For the wealthy of Silicon Valley, if you want to make serious money in venture capital and make a serious impact when you give it away, it is all about getting into the right networks.
Silicon Valley has produced some of America’s richest people and biggest philanthropists of the last 30 years. Early information technology pioneers like Bill Hewlett and Dave Packard waited until they had retired before getting serious about their giving. Today, the trend among a new generation of donors, such as Pierre Omidyar and Jeff Skoll of eBay, has been to get moving on their philanthropy a lot younger. Men like Packard and Hewlett must take some of the credit for making philanthropy just as much a part of the tech entrepreneur’s way of life as starting your business in a garage. Now, the new generation’s enthusiasm for giving has also been a product of the success of California’s venture capital business in growing companies quickly, allowing entrepreneurs to turn their ideas into serious wealth at an early age through an IPO.
The movement we have described as “philanthrocapitalism” is all about harnessing the best techniques in business for doing good. In the venture capital world of Silicon Valley, one of the leading examples of this movement is Legacy Venture, a Palo Alto–based venture capital fund of funds. While venture capital continues to thrive in Silicon Valley, not all funds are equal. Success breeds success, so a select few venture capital firms get access to the best deals, and those firms can pick and choose their investors—if you want to make serious money you have to get in the right fund. The thing that sets Legacy apart from other Silicon Valley venture funds is that every dollar it earns for its investors will go back to philanthropy. It is this commitment to giving that helps Legacy gain access to the best funds that offer the biggest returns—itself a form of philanthropy by the funds that take its money.
Legacy was the brainchild of venture capitalist Jim Anderson, who founded it in 1999 with Russ Hall, one of his associates a decade earlier at venture firm Merrill Pickard Anderson & Eyre. Together they raised $40 million from individuals willing to commit that every penny the firm makes for them by investing in the top Silicon Valley venture capital funds would go to philanthropy. They could hardly have picked a worse time to start, just before the dotcom bubble went pop in 2000. Yet Legacy has gone from strength to strength, investing in start-ups that have become some of the hottest companies, like YouTube and Netflix. Hall and his fellow managing partner, Alan Marty, who joined the firm in 2008 from NASA, predict that investors in the first fund, which is already distributing profits, will easily return their money and then some. (Legacy’s third managing partner, Chris Eyre, who also co-founded Merrill Pickard Anderson & Eyre, is currently on an extended sabbatical.)
Returns do not come quickly in venture capital—10 or even 20 years is the norm—but the best funds can easily beat other investment vehicles. Investors in Legacy clearly can see the benefit of being able to access the best investment opportunities. The firm now has more than $700 million under management (it closed its fifth fund in January 2009). If Legacy investments continue to be as successful as the first fund, it will mean a lot of extra money for philanthropy.
Legacy’s main job is making the capital that high-net-worth individuals have set aside for philanthropy work as hard as possible in terms of financial returns. The firm does not go in for the complexities of blended value, or double or triple bottom line investing—its job is making money, pure and simple. “We separate the two spheres,” explains Marty. “We are investing for maximum profitability, and then all the dollars go to philanthropy.”
Yet Legacy itself also gives back in two important ways. First, it charges its investors much less than other venture capital funds. While a typical fee structure in the industry is 1 percent of the assets under management and 5 percent of profits (the “carry”) each year, Legacy’s management fee is only 0.65 percent and it has no carry. This maximizes the profits that are returned to the foundations that invest in Legacy and distributed to the charities selected by individual investors. Second, part of that management fee goes into the firm’s own philanthropic arm, Legacy Works, which gives to promote the infrastructure of philanthropy. (The Philanthropy Roundtable, for example, is one of its grantees.)
Legacy is not unique in harnessing the returns of investment for philanthropy. Since 2005, the London-based hedge fund The Children’s Investment Fund (TCI), run by Christopher Hohn, has been passing the bulk of its profits to its own foundation, the Children’s Investment Fund Foundation, run by Hohn’s wife, Jamie Cooper-Hohn. This is serious money: earlier this year, TCI made Britain’s largest-ever charitable donation, a whopping $800 million. The “TCI model” is catching on in the world of alternative investing, both in Britain and in the United States, where, for example, partners of private equity firm Huntsman Gay use a chunk of their profits from their carry on investments to fund philanthropy.
