Funding

Philanthropy 2.0 : Micro Venture Capital v/s Donations

As a regular donor to causes, I have often wondered whether my donations made a difference. I have read annual reports and useful statistics telling me they have, but reports and scorecards haven’t been able to make me stay connected to the cause. Micro investment is about to change all that.

How is Micro Investing different from Donating?

Micro investments are investments of small sums of money (say 50 dollars) made by individuals, but more commonly, by a group of like minded people (friends, colleagues etc) in a micro venture fund such as Inventure Fund.

The fund shortlists a set of entrepreneurs (individuals or communities) who are trained and mentored by its local reps. Businesses are chosen based on their track record as well as commitment to invest a part of their profits back into improving their communities.

When an investment is made, the business has no pressure to make weekly or monthly interest payments as is usually the case with micro financed loans. Rather, the business is allowed to grow organically. The risk of failure remains with the investor, as well as the investment fund.

When the business returns profits, the business owner ‘buys out’ its investors and invests part of its profits into community development or funding other community based businesses.

Why invest rather than donate?

An investment is not a loan. It is equity within a business. As a result, the investor is likely to be emotionally attached to the success of the project. This has several advantages:

  • Better due diligence
  • Self sustainable  ideas have a great chance of longterm success.
  • Investors have a right to review progress
  • Adding value beyond financial support
  • Investors have an incentive to evangelize the  idea.

Sometimes, donors need compelling reasons to stay connected to causes. On the other hand, successful micro venture funds have the power to retain investors via better investor-investee engagement.

The micro investment model will never completely replace donation based systems. Donations are incredibly important for disaster relief and emergency aid programs to work.

However, micro investing is expected become a key element of future corporate and personal giving strategies, and is expected to attract large groups of investors towards supporting social businesses linked to the causes they care about.

Inventure Fund is a Los Angeles based Micro Venture Capital fund that invests in businesses with a goal to empower them to lift their communities out of poverty. For more information, please visit www.inventurefund.org.