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Apr 2, 2014

Transforming the World: Larry Page Misses An Important Distinction

Felix Salmon wrote a very thoughtful opinion piece on Larry Page’s (Google co-founder) TED talk proposal that giving his money to Elon Musk (SpaceX, Tesla Motors) would make a bigger difference in the world than giving his money to philanthropy.  Page’s notion is that Apple, Google, Cisco, Intel have changed the world, so funding an entrepreneur like Musk has a higher probability of duplicating the transformation Page made with Google than would Page’s forming a foundation.  That is probably a fair observation, as Salmon notes, “there’s a 99% probability that [Page’s] philanthropic activity will end up being orders of magnitude less effective and less important than his tenure at Google.”

It is also a good observation that the skill and passion needed to build a major company is different from the skill and passion needed to build a major, effective philanthropy.

Part of the argument, however, has two false foundations.

The first false foundation is the notion stated by Salmon, “the glory of corporate capital structures is that they allow your money to be leveraged many times, in a way which is very difficult in traditional philanthropic contexts. (Indeed, if you give money to a foundation the then the foundation gives away just 5% of its capital every year, then you effectively have substantial negative leverage on your donation.)”  This notion ignores the emergence of impact investing and social enterprise investing, which have the same leveraging potential as investment in a public company.  As I discussed in an earlier blog, a entire foundation portfolio can be invested in social enterprise (a profitable business that aims for a measurable social impact as well as a financial return) and still meet IRS disbursement regulations.

Now it is true that social impact investing requires some cultural changes, notably the acceptance of risk.  As Salmon notes, “one of the big problems with contemporary philanthropy is that it’s obsessed with results: everybody wants to ensure that their money is making a real difference….The trick is to take risks, rather than try to engineer a certain outcome.  Better a small chance of creating a permanent and positive change to the way the world works, than a much larger chance of making a much more limited intervention.”

Fair observation.  But social enterprise investing, and impact investing, is relatively  new and I suspect that individuals and family foundations are more able to take risk with their own money than are larger foundations led by trustees who have a fiduciary duty for someone else’s money.

The second false foundation is that the market can solve all problems that require transforming the world.  Indeed, both nonprofits and arguably governments are designed to solve the problems which the market cannot solve.  Economics call these problems “market failures”, “externalities”, and “public goods.”  There are some needed transformations that the Google’s of the world cannot rally their market prowess to solve.

So, Larry Page, if you want market-based solutions to world problems, give it to Elon Musk.  But if you want solutions to problems the market can’t solve, you can give your money to a Benefit Corporation, social impact fund or social impact investor.  Acumen, Ashoka, FB Heron, Calvert, Wells, CINCO ……  A list too long for a blog post…and continually growing.