Traditionally, foundations have made grants to nonprofits for specific programs, encouraging innovation as nonprofits compete for funding. Foundation involvement with the nonprofit can be as limited as simply writing a check or it can extend to providing technical assistance and advice on program management. Whatever the level of involvement, foundations typically have not intervened in the daily operations of the nonprofits they fund, nor have they concerned themselves particularly with the organizational capacity of funded organizations. Traditionally, foundations have primarily focused on the specific programs that they fund.
Even with well-crafted, innovative programs, foundations are finding that the social impacts they desire are not being realized. Nancy Hadley, President of the Community Foundation for Greater New Haven, comments that her foundation is in the beginning stages of repositioning itself because it wants to create more of an impact than it has so far. Tony Proscio, a consultant to the Edna McConnell Clark Foundation, observes that the foundation wants not only to encourage innovation, but also to distribute the innovation so that it can have a greater impact. A recent article in the Harvard Business Review notes, "many people in the nonprofit field are reporting a growing frustration that their programs' goals, although valuable and praiseworthy, are not being achieved. . . many leaders of nonprofits are finding that, despite their best efforts, social problems persist and may even be worsening." While other factors such as decreased government funding may contribute to this frustration, foundations are wondering what steps they can take to improve the situation.
Change in the external environment regarding reduced government spending has caused some foundations to re-evaluate their grantmaking strategy. Traditionally, foundations have served as 'the research and development arm of society.' Foundations would identify best practices and then the federal government would step in and expand programs as needed. However, in an age of "smaller government," foundations no longer can rely on the federal government as a source of ongoing support for social initiatives. In addition, foundations' disillusionment with the government as a partner has been growing. Foundations are now being forced to confront nonprofits' needs for longer-term support and larger investments.
In their article, "Virtuous Capital: What Foundations Can Learn from Venture Capital," Christine Letts, William Ryan and Allen Grossman suggest a way to respond to these challenges. Noting the parallels between venture capital firms and foundations-"selecting the most worthy recipients of funding, relying on young organizations to implement ideas, and being accountable to the third party whose funds they are investing," the authors recommend that venture capital practices can be illuminating and applicable for foundations. (See Table 1, Below) We will refer to the use of venture capital practices by foundations as "venture philanthropy."
The Letts et al article has stimulated both support and criticism. Indeed, the article has provoked many foundations to reconsider their grantmaking practices and is being discussed in boardrooms and offices as well as philanthropic magazines. Some have objected to the analogy between venture capital on the grounds that venture capital practices are not consistent with the social sector's core values. For example, Walter and Elise Haas Fund Executive Director Bruce Sievers contends that the venture capital world is undergirded differently in many important ways from the philanthropic world, and consequently lessons are not transferable. In regards to the call for more active, venture capitalist-like involvement in the management of nonprofits, Sievers writes: "As the nonprofit organization has evolved in America, it [has] emerged as the independent voice of society…[to] defend against both the state and the for profit sector…For this reason, the involvement of a foundation in the internal workings of an organization…is inappropriate." In addition, Elizabeth Locke and David Roberson of The Duke Endowment take issue with the contention that foundations can take more risks. They maintain, "the venture capitalist's risk-management controls are poorly suited to the entirely different reward system of the foundation world."
Disputes regarding the analogy should not preclude
a thorough consideration of the venture capital approach, however.
Even Sievers, one of venture philanthropy's most vocal critics,
sees a role for foundations regarding organizational capacity
building and values the fact that this debate has encouraged the
field to be more reflective.
The idea of venture philanthropy has prompted many questions concerning its viability in the nonprofit sector. In particular, many foundations question their ability to accept and execute a venture philanthropy model. At the most general level, this paper assesses venture philanthropy and its feasibility. More specifically, we explored who uses venture philanthropy and identified barriers and obstacles that foundations wishing to use venture capitalist strategies confront. We also evaluated the applicability of venture philanthropy in a variety of environments. In order to conduct this assessment, we interviewed eight foundations, one microenterprise development firm, and a start-up fund for social enterprises. Our research included organizations that have already embraced venture philanthropy and those that are considering the approach. (See Appendix B, Interview Summaries) We also reviewed the limited literature on the subject.
Our research confirms that venture philanthropy is
not reasonable for every foundation. Yet, venture philanthropy
is an exciting and innovative practice that holds promise for
both the philanthropic and social enterprise sector.
The translation of venture capital practices to the philanthropic world has resulted in a variety of interpretations of the phrase 'venture philanthropy.' For example, Pfizer's Corporate Philanthropy Department describes venture philanthropy as "a charitable endeavor based on risk-taking, innovation and entrepreneurial spirit." Tony Proscio of the Edna McConnell Clark Foundation, thinks the main ideas of venture philanthropy are staying power, growth potential and versatility. While venture philanthropy varies in its specific meaning for foundations, some common themes can be identified. A venture philanthropy approach generally entails the following:
While new and exciting, venture philanthropy is only one strategy available to foundations. There is wide variation in grantmaking, from those foundations that generally limit their role to funding specific projects, to those that seek to invest in longer-term, revenue-generating activities where the foundation is a partner with the grantee. It is difficult to characterize what constitutes traditional or venture philanthropy, as well as to place particular labels on foundations. It is clear, however, that some foundations actively and consistently pursue more venture capitalist-like tactics than others. Foundations can be placed along a continuum, ranging from more traditional grantmaking to almost purely venture capitalists approaches.
