Philanthropists are increasingly shaping the development landscape but what drives them and how healthy is the focus on getting 'bang for their bucks'?

With no end to austerity in sight and aid to the developing world continuing to plummet (down 4% in 2012), donors from DfID to AusAid and Korea's Kaidec are exploring new financing mechanisms, including working with philanthropic organisations and foundations.

According to the 2012 index of global philanthropy and remittances (pdf), while government aid accounted for just 18% of total financial flows within international development in 2010, philanthropic giving, remittances, and private capital investment accounted for 82% of the developed world's economic dealings with developing countries.

Philanthropic organisations are also increasingly adopting corporate ethics, opting for venture philanthropy or philanthrocapitalism.

The emerging trend of philanthropy, according to the European Venture Philanthropy Association, features six main characteristics. It involves high levels of engagement, tailored financing, multi-year support, offers beneficiaries assistance beyond finance to include support for marketing or organisational infrastructure, organisational capacity-building beyond mere project delivery, and performance based management with a strong focus on measuring outcomes and impact.

New Philanthropy Capital, a UK-based consultancy, reports that venture philanthropy typically begins with funding basic frontline services where donors can see real 'bang for their buck', as they become increasingly familiar with the issues behind the challenges they seek to address.

NPC's head of charity effectiveness, Iona Joy cites the example of a family trust that has come to focus on the challenge of water and sanitation as the issues drive so many other challenges that occur in the developing world.

"Something like water and sanitation is a good area for funding market, rather than straight [traditional] aid, solutions," says Joy. "So how do you build the informal market for decent cheap toilets or affordable access to clean water? Sometimes the solutions can be market-based rather than do-gooders running around digging wells."

One development organisation that has built venture philanthropy into its DNA is India's Smile Foundation. Co-founded by Santanu Mishra in 2002, the organisation says it reaches out to more than 300,000 underprivileged children and youth across 25 states of India. Having benefited from a middle class upbringing and from cashing in on India's economic boom when the country liberalised its economy in the early 90s, Mishra and his associates felt the need to give something back.

They set up a foundation and chose to run it on a venture capital model. The approach enabled them to look for individuals who had talent, ideas and a wish to do something but lacked adequate resources.

"We decided to equip them with resources to become self-sustainable and scale up the good work they were doing on a smaller scale at grassroots level," says Mishra. "That is why instead of investing or focusing on building infrastructure we opted for social venture philanthropy as ... the social return on investment was high, impacting more beneficiaries."

However, associate professor of law, Garry Jenkins, in his paper 'Who's Afraid of Philanthropcapitalism' (pdf), writes that the new venture philanthropists are "increasingly directive, controlling, metric focused, and business oriented with respect to their interactions with grantee public charities in an attempt to demonstrate that the work of the foundations is 'strategic' and 'accountable'."

The criticism of venture capitalism goes beyond the management style of its proponents. In a recent article Michael Edwards, a senior fellow at the thinktank Demos, questioned whether money can actually foster social transformation. While no development initiatives can function without some money, the wealth required to fund them in Edwards' words, "raises questions about inequality, the strings attached to funding, and the power of those who hold them to push resources to causes they approve of, perhaps even weakening or corrupting authentic social action in the process".

Despite his misgivings Edwards argues that there are emerging experiments in what he calls "transformative financing" – funding that, according to Edwards, "has the double impact of boosting radical changes in society and transforming relationships surrounding money in support of these activities." One such example is the Philanthropic Ventures Foundation. Rather than the top-down, micro-managed approach that is common in the venture philanthropy model, PVF's financing comes with no strings attached. Its philosophy is that by simplifying the grant giving process, "every dollar would work harder and do more."

In the book Grassroots Philanthropy the organisation's founder Bill Somerville writes: "We fail to realise that the chief benefits of working in a foundation – money, power and privilege – also work as the three greatest obstacles to doing a good job." It is a lesson that both philanthropists and development may do well to heed.

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