VC and philanthropy: a vital joining forces: some institutions want to make money while others want to help society. Both goals can be achieved through philanthropic venture capital firms (PVCs), an innovative way for investors and philanthropists to achieve financial and humanitarian aims.

• Author: Edelson, Harry
• Position: Venture Capital

VENTURE CAPITAL--the investment of "sweat equity" and money to invent or discover something that enhances the well-being of individuals and society--is virtually as old as civilization itself, although it didn't evolve into an industry until about 40 years ago. In 450 B.C., the Greek researcher and storyteller Herodotus opined that "All men's gains are the fruit of venturing." Given that practically every invention or service ever created has stemmed from venture capital, it is logical that venture capital can be leveraged to help society achieve its humanitarian goals.

Charitable giving in 2002 rose to $241 billion, according to the "Giving USA" report issued in June 2003 by the American Association of Fundraising Counsel. Charitable contributions continue to increase, but by a smaller percentage than in previous years: While philanthropy grew by large percentages in the 1980s, in the 1990s it increased by only about 5% per year (2002's increase was only 1%). Social problems are now outpacing philanthropy's ability to deal with them. Three innovations can reverse this trend: greater funding for social causes, a more productive use of funds, and new technologies designed to cure rather than just alleviate social ills. All three can be achieved through the establishment of philanthropic venture capital firms (PVCs). These firms can draw on the discipline, incentives, and success of venture capital to solve some of the world's leading social problems. Here's how this can happen:

* Greater Funding for Social Causes: The leverage implicit in venture capital can be of enormous benefit to those interested in solving nettlesome social problems. For example, a $2 million investment by a PVC in an early-stage company developing a cure for AIDS or cancer can ultimately generate hundreds of millions in additional funding from both private and public sources. Investors and philanthropists can enjoy the benefits of leverage by funding PVCs that focus on solving the same social problems that they are addressing. The PVCs can return both principal and profits to philanthropic-minded investors, who can recycle the money into additional social endeavors.

* More Productive Use of Funds: Venture capital firms have strict requirements for the companies they fund, including oversight, transparency, frequent financial reports, and a focus on results. Nonprofit donors often encounter fuzzy definitions of "results." But one key metric of venture capital--financial results---is easily measured. Good financial results are a reliable indication that a company is achieving its goals. See accompanying chart for the annual returns for...