Can the philanthropy revolution succeed?

In 1972, during Richard Nixon’s visit to Beijing, Zhou Enlai, the first Premier of the People’s Republic of China, was asked for his view of the impact of the 1789 French Revolution. “It is too soon to say,” he is said to have replied.

Zhou probably misunderstood the question (thinking it referred to the May 1968 French revolt). But his answer could just as easily be applied to the revolution that has recently shaken the world of philanthropy. The implications could be far-reaching – but it will take some time before they are fully understood.

Philanthropy’s Storming of the Bastille began in November, when a group of nearly 30 billionaires, including Amazon’s Jeff Bezos, Virgin’s Richard Branson, and Alibaba’s Jack Ma, announced the formation of the Breakthrough Energy Coalition. The BEC promised a “new model” that would leverage public-private partnerships to mobilize investment “in truly transformative energy solutions for the future.”

The announcement was closely followed by Mark Zuckerberg and Priscilla Chan’s commitment to give 99% of their Facebook shares (currently valued at some $45 billion) to improving the lives of newborns across the world. They, too, stressed the importance of “partnering with governments, non-profits, and companies.”

The game-changing development is the recognition of a funding gap – a “collective failure” of government, traditional philanthropy, and commercial investors, in the words of the BEC – that creates “a nearly impassable valley of death between promising concept and viable product.”

No single actor – be it a government, a university research laboratory, an NGO, an entrepreneur, or a group of investors – can solve today’s really big problems alone.

It is a gap seen in areas as diverse as health care, education, and the fight against climate change.

That is why the Chan Zuckerberg Initiative was designed for maximum flexibility, allowing funds to be channeled into non-profits, directed into private investments, or used to help influence policy debates. Similarly, the BEC has pledged to boost the work of others by taking “a flexible approach to early stage, providing seed, angel and Series A investments, with the expectation that once these investments are de-risked, traditional commercial capital will invest in the later stages.”

Of course, not even billionaires can solve the world’s problems on their own. Other stakeholders will need to play a part in the revolution as well. Traditional philanthropies should revisit their mandates. And governments must do more to facilitate a greater flow of private funds into more sustainable infrastructure assets. Policymakers could look at tax incentives, including credits in key areas.

There is an opportunity for the finance industry to participate, too, through so-called impact investing, which aims to achieve both social progress and financial returns high enough to attract mainstream private investors.

This, of course, is more easily said than done. As Bill Gates, who has given away more money than anyone in the history of the world, put it: “So many things have a social return, but not a financial return. You really have to be careful thinking you can have your cake and eat it.”

That is especially true for those who design financial instruments for impact investing. Among the most innovative are development impact bonds, in which investors provide financing for development projects, in exchange for returns provided by donors, NGOs, or government agencies if, and only if, the agreed-upon outcomes are achieved.

For example, one such bond is funding an effort to enroll and keep girls in school in Rajasthan, India. Depending on the program’s attendance rates and success at imparting numeracy and language skills, the Children’s Investment Fund Foundation will pay a return to bondholders. Programs like this, it is hoped, will provide a model that can be replicated and scaled up elsewhere.

Another promising opportunity are investments in the riskiest stage of the development process for new drugs: the phase between basic research and human clinical trials, which has traditionally struggled to attract funding. Indeed, for every $1 million dollars spent on this part of the process, some $8 million is spent on basic research and another $20 million on clinical trials.

Quarterly earnings cycles, real-time pricing, and constant scrutiny by shareholders have pushed pharmaceutical companies toward projects with clear, immediate payoffs – at the expense of more speculative, but potentially transformational research. With interest rates at record lows in much of the developed world, major players in the financial system have an opportunity – and, I would add, a responsibility – to help bridge this gap. In addition to providing a robust social impact, a patient investment strategy in this area would also offer high long-term financial returns.

There is a strong desire on the part of many in the finance industry to make investments that improve the world. The revolution in philanthropy will be truly successful only when we realize that we do not have to be billionaires to make a difference.