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Do Good or Do Well? – Why Not Do Both?

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Another year has come and gone and for many ‘well off’ Americans, it was another season of ritualistic year-end tax planning.  Decisions abound: to take some gains to offset some losses or not; to move to tax free instruments or stick with “taxables”; to change the portfolio allocation percentages or stay the course; to increase investments in more speculative, high risk/return equities or keep ‘powder dry’ even though it yields negative returns on cash; and the inevitable choices related to philanthropic and charitable giving.

 

Most Americans are generous at heart and willing to share some portion of their financial success with organizations of all sorts – religious, public good/social benefit, health related research, etc. – and donated $290 billion in charitable contributions alone in 2010. Of that staggering amount, about $211 billion, nearly three-quarters, was donated by individual taxpayers, not corporations, foundations, etc., but American people hoping to make a difference in the world, to help the sick, provide for the poor, find cures for the world’s chronic ills, fund research into breakthrough innovations and numerous worthy and laudable causes.  In short, Americans are generous, want to “Do Good” and are willing to share their success with organizations which support a wide range of worthy initiatives.

 

Tax planning at year end 2011 found Mr. and Mrs. John Doe American facing yet another dilemma. After 3 years of economic turmoil and with the perpetual threat of a tax increase on high-income individuals looming in Congress, charitable giving has suffered through years of decline. Donations fell 13% over the 2008-2009 period and are unlikely to change materially until evidence of an economic recovery becomes clear and sustainable.  Charitable organizations of all kinds have suffered reduced contribution rates, and one-time disasters (i.e., the Haitian earthquake and Japanese quake/tsunami) have resulted in direct contributions to those emergency funds and away from generic or institutional contributions over the past year.

 

While things may improve as the economy recovers, charitable organizations of all kinds face a more fundamental challenge when viewed against the traditional American desire to Do Good.  The dichotomy facing donors is easily understandable: donors have faced 3 years of economic downturn, their portfolios have been hit hard, their assets are under attack from all sides – from local/state/federal government taxes to higher transportation and overall cost-of living to the erosion of the value of the dollar as the global currency standard.  Despite these challenges, most high net-worth Americans still feel an obligation to ‘give back’ in one form or another.  Recipients of this magnanimous generosity face a newer challenge – one that threatens the fundamental structures and institutions that they operate and a phenomenon that is not likely to change for another generation, if ever.

 

The issue, simply put, is control. Consider that the vast majority of high net-worth individuals – those with the assets and inclination to invest or contribute to worthy causes – have built their wealth on the strength of their own professional efforts.  In essence, they didn’t inherit it as many in the prior generation may have done, they got it the old fashioned way: they earned it.  Their wealth is the result of years of progressively increasing responsibility and success in business or professional careers where they typically called the shots – make the tough decisions, managed the bottom line and watched every dollar on the P&L in a never ending struggle to increase profitability and margin.  To one extent or another, many could be referred to as “Titans of Industry”.  They are large in number (over 8 million millionaires in the US) whose own sweat and sacrifice has landed them in positions where they now have some discretionary wealth and the inclination to share it.

 

Successful entrepreneurs, however, are not inclined to cede complete control of this precious asset after working so hard to accumulate it.  The issue with traditional charitable or non-profit organizations and foundations is that they are faceless (vs. personalized) entities with broad (vs. tightly focused) missions and charters whose accounting is often called into question and whose overhead often prevents the full value of the contribution from reaching the intended recipients.  While some keep the overhead costs under 10%, many have cost structures in which 35% or more of every dollar received is spent on marketing and administration at the expense of the targeted mission recipient.  To someone who has worked long and hard to accumulate wealth – and has succeeded through their own efforts – these kinds of expenses are anathema.

 

So, where does one turn when they have a desire to give back, have a cause or mission that they are particularly interested in funding, but at the same time have watched their assets decline in value due to economic conditions and want to restore that portfolio through investment?

A possible answer to the dilemma of “Do Good” vs. “Do Well” may lie in selective investments in early stage companies dedicated to the causes and missions of personal interest to the investor.

If I have, say, $50,000 or $100,000 that I am prepared to contribute to see my personal mission advanced in some meaningful way, do I give it to a charitable entity or non-profit organization knowing that a good portion will be consumed in overhead costs and that the tax benefits continue to become marginalized due to changes in the tax codes; do I give it to a foundation to be combined with other funding from private and public sources intending to advance my mission or do I take a completely different approach and find an early stage company totally dedicated to my mission where 100% of my money goes directly to the people (scientists, researchers, inventors, etc.) who can make a difference? In other words, rather than throw it over the wall where all accountability is lost, my ability to see my money at work is absent, and where there is little or no transparency into the workings and decision making as it affects the expenditure, would I be better served by targeting a company whose focus is a match with my personal mission or cause,  and watch my investment accomplish both my desire to Do Good (for my cause, mission, society in general, etc.) and my desire to Do Well (with the potential to recover some portion of my portfolio lost during economic downturns)? In a phrase, why can’t I Do Good and at the same time Do Well?

 

While this approach may not be for everyone, and it need not consume all of one’s assets earmarked for mission and cause-related contribution,  it can provide multiple attractive benefits to the donor/investor.  The spectrum of mission/cause related startups spans nearly every major societal challenge.  Venture funded companies have already established a track record of breakthrough discoveries to many of the same challenges that foundations and charities have focused on for years – while returning substantial value to early investors.

 

To put it in some perspective, in the same year that individual charitable contributions totaled $211 billion, the total amount of capital deployed in support of all venture capital backed companies totaled only $26 billion!  New commitments to the medical/health/life sciences sector totaled only $1.1 billion in 2010 according to the National Venture Capital Association. One can only imagine if just 10% of those $211 billion in individual contributions were directed to venture supported companies what kinds of breakthroughs might have been accomplished.   Just saying!

*A Spencer Trask sponsored company.