Christine Bariahtaris
One of the things that’s great about prospect research is that we’re students of emerging trends. Every day is a new adventure into some aspect of finance, or business, or cleverly-created endeavor that’s new and potentially sector-changing. That’s the way it was with venture philanthropy, and philanthropic ventures. This week, HBG Consultant Christine Bariahtaris walks us through what these are, and how to find more information about them. ~Helen
If I had to name my 2023, I’d say it was my Year of the Philanthropic Venture.
Remember in 2016 when Mark Zuckerburg and Priscilla Chan launched the Chan-Zuckerburg Initiative (CZI) as an LLC and caused a ruckus? Almost eight years later, I think it’s safe to say they started a trend. I spent many research hours getting to know different philanthropic ventures this year, and always had the same questions – how do these work, why are so many popping up, and is that a good thing?
Don’t You Mean “Venture Philanthropy”?
Yes and no. “Venture philanthropy” (the use of venture capital investment models in nonprofit fundraising strategies) is well-established in our industry – John D. Rockefeller III coined the term all the way back in 1969 – and has been the standard operating model for many donors since the 1990s. The venture model shifted major philanthropy away from single-year gifts to multi-year grantmaking and additional support practices that most of us are familiar with today. It’s an operating model that doesn’t demand any fundamental changes to how 501(c)3 organizations are usually structured.
Philanthropic ventures use venture philanthropy’s model, but decided they could also create a better giving vehicle. 501(c)3s are out, and LLCs are in. In addition to CZI, other big-name philanthropic ventures include Laurene Powell Jobs’ Emerson Collective, Bill Gates’ Breakthrough Energy, and Eric Schmidt’s Schmidt Futures.
How Do They Work?
One of the big reasons why describing philanthropic ventures is difficult is that there is no standard model. If we really want to know, we have to investigate the structure of each LLC individually. And since they’re LLCs, we’re only going to know as much as they want to tell us.
Some ventures are complicated, but they’re transparent about it. Both CZI and Breakthrough Energy are umbrella LLCs that encompass both traditional 501(c)3 entities and for-profit venture capital funds that work in tandem towards common goals. They disclose the names and nature of these sub-organizations on their websites (in fine print at CZI and a whole page at Breakthough). It’s a tangle of legal relationships, but it’s there for all to see.
Others are LLC subsidiaries of existing nonprofit organizations, such as the Juvenile Diabetes Research Foundation’s T1D Fund and the National Bleeding Disorders Foundation’s Pathway to Cures (P2C). In practice, they operate as typical, for-profit venture capital funds governed by independent advisory boards but use their parent organizations’ subject expertise to inform their investment strategies. Donors to these funds, however, really are still donors (including the tax break) – instead of redistributing profits to investors, these funds reinvest the capital into new ventures and support their parent organizations’ goals.
And then there are the ones that embrace the LLC of it all and keep the details under wraps, like Emerson Collective and Schmidt Futures.
The Upsides
The biggest benefits of philanthropic ventures for donors are privacy and control. LLCs do not have disclosure requirements like 501(c)3s, and they can directly fund restricted activities like political lobbying. Additionally, a donor can retain voting rights and disposition control over stocks transferred to an LLC, which they would have forfeited in a donation to a private foundation. CZI is a good example of how this works: Mark Zuckerberg transfers Meta shares to the Chan Zuckerberg Initiative LLC, which he owns, and therefore retains control of the stock. The LLC then donates those shares to CZI’s affiliated private foundation, donor-advised fund, and 501(c)4 group, while also making private investments that align with its mission. Even though Mark Zuckerberg and Priscilla Chan are directing these activities, they are not legally the donors, and so can sidestep the usual IRS giving rules (including that pesky 5% annual distribution requirement), as well as never directly lose control of the funds. It’s giving without giving away.
The most noteworthy benefit of philanthropic ventures to nonprofits, in my opinion, is that they are comfortable with risk. There is a reason most of the examples in this post are associated with the science and technology sectors – progress in these industries requires massive financial investment that would make most traditional philanthropists sweat, given there is no guarantee early-stage science will pan out. To make things worse, the state of public funding for science and health research is fraught. Nonprofits in these areas should jump at the chance to engage with funders who want to go big. A visit to their websites will show that all ventures listed here want to solve everything from eradicating diseases to solving systemic inequality – we should take the helping hand.
The Downsides
It can’t all be roses. There is a very good reason to be wary of a rise in philanthropic ventures.
501(c)3 foundations all must play by the same rules. They must distribute a portion (not enough!) of their funds annually, they must disclose how their money is moving, and most importantly, they all follow the same definition of what is and isn’t considered philanthropy.
LLCs don’t have to agree on any of these topics. Ultimately, they make their own rules about who and when and how much they fund, which means they get to decide what is philanthropic. And in a Giving Pledge world, that should give us pause – are we just supposed to take their word that what they’ve chosen to privately invest in is philanthropic? Are we cool with not knowing if they’re counting money they’ve given to relatives, or loans they’re recouping? What if they’re funding programs that they personally support but many would find unethical?
If you want to see how dark this could go, play Mass Effect and get acquainted with the Illusive Man. He’s a shadowy mogul who pursues his own agenda for the good of humanity through Cerberus, a totally opaque private company. The results are messy, to say the least (but seriously, Martin Sheen voices him and it’s incredible).
We’re not at doom and gloom just yet, though. For now, let’s see what philanthropic ventures can help us do. But let’s make sure we pull back the curtain to understand the machinery as much as we can, and not mistake them for wizards.
