Giving Compass' Take:

• Alex Amouyel and Casey van der Stricht explain how donors can leverage donor-advised funds to invest in early-stage entrepreneurship and innovation. 

• What are the challenges of using DAFs for impact investment projects? Do donor-advised funds help advance your philanthropic goals? 

• Read more on how donor-advised funds can become an impact investing tool.

Donor-advised funds (DAFs) are a rapidly growing, philanthropic giving mechanism. In 2018, they held $110 billion of capital across the United States—a 27 percent increase over 2016. Yet they have come under criticism in recent years, with some saying they lack transparency and “hoard” money, rather than distributing it to mission-driven organizations. Some believe they serve to provide a tax break for the 1 percent, while incentivizing DAF sponsors to keep the money so that they can bolster their management and investment fees.

Indeed, with no required disbursement rates, money can sit in DAFs for years before donors grant them out. While the money waits, only a small percentage is invested for impact, and even less is allocated to venture impact investing.

Herein lies the real growth opportunity: What if donors could leverage their DAFs toward impact investing, specifically venture investing? We believe it would help fill the long-standing “pioneer investment gap” for early-stage social enterprises.

Over the last 18 months, MIT Solve—which supports early-stage, tech-based social entrepreneurs—conducted a landscape analysis that included more than 100 interviews. Our research found that very few DAFs are invested for impact.

While this model is currently unique, families, foundations, and institutions interested in supporting early-stage social innovators can use their existing DAF capital (or move new capital into DAFs) by taking the following next steps:

  • Select the right DAF sponsor.
  • Define your investment thesis.
  • Think about what additional, non-financial support you can provide.
  • Work with partners.

Read the full article about using donor-advised funds to invest in impact by Alex Amouyel and Casey van der Stricht at Stanford Social Innovation Review.