Stuart Comstock-Gay, Vice-President of Programs for New Hampshire Charitable Foundation, notes that the foundation has two general reactions to venture philanthropy: First, it requires a lot of change, and second, some aspects of the approach are currently being used. Already many foundations use elements of venture philanthropy; foundations recognize that longer-term grants and capacity building result in more successful outcomes. As indicated in The Philanthropy Continuum, other philanthropic organizations such as the Robin Hood Foundation, the Peninsula Community Foundation, and the Pfizer Corporate Philanthropy Department have explicitly embraced venture philanthropy and see themselves as forerunners attempting to change the traditional philanthropic model. Similarly, for profit-oriented organizations such as New Profits Inc., Working Capital, and Bankers Trust Company use their capital to leverage market forces toward social change. We examined how these organizations have implemented the various themes of venture philanthropy.
Lisa Smith, Deputy Director of the Robin Hood Foundation, parallels her foundation to a "charitable investment fund." Its goal is to move more and more in the direction of greater involvement with funded organizations, ensuring the success of each of their investments. To achieve this level of involvement, Robin Hood seeks to develop partnerships with the nonprofits in which they invest. These partnerships create an environment where nonprofits can openly and honestly share their "dirty laundry" with Robin Hood. Once critical management and programmatic issues are in the open (issues that are usually hidden from most funders), it becomes much easier to provide general advice and to develop appropriate plans of action. As partners, foundations and nonprofits will ensure they are "singing out of the same hymnal."
In the case of New Profits Inc. (a new start-up combined giving fund for social enterprise), relationships with organizations will be predicated on its planned involvement with the board of directors of the organizations in which they will invest. This is, in essence, the approach taken by venture capitalists in the private market. New Profits Inc. also plans to play an active role in the management of the projects they fund. When appropriate, they will provide consulting services and various forms of technical assistance.
Other foundations are careful to maintain some distance from their grantees. For example, the Bankers Trust Company Foundation tries not to be overbearing by using an intermediary organization to provide management assistance. In addition to contracting with outside consultants, Pfizer's approach includes having employees volunteer for the grantee as well as having employees share their own management experience. Pfizer not only helps existing programs, but it also provides assistance with the development of new, start-up organizations or programs.
It takes time to develop systems and processes to optimize organizational performance. Recognizing this, Peninsula Community Foundation issues has lengthened most grants to three years and is extending some grants to five years. Because the Peninsula Community Foundation is a community foundation that serves one area, they know that the same nonprofits will be back year after year. Long and close relationships are intrinsic to their process and inherently breed venture capitalist qualities.
Working Capital is a nonprofit microenterprise development fund that supports emerging small businesses. It provides a good model for venture capitalists approaches. Working Capital shares Peninsula's sentiment on the necessity for longer-term funding; they continue to provide funding to an entrepreneur for up to 8 years, as long as all members of the entrepreneur's peer group are up to date on their loan payments. Through its model, Working Capital is able to maintain strong relationships with businesses as they mature through various stages.
Lisa Smith of the Robin Hood Foundation believes that it is rare for a nonprofit to be self-sufficient. With that in mind, foundations must remember that they cannot provide program support alone, but must support the infrastructure and overhead needed to run these programs. Robin Hood often makes general operating grants that are renewable year after year without time limit, believing the supporting the larger organization has tremendous impact on the community. Chris Perez, Grants Coordinator for the Pfizer Philanthropy Department, is more cautious. He comments that if Pfizer feels that there may be an on-going relationship with the grantee, then larger initial grants may be warranted. Meanwhile, the Peninsula Foundation provides an added $2,000 of capacity building funding to every grant.
Managing risks is more of an art than a science. In an ideal world, risks are managed by ensuring the right decisions are made at the right time. Given that we do not operate in an ideal world, however, risks are managed by making smart and well-informed decisions. Bankers Trust and the Peninsula Community Foundation manage risks by entering into collaborative funding agreements to spread the chance of an funded organization's failure among several funders, while still providing significant support to each grantee. The Pfizer Philanthropy Department purposely takes risks by funding organizations that do not have other sources of support. To offset these risks they spend time with the organizations carefully assessing their resources and constraints. In addition, like Bankers Trust and Robin Hood, they use consulting services to help manage projects, plan strategies, and provide expertise.
Ultimately, donors expect their money to produce significant social returns and prefer their money to be invested in low-risk projects. To address donors who care deeply about the use of their funds, Nancy Hadley of the Community Foundation for Greater New Haven suggests that foundations keep donors informed about the status of projects and collaborate with them before funding is withdrawn from a grantee which has failed to produce the desired impact.
Drawing from the business sector, Working Capital rates the value they create in the market by tracking the business performance of its portfolio of companies. For instance, since joining Working Capital, businesses have experienced a 57% annual increase in sales per business, 72% annual increase per business, and 40% increase in the number of monthly customers.
Performance in the nonprofit industry can be very subjective, however. Yet, interesting ways to assess performance have been developed. New Profits Inc. plans to evaluate performance by using a "balanced scorecard" approach to assess finances, customer satisfaction, internal organizational procedures, and overall organizational learning and growth. New Profits Inc.'s program staff will be compensated based on performance and the success of their projects as it relates to their stated goals and objectives. The Peninsula Community Foundation has also been moving toward tracking outcomes instead of simply accounting for how money was spent, looking for evidence of the value added to the community.
Chris Perez of the Pfizer Philanthropy Department notes budget constraints demand that foundations develop viable strategies to exit their grants. The differences in interpretation of what a venture philanthropy approach entails are perhaps most marked over exit strategies. There simply is no equivalent to the venture capitalist's "initial public offering" in the social sector. Recognizing this, some foundations clearly establish an end to the relationship when the initial grant is made. For example, Bankers Trust makes grants for a three-year period, with two additional years of a loan.
