Giving Compass' Take:

• Writing for Forbes, The Bridgespan Group's William Foster discusses how the principles of venture capitalism can apply to philanthropy, specifically when it comes to being precise and innovative with grantmaking.

• How many organizations follow this model for their investments? What are the overlaps with venture philanthropy and venture capitalism in general?

• Even if venture philanthropy has fallen short in the past, it can get stronger.

In the private sector, no one thinks that great investments are easy to find. A 2010 study found that the median private equity or venture capital fund requires more than three investment team members reviewing 80 companies for a year to close a single transaction. For-profit investors who find one truly great deal per year are considered stars in the field. Recently, I spent the day with the team at Battery Ventures. They have 50 professionals working in an essentially scientific way to find the best opportunities. The team evaluates thousands of potential deals per year, but averages just 10 investments; without a strict process, the firm would likely not have recorded the number of portfolio company exits that it has. In February, Battery disclosed that in the previous three calendar years, it had six portfolio companies stage initial-public offerings, while 15 were purchased by acquirers.

Compare that investment approach with a foundation program officer’s, or that of someone working for an individual philanthropist. What if they made only one commitment to a grantee per year? In most cases, this would not be enough to keep their job!

If donors want to change the world — and recent Bridgespan research shows that 80% of the most generous philanthropists do — how hard do funders need to work to find the right investment opportunities?

In my experience, many philanthropists, even those with great ambitions and results-oriented approaches, tend to underinvest in sourcing and due diligence. They may be reluctant to spend their philanthropic funds on anything other than the end recipients, or put too much money in any one thing, or let familiarity or inspiring conversations with a nonprofit leader guide their decisions. Sometimes that leads to great results for society, sometimes not.

[Venture capitalist] strategy reveals several lessons that are especially worth noting:

  • They broadened their search beyond organizations they already knew: this gave them the opportunity to think critically about what they wanted to achieve, and find the most promising organizations, not merely the ones nearest at hand.
  • They sought advice along the way: many of the smartest givers view philanthropy as a learning experience. They are searching for knowledge, not merely dispensing it.
  • They tested the waters with smaller gifts before making a significant investment: there is no substitute for direct experience with an organization; it is the surest way to identify potential pitfalls before making a large gift.

Read the full article about why philanthropists should think like venture capitalists by William Foster at Forbes.