Morgan Stanley
  • Wealth Management
  • Jun 24, 2022

What Philanthropic Approach is Right for You?

There are myriad ways to drive positive change in the world. Three worth considering: hybrid philanthropy, venture philanthropy and impact investing. Take a closer look at each.

How can I make a difference? It’s a question many people ask themselves and struggle to answer. The philanthropy sector is home to a large number of social entrepreneurs looking to make a demonstrable impact, and there are as many different approaches to philanthropy as there are charitable causes to support.

It can be overwhelming and confusing to determine which tactics make sense for your broader wealth strategy, and the lines are blurring when it comes to the various approaches to making an impact.

It’s time for a little clarity.  

A big advantage of a hybrid approach is that your for-profit and nonprofit entities can work symbiotically to maximize your impact.

Hybrid Philanthropy: Striking a For-Profit/Nonprofit Balance

Although it is widely used, the term “hybrid philanthropy” can be a misnomer. This approach refers to structuring your giving around creating a for-profit company and a nonprofit organization that both serve a similar impact purpose.  The nonprofit will have access to grants and donation and the for-profit will be able to take on investors, so there’s access to more sources of funding.

The tricky thing about these hybrid structures is how they are structured.  The relationship between the for-profit and nonprofit entities can either take on a parent-subsidiary or brother-sister model.

In a parent-subsidiary dynamic, your nonprofit acts as the parent organization, and your for-profit serves as a subsidiary owned by the nonprofit. In order to do this, your nonprofit would have to qualify as a “public charity,” which means that it has to receive most of its funding from public sources to satisfy the public-support regulatory requirement.

Under the brother-sister model, you would operate the nonprofit and for-profit as entirely separate entities. It’s important to note that under both the parent-subsidiary and the brother-sister structures, money can flow from the for-profit to the nonprofit, but not from the nonprofit to the for-profit. Your for-profit entity can donate money to your nonprofit and potentially yield a more favorable tax outcome. However, because all assets of a nonprofit must be permanently dedicated to charitable causes, you cannot transfer funds to your for-profit. 

A big advantage of a hybrid approach is that your for-profit and nonprofit entities can work symbiotically to maximize your impact. There is also no limit on revenue-generating activities as long as these activities are carried out under the for-profit entity. The big drawback with this hybrid approach is that you would have to essentially run two separate organizations, each with its own boards, which might be challenging administratively since it is best to avoid too much overlap.

So, what does this look like in practice? One example is a nonprofit that provides educational services to the public, and then, with client approval, provides data generated by those services to a for-profit, which utilizes that data to provide B2B services to the professional community. In this case, it’s important that the data generated by the nonprofit be available exclusively to the for-profit sister corporation.

Venture Philanthropy: Investing Money and Time

Before going the venture philanthropy route, there are a few things to consider: Can you commit your long-term focus? Will you leverage your time to identify how you can partner with the organizations you’re supporting?

Venture philanthropy stems from the idea that the same practices and principles employed by venture capitalists can be used in the social sector and toward philanthropic goals. While there isn’t one definitive way to practice venture philanthropy, organizations rely on certain strategies, such as years-long engagement to drive systems change, to be successful.

High investor engagement and financing plans that are specific to an organization’s capacity needs are core pieces of venture philanthropy, as are unrestricted funding and a focus on outcomes. Much like a venture capitalist who may seek a board seat, as a venture philanthropist you would provide a range of support services that may include coaching, planning and strategy in addition to loans, grants or other funding mechanisms.  

Think about how your human and social capital can be wisely used alongside your financial capital.

Venture philanthropists often work with a wide range of stakeholders, including leaders of social purpose organizations, people helped by the organizations they support, government officials, foundations and corporations. Think of it more like a partnership with a purpose than a venture with an investment goal. It’s real time and a real commitment. 

Also, like venture capitalists, venture philanthropists look for exit strategies before they make an investment, but instead of selling or going public, a venture philanthropist is seeking sustained change in a sector resulting from both their money and their time.

With venture philanthropy, your deep level of involvement and strategic approach from the outset to creating sustained change can give you more control over the direction of the work and the impact you can make.

Again, I can’t stress this enough: Venture philanthropy takes real time. This work can be challenging, but the potential for real sustainable impact is significant.    

Venture Philanthropy vs. Impact Investing

Venture philanthropy and impact investing share some similarities. For example, both utilize investment capital for philanthropic efforts. But venture philanthropy favors involvement while impact investing is centered on specific investments and the social returns associated with them.

Impact investing encourages expanding your investment portfolio to make socially responsible investments and/or divesting away from investments that aren’t making a social impact. Venture philanthropy, on the other hand, is driven by foundations and private firms giving grants to a range of social entrepreneurs, nonprofits and other philanthropists.

The biggest deterrents to impact investing are the belief that you can’t get the kinds of returns that you can achieve through traditional investing, and that it’s difficult to measure impact. However, this viewpoint is debatable. “It’s historically been challenging for clients to measure the positive impact of their capital allocation decisions, but this is increasingly possible,” notes Lily Trager, Head of Investing with Impact at Morgan Stanley. “Our Investing with Impact Platform is designed with this in mind.”

Bottom line, there are a myriad of ways to commit to making a difference, including other forms of giving like making direct grants to nonprofit organizations, making loans to social purpose organizations and utilizing a donor-advised fund. Before you make any decisions, it’s crucial that you seek the appropriate legal counsel to discuss the tax implications for any of these strategies as they can vary greatly depending on your particular situation and approach.  

No matter which route you choose, sometimes the best way forward is to think about how your human and social capital can be wisely used alongside your financial capital to elevate your impact, align your passions and do the most good.

This article appears in Insights & Outcomes, a magazine from Morgan Stanley Private Wealth Management providing industry insights, analysis and thinking from our Firm’s leading specialists.

Morgan Stanley Private Wealth Management