Foundations can sometimes imagine an end to the relationship because their grantees are involved with revenue-generating activities-what many foundations consider an integral part of venture philanthropy. Jed Emerson of the Roberts Foundation believes, "If the nonprofit of the coming decades is to preach economic self-determination for its clients, it must seek to practice the same for itself or risk extinction. In addition, a 'program' which provides training and employment while generating some significant percentage of its costs will be more valuable in the future environment of limited resources than those which rely completely upon public or private support."
Nancy Hadley of the Community Foundation for Greater New Haven believes foundations might do a disservice by capping their involvement to 3 or 5 years because then nonprofits have to spend time trying to figure out new ways to re-package themselves in order to receive essential funding. In addition, Ms. Hadley comments that many nonprofits attend to the infrastructure for a community and address long-term needs such as pre-natal care. Peter Kiernan, the chair of the Robin Hood Foundation board, echoes this sentiment when he states, "You could say our exit strategy is to solve the poverty problems of the city of New York. And if that's our goal, we're obviously going to be investing for a long time."
Tony Proscio of the Edna McConnell Clark Foundation had perhaps the most novel conception: An "industry" should form around a "best practice" program. As foundations enter the market by supporting innovative programs, others will leave and move on to another project. This conception requires the initiating foundation to begin soliciting the support of other foundations from the start or new projects. They must cultivate a sense of ownership among funders in order to preempt territorial feelings and accommodate the need to be in on the ground floor.
In some cases, the exit is more abrupt. Both Robin Hood and Bankers Trust noted that they will revoke their grants if the organization does not perform. Of course, relationships can also end simply because the partnership never developed or just did not working out.
In our discussions with the leaders of foundations and review of the trade literature, it is apparent that there is opposition to the application of venture capitalism to philanthropy. Even foundations that are considering venture philanthropy have identified several barriers to its implementation. There are general themes that characterize the reluctance of foundations to adopt venture philanthropy as well as the transitional challenges they face. There are, however, solutions to many of these obstacles.
Less than 25% of foundations have paid staff. Even for foundations with paid staff, lack of capacity can be a problem. Stuart Comstock-Gay of the New Hampshire Charitable Foundation observes that one reason why his foundation cannot move to a venture philanthropy approach right now is that they lack the staff needed in order to provide the necessary support for grantees. The majority of foundations are relatively small, volunteer-run organizations capable of making only a few large grants annually. Venture philanthropy requires a proactive management approach and long-term, large-scale financial commitments that most foundations simply cannot make. Even larger foundations, which have the financial resources, may not have staff with the appropriate skills to engage in the more active, management consulting techniques of venture capitalists. Chris Perez of Pfizer's Corporate Philanthropy Department notes that the demand for this approach is overwhelming and that it is difficult to maintain comparable growth rates between the staff capacity and the demand for grants.
While staffing capacity is a significant barrier, it does not preclude foundations from using venture philanthropy techniques. As noted earlier, Working Capital, uses the "peer lending" investment strategy. Working Capital organizes groups of independent entrepreneurs and provides a capital investment for the group to work with as a whole. The group of peers decides through consensus when each entrepreneur needs more capital and how much to lend. Because the peer group supports and advises its members the model requires little staff or overhead costs. If the peer group meets established performance benchmarks, Working Capital provides additional funding for the group. Foundations with small staffs may be able to better use venture capitalist approaches through peer-grantmaking processes.
Many of the foundation staff interviewed emphasized that the range of organizations they work with requires a "generalist" approach. To address this issue, foundations have created internal consulting groups or solicited pro-bono assistance from established consulting groups. One example is Bankers Trust's BT SWAT, a group of bank employees that provide intensive consulting to grantees. Such consulting groups have been instrumental in providing management assistance services and evaluating the success and effectiveness of their grant recipient's programs.
Jed Emerson of the Roberts Foundation describes traditional foundation program officers as "transaction driven." The performance of foundations and their staff is evaluated by the number and value of transactions produced. If the number of organizations under consideration for funding is limited to a few large grants, the foundation's power is diminished. Recognizing this, many funders may prefer to make more small grants, thus maximizing the number of transactions and the perceived leverage of the foundation.
Moreover, Vanessa Kirsch of New Profits Inc. explains that the prevailing attitude is that the nonprofit sector is 'second class.' Salaries are below market rates and overhead is so low that basic infrastructure like staff development is neglected. Many leaders in foundations and nonprofits mistrust corporations and the connotations of market forces and competition. Yet, many nonprofits manage themselves in a more market-oriented fashion which can lead to higher salaries overhead costs. Donors, believing lower overhead rates are better, will resist this trend. Foundation staff and donors will need to be convinced that more expensive venture capitalists methods work in the social sector. Venture philanthropy also requires a long-term focus and will not be appealing to funders expecting immediate short term results. Venture philanthropy provides "patient capital" for long-term outcomes.
Another barrier for foundations seeking to employ venture capitalist methods is that long-term grant funding commitments "tie up" resources and funds. Angel Bermudez, Senior Program Officer of the Boston Foundation, sees value in the venture philanthropy model but feels it reduces the flexibility of the foundation to address new issues affecting the nonprofit market. If foundations have only a fixed amount of funding available each year, making a five-year grant today reduces the possibility of making grants to other organizations in the future.
