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Benevolent Schizophrenia - A Tale of Donors and Investors

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A Swiss hotel high in the Alps filled with wealthy philanthropists suffering from a peculiar affliction. What sounds like the setting for a mystery thriller is the scene for a revealing discussion about giving and investing.

There are two types of people in the room: grant makers and social investors. Grant makers feel anything other than giving without any financial return to an often highly specific cause is not what they want. With all the hype around impact investing, however, they wonder if losing their money is a little passé. Social investors, by contrast, see anything below inflation rate return as a failure. And why not get more buck for the bang?

The peculiar bit: The two groups of philanthropists overlap by about 80%. They are largely the same people, yet they give to projects they would never invest in, and invest in organizations they would never make a donation to. As if from different planets (more on this), their two strategies are completely disconnected. Benevolent schizophrenia.

After a while, the grant makers confess to a challenge: They would like to help their grantees become sustainable, but are not sure what that exactly means. After all, grantees mostly come back for more grants. Social investors share a different problem: They and their intermediaries have a hard time finding investees, because too many social entrepreneurs remain dependent on unreliable income sources and are unable to return funds with interest, or have strategies that may not benefit from investments (more on the dangerous promise of impact investments).

The discussion in the hotel is indicative of the state of philanthropy, which operates with instruments at the extreme ends of the return spectrum - -100% for grants, +x% for investments -  and nothing in the middle.

What they should realize is that each philosophy is the key to solving the other's problem, and more importantly, some of societies' most urgent problems - IF they can me made to work together.

American psychologist Abraham Maslow observed: "I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail." Translated to philanthropy: When you are a grant maker, every project looks like a potential grantee, and every project will treat you as a grant maker. The same applies to the investor-investee relationship.

However, philanthropy has more than one tool. Maybe it is time to rehabilitate grants as a key tool in the investor toolbox. They are not a "loser currency" but can be the precursor or companion of investments, for example as investment readiness grants, as loan guarantees, even as equity without dividends. Applied to the same organization or field, smart grants can leverage investments many times over, as long as they do not carry pointless restrictions, and are part of a larger plan creating other unrestricted, long term sources of income.

Both grant makers and investors have to learn new tricks and use new tools for connected, hybrid strategies (see this HBR thinking on combining giving and investing). The encouraging news is that helping social entrepreneurs grow is not dissimilar to many other growth challenges of ideas that started without immediately profitable markets but high social value - the history of business is full of them.

Benevolent schizophrenia is curable. All it takes is to view social entrepreneurs with both eyes - as a continuum; an open pipeline of collaborative deals.

Hallucination or vision? What do you think?

Written by Felix Oldenburg, who leads Ashoka in Germany and co-leads Ashoka in Europe.