The Bill & Melinda Gates Foundation is a massive, and massively powerful, philanthropy. In 2014, it gave $3.9 billion dollars to efforts ranging from college readiness in the United States to engineering a better toilet for low-income countries. It has the ear of presidents around the world, and can change policy with its heft.
Which you probably already knew. But, rather quietly, it is also profoundly affecting the nature of philanthropy itself, by becoming an active equity investor in early-stage startups. Though it didn’t invent this model, the foundation’s sheer size and scope may convince other foundations to give it a shot, and the foundation’s public prominence draws attention to the model.
According to a recent article in The New York Times,
“The foundation has made about a dozen direct equity investments in companies over the last couple of years under the umbrella of program-related investing, as it is called in foundation circles.”
The foundation directly invests in for-profit ventures for two reasons: it believes that markets are efficient mechanisms to achieve progress; and it believes that a return on investment can be thought of not only in financial terms – the financial return on investment that most equity investors yearn for – but also in terms of social good.
Or, to put it another way: it invests in organizations that are under-valued when viewed solely through a financial lens, but are a good bet when the social return on investment (SROI) is properly accounted for.
I’ve written about this basic philanthropic model a number of times (and even have a ‘chapter’ in a short eBook about it), though previously I focused on situations where a foundation could wholly own a for-profit social enterprise – a model I termed ‘Foundation-Owned Social Enterprise,’ or FOSE.
The most salient benefit of a large equity stake in a business is that it allows a foundation to attack a problem using more traditional market mechanisms to solve market failures; as I wrote in an article at the Stanford Social Innovation Review:
Owning a social enterprise (or creating a disregarded entity) allows a foundation to efficiently effect change using market mechanisms to sell a good or service, while using philanthropic resources to address market failures and advocate a cause.
This strategy isn’t wholly positive, and sometimes it can even be self-defeating. When the Bill & Melinda Gates Foundation invests in a company, it signals to other investors two things: 1) it isn’t obvious to us that this organization can provide a market-driven financial return on investment; and 2) even if it can, we will push it to focus on low-ROI priorities, because we care more about SROI. It scares the other investors away, which could lead to a lower SROI.
And, as I’ve written previously, it can be an inefficient use of philanthropic dollars:
The FOSE model isn’t appropriate for all social enterprises or all foundations. If it’s likely that a social enterprise will be profitable, a foundation’s funds are probably better invested in higher-risk, lower-return ventures, as the social enterprise can probably raise capital in more traditional debt and equity markets.
But then again, so can issuing grants to poorly-run non-profit organizations. Many venture investments won’t pay off – but some will. The Bill & Melinda Gates Foundation seems to think that is a suitable value proposition, and hopefully its implicit advocacy for the model will push other foundations to do the same.