Venture Philanthropy

  

Categories: Tax, Ethics/Morals

Take on a social issue like it's a venture capital backed startup. Raise money to cure homelessness, or poverty, or a disease (or 10), or ignorance, or opportunity for smart, motivated kids whose only "crime" is that they are poor and/or their parent(s) have no clue how the system works.

That's venture philanthropy. Cool idea. Fun-ish fact: Bill Gates did this. Yes, he took his own money and said, "Um, hey. I'm done ripping off intellectual property and other ideas from Silicon Valley startups for MSFT. I'm now going to use my wealth to cure malaria by buying like 9 gadjillion yards of netting." And, more or less, he did. Malaria rates are down some 80% from where they were 25 years ago.

So yes, Bill, many of us will always think of you as a villain...but you saved like a billion lives, so it's all good now.

Related or Semi-related Video

Finance: What is Venture Capital?755 Views

00:00

finance a la shmoop- what is venture capital? Google Facebook Yahoo Netflix

00:08

LinkedIn snapchat Instagram well they were all originally funded by venture [logos flash across screen]

00:14

capital. and the common theme was that two college dropouts built these

00:18

companies starting in a garage in Silicon Valley, creating something

00:21

dot-com that would change the world. and the world's a mess so it needs a lot of

00:26

changing. venture capital comes in a few flavors-

00:28

the earliest rounds are called seed capital, and it usually mean that an

00:33

original investor put in a few hundred grand, maybe a million or two .the money

00:37

was invested at the very beginning of a company when it usually has no revenues [seed capital defined]

00:41

no product no nothing. just a hope and a dream and a big idea .and the idea can be

00:46

huge. at one point Yahoo's original seed

00:49

investment returns 10,000 times its original capital. a regular seed level

00:54

investors are called angels and they are typically previously

00:58

successful founders or entrepreneurs who want to recycle precious high risk

01:02

capital back into the Silicon Valley ecosystem in that form. and yeah Angels [man holding money looks excited]

01:07

know that 99 plus percent of their investments go fully bankrupt, but a few

01:11

become lottery ticket winners which produce massive returns and those

01:15

returns make up for the many many many losses. well once a company has say a

01:19

million bucks in revenue and has likely burned through the original seed money

01:24

million-ish or so that they raised, well they would then seek to take in what's [money burns in a fire]

01:28

called an a round. ie a first level full venture capital round where the company

01:33

raises four or five million dollars to then bring it to the next level of

01:37

growth. either in product use or revenues or depth and power of its patents or

01:42

intellectual properties and so on. anyway later stages of venture capital

01:46

investment are cleverly tagged B C and D rounds. and when a company is in the tens

01:52

of millions of revenues looking at a hundred million around the corner well

01:56

they would raise what is called growth capital- if they're no longer a [people peek around a corner]

02:00

speculative venture and they then appeal to a lower risk lower reward group of

02:04

investors. so where does the venture capital money come from? well the initial

02:09

seed amounts are relatively tiny. a pocket of 50 million dollars might fun

02:13

a hundred early startup companies for years and in the scheme of all the

02:17

wealth and Silicon Valley well 50 million bucks is just lunch money. a

02:21

normal sized venture capital fund might have half a dozen partners and another [business people smile at each other]

02:25

half a dozen junior partners .it would raise money from what is called limited

02:29

partners and that has nothing to do with the department store. the people

02:33

responsible for investing the money diligently are called the general

02:37

partners, and for this pleasure the general partners charge roughly 2% a

02:42

year in management fees and then they also take a 20 to 30 percent success fee

02:47

or carry if their fund pays back all of its initial capital and then has real

02:52

profits. so for a normal-size venture capital fund now let's say there's just

02:56

four general partners if they raise four hundred million dollars, invest it well

03:00

and in say eight years they've produced maybe a dozen IPOs and they've sold [graph showing growth]

03:05

maybe a half a dozen other companies so that the 400 million originally raised

03:09

has now turned into 2.4 billion dollars well they would show a profit of 2

03:15

billion bucks, and if their carry was 25 percent then the partners would split

03:20

five hundred million dollars among the four of them. and they'd get that all in

03:24

addition to the nice fat salaries they were taking along the way, so yeah it's a

03:28

nice work if you can get it and then there's the other side of the street as

03:31

an entrepreneur, if you're looking to start any sort of major venture you'll

03:35

need to attract some venture capital unless you know you and your buddy in

03:39

the garage have a couple mil just lying around with nothing better to do. [two people sit behind computer screens]

Up Next

Finance: What are Five Questions You Can Expect to be Asked in a Venture Capital Investing Interview?
10 Views

What are Five Questions You Can Expect to be Asked in a Venture Capital Investing Interview? Why are you doing this? What DO you know? What do you...

Finance: What is an IPO?
25 Views

What is an IPO? IPO stands for initial public offering. These are used when a company decides to go public; meaning people can buy shares of the co...

Find other enlightening terms in Shmoop Finance Genius Bar(f)