Most foundations, however, do not have a fixed supply of capital. Foundations grew by more than 30% in the early 1990's, due to both investment growth and new gifts from donors (See Appendix A, Table 2). Moreover, the Peninsula Community Foundation experienced growth in new donations since applying venture capital practices. It appears that foundations using the venture capitalist approach can grow sufficiently to allow them to continue to meet the current needs of the community. Interestingly enough, we see a cycle beginning to emerge: progressive partnerships lead to successful grants and programs which lead to increased donations which lead to additional partnerships. It is essentially a snowball effect. Once the venture philanthropy model works and proves itself, new donations begin to flow to the foundation.
Strong leadership from the staff, board and donors is a fundamental component of venture philanthropy. The most progressive venture philanthropist foundations, such as Robin Hood and New Profits Inc., were begun by visionary leaders who intended to create unique organizations from the start. Those foundations that are converting to more venture philanthropist methods have encountered more resistance. There are risks to being proactive, concentrating funding among fewer organizations and making long-term commitments. If the board of the foundation, donors or staff have differing tolerances for risk, conflicts will occur. Likewise, if the leadership of the funded organizations is resistant to being partners with a foundation or resistant to the funder's management assistance, the project is less likely to succeed. The Robin Hood Foundation finds that if the organizations they fund are not led by true collaborators, their projects fail. Angel Bermudez of the Boston Foundation contends that nonprofits often cannot sustain leadership over several years. Because the nonprofit field is competitive and chronically under-funded, it is difficult to retain qualified staff. Yet, it seems high turnover magnifies the need for strong infrastructure. Venture philanthropy may in part provide a solution, helping support infrastructure through management consulting, capacity building and technical assistance.
Foundations must be conscious of the balance between oversight and partnership. Many foundations do not want to own or drive the nonprofits they support. Because the venture capital model includes an ownership relationship, investors become directly involved in management and performance evaluation. As Bruce Sievers points out, "foundations typically supply a modest portion of a grantee's income stream. Thus the foundation supports, but does not "control", the nonprofit. Foundation involvement in hiring and internal management decisions of nonprofits would be rightly viewed as intrusive, in most cases, and would probably be dysfunctional."
However, Lisa Smith has found in recent surveys of Robin Hood Foundation grant recipients, a desire for more site visits, increased in kind donations, and additional training and assistance. In contrast to Robin Hood, the Community Foundation for Greater New Haven encountered some resistance when it tried to participate on the board of a grantee and has found some grantees do not understand the foundation wantsto be its partner. These experiences show the importance of fostering a relationship through meetings and conversations.
The value an experienced investor can bring to a nonprofit is apparent. Venture philanthropy helps minimize instability through management assistance, technical assistance, and infrastructure building services. Ultimately the relationship between funder and fundee in either the venture philanthropy or capital world, is marked by partnership, not micro-management. If each party benefits from the relationship and works in collaboration, control should not become an issue. Both parties need venture philanthropy's partnership to generate positive social returns.
While venture capitalists can review business plans and SEC 10-K filings, nonprofits sometimes lack even audited financial statements. Likewise, a venture capitalist knows if an investment is successful based on the profits produced. Because nonprofits produce social benefits, rather than profits, there is no easily quantifiable return on investment. Vanessa Kirsch of New Profits Inc. hopes that the use of the balanced scorecard evaluation will provide better information. The most effective signal of an effective organization comes from market forces, such as price or demand, but it remains difficult to use these indicators in the social marketplace. The Edna McConnell Clark Foundation directs grantmaking to creating, compiling and analyzing outcomes data that will better show the value of projects.
The bottom line is donors want their scarce charitable dollars to be used wisely. As Angel Bermudez of the Boston Foundation explains, "donors want to be part of success in the way investors want to be a part of a profit." To draw a parallel to the capital markets, donors want to have their money invested in projects that provide a positive net present value (NPV). The magnitude of the NPV is determined by the social, community, and economic benefits resulting from the grant recipient's programs. Although hard to quantify, if donors "perceive" a positive NPV as a result of their contribution, they will be more likely to make contributions. Venture philanthropy's long-term partnerships ensure that the values of the donor are aligned with the values and programs of grantees.
At most community foundations, one-third or more of all donations is restricted to uses prescribed by the donor. Many private and operating foundations have similar restrictions. (See Appendix A, Table 3) These restrictions remove staff discretion from the grantmaking decision process, eliminating opportunities to engage in venture philanthropy. Given these donor restrictions, the pool of foundation dollars available for venture philanthropy is limited. In time, however, venture philanthropist donors may be less restrictive in the use of their funds. The Peninsula Community Foundation found that as it expanded the use of venture philanthropy, donors who controlled restricted funds began to ask the foundation for grantmaking advice. The foundation's president, Sterling Speirn, believes that as this strategy is more widely accepted, more donors will look to the foundation to direct more of their grantmaking.
Donors receive an income tax deduction in return for gifts that are made to publicly supported organizations. Foundations, as a conduit of donor's tax-advantaged gifts, must adhere to this requirement. While most gifts to nonprofits are allowed, donors may not fund for profit business ventures, regardless of the social objectives of that business. The emerging class of new "social enterprises," such as CitySoft (a new for profit Internet home page design firm that trains and employs urban minorities), cannot access philanthropic capital because of these regulations. Jed Emerson of the Roberts Foundation and Vanessa Kirsch of New Profits Inc. both contend that changes in the tax laws are needed to provide capital for new hybrid organizations that combine for profit management with a social mission. Until these changes occur, however, venture philanthropy will not maximize its potential to bring greater market forces into the nonprofit capital market.
