As the financial squeeze continues, businesses are finding innovative ways to support good causes. Rather than simply handing over the cash, many become directly involved in running charities. We explore a new era for philanthropy

Doomsayers seized on Sir Tom Hunter's announcement in January that he might not be giving away £1bn to charity—as he had pledged in 2007—as the beginning of the end of what looked like a new golden age of philanthropy. Across the world, the swelling ranks of self-made seriously rich have been donating money and time in unprecedented amounts to address social problems—a trend that led management thinker Charles Handy to conclude in his 2007 book, The New Philanthropists, that "generosity is fashionable again".

But Hunter has been forced to rein in his giving, because funding for the Hunter Foundation is tied to the profitability of his investment company, West Coast Capital, which has been hit hard by the recession. Responding to his announcement, Guardian columnist Polly Toynbee declared: "Donors turn off the taps during a recession," and an editorial in the same newspaper warned that "the credit crunch is teaching us afresh that there are dangers in banking on handouts".

But such comments are misleading. It is too early to say what will happen to charitable giving and philanthropy this year, but the evidence indicates a more complex picture. For example, research from the Association of Charitable Foundations found that although only 45 per cent of UK-based trusts and foundations plan to maintain or raise their levels of grant-making over the coming year, nearly 75 per cent predict steady or rising income over the longer term, with two-thirds planning to maintain or increase their award levels in the future.

Meanwhile, a sizeable number of philanthropists surveyed recently by the Coutts Forum for Philanthropy expected to either increase (42 per cent) or maintain (45 per cent) their level of giving this year. "Many people are drawn closer to the causes they support because they feel the need is even greater," says Mark Evans, head of family business and philanthropy at Coutts & Co.

And while large charity balls and other high-profile fundraising events are being hit, appeals such as Children in Need and Comic Relief, which have no or low administration costs, have raised record-breaking amounts. Karl Wilding, head of research at the National Council for Voluntary Organisations (NCVO), says: "People seem to want to give more directly to the cause."

A shift from handing over cash to giving in kind is another trend that is likely to be accelerated by the downturn. Volunteering has risen significantly, with several philanthropy organisations reporting increases of up to 200 per cent in the number of lawyers, bankers, accountants and other professionals offering services. Susan Mackenzie, director of Philanthropy UK, believes that the overall effect of the recession will be to increase the trend towards more strategic giving.

Over the past four decades, the historic relationship between companies and charities—summed up by Paul Szkiler, chairman of Truestone Asset Management, as "we'll sponsor your ball"—has evolved into a more productive link-up characterised by an exchange of skills and knowledge, fuelled by a growing social consciousness.

Perhaps the highest profile example of this is the work of Microsoft founder Bill Gates and his wife, Melinda. Their eponymous foundation has assets of almost £50bn, half of which was donated by fellow billionaire Warren Buffett. The foundation uses these funds to make annual grants in excess of £1.5bn. In his first annual letter to the foundation, Gates claimed: "The common sense of the business world, with its urgency and focus, has strong application in the philanthropic world."

But philanthropy is not easy. Donors need to think hard about what they want to achieve and how best to succeed, and be prepared to work with experts, intermediaries and grass-roots organisations. "You need professional insights as well as good intentions," says Szkiler, who is sceptical about the so-called "Good Club" of billionaire philanthropists that Bill Gates convened recently in New York. "Oprah Winfrey [a member of the Good Club] has given lots of money to helping people with HIV/AIDS, but the real problem in West Africa is malaria. People need to engage and get dirty, and come in and serve. That involves empowering the people who are there already, many of whom have great ideas, but lack the capital to solve their own problems."

The fusion of business and charity aptitudes has led to the rise of social enterprises—companies set up to tackle a social or environmental need—and to the increase in social "intrapreneurs", individuals who develop solutions to societal and environmental problems from inside large corporations. It has also spawned the new philanthropists—those who seek to apply to social causes the business skills that made them successful. Rather than just writing a cheque, they like to get heavily involved, often looking for a financial as well as a social return.

All are part of a movement described by the Hunter Centre for Entrepreneurship at the University of Strathclyde as "entrepreneurial philanthropy", and by Matthew Bishop, the New York bureau chief of The Economist, as "philanthrocapitalism". A subset of philanthrocapitalism is "venture philanthropy"—essentially the application of private equity/venture capital models to the non-profit and charitable sectors. A pioneer of this approach in the UK is Stephen Dawson, co-founder of venture philanthropy fund the Impetus Trust.

Dawson partnered with Nat Sloane of consulting firm Accenture and hired a chief executive from the charity sector. They invested their own money and raised more from other venture and private-equity firms. Impetus works with charities to make them more effective, and by 2007 its 10 partner charities, which are addressing issues such as reintegrating ex-offenders, supporting people with eating disorders and preventing gang violence, had already boosted income by 20 per cent and the number of beneficiaries by 50 per cent. Truestone is another example of venture philanthropy. A conventional asset management business until five years ago, the firm has since teamed up with charities to help stimulate philanthropy among wealthy clients, who address problems around the world ranging from reforesting the Amazon Basin to relieving hunger and poverty in Malawi.

