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Venture Philanthropy: A New Approach to Funding Innovation

Venture Philanthropy is a new approach to funding innovation. It helps bridging the gap between the traditional philanthropic funding of scientific research, and the venture capital funding of innovation. A path breaking article shows how it works, as well as its pros and cons.

Venture Philanthropy is a mix between philanthropy and venture capital in a way that it aims at getting the best of both worlds: the philanthropic not-for-profit support and the close-to-final-product of venture capital support for innovative solutions. This is a relatively new concept that has been primarily developed in the USA, and that seems to have great potential. This potential is the ability to overcome the feared “Valley of Death” (lack of venture capital funding) in the development and close-to-market product development and commercialization phases of innovation. This gap or “Valley of Death” is particularly problematic for some sectors, typically where the market is too small and/or where the costs of development and commercialization from the lab to the market are far too high. This results in unattractive rates of return for risk capital and therefore in venture capital investment levels rapidly drying up. By engaging philanthropically in this development and commercialization phase, venture philanthropy can make a difference to bring products to the market that otherwise would have ended up in the lab.

A recent publication by Maryann Feldman and Alexandra Graddy-Reed does an excellent job explaining how this works(Feldman and Graddy-Reed 2014). Their case describes how the Cystic Fibrosis Foundation got involved in venture philanthropy in their active role in the development of the drug Kalydeco®. The Foundation did so by “stewarding the commercialization process from funding basic scientific work in academic institutions, to making an equity investment in a start-up firm” (Feldman and Graddy-Reed 2014: 504). Cystic fibrosis is declared as a rare disease in many countries because it affects a small proportion of the population.

The authors see some possible negative effects of this, which might be the loss of licensing revenue of patents, particularly for those (few) universities that have been able to make profit out of academic patenting. It can also potentially interfere (as any other funding agent, public or private, profit or non-profit) with scientific activity. The possible positive effects are motivating scientific researchers in non-for-profit universities/labs to engage more actively in collaborative links with the non-academic world in the search for real solutions when the (financial) market is not up to the task.

This brings forward two considerations from my side. One is that venture philanthropy is a concrete model that follows a more general trend in philanthropy over the last few years. This is the move from traditional donation concepts towards “catalytic philanthropy” which aims at fostering social change more intentionally. The second consideration is that venture philanthropy might become an interesting and tangible model for bringing forward strategic partnerships between the public and the non-for-profit sectors. In the current discussions and innovation policy instruments put forward for addressing grand social challenges, more could be done to explore the particular link between public and non-for-profit collaboration, particularly where there is little room for private-for-profit related solutions, like the treatments and drugs for rare diseases.

Photo credit: “Leila and her bald ballons” This is a beautiful picture!
Leila and her Bald Ballons

Literature reference:
Feldman, M. P. and A. Graddy-Reed (2014). “Accelerating commercialization: A new model of strategic foundation funding.” Journal of Technology Transfer 39: 503–523.

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