If (through expanded tax advantages or other means) venture philanthropy entails the funding of a wider variety of social enterprises, it is possible that donors will make low-return investments in businesses with social missions rather than give to charity. New Profits Inc. has found some foundations are threatened by venture capitalist strategies because it might eliminate their role as a donor intermediary.
Because this field is so new, no one knows how donors will react. However, venture philanthropy is not necessarily competition for traditional grantmakers. It may be that the investors attracted to social enterprises are not currently making any donations. Perhaps disenchanted with traditional philanthropy, their giving will be stimulated by venture capitalist approaches. Organizations like New Profits Inc. may end up providing a value-added service for more traditional foundations by advising their venture philanthropy projects and offering additional support to donors wishing to make investments in social enterprise.
The staff of the foundations interviewed agreed that more projects deserve the venture capitalist approach than are currently served, but that the approach makes sense for perhaps 10% to 50% of all grantmaking. Some projects, such as battered women's shelters or soup kitchens, cannot easily generate revenue to support overhead costs. Of the projects appropriate for venture philanthropy, we have identified several success factors, however. Based on our small sample of funders from various communities and donor bases, the following themes emerged as conditions for venture philanthropy:
New Profits Inc. has identified its target donor as self-made, high-wealth and young (age 30 to 50) money managers and entrepreneurs. These donors have the resources to give, they are willing to take risks, and they are most unwilling to use traditional giving methods. In their charitable giving, these donors prefer to apply the business practices with which they are familiar. Venture philanthropy seems to have the strongest following in the Silicon Valley, Seattle, New York and Boston-all areas with concentrated young, self-made wealth profiles similar to New Profit's target. These donors are very different than those with inherited wealth, who perhaps also inherited the giving processes of traditional foundations. Areas with more traditional donors may be least amenable to venture philanthropy.
Nonprofits will probably always need traditional sources of funding. In many communities, foundations fund nonprofits for those expenses they incur over and above their normal annual operating budget, such as new buildings and equipment. In these communities, traditional grants can be complemented by venture philanthropist activities that fund organizational development and annual operating expenses. In areas where sources of funding for basic capital expenses, such as buildings and equipment, are limited, venture philanthropy may be less of a priority.
Some communities have United Ways that provide operating funding for new and existing organizations. In these communities, foundations can focus on short-term capital needs and start-up funding, expecting the United Way to support operating expenses and capacity building. In many communities, however, the United Way is not able to provide operating funding. As a result, foundations may be forced to fill the void by providing funding with very long-term venture philanthropist strategies.
Community foundations provide a larger share of operating funding for nonprofit organizations than other types of foundations. (See Appendix A, Table 4) In cities where these foundations provide stable, long-term funding, the need for venture capital is reduced, at least for traditional nonprofits.
Because the venture philanthropist funds projects for several years, new sources of capital are required to meet community needs that may arise in the future. While it is possible that the venture capitalist approach will "unlock" untapped funding sources, for the venture capitalist approach to work, the community must have a growing donor base to provide more resources.
A good source of on-going funding after foundations exit their grants is clearly missing from the nonprofit capital market. By focusing on organizations that can generate their own revenues, venture philanthropy can address this problem. Bankers Trust, which primarily funds community development corporations (CDCs) for housing and economic development projects, provides two year loans after an initial three-year grant with the intention that the organization will be self-sustaining after that point. Billy Shore, of Share Our Strength, has examined many examples of nonprofit enterprises that can create revenue after an initial investment. Chris Perez notes that Pfizer is particularly interested in funding organizations that generate revenue. Generating revenue, however, may not produce enough operating funding for many organizations. The Robin Hood Foundation, recognizing this fact, continues its funding at some level as long as the project is performing well.
Private foundations seem to have the highest capacity to take risk. Unlike corporate funders who worry about sales or community foundations who worry about fundraising from donors, private foundations face few risks if a project fails. Yet private foundations have been among the slowest to adopt venture philanthropy. Perhaps these are the most traditional, most donor restricted sources of foundation funding. Or, perhaps private foundations lack the pressure of competition for new donations. Many private foundations do not have expanding donor bases (because the donor is deceased) and may fear becoming locked into long-term projects. Whatever the cause, it seems venture capitalist approaches are underutilized in this, the largest sector of foundations.
Community foundations are constantly in contact with their many donors. They are fundraising and making grants simultaneously and many donors direct their gifts through the foundation. Community foundations are also focused on specific geographic areas, dealing with the same grantseekers year after year. This is also the fastest growing sector of foundations where new funds are available at faster rates than grants are made (See Table 2). These factors make community foundations an ideal user of venture philanthropy. Although these foundations must be careful not to alienate donors if high-risk funding fails, by adding venture capitalist-type advising services, donor support may increase. Furthermore, the efforts of community foundations are increasingly being recognized by larger national foundations, who offer community foundations collaborative funding opportunities and added prestige. "We can become the local retail outlet for bigger foundations if we prove ourselves as innovators," says Sterling Speirn of the Peninsula Community Foundation.
Corporate foundations can be a natural fit for venture philanthropy, especially if, like Bankers Trust, they are in the financial services industry. In these foundations, social sector values can intersect with business practices. However, if the corporation uses its giving program as part its overall corporate strategy (which requires flexibility and has a low risk tolerance), venture philanthropy makes less sense for corporate foundations. Corporate giving is predominately comprised of matches to employee contributions. There may be some role for venture capitalist approaches to corporate grantmaking, but only as a smaller part of the company's overall grantmaking portfolio.
