The Next Paradigm Shift in Philanthropy: The Inevitable Rise of Catalytic Capital
In The Psychology of Human Misjudgment, Charlie Munger—Warren Buffet’s long-standing business partner—brilliantly describes the man-with-a-hammer-tendency as follows: ‘to a man with only a hammer, every problem looks pretty much like a nail’. Indeed, we all tend to look at the world in ways that are biased, or through a single theoretical or disciplinary lens, whether known or unknown to us. We use monochromatic lenses. It is time we broaden ‘how we see’.
The field of philanthropy is no exception. To be fair, it has evolved tremendously: some speak of outcomes and impact, others speak of inclusion and power dynamics, while new tools online attempt to enable more efficient collective giving processes. Moreover, recent movements such as trust-based philanthropy and effective altruism are attempting in their own diverse ways to propel giving forward, along with exciting initiatives to unlock more payout from Donor Advised Funds (DAFs).
While all these initiatives are instrumental and beneficial, there is still room to improve ‘how we see’ the world. My perspective is admittedly biased as my focus is on global philanthropy. In essence, I think that ‘how we see’ the world could be improved if we focused not just on the ‘giving’ system or a single stakeholder (usually the donor), but if we shifted our stakeholder-focus to the end-user, the under-served, whose voice and words are rarely captured, still, in many of these discussions.
Today, eight men own as much wealth as some three billion people at the bottom of the global pyramid, notably in India and sub-Saharan Africa. But more ‘giving’, using a ‘hammer’, without listening to the needs of the end-users, i.e. students, farmers, artisans, patients, may not improve this rather grim picture of our world. From my time spent in the field, from Bosnia to Afghanistan, and Kenya to India, I have learned that those in need (and their governments) would rather not be dependent on the generosity of others, in a perfect world. They would rather—the majority of them, at least—have their basic needs met (i.e. education, health, income), not for a day or a few months, but sustainably. So, how can philanthropy listen to these voices and metamorphose into actual ‘solutions capital’ for those who are under-served by our system?
The answer is catalytic philanthropic capital - that can support innovative ideas, and attract further funding from investors. After all, it is inherently concessionary capital and not risk-averse, so it is ideally placed to catalyze new ideas and solutions. It is not simply that it can, but it must. Often without catalytic philanthropic capital, private capital tends to migrate to lucrative ideas that service the middle or upper classes, ultimately creating further inequality. By accompanying early-stage ventures and supporting them with this unique risk capital, philanthropy can become part of ‘an answer’ in a continuum of other interventions from both the public and private sectors. It can become part of a broader story to make the world slightly less unequal. Concretely, for instance, catalytic capital can help back educational or health chains to service those left behind, or link handicrafts to global markets to exponentially increase the income of artisans. Catalytic capital can back scalable solutions by pooling resources and framing philanthropy as part of a greater collective and collaborative effort, along with other players, to propel not just philanthropy but our world forward.
In examining any philanthropic portfolio, which is generally composed of social-proof giving (i.e. notoriety), identity giving, emotional giving, and, in some cases, long-horizon giving, one should consider diversification and an allocation of a thoughtful percentage to catalytic philanthropy.
UBS estimates that global giving stands at 1.5 trillion dollars. Many estimate that to meet the needs of our world, synthesized in the global dashboard of the UN’s Sustainable Development Goals (SDGs), at least 5 trillion dollars are needed. If only philanthropy could do its part to catalyze solutions, imagine the ripple effect it could have.
Just imagine that world. You hold the key to it.
Farahnaz Karim is a Harvard-educated social entrepreneur, political scientist, and humanist, with years of experience working in the field. She is the founder and CEO of Insaan Group, a boutique impact investment entity that allocates philanthropic capital to tackle poverty in India and sub-Saharan Africa.