In contrast, apart from the relatively small amount of money that it gives through Legacy Works, Legacy Venture leaves the decisions about giving to its investors. The minimum investment in a Legacy fund is $1 million. As a result, the firm’s network of 225 investors is a “who’s who” of high-net-worth individuals with a passion for philanthropy. Members of what they call the “Legacy Community” give to a whole range of causes, from poverty relief and education to the environment and the arts. They are involved in the biggest and brightest philanthropic organizations, such as Acumen Fund, Malaria No More, Social Venture Partners, and so on.
So is this venture philanthropy? Not necessarily, at least in its purest form, although it is certainly philanthrocapitalism. The idea of venture philanthropy, coined nearly 40 years ago by David Rockefeller, is taking a venture capital approach to charitable giving. This usually means a high level of engagement to support and build the capacity of the investee to prepare for growth. While many of Legacy’s investors are, by that definition, venture philanthropists, many are not and take a different approach to their giving. Legacy’s role is not to prescribe particular causes or ways of giving but to add value by supporting learning across the peer network of investors.
Through Legacy Works, the firm hosts a regular series of seminars that connect investors with leading thinkers in philanthropy and social enterprise, such as Nobel Peace laureate and micro-finance pioneer Muhammad Yunus and Teach For America founder Wendy Kopp. Maybe even more important, though, is the opportunity to learn from each other. “People come to us because we offer great financial returns,” explains Marty, “so we get a very broad and diverse membership. We also have a long-term conversation that can last a decade or more.” Teaching and mentoring is part of that conversation. “Our investor community includes both experienced and aspiring philanthropists,” says Hall.
It’s about the richness of the relationships,” says Charly Kleissner, one of Legacy’s investors, a technology entrepreneur whose KL Felicitas Foundation (which he co-founded with his wife, Lisa) is working to promote social enterprise through impact investing. He was initially drawn by the opportunity to put money into venture capital, and liked the fact that the firm was giving back to the nonprofit sector through Legacy Works. Yet, over the last five years, he has increasingly come to appreciate the opportunities of being part of a network that, he says, has “reach and quality.”
Skeptics might wonder whether the world of philanthropy really needs another discussion forum. Indeed, Marty and Hall admit that it is hard to quantify the benefits of the network they have created, although they think that their events have helped to mobilize philanthropists around mission-related investing and have opened the eyes of many philanthropists to the power of media to leverage social change. Perhaps the most notable example philanthropists can learn from is former eBay president Jeff Skoll’s support of Al Gore’s influential film, An Inconvenient Truth, which shifted the global debate about climate change.
Kleissner has no doubt about the benefits of being part of the Legacy network. “It has given us a platform to share what we care about with 40, 50, 60 people who care about impact investing,” he says, having recently introduced three Indian social entrepreneurs whom he is supporting at a Legacy-hosted event. It may be hard to exactly pin down the impact of such events, but he is convinced that the “ripple effect” of getting ideas out to high-net-worth individuals with a passion for philanthropy is good leverage.
A decade after he started it, Legacy founder Jim Anderson has moved on to new projects (“He’s an inveterate entrepreneur,” says Hall. “I don’t know what’s coming out of his creative mind next.”) and the firm has paused for thought about its future mission. An in-depth study by the Monitor Institute concluded that Legacy should build on the leverage of its network to create more “thematic hubs” (collaborations around particular causes) and communicate better what comes of all the knowledge-sharing. The firm is expected to announce its new “chief philanthropy officer” soon. True to Silicon Valley form, the advertisement includes playful details on what they are not looking for. Evidently, “lone rangers” need not apply.
Matthew Bishop and Michael Green are the authors of Philanthrocapitalism: How Giving Can Save the World
