanthropists is microfinance, or the supply of loans and other financial services to the poor, usually a direct provision. This is generally used in support of microenterprise, i.e., cottage businesses. One example would be a local woman buying yarn (or better yet, a high-tech loom) to weave rugs as part of a local cooperative. Microfinance can be highly effective at moving individuals and small communities into a sustainable mode. The book Philanthrocapitalism by Matthew Bishop and Michael Green is subtitled "How Giving Can Save The World," and it is a good read for those interested in learning more.
Along the same theme, perhaps the most innovative and certainly the most intriguing ideas are in the emerging field of social entrepreneurship and social enterprise. The PRIs discussed earlier can be quite useful in this regard, but the newest idea is the L3C, or low-profit limited liability company. The L3C is a hybrid legal structure that combines the financial advantages of a limited liability company (LLC) with the social aims of a nonprofit. Profitmaking occurs, but the primary focus must be social benefit.
Arthur Wood, an Englishman and former banker and director of social financial services at Ashoka, helped formulate this new legal structure to accommodate a formal partnership among the social sector, government, corporate sector and philanthropic institutions. Wood advocates for a new social contract in philanthropy. He points out that philanthropy has two roles in society; one is charitable, but the other is to provide the hub of new ideas. Wood argues that the use of private capital in a profit-making model is necessary to address the reality that there simply is not enough money to deal with the issues. Using the corporate and banking sectors to provide seed capital, with a return on their investments to address societal ills, is a sound approach whose time has come.
The L3C was first enacted by Vermont in April 2008. Several other states have now passed the legislation, with Illinois being the most recent. Legislation was introduced in the Kentucky General Assembly this session by Rep. Kelly Flood. HB 371 was in committee at the time of this writing.
It remains to be seen how L3Cs will be used. There are many intriguing possibilities. In North Carolina, Robert M. Lang, Jr., a founder and leading proponent of the model, advocates the use of L3Cs to deal with that state's hard-hit furniture manufacturing industry. The newspaper industry is often touted as a target for L3C modeling to raise capital in a society that has radically changed how it ingests news. Vermont leads in actual L3C projects, but it is simply too early for any proven results. This is a quickly evolving concept with tons of potential but still some wrinkles to iron out.
Kentucky is a state not known for major philanthropic funding, but our needs are obvious. If we tap our budding entrepreneurial community to engage in social enterprise, encourage our foundations to utilize innovative tools as they become available, and strengthen the effectiveness of our nonprofit sector, then we can achieve real results. Game-changing philanthropy is within our reach, but we must step up to the challenge.
Anne E. Nash, J.D., is principal and owner of My Giving Advisor, LLC - www.mygivingadvisor.com, a national philanthropic advising firm based in Lexington.