Impact investing and venture philanthropy might sound like the same thing, but they have several differences.
Perhaps most significantly, venture philanthropy has been around for much longer. The phrase was coined by John D. Rockefeller III in 1969. His idea of venture philanthropy was said to be an "adventurous approach to funding unpopular social causes.” Venture philanthropy peaked in popularity in the mid- to late-1990s.
Impact investing emerged as an "ethical" investment strategy in 2007 when the phrase was coined at the Rockefeller Foundation. At the time, impact investing was defined as “mobilizing large pools of private capital from new sources to address the world’s most critical problems.”
Venture philanthropy specifically focuses on social causes, while impact investing has a broader remit of social and environmental causes. Both generally aim for a financial return while having a positive impact on the world, but not all investments yield a financial return.
Impact investing, with the dual goal of making a profit and creating positive social or environmental improvements, can take place in developed or emerging markets. In emerging economies, microfinance projects are popular, but impact investing also funds improving employment and education opportunities, supporting sustainable agriculture, making healthcare or housing affordable, and developing clean technology. This is often accomplished through private equity, debt, or fixed-income securities.
Many large corporations—including Apple Inc. (AAPL), Tesla Motors Inc. (TSLA), General Electric Co. (GE), and First Solar Inc. (FSLR)—have stepped up to the plate to reduce the carbon footprint in their supply chain. When you see that a private or public company is taking this approach, putting some money behind that company is a form of impact investing. You can also start impact investing through a variety of exchange traded funds (ETFs) and mutual funds.
Impact investing is experiencing explosive growth, with assets in the sector expected to grow to $500 billion by 2020, from $50 billion in 2009. Some predict assets ultimately will hit as high as $3 trillion.
Venture philanthropy is more focused on capital building than general operating expenses, and there is a lot of involvement with the grantees to help drive innovation. There also is a lot of emphasis on performance measurement, with the primary goal of improving systems and sectors as opposed to promoting individual organizations and funding individual projects.
The engagement period for venture philanthropy is a minimum of three years and an average of five to seven years. Most venture philanthropy investments are transacted through a foundation or a private equity firm. With impact investing, there is no time frame. It’s more of an “as long as it takes” approach.
The Bottom Line
With impact investing, the investor is looking to make a profit while also having a positive impact on the world's social or environmental concerns. With venture philanthropy, the goal is usually (but not always) to make a profit while having a positive social impact on the world.