Nonprofit lipstick on a startup pig?

In the midst of a conversation on the 501(c)Files among skeptics about “venture philanthropy,” the following comment appeared, suggesting that what’s really going on is a sort of high-end shell game and money laundry. The Nonprofiteer extends her appreciation to commenter JP Burnes for his/her provocative notion:

Venture Philanthropy . . . one of the last few tax write-offs or tax advantageous schemes–-or ways to help buddies get rid of dogs or other unwanted investments[?] Here’s how it works . . . . a non profit . . . creates for-profit entities to generate revenue to help support the non-profit parent. But . . . . a for-profit company, a startup in technology, needs an investment from a known brand . . . to make it attractive to other investors. But the known-brand knows it won’t get anything for its investment in the startup. So the primary backer of the startup, a V[enture]C[apitalist], donates a few million to the name-brand’s parent non-profit. The brand then turns around and invests nearly the same amount into the startup……lots of favors all around.

In other words, a start-up business buys credibility by “donating” to a brand-name nonprofit, whose for-profit subsidiary funnels the money back whence it came. The start-up is no richer than it was before, but no poorer, either, and now it’s able to present itself to potential purchasers as an established pillar of the community instead of a fly-by-night operation–particularly if its founder has gotten some ink as one of those amazing “venture philanthropy” creatures who’ve figured out how to make charity unnecessary.

Comments from people who actually understand venture capitalism eagerly solicited!

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2 Responses to “Nonprofit lipstick on a startup pig?”

  1. Tom Durso Says:

    Can’t say I know a ton about venture capitalism, but, like you, I’ve found the discussion fascinating. Especially coming so late in the game.

  2. Paul Jones Says:

    Academic research has studied asymmetrical relationships between causes and companies, especially with regards to cause-related marketing, which is my specialty.

    The findings are varied, but one thing that’s clear is that the benefits can and do cut both ways. That is, as you suggest, sometimes the NPO has the better brand and the company in effect trades on that asymmetry.

    But that certainly isn’t always the case. Frequently it is the company with the superior brand and the cause that is trading on the company’s brand. That’s as you’d expect since there are many more companies with high scoring brands than nonprofits.

    As to JP Burnes hypothetical about the asset trading between VCs, nonprofits and for-profit subsidiaries, I’d love to see an example or two.

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