Angel investors provide financial support to startup businesses in their earliest stages when most investors are not prepared to back them. But do angel investors invest in nonprofits?
Nonprofit organizations have grown to record heights. The sum-total of philanthropy in the United States is twice the size of Amazon, Google, and Facebook combined. And individual donors and private foundations led the way, amounting to over 90% of all philanthropic contributions over the past 45 years. (Notre Dame Online)
Angel and venture capital investors used to shy away from nonprofit businesses. But over the last twenty years, attitudes have been changing among lenders giving rise to investment strategies that take the concepts and techniques from venture capital finance and high technology businesses and apply them to philanthropic goals.
Entrepreneurs have several options open to them to find angel investment for a nonprofit venture. They should focus their efforts on approaching venture philanthropists, or else seek out capital groups engaged in the strategy of impact investing.
What are Venture Philanthropists?
The term ‘venture philanthropy’ was coined in 1969 by John D. Rockefeller III to describe an imaginative and risk-taking approach that might be undertaken by nonprofit concerns. When the term became popular, its definition was, ‘…an adventurous approach to funding unpopular social causes.’
The concept of venture philanthropy was said to have peaked in the mid- to late- 1990’s. However, there are numerous modern examples, including the socio-political activism efforts of wealthy individuals like George Soros or the Koch brothers. (Investopedia)
According to a 2014 report by the Organization for Economic Co-operation and Development (OCED), the term venture philanthropy describes, “a number of hybrid forms of philanthropy most of which eschew the traditional ‘grant-giver/grantee relationship’ in favor of capacity-building partnerships.” The report found several “overlapping characteristics” that venture philanthropy efforts share, including:
- A strategic framing that coordinates targeted resources (grants or investments) so that they collectively create systemic change.
- A scale of intervention intended to address whole systems and sectors rather than individual organizations or projects.
- A cross-sector focus targeted at engaging civil society, markets, and/or governments as needed.
- Funding mechanisms that blend grants and strategic investments to facilitate targeted societal changes.
- A more hands-on style of engagement, with more extended interactions between philanthropists and grantees, or even communication between grantees.
- Longer periods of engagement – often five to ten years rather than the more traditional one or two years for a grant.
- A distinct focus on innovation and experimentation.
- Extensive monitoring, allowing for quick adaptation to maximize outcomes and impacts.
What is Impact Investing?
In 2007 the Rockefeller Foundation coined the term ‘impact investing’ to describe ethical investment strategies conceived to address the world’s most critical problems. (Investopedia)
Impact investment firms seek to mobilize large pools of private capital from new sources. They might work with individuals, institutional investors, hedge funds, private foundations, banks, pension funds, and other fund managers, and they may hold numerous classes of assets.
Impact investment strategies may result in a wide variety of outcomes. Often income investment firms make money, but sometimes that is not their explicit goal, choosing instead to prioritize creating maximum positive impact for their investments in sectors like clean energy or environmental concerns.
The Global Impact Investing Network identified several tenets that establish baseline expectations for impact investment. (GIIN) They include:
- Intentionality – An investor must have the stated intention of making a positive environmental or social impact through their investment strategies.
- Investment with Return Expectations – Impact investments are not pure philanthropy – they are expected to generate a financial return on invested capital or, at minimum, the return of initial investment.
- Measurement of Impact – Investors are committed to measuring the social and environmental performance of their investments, with the reciprocal obligation on the part of the firm to provide transparency and accountability against the investor’s stated goals.
What is the Difference Between Venture Philanthropists and Impact Investment?
Both types of investment aim to make a positive impact on the world while creating financial returns for their investors, but there are key differences between them.
Venture philanthropy was traditionally centered on specific social causes – often those that were considered unpopular or contrary to contemporary cultural norms – but those perceptions have faded with time. Current examples of venture philanthropy support a broad spectrum of causes, many of which are very personal to the backers. Venture philanthropy is often characterized by personal involvement of the angel investors who often lend their own expertise, guidance, and passion to the organizations that they help to found.
Impact investment has grown in popularity as societal values have shifted. Large capital sources have recognized the brand value of ethical practices, and the opportunities presented by emerging markets focused on socially conscious or environmentally responsible business practices. Examples include investment in the emerging markets of renewable energy, or of traditional goods and services that are organically sourced or fairly traded.
How Do You Contact Philanthropic Angel Investors?
The following is a list of just a few of the most notable philanthropic organizations active today.
- The Draper Richards Kaplan Foundation is a “global venture philanthropy firm supporting early stage, high impact social enterprises.”
- The Eli and Edythe Broad Foundation prioritizes organization leaders with a transformative idea, insists on results, and assists with thought-partner and benchmarking, and scrutinizes for proper leadership to leverage their investments.
- The Bill and Melinda Gates Foundation specializes in building partnerships that combine resources, expertise, and vision to organizations around the globe, helping them to find answers and drive change.
What Firms Specialize in Impact Investment?
The firms listed below identify themselves as specializing in impact investment strategies. The following companies are explicitly included because they had the most assets under management as of January 2020. (Investopedia)
- The Vital Capital Fund – This fund controls approximately $350 million in assets and invests principally in developing areas in Sub-Saharan Africa.
- Triodos – This fund has been involved in impact investment since 1995, and controls approximately $5 billion in assets. Their primary interests are in renewable energy, sustainable food, health care, and education.
- The Reinvestment Fund – This fund finances housing projects, access to health care, educational programs, and job initiatives, and controls approximately $1.2 billion in assets.
How Do I Approach An Angel Investor?
There are a few steps that any entrepreneur should take to prepare for a meeting with potential angel investors. (startupgrind)
While this list is not exhaustive, it can serve as a general framework for understanding the process.
- Have a Clear Plan – You should be able to succinctly explain how you will bring your plan to life, along with some description of the logistics, challenges, budgeting, and timelines for completion.
- Have a Team – It’s important to have people tagged for organizational roles like business, technological, financial, and public outreach, as well as team members with special skills or expertise germane to your mission. If your startup is highly technical, it might be helpful to have a board of advisors, selected to help identify and mitigate key risks.
- Have Proof of Skin in the Game – For-profit entrepreneurs would approach a meeting with angel investors with a proof of concept; for example, a prototype of the product that they intend to sell. While nonprofit organizations don’t necessarily create ‘widgets,’ it can be helpful to have proof that you or your organization have already been active in the philanthropic space that you intend to occupy. Volunteer and advocacy work are excellent ways to build the foundations of a new nonprofit organization.
- Have a Valuation – It is important to present angel investors with some idea of the scope of your vision, and what it will cost to achieve it, financially. You need to have an idea of how much money you are asking for, and it can be beneficial for you to understand what compromises you are willing to make to get access to early capital. Are you willing to sacrifice some share of control of the organization? Are you prepared to part with a percentage of the ownership stake?
Of course, any potential entrepreneur interested in starting a new non- profit should carefully research potential backers or partners. Venture philanthropists and impact investment firms often have clearly stated goals or methodologies in place that shape the nature of their involvement with existing and future partners or projects.
It is wise to know what sectors or strategies potential backers have already committed to, and, if possible, what terms they negotiated with previous partners before asking them to get involved in something new.
While the conventional wisdom of the past said that angel investors would not engage with nonprofit businesses, as we have seen, changes in societal norms and the rise of “ethical investment” strategies have created a new landscape for entrepreneurs with a bold vision in the nonprofit space.