Doth the taxman cometh to destroy social innovation?

A literature review of venture philanthropy (VP) demonstrates clear differences between what I will call VP Version 1.0 and VP Version 2.0. If you have been involved with philanthropy for five years plus, you remember the hype of Version 1.0 which coincided with the dot.com boom.

It's fascinating to see how the challenges faced by the first wave are being sidestepped by the second. Most notably, the new kids (Omidyar, Case, Branson, etc.) aren't interested in struggling with the challenges of overcoming nonprofit resistance to for-profit practices that enhance scalability. They are simply starting for-profits with social missions.

Another thing different about Venture Philanthropy 2.0 is that even the uber-wealthy don't think they can solve the world's most deeply entrenched social resources themselves, so collaborations are key. An obvious barrier these collaborations face are tax laws that discourage co-investment by high-net worth donors. At a time when the innovations of venture philanthropists would benefit greater flexibility, Forbes.com features an article which suggests that tax laws are trending toward greater restriction:

State officials used to love it when not-for-profits, such as health insurers, decided to convert to a for-profit corporation. Why not? It often meant millions of dollars for the state's kitty and politicians' favorite programs. When not-for-profits convert they're required to surrender to the state an amount of money equal to the worth of the new company. That's to compensate the state for the taxes foregone while the organization was exempt. But now state regulators around the country are growing disenchanted with these conversions, the potential windfalls notwithstanding.

Obviously, accountability is important and healthcare conversions cited by the article may be an area ripe for abuse. But let's keep our eyes on the prize, not on a few bad apples.

Susan Herr