Entrepreneurial philanthropy has been really gaining momentum in the tech sector. We know in the late 90s that a start-up could dive in just for the sake of profit and if the business plan showed promise they’d acquire investors. Then the bubble popped and sent those investors looking elsewhere for revenue.
Today it’s tough to make it mainstream, even for viable business models. However, a trend has developed that not only requires only mediocre viability, but also manages to keep investors from jumping off the sinking ship much longer. We like to call it “entrepreneurial philanthropy.”
People are bargain shoppers, and there are plenty of people in this world that are simultaneously burdened with a desire to be meaningful and make some difference in the world. Enter the entrepreneurial philanthropist (hereafter referred to as EP).
The EP has identified a niche market with capitalists who are willing to incur much greater risk on the possibility that the end product of their investment could, even in a small way, make the world better. After all, it’s the thought that counts isn’t it? Well, actually no.
1. Handing out money to beggars on the street feels good but the reality is your money is very unlikely to make that beggar’s life any better. In fact it will only enable them and neutralize any actual potential that individual had in the first place. It will make their life worse. If the EP is the beggar then the “actual potential” would have been an actually viable business model.
2. Philanthropy really isn’t about looking to make a financial return on your investment. So let philanthropy be about philanthropy and your investments be about investments. There is nothing noble nor charitable about wasting money for no profit and no improvement. As already stated in #1 the lack of improvement probably means that you are making lives worse with your money. This is the kind of wasted potential that made Dagny Taggart so grumpy.
3. I’ve rarely met a good investor that did not accept Occam’s razor except when it comes to EPs. A few pictures of hungry kids can and should move us to tears, but not to stupidity. There are proven ways to feed kids, and that is by feeding them. The EP will have more assumptions than answers in their presentations but still fools eager to be parted with their money will bow to the emotional appeal.
So beware of the EP. While viability and charity are certainly not mutually exclusive in the world of business models, charity is also not a suitable replacement for viability. If you know of an EP project that failed financially but succeeded socially please do let us know in the comments below. Otherwise, assumptions aside, viability must be important whether your investment is philanthropy or entrepreneurial. Otherwise you’ll likely accomplish neither.