The next Silicon Valley must-have? A private foundation

While the pandemic may have shuttered businesses across the country, Silicon Valley tech companies have defied the odds. In 2020, IPO capital raising hit its highest level in a decade. Start-up valuations soared, and blockbuster IPOs, like the one for Airbnb, created a bumper crop of wealth. But unlike previous iterations of newly minted money, the beneficiaries of this recent boom are forsaking the traditional private-island-and-jet splurge. Their new acquisition of choice could be a more charitable one.

Last year my company, Foundation Source, helped set up more new foundations than at any other time in our twenty-year history — many for tech entrepreneurs and business owners planning for a liquidity event. And we expect that the ongoing wave of IPOs could fuel a surge in private foundation philanthropy, even as Brookings, NPR, and others have documented a decline in spending among America's most affluent households during the past year.

What, no gold-plated yacht?!

Boom times in Silicon Valley used to be marked by lavish displays of excess, including the now-legendary wedding of Napster co-founder Sean Parker, whose 2013 "Lord of the Rings" nuptials cost $4.5 million and featured a nine-foot-tall cake and guest apparel by the film's costume designer. So, why aren't the beneficiaries of the current boom acquiring sharks with laser beams and other accessories for their Bond-villainesque subterranean lairs?

One possibility is that economic uncertainty has put a damper on lavish displays of conspicuous consumption. As recently reported in the Wall Street Journal, the so-called "smart money" is bearish on companies that have gone public through special purpose acquisition vehicles (SPACs). Short-sellers have increased their bets to more than triple their value at the start of the year, rising from $724 million to about $2.7 billion. And broadly speaking, no one is sure whether the post-COVID economy will be characterized by unprecedented growth or inflation and sluggish employment rates.

Other factors, however, may be inspiring Silicon Valley's latest crop of multi-millionaires to seek gratification in philanthropy instead of consumerism:

Heightened awareness of increased need: While the gulf between America's haves and have-nots has been widening for decades, the gap grew even wider during the pandemic. The weight of the public health crisis fell unequally on the vulnerable, with millions of Americans unable to afford or access essentials such as food, health care, housing, and broadband. Against a backdrop of seemingly endless lines at food pantries — even on military bases — extravagant displays of wealth may seem insensitive as well as immoderate.

An attitude of gratitude: Aaron Rubin, a partner at Werba Rubin Papier Wealth Management, told the New York Times that this boom feels qualitatively different from previous ones. In addition to experiencing unease about the economy, his clients are expressing "more gratitude" and making more plans for charity.

Social crisis: COVID wasn't the only emergency in 2020. Racial equity, social justice, and our polarized political environment — all featured prominently in our national conversation over the course of the year and caused many people to think more seriously about how they could use their assets to influence society positively.

Generational generosity: Many Silicon Valley "techies" are millennials. Fidelity Charitable's Entrepreneurs as Philanthropists survey shows that in comparison to other generations, millennials are relatively more philanthropic, more concerned about using their social capital and purchasing power to improve the world, and more interested in aligning their actions with their ideals. And they've been very responsive to the increased need as of late.

In addition, nearly three-quarters of millennials have sent financial aid to family or friends or donated to a nonprofit since the pandemic began, according to payment app Zelle's September Consumer Payment Behaviors report. That's the highest rate among any of the generational cohorts polled.

The Tesla of charitable vehicles

It's easy to see how the next wave of IPOs could fuel an explosion of interest in philanthropy; what's less clear is how that interest will manifest itself. Although Silicon Valley has a very robust community foundation that serves the surrounding region, not all of the millennial philanthropists in the valley are likely to be content with limiting themselves to meeting local needs. Nor are they likely to be satisfied with giving only through donor-advised funds (DAFs), which, while popular for their tax advantages and easy set-up, do not offer donors much say over their giving.

Consider these critical insights into how millennials approach their giving, as noted in the Fidelity Charitable survey:

• While they are more likely than other generations to see giving as part of their identity, millennials also may have lower levels of trust in the nonprofits they support and may be more likely to want to be actively engaged in the direction and use of their financial support.
• Millennial entrepreneurs see charitable giving as a way to build their reputation, with 84 percent saying they value giving as an opportunity to demonstrate leadership in the community.
• Seventy-four percent of millennial entrepreneurs value having their contributions recognized publicly, compared with only 19 percent of boomers.
• Millennial business owners are already planning their charitable legacies; nearly two-thirds plan to leave money to charity after they're gone, versus 46 percent of boomers.

The same study also notes that "[y]ounger entrepreneurs are going beyond simple cash donations — both personally and in their businesses — and are giving in increasingly sophisticated ways."

For all these reasons, a private foundation, which confers complete donor control and offers an almost limitless toolbox for creative giving, might emerge as the preferred charitable vehicle for this new cohort of donors, one that values hands-on, outside-the-box philanthropy. In addition to making grants to publicly supported nonprofits, the type of giving permitted by a donor-advised fund, private foundations are empowered to:

• Give directly to individuals in need.
• Make loans to charitable organizations and use the proceeds from the repayments to make other programmatic investments.
• Invest in for-profit businesses to further a charitable purpose.
• Conduct their own charitable programs and activities.
• Give awards and prizes to catalyze progress on an issue.
• Enter into binding agreements with grant recipients to ensure they use the funds as intended.
• Dictate naming rights as part of a grant agreement and enforce adherence.
• Deliver grant checks in person (e.g., at a fundraising gala).
• Follow any investment strategy that complies with prudent investor rules.

Moreover, because a private foundation can be established to exist in perpetuity, handed down from one generation to the next, it might have a special appeal for techies who are intent on building an enduring personal legacy associated with lifelong philanthropy and social impact.

For some great examples of charitable giving made through private foundations, check out the Foundation Source website.

(Photo credit: Layton Diament via Unsplash)

Hannah Shaw Grove is the chief marketing officer at Foundation Source, the nation's largest provider of support services to private foundations.