Venture Philanthropy: Accelerating progress towards the SDGs
16 Sep 2016 by Emilie Romon
The Sustainable Development Goals (SDGs) adopted in September 2015 will shape the global development priorities for the next 15 years. Their scope is ambitious. And what it will take to implement them far exceeds the 2015 total of USD 131.6 billion in official development assistance (ODA). In fact, the annual financing gap is about USD3.1 trillion according to UNCTAD estimates.
In the Addis Ababa Action Agenda, the international development community recognised the private sector’s pivotal role in bridging this gap. Yet, channeling more private investment in support of the SDGs remains challenging. Corporations need to clearly understand how they can help develop solutions for development, which are both sustainable and profitable. In other words, the business case for the SDGs still largely needs to be made, in spite of recent encouraging initiatives.
Patient capital to test and prove business models
Philanthropic foundations can facilitate this transition towards market-based and innovative financing solutions that generate financial returns alongside positive social and environmental impact. Their flexibility enable them to support riskier initiatives. They are not bound to election cycles nor are they under the same pressure as private investors to deliver immediate financial returns for their shareholders. By deploying their risk capital to test and prove business models or by providing patient capital to support business expansion, foundations can prime the pump to de-risk investments and leverage other sources of funding in support of development results.
Many philanthropies have thus decided to support social entrepreneurship, inclusive markets and strengthened value chains to address complex issues, such as youth unemployment or access to health services and energy. This entrepreneurial and market-driven approach to philanthropy — what is also called venture philanthropy — combines a variety of financial and non-financial resources to identify, analyse, co-ordinate and support self-sustaining, systemic and scalable solutions to development challenges for greatest impact (OECD netFWD, 2014).
While no unique operating model exists, a study by the OECD’s Network of Foundations Working for Development (netFWD) published two years ago in 2014 identified venture philanthropy as a set of principles that can help increase the reach, scale and social benefit of foundations’ resources. Venture philanthropists describe their relationship with grantees as a ‘’long-term high engagement partnership,” thus positioning themselves on an equal footing and providing them with both financial and non-financial support, such as technical knowledge and capacity building. They make strategic and targeted ‘’investment’’ choices, after cautiously assessing where and how they can achieve the highest impact, instead of spreading their giving to a large number of projects. Given the complex nature of the issues they tackle, the scale of their intervention becomes more sector- and systems-level focused. These philanthropists often are agnostic about the type of organisations they work with, engaging rather with diverse social purpose organisations that include for-profit enterprises and non-governmental organisations. In others words, venture philanthropy is breaking the cast-system whereby the for-profit sector can only be supported by similar (but bigger) organisations.
Applying venture philanthropy practices can contribute to testing or exploring new solutions to help achieve the SDGs. However, bringing those to scale requires a deep cultural transformation amongst development actors (public and private) and a strong willingness to partner across sectors and disciplines.
Cross sectoral collaboration will maximise impact
The unprecedented scale and complexity of development challenges demand collaborative action. Foundations, which are fiercely independent by essence, must learn to work effectively with their peers as well as with other actors, including governments, to sustainably achieve impact at scale.
Networks, such as netFWD, the Global Impact Investing Network or the Asian Venture Philanthropy Network, provide venues to meet the growing need of foundations and impact investors to compare experiences. These fora offer opportunities to share best practices and learning from the field, or to apply insights from one sector to another. Such convening organisations also help their constituencies move from dialogue to action, especially as foundations start forming coalitions around issues of common interest. For instance, the Emirates Foundation has reached out to peer organisations in the Middle East and North Africa to take collective action to tackle youth unemployment through entrepreneurship.
Indeed, foundations are increasingly aware that buy-in from local actors, including governments at different levels and social purpose organisations, is paramount for innovation to create lasting change. Emerging efforts bringing together foundations, corporations and governments will likely expand and replicate on a larger scale.
Venture philanthropy is no silver bullet. Not all development issues, like governance and human rights, have an entrepreneurial solution. And foundations still contribute only 5.6 % of total official and private flows to developing countries (USD 32 billion in 2014) (OECD DAC). But at a time when cross sectorial collaboration is essential to meet the SDGs, this innovative approach to commit resources and create shared value certainly offers some promising options worth considering.