Will ‘Venture Philanthropy’ Leave a Lasting Mark on Charitable Giving?

A new humility marks venture philanthropists today, a far different attitude than a few years ago, when the venture-philanthropy approach swept the foundation world with revolutionary momentum, challenging philanthropists to emulate its tenets or languish in the hopelessly ineffective backwaters of “traditional” philanthropy.

While the idea is still frequently discussed, it is no longer the answer to every question. With the perspective of time, it is worth looking back to see what fundamental changes, if any, the venture-philanthropy movement has wrought, and what its lasting legacy might be.

Venture philanthropy has never been precisely defined, but it generally emphasizes a few common principles. The first is helping nonprofit groups gain the capacity to serve more people more effectively by building the infrastructure and management capacity of the organization. Second is that grant makers are highly engaged, bringing not just money but also management assistance through a close and long-term involvement with grant recipients. Third, clear benchmarks of performance are jointly developed by both the grant makers and the recipients, and future support is contingent on meeting those goals.

But are these principles enough, even if widely adopted, to alter the performance of nonprofit organizations? Or with hindsight, can we identify inherent limitations to the venture-philanthropy approach — limitations that depend not on the behavior of donors, but on the very principles that made the venture capitalists themselves so successful?

In some ways, the zeal with which the venture-capital talk overtook philanthropy was no different — in fact far tamer — than the momentum with which it overwhelmed every other aspect of the economy. Venture capitalists were coining millionaires and billionaires among the 20-something set with astonishing rapidity. Young entrepreneurs became our heroes, and we hailed a new breed of “social entrepreneurs” to bring the magic of this success to charities and foundations.

The key to this success, of course, was the spectacular valuations that companies achieved almost as soon as they were formed, even without any profits or predictable business models. Driven by the overwhelming public desire to invest in the New Economy, vast sums of new money flooded into the public markets, and venture capitalists were able to achieve extraordinary exit strategies by taking their companies public at huge valuations in record time.

But times have changed. In retrospect, it is obvious that the brief but phenomenal success of the venture capitalists cannot be explained entirely by their genius, methodologies, or the management wisdom they brought to their portfolio companies. An exuberant stock market made them heroes, but, when it collapsed, so did their Midas touch.

Of course, philanthropy has no public markets, and, although foundations also speak of an “exit strategy,” its meaning is entirely different. In venture capital, exiting means cashing out, and it is the entire goal of investing, transforming hypothetical value into real money in whatever amount the public markets think it is worth. As public attitudes change, the swings in value can be — and were — huge.

In philanthropy, the goal of investing is achieving social change, and an “exit strategy” means that someone else will provide the future support for a project or service. Without public markets, large changes in valuation, or massive new sources of money flooding into the nonprofit world, the funds available for philanthropic “exit strategies” don’t change very much from year to year. In fact, given the relatively static sums donated to charity, the more new projects that are tried in the hopes that someone else will provide future support, the more thinly spread this exit money is.

For venture philanthropy to show the kind of results that venture capitalists did, the funds available to nonprofit groups would have to increase drastically — tenfold or more. Without more money, the venture philanthropists’ new ideas and help in organizational effectiveness can never achieve more than a marginal benefit, just as the venture capitalists themselves cannot help their companies overcome the changing valuations of the public markets.

Thus far, venture philanthropy does seem to have produced only marginal benefits. The approach seems to work best with new donors, modest sums of money, direct services, and a decidedly local impact. As a result, a handful of nonprofit groups have benefited, a few dozen wealthy entrepreneurs have become enthusiastic donors, and a loose network of venture-philanthropy partnerships has sprung up in cities across the country. But the venture-philanthropy movement has been around for at least six years, started in part by a Harvard Business Review article in 1996, and it has not yet demonstrated any successes on a national scale. What, then, will have been the lasting effects of the venture-philanthropy movement?

Interestingly, the three main elements of venture philanthropy — building operating capacity, close engagement between donors and recipients, and clear performance expectations — are not new at all. Many would argue that those have been among the trademarks of effective philanthropists for decades, and that they were well on the rise long before venture philanthropy gained public attention. One cannot divorce the success of a program from the caliber and resources of its management. Active donors, whether board members or knowledgeable and supportive program officers, have long been recognized as the most valuable supporters a nonprofit group can find. And the field of philanthropy has been moving inexorably to evaluation and performance measurement — not only of grantees, but of itself as well.

Perhaps venture philanthropy is more of an evolution than the revolution it first seemed to be. Already, it is beginning to blend in, taking its place as one style of grant making among many. With the new humility of today, a more open dialogue is beginning to take place between advocates of venture philanthropy and more traditional grant makers, each recognizing the potential to learn from the other, instead of arguing over who is right or wrong.

In short, venture philanthropy’s greatest lasting effect may be to reinforce a few basic principles of effective philanthropy that were already emerging. And, like many of the dot-coms that made venture capitalists so successful for a while, what seemed so new about venture philanthropy may have been the sizzle, not the content.

Mark R. Kramer is a founder of the Center for Effective Philanthropy, a nonprofit research organization, and managing director of the Foundation Strategy Group, a consulting firm in Boston. He is a regular contributor to these pages. His e-mail address is kramercap@aol.com.