Among other initiatives, the company has set up a donor-directed charitable trust, which allows clients to establish a smaller trust that provides them with the charitable body's benefits without the usual administrative burdens. Corporate clients can establish a micro-foundation, which works in a similar way. Truestone has also created a socially motivated fund for those clients interested in helping disadvantaged people while still making a potentially good return on capital.

Another pure venture philanthropy model is Bright Ideas Trust, a charity founded by Tim Campbell, the first winner of The Apprentice, to help people aged 16-30 from disadvantaged backgrounds to set up their own businesses.

"We provide start-up capital of up to £25,000, which is a sensible amount to allow them to work out their proposition and get it off the ground," says Campbell. "But it's a hand-up, not a hand-out. I take an equity stake, which I will crystallise at some point, and the beneficiaries are repaying the debt, so there is an income stream already."

Each beneficiary gets a dedicated entrepreneurial mentor, along with professional legal, financial and marketing advice from partner firms including WPP, Taylor Wessing, Ernst & Young, Accenture and Bank of America. Among those Bright Ideas Trust has helped are 29-year-old Amariyah Raheem, who, with £12,000 of trust funding and £5,000 from The Prince's Trust, launched a hairdressing and beauty salon at Arsenal's Emirates Stadium in May. Raheem, who used to be homeless, says: "Life has been very bleak at times and I felt I was never going to amount to anything and that everyone was waiting for me to fail. I never thought coming from my background I would own my own business—this is a dream come true."

But if Campbell doesn't want to be seen as a do-gooder ("I concentrate on results"), he believes the term venture philanthropy is powerful, because "it reorders what social enterprise sometimes gets wrong—that is, putting too little emphasis on the enterprise/venture side of the equation and too much on the altruistic heart-pull aspects".

But while philanthropic enterprises that make a financial return are likely to be more immune to recession-induced cutbacks than traditional grant-making, venture philanthropy can't solve every social problem, say experts.

"There are some areas of social need where you can't make much money, and where individuals can't just be co-opted into the intermediate labour markets," says Cathy Pharoah, co-director of the Centre for Charitable Giving and Philanthropy at Cass Business School. "So there is a huge role for pure grant-making."

And Jessie Sklair Correa, director for research at the Institute for Philanthropy, warns that one of the potential dangers of venture philanthropy is the often-misplaced belief by its practitioners that they can apply business models directly to an area of social need. "We are more concerned with promoting strategic philanthropy, which is about thinking hard about what you want to achieve and the best way to do that," she says.

Jerry Hirsch, a graduate of the Philanthropy Workshop, the institute's international donor education programme, is an exemplary strategic philanthropist. He is based in Phoenix, Arizona, and works with not-for-profit organisations to help make them more efficient. But he seeks only a social return. He describes his approach as "pure philanthropy", though he still applies business practices. After making a fortune in developing shopping centres, he reached a point where he wanted more meaning in his life. But when he first decided to get involved 16 years ago, he realised he didn't know what he was doing. "I needed completely different preparation, training and knowledge from what I had used through my business experience," he says.

After the year-long workshop programme, Hirsch realised he needed to focus on one area, defining his goal as doing "the most good with whatever limited resources we had". That became the basis for the Lodestar Foundation, whose objectives are to make as much impact as possible by encouraging others to become philanthropic and to encourage not-for-profit organisations that benefit from donated resources to use them more efficiently.

One of Lodestar's key projects has been to unite 12 groups that provide adoptive and foster homes for children with special needs. The agencies now work together to provide support and resources. Another scheme has brought together organisations to create a one-stop-shop for homeless people. In partnership with other groups, Hirsch has also set up a programme in some of the former Soviet Union countries to teach young people about philanthropy.

"Most philanthropists want some sort of direct relationship with emotional results—the social effect of their work. But we do things in the background without wanting the glory," he says. It may be low profile and deliver no financial return, but it makes him happy. "It's a selfish motivation," he says. The foundation's strapline is "seeking happiness in philanthropy".

Personal happiness might not be a strong enough business case for everyone, but enlightened self-interest is prompting growing numbers of organisations to weigh up what being a good corporate citizen means. And the all-important Generation Y, which companies are keen to attract, is driving much of the shift.

"Generation Y wants to work in genuinely philanthropic companies rather than those with glossy CSR reports," says Rob John, an independent consultant and adviser at the European Venture Philanthropy Association. Bank of America, which is investing £600,000, as well as skills and expertise, as a Bright Ideas Trust partner, is one example. "I am inundated by requests from young people who want to be involved in more meaningful work," says Amy Clarke, the head of international CSR at the bank. "But I advise them to try to change their own company from within by finding ways to challenge the business model."

The bank's HR team is helping Bright Ideas Trust nurture talent. "People come back enthused because they have used their skills to effect real change in a different environment," says Clarke. What's more, she adds, Bright Ideas Trust is creating potential business customers for the bank.

There may be a dip in some areas of giving during the recession. But, overall, the range of innovative approaches to philanthropy, combined with the trend for engagement with good causes, represents a powerful force. Not only could this help solve some intractable problems, but it could also infect traditional capitalists with what Emma Harrison, founder of social purpose company Action for Employment (A4E), calls "doing well by doing good".