Combined funders or intermediaries, such as the Robin Hood Foundation, have been specially designed to employ venture philanthropist strategies. They can develop the unique capacity and skills needed to seek out and fund appropriate social enterprises. Much like community foundations, they are closely connected to their donors and can specialize in providing services that other funders cannot offer. New Profit Inc.'s plans to compensate staff based on grant performance will give it advantages over other funders using venture philanthropy. The advantages of combined funders may also be their increased specialization and ability to offer hybrid investments in hybrid social enterprises. This group of funders is at the forefront of venture philanthropy. Most interesting is that traditional foundations are financially supporting these organizations, in essence "outsourcing" the specialized task of venture philanthropy.
Donors to charity are the providers of equity in the social sector, just as investors are in for profit markets. If the needs of the nonprofit sector were considered to form a capital market, it would be worth $500 billion. Of that amount, one-third, or $150 billion, was provided by all forms of philanthropy. Of all philanthropy, foundations financed $10 billion, or two percent of the nonprofit capital market. Yet, in this capital market, foundations are the most organized funding source. Foundations are intermediaries in the nonprofit capital market-like investment bankers in the for profit market. Not all investors in the private market are venture capitalists, nor should they be in the nonprofit capital market.
Clearly venture philanthropy is currently a small share of all giving, but it is a significant trend. According to Jed Emerson it has become "chic to draw parallels to venture capitalists." Despite its critics, however, venture philanthropy is becoming more than a "private sector metaphor." There are three reasons venture philanthropy has the potential to significantly change today's nonprofit capital market.
First, there is a new generation of young, self-made wealthy that dislike traditional philanthropy. The US has more than 7,000 self-made millionaires and 170 billionaires. The majority of the new wealthy are young, well-educated, entrepreneurs who made their fortunes in the last decades. Moreover, these donors are not donating the same proportion of their wealth to charity as people of similar wealth levels in the past. These donors apply market discipline by investing in philanthropic activities rather than just contributing to them. One potential donor told the New York Times, "I don't find it satisfying to just write a check when I don't know the money will be used in a positive way. There should be a hybrid of the purely commercial and purely philanthropic world." Another donor told the Washington Post, "We don't expect them to go as far and as fast as Microsoft did, but we don't want to give passively and not challenge how things have been done forever, either."
Second, the primary sources operating funding in the nonprofit capital market are evaporating. Government's role is reduced, and the resources of the United Way are declining in many areas. Downsized government is a well-documented trend. But the United Way, which depends on annual employee giving campaigns, has been harmed by the cutbacks among in large employers. The percentage of employees reporting access to payroll deduction programs has declined from 39% in 1992 to 26% in 1996. Meanwhile, the organization has been plagued by scandals and charges of mis-management. The New York City United Way, for example, lost 18% of its donations in the last five years.
Third, there is an emerging social enterprise sector-hybrid nonprofit-for profit organizations that run as revenue generating businesses and pursue a social mission. One example, CitySoft in Boston, has received a grant from the Echoing Green Foundation, although tax issues over the grant were complex. These organizations need new equity investments, but because they offer no or very low financial returns, attracting traditional capital is difficult. Foundations can better serve this market by not just donating earned income but also investing their principal in social enterprises.
Perhaps the growth of social entrepreneurs is the
most important reason for adopting the venture philanthropy approach.
Just as there is a continuum of social enterprise, ranging from
purely volunteer charitable organizations, to for profit businesses
that pursue a social mission, there is a continuum in philanthropy.
There is a range of strategies available to donors and social
entrepreneurs seeking a better society. The chart below shows
how these two continuums need complementary resources.
Start-Up Capital: New social entreprenuers such as Melissa Bradley of The Entrepreneurial Development Institute, Nick Gleason of CitySoft and Steve Mariotti of the NFTE have expressed the difficulty they had accessing start-up capital because of the social enterprise nature of their organizations. Strategies to develop specialized equity investments for nonprofit or for profit social enterprises, such as Jed Emerson's proposed social enterprise tax credit, will provide "direct incentives for investors to place investments in non-profit enterprises." As the field of social enterprise continues to expand these approaches require changes in tax policy, donor culture and the nonprofit capital market.
Ongoing Funding: It is important to remember there will always be nonprofits that provide infrastructure-like services for society that cannot engage in revenue-generating activities. The promise of becoming self supporting inspires many social enterprises, but even with the nurturing of venture philanthropy, it is difficult for nonprofits to operate independently of outside support. Venture philanthropy will not eliminate the need for on-going support of organizations.
Managing Change: This project also stressed the importance of managing change. A newly created foundation, Robin Hood most explicitly exemplifies the venture philanthropy approach. However, other foundations have had to struggle with the transition to the approach. Venture philanthropy requires foundations to analyze their external environment, balancing the needs and culture of their organization, donors, staff, grantees and the community at large. The importance of focusing on staff when implementing strategic change was continually emphasized. Staff must be motivationally and technically aligned with the foundation's changing mission. Pfizer's Corporate Philanthropy Department and the Community Foundation of Greater New Haven have largely been able to consider and implement the approach by bringing in new staff and gently explaining to donors and staff that change is occurring.
More personally, this project has suggested to us,
that in our own giving, we should prefer organizations that support
and employ venture philanthropy approaches.
Boston Foundation 1997 Annual Report and Grant Seeker's Guide.
Community Foundation for Greater New Haven Grant Application.
Cook, Jonathan. "Cost Effectiveness: First the Grantmakers Must Do Their Job Right," Foundation News, (33)66 Nov-Dec 1992, pp. 34-38.
Cringely, Robert X . "High-tech wealth" Forbes, Vol. 160 July 7, 1997, pp. 296-308.
