Disease-focused foundations have used venture philanthropy (VP) for decades to develop interventions that have patient impact and generate revenue to support their mission. We articulate the distinguishing motives and features of VP funds and their distinct role in the life sciences innovation ecosystem. In particular, we focus on how entrepreneurs and VP funds can work together to help patients and generate economic value. We recommend that entrepreneurs seeking VP support understand a fund’s mission and objectives, and position themselves to fit the fund’s strategic and financial portfolio needs. Finally, we provide case studies of three specific initiatives — the JDRF T1D Fund, targeting type 1 (juvenile) diabetes; MPM Capital’s Oncology Impact Fund; and the American Heart Association’s Cardeation Capital — to showcase these efforts and benefits in practice.
Quantifying the Impact of Impact Investing (Working Paper)2021
We propose a quantitative framework for assessing the financial impact of any form of impact investing, including socially responsible investing (SRI), environmental, social, and governance (ESG) objectives, and other non-financial investment criteria. We derive conditions under which impact investing detracts from, improves on, or is neutral to the performance of traditional mean-variance optimal portfolios, which depends on whether the correlations between the impact factor and unobserved excess returns are negative, positive, or zero, respectively. Using Treynor-Black portfolios to maximize the risk-adjusted returns of impact portfolios, we propose a quantitative measure for the financial reward, or cost, of impact investing compared to passive index benchmarks. We illustrate our approach with applications to biotech venture philanthropy, divesting from “sin” stocks, investing in ESG, and “meme” stock rallies such as GameStop in 2021.
The Risk, Reward, and Asset Allocation of Nonprofit Endowment Funds (Working Paper)2021
We collect tax return data from all 311,222 public NPOs in the United States over the 2009-2017 period to study the asset allocation choices and investment returns of their endowment funds. One in nine public NPOs have endowment funds. The majority of funds allocate their assets conservatively to low-risk assets, and as a result, earn an average annual return of 5.3%. There is substantial heterogeneity in investment returns across funds. Large funds significantly outperform small funds across all return measures and nonprofit sectors. Endowments in NPO sectors devoted to public and societal benefit, the environment, and the arts are among the top performers. High returns among higher education endowments are explained by size, while hospital endowments significantly underperform. Higher investment returns are associated with better governance, more highly paid management, lower discretionary spending, and lower investment management fees. Lastly, when faced with volatile contributions, endowment funds hold more cash and invest more conservatively.