Taxed to Invest

Pierre M. Omidyar, fabled promoter of online auctions, made his billions and decided to invest.  But Omidyar's investment strategy is not taught in any business school.  Omidyar invests in groups that seek to empower individuals. 

Traditionally, the tax exempt charitable organization cartel held oligopolistic control over funds intended to empower people.  Omidyar's eBay took the for-profit route, and has empowered more consumers to control price than Ralph Nader ever did.  In March of 2004, the Omidyar Network made a bold decision: they would forgo millions in federal tax breaks so that they could invest in for-profit business that produces social change.  Omidyar is breaking the non-profit trust and invested in cutting edge social entrepreneurs driven by the intersection between social change and profit motive.  His investments including Global Social Venture Competition, Socialtext, Microfinance Securities, and my favorite, Linden Labs.

By forgoing tax-exempt status, a profitable organization immediately moves from paying 0% in taxes to 35% in taxes.  For those interested in social change and socially responsible investing, this means that a social business suffers a real opportunity cost by forgoing tax-exempt status, an opportunity cost in the neighborhood of 35% of profit.  To justify such an opportunity cost, the social return the business provides must be valued at higher than 35% of profit.  That's a huge social return!  With potential for such enormous social return comes high risk of failure; this is the mix of risk and reward that excite venture capitalists.

I hope to see a lot of social entrepreneurship and social venture capitalism over the next four year.

Comments

[Alan]

Your point is that in order for taking the 35% hit to be worthwhile, Omidyar has to (thinks he can) find social value equal to 35% in the companies he invests in, or else he wouldn't do it ... There is also the other side that tax incentives encourage distortions and inefficiency; by giving money to for profit businesses, he ensures that his money is spent more efficiently ... In non-profits those donating depend on the reputation/intent of those running the place to control both the social mission and the efficient implementation of that maission; in a for-profit, the profit motive ensures efficiency in daily operations and the donor just has to check in occasionally to make sure that the social goal doesn't get lost