While the advantages of vertical integration are clear in the private sector, many of them also apply to philanthropy. Early signs of vertical integration are quietly beginning to surface among a new breed of social impact organizations that are not only embracing traditional tools of philanthropy but also investing in for-profit businesses (downstream), working to shape policy (upstream), and even acquiring mission-aligned nonprofit organizations themselves.

In a vertically integrated model, philanthropy can serve as the connective tissue, ensuring emerging solutions are interoperable or filling gaps in the value chain that would otherwise limit progress and impact. Some organizations, like Strada Education Network, which I help lead, connect multiple vertically integrated organizations with a shared services infrastructure, providing economies of scale that decrease overhead costs (e.g., HR, legal, compliance) for nonprofit affiliates.

Vertical integration has particular promise within complex areas like the intersection of postsecondary education and employment, where individuals’ economic mobility hinges on the behaviors and decisions of a series of interrelated—but often disparate—actors (individuals, policymakers, employers, and education and training providers). A generation ago, funders that largely would have underwritten independent efforts through grants or scholarships are now working to improve outcomes by not only investing in but actually building up- and downstream components that are critical to a more equitable education-to-employment ecosystem.

Vertical Integration for Impact

Vertical integration may be particularly useful in addressing challenges typified by multiple players, spanning the public and private sectors, each with its own (potentially misaligned) incentives or timelines. It may also provide a solution for sectors where simultaneous investments of patient capital are required at multiple points within a value chain.

Combating climate change is one example, with many would-be solutions tempered by constraints that would benefit from a vertically integrated approach.

Lithium—or the lack of it—is one such constraint. Electric cars require lithium batteries, but lithium is a relatively rare element and is most often found in low concentrations. That makes it challenging and expensive to extract sufficient amounts of lithium to meet demand for electric vehicle batteries. As a result, increasing adoption of electric cars is predicated on improving the extraction of lithium, and improving lithium extraction represents an opportunity for upstream vertical integration.

Established in 2015 by Microsoft co-founder Bill Gates and a group of private investors concerned with the effects of climate change, Breakthrough Energy is an organization that “supports the innovations that will lead the world to net-zero emissions,” according to its website. In 2020, Breakthrough Energy led an effort to invest $20 million in Series A funding in the Oakland, California-based startup Lilac Solutions, which has developed a new method of extracting lithium from brine that has a higher yield and improved purity compared to existing methods. If successful at scale, it will improve the supply chain for lithium and, as a result, enable more (and less expensive) production of batteries for electric vehicles—and hopefully drive electric vehicle adoption by lowering prices.

Breakthrough Energy consists of a public-private network of investment funds, nonprofit and philanthropic programs, and policy efforts that work to move new technologies to market. It also brings together governments, research institutions, private companies, and investors in support of five “Grand Challenges,” targeting the five biggest sources of global greenhouse gas: manufacturing, electricity, agriculture, transportation, and buildings.

Read the full article about vertical integration by Tom Dawson at Stanford Social Innovation Review.