Philanthropy as Risk Capital: How Foundations are Supporting Impactful Startups

By Tasha Seitz

For those of you interested in how foundations are thinking about impact investing, we highly recommend checking out the Mission Possible Series from Stanford Social Innovation Review, a 10-week series that recently concluded with the announcement that the Ford Foundation will commit $1 billion from its endowment to impact investing. Many leading foundations are thinking about their funding as having the potential to play a catalytic role in providing risk capital, allowing organizations to gather “proof points” and attract other types of capital. This is true of across all types of impact investing, including the very early stage. In the words of Clara Miller, President of the Heron Foundation and a pioneer in impact investing, “success requires a chorus rather than a soloist,” and in that spirit we wanted to share ways that our portfolio companies have benefited from philanthropic capital.

Grants for Product Development

Most foundations will provide grants that award money to support the development of a specific tool or product. Unfortunately, most still limit applicants to 501(c)3 organizations, but some are branching out to support for-profit social entrepreneurs. ThinkCERCA, a member of Impact Engine’s portfolio, was awarded a $250k grant from the Bill & Melinda Gates Foundation through the Literacy Courseware Challenge. This initiative awarded $6 million to 29 organizations focused on building tools to help students in grades 4 through 8 improve their reading and writing skills. ThinkCERCA was already building an online platform for creating personalized critical thinking lessons and utilized the grant money towards expanding their online resource and lesson library. In this case, ThinkCERCA’s mission and pre-existing software platform was well aligned with the product development requirements of the Gates Foundation’s grant.

Grants to Nonprofit Customers of the Product

As mentioned above, most foundations are still most comfortable giving grants to 501(c)3 organizations. For those companies serving nonprofit customers, another option is to facilitate matchmaking between foundations that support the the outcome of your product and the nonprofit customers that would use and buy your product. One of our portfolio companies, Civic Artworks, worked with ChicagoQuest charter school to develop a new civic-engagement curriculum: Regenerate Chicago Neighborhoods. That project was paid for by a grant from the Chicago Community Trust and helps demonstrate to donors that for-profit models can be acceptable and effective ways to create sustainable, scaleable social good.

Program-Related Investments (PRIs)

A PRI is an investment made by a private foundation primarily for the purpose of furthering its mission. The investment and its associated costs count as qualifying distributions towards the foundation’s 5% annual payout requirements. One of our portfolio companies is in advanced discussions with a foundation to secure PRI debt funding to finance the purchase of inventory, so they can serve more customers and create more impact. Foundations, including several of Impact Engine’s investors, also make impact investments out of their endowment as mission-related investments. The Mission Investors Exchange, which sponsored the Mission Possible series, is a membership organization of foundations exploring the use of PRIs and MRIs and a great resource for foundations exploring impact investing.

Prize Money Grants

Another way foundations can offer capital to startups is by providing innovation grants through competitions and prize money. For example, the Case Foundation collaborates with various foundations to host the Forbes Under 30 Change the World Competition. This competition allows young social entrepreneurs leading both nonprofit and for-profit organizations around the world to share their disruptive and scalable ideas. Together, the foundations awarded $100k in funding to each of the six finalists. In 2013, one of the finalists was Sokowatch, a distribution and mobile e-commerce platform for small retail shops in emerging markets and a member of the Impact Engine portfolio. This investment from the Case Foundation allowed Sokowatch to launch and expand its innovative platform throughout East Africa.

For those interested in learning more about the ways that foundations are investing for impact, we highly recommend reading the Mission Possible series to see what resonates. We were particularly struck by Clara Miller’s article, which shared some of the lessons learned by the Heron Foundation over the last five years since they published their strategy regarding impact investing in a white paper, “The World Has Changed And So Must We.” In that report, she says, “Ultimately we will succeed by influencing the attitudes and behaviors of many other investors, perhaps beginning with philanthropy but extending well beyond. Forming networks of thought, communication and action with other investors will become a central priority.”

We are excited to see foundations continue to embrace impact investing in a catalytic early stage role and hope to see more foundations commit!

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