The third sector and startups are often thought of as unlikely collaborating partners due to a number of barriers – institutional, financial, legal, cultural – that undermine or even prevent them from working successfully together. Yet, there is much to gain when the two worlds align. By tapping into startups’ innovative ideas and ways of working, third sector organisations can explore novel ways to achieve impact that are vital to remaining fit for purpose.

Featuring examples from UNICEF, Save the Children, Friends of the Earth and others, our latest report highlights various ways in which the third sector can overcome barriers to successful collaboration with startups, despite their unlikely match. From co-working spaces to accelerator programmes and investment funds, there are many ways for the third sector and startups to work together. Here are three sector-level changes that could facilitate their partnership.

Third sector organisations struggle to fund collaborations with startups. Relatively small budgets are one part of the problem – to illustrate, the top ten UK corporate R&D spenders spend more on R&D alone (£13.6 billion per year) than the largest 51 UK charities spend in each year in total (£11.1 billion). A lack of flexible capital in the third sector poses an even greater challenge. Money is often earmarked (when projects are grant- or legacy- funded, for example) and therefore cannot easily be allocated to startup collaboration. By law, it is also difficult to fund for-profit startups because charities need to demonstrate that sufficient public benefit can be derived. As a result, promising collaborations often fail because there is no dedicated budget behind them.

Third sector organisations alone are unlikely to fill the gap, so they should take steps to pool funding from multiple third sector organisations. Where additional budget providers are required, they need to broker multi-party collaborations that could include the government or corporates. There may also be an opportunity to set up a government-backed venture fund to help third sector organisations invest in innovation and startup collaboration.

The private sector has seen a surge in collaborations between corporates and startups in the past decade. This is partly because incentives are easier to align; corporate investors typically take an equity stake in return for supporting startups, allowing both parties to financially benefit if the value of the startup grows. In the third sector, it is relatively rare to negotiate equity – or any other return mechanism, such as a share of any arising intellectual property (IP) – in exchange for supporting startups, as long as the collaboration is expected to increase the third sector’s impact. Many third sector organisations deliberately do not take equity or IP because it implies a risky, long-term commitment that needs to be managed, or because they lack the legal and commercial expertise. There may also be an ideological opposition to seeking any returns other than impact. However, in the absence of clear, measurable return mechanisms, there is less incentive to commit substantial resources to startup collaboration. It also undermines the sector’s ability to re-invest any returns to make collaboration programmes with startups commercially sustainable.

Instead of equity or IP, a range of (imperfect) value-sharing mechanisms have emerged to distribute some of the collaboratively created value to the third sector, including founder pledges, revenue sharing agreements, discounted deals and open-source outcomes. To better align incentives for long-term collaboration, we believe there is a role for an intermediary that holds equity or IP on behalf of multiple third sector organisations.

Innovation is not yet deeply ingrained in the third sector and often only takes place out of necessity. To illustrate, less than 1 per cent of charities in England and Wales list innovation in their charitable objectives or aims and activities (based on an internal analysis of the text charities use to describe themselves when they register with the Charity Commission for England and Wales), and many report that the environment makes innovation difficult.

Trustees play an instrumental role in shaping charities’ direction and approach to innovation. To guide their decisions, the UK Charity Commission set out guidelines and regulations. One of these guidelines states that the role of trustees is to manage risk. In contrast, there is no guidance about innovation, growth or increasing impact. As a result, current guidelines can inadvertently dis-incentivise innovation and result in disproportionate risk aversion, thereby discouraging collaborations with startups.

To make room for risk-taking and innovation in the third sector, the Charity Commission should consider adding guidelines to incentivise innovation. This could include a recommendation to appoint a dedicated trustee responsible for innovation, guidance that ensures the future viability of the third sector and clarifies the risks of not innovating or advice for charities on how to invest long-term reserves or endowments.

By failing to facilitate collaborations with startups, the third sector risks losing out on new ways to deliver the most impact. Startups can help third sector organisations adopt more agile approaches, for example in the way it manages projects or monitors social impact.

Fruitful collaborations can also result in innovative solutions for beneficiaries that neither startups or third sector organisations could have developed in isolation.

A great example of this comes from the Alzheimer’s Society. As part of its Innovation Accelerator, the society partnered with a startup that develops ‘Jelly Drops’ which helps people affected by dementia stay hydrated. 1 per cent of profits from every box sold goes back to Alzheimer’s Society, thereby helping the charity develop new income streams and achieve its mission at the same time. This is just one model of how startup collaboration can help the third sector deliver impact in an innovative and sustained way.

The third sector plays an important role in delivering public benefit but it faces many challenges, including declining funding, low levels of public trust and increased competition from the private sector – innovation, renewal and collaboration will be key to its survival.

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