Crutchfield, Leslie R. "Wall Street Philanthropy: A Roundtable Discussion with Vanessa Kirsch, Christine Letts, Walter Palmer and Eric Kriss," Who Cares April 1997, pp. 44-47.
Crutchfield, Leslie R. "Guerilla Philanthropy: The Robin Hood Foundation," Who Cares September/October 1997, pp. 36-39.
Edna McConnell Clark Foundation 1996 Annual Report.
Emerson, Jed and Fay Twersky, eds. New Social Entrepreneurs: The Success, Challenge and Lessons of Nonprofit Enterprise Creation. The Roberts Foundation Homeless Economic Development Fund, San Francisco, September, 1996.
Goldberg, Carey, "Computer Age Millionaires Redefine Philanthropy," The New York Times, July 6, 1997 Section 1, p 1.
Havemann, Judith. "Philanthropy: The Next Generation Young Millionaires Seek Innovative Ways to Donate Their Dollars," The Washington Post Nov. 16, 1997, p. A01.
Hodgkinson, Virginia Ann and Murray S. Weitzman with John Abrahams, Eric Crutchfield, and David R. Stevenson, Nonprofit Almanac, 1996-1997: Dimensions of the Independent Sector, Jossey-Bass Publishers, San Francisco, p. 4-118.
Irwin, David. "Virtuous Capital" Letter to the Editor Harvard Business Review Sept-Oct 1997.
Johnson, David Cay, "United Way Faced With Fewer Donors, Is Giving Away Less." The New York Times November 9, 1997. Section 1, p. 1.
Letts, Christine, William Ryan and Allen Grossman. "Virtuous Capital: What Foundations Can Learn from Venture Capitalists," Harvard Business Review March-April 1997 (Reprint).
Locke, Elizabeth H. and David H. Roberson, "Virtuous Capital" Letter to the Editor Harvard Business Review May-June 1997.
New Hampshire Charitable Foundation 1996 Annual Report and Grant Application.
Pfizer Inc & the Pfizer Foundation Inc Corporate Philanthropy Report for 1996-97.
Robin Hood Foundation Grant Seeker's Guide and Information Packet.
Schverish, Paul G. The Study on Wealth and Philanthropy. "Managerial Philanthropy Among the Wealthy." Boston College Social Welfare Institute Working Paper, 1996.
Sievers, Bruce, "If Pigs Had Wings," Foundation News & Commentary November/December 1997. (Downloaded from website: http://int1.cof.org/fnc/sievers.html)
Working Capital Information Packet and Loan Policy.
Bermudez, Angel. Senior Program Officer: Boston Foundation, 1 Boston Place, 24th Floor, Boston, MA 02108.
Comstock-Gay, Stuart. Vice-President for Programs: New Hampshire Charitable Foundation, 37 Pleasant Street, Concord, NH 03301.
Hadley, Nancy. President: Community Foundation of Greater New Haven, The New Haven Foundation Building, 70 Audobon Street, New Haven, CT 06510.
Hattem, Gary. Managing Director: Bankers Trust Company Foundation, 130 Liberty Street, 10th Floor New York, NY 10006.
Kirsch, Vanessa. Founder: New Profit Inc., 285 Columbus Ave Boston, MA 02116.
Perez, Chris. Grants Coordinator: Pfizer Corporate Philanthropy Programs, 235 East 42nd Street, Mail Stop 235/11/11A, New York, NY 10017.
Proscio, Tony. Consultant: Edna McConnell Clark Foundation, 250 Park Avenue, New York, NY 10177.
Smith, Lisa. Deputy Director: Robin Hood Foundation, 111 Broadway, New York, NY 10006
Speirn, Sterling. Executive Director: The Peninsula Foundation, 1700 S. El Camino Real, #300, San Mateo, CA 94402.
Wilson, Kimberly. National Program Director: Working Capital, 99 Bishop Allen Drive, Cambridge, MA 02139.
| Definition | |
| Independent | An endowment legal defined as a private foundation (as opposed to a charity) usually starts with funds derived from an individual or family. The foundation's primary function is to make grants. If run by a particular family, it may be referred to as a "family foundation." About 85% of all foundation assets are in independent foundations. |
| Company | A private foundation that derives its funds from a for profit corporation. Fund management and grantmaking is usually closely tied to company officials. Companies form foundations in order to maintain philanthropic commitments regardless of fluctuations in the business cycle. Most maintain very small endowments. About 3% of all foundation assets are in corporate foundations. |
| Operating | An endowment designated as a private foundation but that awards few or no grants. As the name implies, operating foundations "operate" programs, provide services directly to clients or conduct research. About 5% of all foundation assets are in operating foundations. |
| Community | Classified as 501(c)(3) charities by tax laws, these foundations operate like private foundations, however their funds are derived from many donors and many funds. Administration of many funds within a region or community is centralized to gain economies of scale. Grants and donors are usually geographically based. Donors have various degrees of control over their funds, in some case restricting grants to only one organization. Donors may make gifts to the foundation and then make sub-grants over time, operating much like a private foundation. About 7% of all foundation assets are in community foundations. |
Table 4: Grant Support By Type of Foundation
Appendix B: Descriptions
of Interviewed Organizations
| Bankers Trust CompanyFoundation
Contact: Gary Hattem, Managing Director (212) 250-7060 | |
| Description of Foundation |
|
| Size of Investments |
|
| Length of Relationship |
|
| Closeness of Relationship |
|
| Risk Management |
|
| Performance Measures |
|
| Exit Strategies |
|
| Key Success Factors |
|
| Specific Thoughts about Venture Philanthropy |
|
| Boston Foundation
Contact: Angel Bermudez, Senior Program Officer (617) 723-7415 | |
| Description of Foundation |
|
| Size of Investments |
|
| Length of Relationship |
|
| Closeness of Relationship |
|
| Risk Management |
|
| Performance Measures |
|
| Exit Strategies |
|
| Key Success Factors |
|
| Specific Thoughts about Venture Philanthropy |
|
| Community Foundation for Greater New Haven
Contact: Nancy Hadley, President, (203) 777-2386 | |
| Description of Foundation |
|
| Size of Investments |
|
| Length of Relationship |
|
| Closeness of Relationship |
|
| Risk Management |
|
| Performance Measures |
|
| Exit Strategies |
|
| Key Success Factors |
|
| Specific Thoughts about Venture Philanthropy |
|
| Other |
|
| Edna McConnell Clark Foundation
Contact: Tony Proscio, Consultant, (718) 625-0035 | |
| Description of Foundation |
|
| Size of Investments |
|
| Performance Measures | · How to define success is very difficult; it's hard to reach a consensus since there is no equivalent to an IPO.
