Although the term was probably first used in 1969 by the American philanthropist John D. Rockefeller III (John, 2006), only in the late 1990s, the first venture philanthropy funds were established. Important for this development was an influential article by Letts et al. (1997) in which the authors tried to answer the question "What Foundations Can Learn from Venture Capitalists".
They indirectly criticized foundations for not considering the risk-return trade-of, for financing short term and only new projects, for not giving nonfinancial support, for financing only a small portion of the organizations funding needs, and for not planning and preparing the funded organization for the time at er the exit.
Venture philanthropy tries to overcome these assumed systematic mistakes in foundations’ investment approaches. Just as social entrepreneurs apply commercial approaches to solving social problems, venture philanthropists apply commercial approaches to financing social purpose ventures.
Venture philanthropy thereby mirrors the development of social entrepreneurship on the capital provider side. Although there is no universal definition of venture philanthropy, a few common themes have emerged in the literature (John, 2006; Venture Philanthropy Partners, 2002):
- Funders are highly engaged with the funded organization; in addition to financing, other nonfinancial support such as management expertise and personal networks are also provided.
- Support is provided over an extended period of time.
- Financing is tailored to the need of the organization.
- The goal is to allocate resources efficiently and thereby maximize the social return on investment.
- Performance measurement is important for venture philanthropists.
Venture philanthropy funds start early with developing an exit strategy—exit not meaning the sale of an equity stake to another investor but planning for the time at er the involvement with the organization funded in order to ensure their further existence. According to this definition, exit may also mean establishing earned income strategies or helping the organization to find a new investor.
Most venture philanthropists have an entrepreneurial or venture capital background and many made their fortunes during the dot.com-boom. With the possibility to spend large amounts for philanthropic causes, they transferred their business approaches to the social sector.
So far, no evidence can be found in the literature that venture philanthropy is a superior approach to financing social organizations. One reason is that venture philanthropy funds are still young, but even more important, since measuring social impact is very difficult, if at all possible, comparing venture philanthropy funds with foundations is much more difficult than comparing two venture capital funds, which easily can be compared by the financial return they achieved.