Toward the end of the year, donor advised funds (DAFs) become a popular vehicle for year-end tax breaks and philanthropic aims. But Casey van der Stricht, principal of Solve Innovation Future, a donor-advised venture fund, hopes DAFs will become something more: a forum for disruptive philanthropy as a source of impact capital.
A donor advised fund is a charitable giving instrument that invests contributions, allowing contributors to receive a tax deduction for donations, and, over time, recommend grants to charitable organizations. The National Philanthropic Trust reports American DAFs have over $120 billion in charitable assets.
“There’s a huge amount of capital that is currently sitting in DAFs being invested, but not necessarily being invested for impact,” says van der Stricht. But she sees a “huge missed opportunity” for investing the capital in social enterprise. “Rather than investing in XYZ index fund, in our world we believe that you should invest at least a portion of the portfolio in early stage entrepreneurs.”
Launched in 2019, Solve Innovation Future is a venture fund set up as a DAF through ImpactAssets, a U.S. impact investment firm that offers DAF strategies. ImpactAssets manages and operates the fund, while MIT Solve—a university-affiliated social enterprise and innovation initiative—acts as donor-advisor. It plans to raise $30 million.
Contributions are immediate tax deductions, but the Solve Innovation Future fund distributes donations as debt and equity investments to Solver Teams responding to global challenges like sustainable food systems, education, and health security. Returns are reinvested in future program participants in a “pay-it-forward” model.
MIT Solve is a first mover in this arena, but van der Stricht anticipates this area of DAFs will expand. Its potential brings to mind longer-term shifts. For instance, 20 years ago environmental, social, and governance investing was public market screens. Then socially responsible investing came into play, and today’s impact opportunities allow for the creation of shared value.
“We’re already seeing the sophistication unfolding in front of us. And I believe that we’re a part of that wave,” van der Stricht says. “We want to be a proof point for the field so that others can do this on their own, or can collaborate with us to unlock some of this capital that’s sitting on the sidelines.”
Here are three of van der Stricht’s tips for impact investing using DAFs
Assess If You Want To Go It Alone
Van der Stricht says investors need to be realistic about whether they have the time and energy to pursue impact investing on their own, or whether they should associate or collaborate with an intermediary.
She says there are benefits to both, especially when investors try aligning their portfolio with their values. “Certainly doing it on your own is really rewarding. I think It can be incredibly sort of complex and creative.”
But she cautions some investors may not be interested in the level of work that’s required to go it alone. Additionally, it requires educating oneself in topics like the “value” of social impact and the growth trajectory for impact-focused companies. Leaning into collaborative networks and organizations which put out information can make that easier.
“The benefits of working with an intermediary are also very obvious,” van der Stricht says. “We have a leadership circle of donors who all get to chit chat and share ideas and get together a few times a year. And frankly, we do the pipeline work. There’s real value from a cost-benefit analysis.”
Be Honest About Philanthropic Goals
Is the ultimate aim to accelerate progress toward a specific particular impact goal, or to experiment with alternative philanthropy? These different investment goals require different execution strategies, van der Stricht says.
“You could fund all learning technologies out of your DAF and do it through a combination of grants and investments,” she says. “And that would look really different than saying, ‘I still want to invest in impact, but I really want to maximize my return.’”
Solve Innovation Future positions itself “firmly in the catalytic side of the house,” says van der Stricht, with about 30% to 60% of investments high risk, high return. But she believes there’s an obligation, given the philanthropic capital sources, that at least 30% of funding is earmarked for riskier teams that have a direct impact on their client groups.
When making investments purely with investment capital you might invest in slightly different companies, she says. “But hopefully if you do it with philanthropic capital you’re growing the pipeline for those companies in the long run.”
Understand the Return Continuum
“It’s been unfair in the impact landscape to say that unless you’re hitting venture capital returns—unless you’re returning 40% every year—then it’s concessionary,” she says. There’s a role for capital across the return spectrum, van der Stricht says. Much like the many asset classes with different returns in capital markets, impact’s landscape should look similar.
“What that actually means from a portfolio perspective is that we likely will mimic a very traditional angel or early-stage venture capital portfolio,” she says. This means a bunch of small investments with some high performers and others which are more modest. Solve Innovation Future’s goal is to double the money over several years, allowing the fund to recycle capital and reinvest.
van der Stricht thinks it’s important to match entities of all types—early or late stage, revenue generating, or loss-leading—with appropriate capital, like traditional capital market entities could access.
“That, to me, is really important—that we think about a robust and diverse capital continuum, and that we use the tools and the creativity at our disposal to do so.”