|
| Exit Strategies |
|
| Key Success Factors |
|
| Specific Thoughts about Venture Philanthropy |
|
| Other |
|
| New Hampshire Charitable Foundation
Contact: Stuart Comstock-Gay, Vice-President for Program, (603) 225-6641 | |
| Description of Foundation |
|
| Size of Investments |
|
| Length of Relationship |
|
| Closeness of Relationship |
|
| Risk Management |
|
| Performance Measures |
|
| Exit Strategies |
|
| Key Success Factors |
|
| Specific Thoughts about Venture Philanthropy |
|
| Other |
|
| New Profit Inc.
Contact: Vanessa Kirsch, Founder, (617) 627-2466 | |
| Description of Foundation |
|
| Size of Investments |
|
| Length of Relationship |
|
| Closeness of Relationship |
|
| Risk Management |
|
| Performance Measures |
|
| Exit Strategies |
|
| Key Success Factors |
|
| Specific Thoughts about Venture Philanthropy |
|
| Other |
|
| Peninsula Foundation
Contact: Sterling Speirn, Executive Director (415) 358-9369 | |
| Description of Foundation |
|
| Size of Investments |
|
| Length of Relationship |
|
| Closeness of Relationship |
|
| Risk Management |
|
| Performance Measures |
|
| Exit Strategies |
|
| Key Success Factors |
|
| Specific Thoughts about Venture Philanthropy |
|
| Other |
|
| Pfizer Corporate Philanthropy Department
Contact: Chris Perez, Grants Coordinator, (212) 573-6641 | |
| Description of Foundation |
|
| Size of Investments |
|
| Length of Relationship |
|
| Closeness of Relationship |
|
| Risk Management |
|
| Performance Measures |
|
| Exit Strategies |
|
| Key Success Factors |
|
| Specific Thoughts about Venture Philanthropy |
|
| Robin Hood Foundation
Contact: Lisa Smith, Deputy Director (212) 227-6601 | |
| Description of Foundation |
|
| Size of Investments |
|
| Length of Relationship |
|
| Closeness of Relationship |
|
| Risk Management |
|
| Performance Measures |
|
| Exit Strategies |
|
| Key Success Factors |
|
| Specific Thoughts about Venture Philanthropy |
|
| Other |
|
| Working Capital
Contact: Kimberly Wilson, National Program Director (617) 576-8620 | |
| Description of Foundation |
|
| Size of Investments |
|
| Length of Relationship |
|
| Closeness of Relationship |
|
| Risk Management |
|
| Performance Measures |
|
| Exit Strategies |
|
| Key Success Factors |
|
| Specific Thoughts about Venture Philanthropy |
|
Outline
Assessing Venture Philanthropy
The Challenges For Traditional Philanthropy
Desired Impacts Are Not Being Achieved
Government Has Changed Its Involvement
A New Approach
What Is Venture Philanthropy?
The Philanthropy Continuum
How Venture Philanthropy Works In Practice
Closeness Of Relationship
Length Of Relationship
Size Of Investments
Risk Management
Performance Measures
Exit Strategies
Challenges Of Venture Philanthropy
We Do Not Have The Staff Or Funding Capacity To Use Venture Philanthropy
The Culture Of The Field Is Contrary To Venture Philanthropy
Venture Philanthropy Reduces Our Ability To Make Grants In The Future
We Have A Leadership Crisis On Our Board And Among Grantees
We Do Not Want To Meddle In The Affairs Of Our Grantees
There Is Not Enough Information To Evaluate Philanthropic Investments
Our Donors Restrict The Use Of Our Funds
The Tax Laws Prevent Us From Engaging Investing In Business Activities
Venture Philanthropy Robs Us Of Donations
Fertile Environments For Venture Philanthropy
Donors Are Entrepreneurs
The Role Of Other Sources Of Funding In The Community
Funding Revenue Generating Businesses
Organizational Form Matters: Community, Private Or Corporate Foundations
Venture Philanthropy And The Social Enterprise Capital Market
Reflections And Implications For Social Entrepreneurs
References
Interviews
Appendix A: Tables
Appendix B: Descriptions Of Interviewed Organizations
Endnotes
This paper was written by:
Christopher Capers, Harvard Business School MBA 98
Michael Collins (michael.collins@usa.net),
Harvard Kennedy School of Government MPP 98
Shahna Gooneratne, Harvard Kennedy School of Government MPP 98
Prepared for Harvard Business School Professor James Austin, Entrepreneurship in the Social Sector