The Social Business Revolution: Why is Venture Philanthropy the Most Effective Form of Giving?

The Social Business Revolution: Why is Venture Philanthropy the Most Effective Form of Giving?

July 5, 2019

In the world of giving, the question of how to give effectively is becoming increasingly important

How should we give? Along with the issue of how much, questioning the model into which we donate our money is becoming more and more pertinent in the modern age. As we seek to optimise the way we spend and invest our money, it’s not surprising that we are also looking to optimise the way we give. There is a scarcity in the philanthropic capital available - so it’s important that it is spent well.

Venture philanthropy, as described by the European Venture Philanthropy Association, is about “matching the soul of philanthropy with the spirit of investment, resulting in a high-engagement and long-term approach to creating social impact”. It’s a fresh way of looking at charitable donations as money that should be used in the most effective and efficient way possible. Instead of giving money away, venture philanthropy invests into the ingenuity, knowledge and talent of entrepreneurs that want to make social change in their communities.

As a Philanthropic Venture Fund at Yunus Social Business, we turn donations into investments and growth support for social businesses that either provide essential products and services (like healthcare, safe water or clean energy) or secure higher incomes for the poor. A social business combines the mission of a charity with the business acumen of a for-profit business. Unlike a charity, it generates profit and aims to be financially self-sustaining, while profits are reinvested in strengthening the social mission.

Our Chairman and Co-Founder, Professor Muhammad Yunus states, “A charity dollar has only one life, a social business dollar can be invested over and over again”.  And he is right, we estimate that on average, $1 of social business donation produces the same impact as $8 of a traditional charity donation. This is because as the social business repays the loan the donation is recycled to create more impact over and over again.  

How does this work in practice?

Let's take the example of a social business model that provides safe water to schools. They sell and maintain environmentally-friendly water purification systems at affordable rates that can be paid for over a long period of time. The Venture Philanthropy model multiplies the donation in two different ways: 1) the social business creates an ongoing impact as it is financially sustainable and 2) the loan is repaid meaning the money can be invested into other social businesses over and over again. That means clean water for millions of children delivered with a sustainable model. If we compare this to a traditional charity model - the money will quickly run out:

We estimate here that one filter costs $1,000 and each one reaches a school of 500 children.

Any investment comes with risk, but starting an early-stage social business in a developing economy is incredibly difficult. They face an array of different challenges such as lack of infrastructure, political instability and environmental factors like drought. Some businesses will fail and we have to take this into account. On average 3 out of every 4 of our companies will succeed in becoming a sustainable business creating social impact - so the risk is worth taking!

By rethinking the way we look at charity, the capital donated can be employed in a much more effective way. Maybe it’s time to consider how you donate your money?

You can set up a monthly donation to Yunus Social Business:

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