Donor Advised Funds

A source of investment capital for impact ventures and funds

It is with both befuddlement and a sense of optimism that we approach the topic of investing in impact-oriented ventures and funds through donor advised funds (DAFs). Befuddlement in that DAFs aren’t adopting the use case more widely or as quickly as they might. Optimism in that the opportunity DAFs present for the field of impact entrepreneurs is exciting and opens up a new avenue for funding. ​

First, a little scene-setting is in order. DAFs are vehicles that enable philanthropists to use tax-advantaged dollars for grantmaking over time. Before these charitable funds are granted out, they are often invested in mutual funds or ETFs. Yet these dollars could also be used to invest directly in social enterprises and private impact funds.

Hand reaching for walletThere are 1.3 million DAFs offered by 1,000 sponsors across the US. With more than $234 billion held in DAFs today (an increase of nearly 40% YoY), we’re seeing a greater percentage of philanthropic dollars being used to fund innovative ideas… as investments. But it’s just scratching the surface. What if the $230 billion in DAFs fully integrated impact investing throughout 100% of their endowments (rather than just giving away yield and toe-dipping anecdotally in impact investing)?

The challenge we can collectively issue to the DAF industry is to build out investment platforms and capabilities that make it easy for donors to select from deeply impactful investment options, or even to source and recommend their own deals that are then executed from the DAF. We will note that ImpactAssets was founded more than a decade ago to enable donors to do just that – use their philanthropic assets to invest in impact entrepreneurs and fund managers that they believe in, so we know it’s possible!

Why are DAF dollars different?

Because these funds have already been designated for philanthropic purposes, donors often view this capital as being able to take on more risk or less return than their traditional investment portfolio. Some donors have run successful businesses and are looking to ‘pay it forward’ to other impact-driven entrepreneurs. Others are angel investors looking for exciting early-stage opportunities to help get off the ground. Some are foundations and corporations interested in moving the needle on issues like climate change, racial equity and gender equality and they are investing in ventures and funds addressing specific areas of this important work.

The opportunity DAFs present for the field of impact entrepreneurs is exciting and opens up a new avenue for funding. ​

Put simply, donor advisors are passionate about causes. Their impact interests often correlate to investible segments that can be amplifiers of their philanthropy. Conversely, their philanthropy can act as a bridge into thematic impact investing.

DAFs leverage capacity and expertise across a much larger operational and asset footprint than a small family or corporate foundation would have by itself. And they don’t have cumbersome boards or decision-making processes, as that is all centralized at the DAF sponsor (the organizations offering the DAFs). And because of aggregate scale, DAFs are also less expensive to operate.

All of the above contribute to an ideal environment for moving concertedly into impact investing from DAFs.

The bottom line for impact entrepreneurs and fund managers is…

  • Individuals and institutions either with DAFs, or by setting up a DAF, are really open to the model and may often do investments there that they might not do from their personal investment accounts, foundation endowments or corporate treasuries. They can count it as a tax-deductible donation or grant up front
  • Your current (and prospective) investors can use their philanthropy to invest in your company or fund, or even to lend to a nonprofit. Investors will sometimes invest with both their traditional capital and philanthropy in order to “double down” on their investment. You may position this as an option in the investment fundraising conversation
  • Investors can pool donations together from DAFs or even in a ‘special purpose’ multi-donor fund in order to make a single, larger investment from the DAF sponsor into a venture or fund
  • Investments from DAFs can accommodate nearly any investment structure, spanning the full spectrum of risk and return
  • But, by and large, DAF sponsors are not ‘there’ yet on enabling deep impact investing, much less the idea of actively promoting your raise to their donors, so don’t count on that

Momentum and pressure are growing for the DAF industry to lean into impact investing, from the big national financial firm affiliates to the local community foundations down the street. It’s still early days, though, and we have a long way to go towards maximizing the impact of this $234 billion in philanthropic endowment capital (much less the $1.3 trillion in foundation endowments), representing 1.3 million DAF accounts. But the opportunity is there to utilize DAFs to fund world-changing solutions, we just need to collectively popularize and realize it.

Tim Freundlich is founder & executive director, strategic development of ImpactAssets, an impact investing firm and donor advised fund with $2.3B in assets. He also helped to build Calvert Impact over twelve of its early years and co-founded SOCAP, among other social enterprises.
Tracy Sherman is the senior marketing content manager at ImpactAssets. She has a background in investigative journalism, as well as experience managing content marketing and communications for technology startups and nonprofits.

This article was produced in collaboration with the Magazine's Content Partners.

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