Back when I was a kid, Oldsmobile ran an ad that was so creative it kicked off a whole new way of describing innovation. The phrase itself, “This is not your father’s Oldsmobile” took what had been considered a sleepy brand for dull suburban granddads and made people take a second look.
In a hot minute, permutations of the tag line entered our common lexicon in new forms. Saying “Not your father’s/mother’s/grandma’s….” became commonly used to describe novel approaches to things. Some of us still say it occasionally.
Perception vs reality
We’re at (and in some ways, beyond) that point with donor advised funds now. We know that DAFs are hot; growing at a rate of 28% per year (2021 figure), according to the National Philanthropic Trust.
And we know that they’re giving like gangbusters. There are more than 1,000 sponsors just in the United States (and there are sponsors all over the world!), and DAF holders at just three of them, Fidelity Charitable, Schwab Charitable, and Vanguard Charitable, gave more than $20 billion combined last year.
But even with all that growth and all that giving, DAFs still have a sort of reputation as a very granddad way of giving money away. They’ll get to it. Eventually. At some point. Maybe.
Although donor advised funds donate at a rate of between 18 – 27% of the fund’s total assets annually (NPT 2021 again), our sector’s concern about their lack of transparency makes those numbers seem less tangible somehow.
They’re giving way more than foundations as a percentage of assets, but they still feel…sleepy.
They’re not sleepy. Not by a long shot. Some of them are crazy innovative.
What if I told you that in 2021, DAF donors who had funds at sponsor ImpactAssets used $1.1 billion to invest in 224 companies and funds?
You weren’t expecting that I was going to say that, were you? I was surprised myself when I learned about this. And that’s just one sponsor.
(Now, I know that it’s expected that the funds people put into their Fidelity Charitable account will be invested in some portfolio of securities because the money doesn’t just sit there in a bank account. When someone donates their money to Fidelity Charitable (or whatever sponsor they select), they also get to pick how they want that money to be invested to earn interest, sort of like a philanthropic IRA.)
But this is totally different. What I’m talking about here is money from a donor advised fund (or several) being used as a tool to invest in impact companies, in social ventures, and to use as leverage, like private equity, as loans.
This works particularly well in situations where a for-profit private equity firm wouldn’t be interested in investing in a social venture company because it would have too low of a rate of return.
Here’s how it works: the sponsor identifies a company or consortium that is in business to solve a problem, like building solar or wind infrastructure that helps neighborhoods (or whole countries) get to net zero emissions. They market it to their fund holders as an impact investment opportunity.
Then, DAF donors allocate grants from their funds into a pooled resource managed by the sponsor, which then invests in the company or consortium for a time at a guaranteed rate of return. The project is completed, the funds are returned with interest, and there’s now more money to be invested by the DAF holders in the next project.
Real life example, excerpted from the Stanford Social Innovation Review
Mark Newhouse has a long and successful history as an entrepreneur. He is also a philanthropist and a donor advised fund holder. In recent years he has become a champion for impact investing and an advocate for bringing investment capital to innovative social enterprises. Realizing that investors often aren’t willing to take the risks needed to seed businesses with a double bottom line (social and financial return), he turned to donor advised funds to help solve the problem.
Working with other entrepreneurs he met at Social Venture Partners Denver, Mark engaged in a partnership with Hands of the Carpenter, a local nonprofit organization with an affiliated for-profit social enterprise. Hands of the Carpenter provides used vehicles to low-income individuals and families, especially single mothers, and provides low-cost repairs for women in need. After losing their lease on their automotive garage, Hands of the Carpenter found a new location that would help it grow its for-profit car repair and car sale business and therefore enable it to serve more women.
Hands of the Carpenter began working with Newhouse and his partners to raise impact investment capital to support the purchase of this new building. Through an innovative loan structure, Hands of the Carpenter was able to secure funding for a first and second mortgage through investments made in part through multiple donor advised funds held at The Denver Foundation.”1
So what does this have to do with prospect research?
Well, primarily, the number of DAFs, and the amounts being donated from them collectively, are just mind-bendingly huge and growing. There’s an extremely good chance that one of your current major donors has one. This is yet another way that they can use their charitable giving to support your nonprofit.
From a prospecting perspective: Is the current donor that you’re researching the type of person that might be even more intrigued to use their fund to invest in a project your nonprofit is looking to fund?
Or maybe your nonprofit, like Hands of the Carpenter, is thinking about finding new ways to engage donors and leverage funding for social impact projects. Finding DAF advisors that you know are interested in these types of projects could be a good place to start.
1 Macpherson, R., Kulow, E., & Kearney, S. (2018). How to Use Donor-Advised Funds to Make Impact Investments. Stanford Social Innovation Review. https://doi.org/10.48558/ACH1-FQ62
Change The Trajectory: 2022 Impact Report, ImpactAssets. Report here.