A Revolution Was Ventured, But What Did It Gain?

‘Venture philanthropy’ was all the rage during the technology boom. It went through a transformation after the market bust, but its ideals live on

In the late 1990s, proponents of “venture philanthropy” vowed that it would revolutionize the

charitable world. Yet some venture funds, which emphasize long-term grants, efforts to improve charity management, and rigorous evaluation of results, didn’t survive long enough to make investments for more than a year or two.

The Entrepreneurs Foundation, for example, briefly used stock options donated by start-up companies to make venture grants, but its revenue dried up when the number of initial public offerings plummeted in 2001. The Silicon Valley foundation made just three grants before abandoning its venture fund and shifting to advising companies on corporate philanthropy.

Another venture-philanthropy fund, the Flatiron Foundation, made only a handful of grants before the company that sponsored it, a venture-capital fund hurt by the declining stock market, decided to cease new grant making in 2001. And the $6-million Innovation Fund, started by the James Irvine Foundation in 2000 to form partnerships between nonprofit groups and businesses, lasted just one year.

Such examples have led to the perception that venture philanthropy is on its last legs.

“People call me up and say, ‘I hear venture philanthropy is dead,’” says Vanessa Kirsch, president and founder of New Profit, a venture fund based in Cambridge, Mass., that works with eight nonprofit groups. “I say, ‘That’s interesting because I’m still at it.’”

In fact, New Profit is thriving, and so are several other survivors of the shakeout. Revenues of the nonprofit groups that New Profit supports grew by 31 percent last year.

One grantee, Jump Start, which enlists college students to tutor children struggling in preschool, is now working at 35 sites, up from four when New Profit began supporting it three years ago. And the John S. and James L. Knight Foundation just gave the fund $2-million to work on strategic planning with Kids Voting USA, a longtime Knight grantee that aims to promote greater civic participation among youths.

Weathering the Recession

Although some grant makers still consider venture philanthropy mere marketing hype, many nonprofit groups that have worked with venture funds say the advice and aid in strategic planning that they have received goes well beyond the support that they have gotten from traditional foundations. Surviving venture funds say there is no better sign of their staying power than the money flowing in during this time of economic weakness.

The Center for Venture Philanthropy, an arm of the Peninsula Community Foundation, in San Mateo, Calif., recently raised $2-million to start a fund to support environmental groups. That is only slightly less than it raised for similar funds in 1999 and 2000.

Carol Welsh Gray, the center’s executive director, attributes the fund-raising success to the accomplishments of an earlier fund, which focused on childhood literacy and started by pulling together a group of children’s librarians to identify what approach would work best to get the children of low-income parents better prepared to start kindergarten. Their answers, as well as a review of the research on childhood brain development, persuaded the fund’s leaders to actually create a new charity, Raising a Reader.

They had initially planned a more conventional approach — making grants to several nonprofit groups — but they viewed the new charity as an “exit strategy,” a term from the venture-capital world that connotes successfully closing out an investment. Although the fund was scheduled to last only four years, the charity would survive it, and continue to help prepare children from low-income families for kindergarten. “All of the way through, we were thinking, ‘How are we going to sustain this over time?’” Ms. Gray says.

Over the past three years, the charity has loaned bags of books to the low-income parents of 48,000 preschool youngsters, and students who participate in the program are scoring higher on a test of “kindergarten readiness” than a control group.

“The [venture-philanthropy] field has shrunk and dollars are tight,” Ms. Gray says. “That said, there’s no question that when you get results, people are attracted to them. We’re finding that people are just as excited about our work now as they were three years ago.”

Other venture-philanthropy funds that have weathered the downturn include:

• Social Venture Partners, which started in Seattle and puts equal emphasis on venture philanthropy and donor education. Twenty-three other cities now have Social Venture Partners affiliates, and many receive financial support from community foundations.
• The Roberts Economic Development Fund, a San Francisco group that supports local nonprofit organizations that operate businesses employing homeless people and others whose lives are unstable. A study tracking roughly 1,000 people who have worked for the businesses since 1997 found that 80 percent were still employed somewhere two years after being hired.
• NewSchools Venture Fund, in San Francisco, which focuses on improving elementary and secondary education. The fund has raised $65-million for a new effort focused on developing better management for charter schools, topping its $50-million goal. In late June, the Bill & Melinda Gates Foundation pledged the effort’s largest grant so far, $22-million.
• Venture Philanthropy Partners, which focuses on helping children from low-income families in the Washington, D.C., area. The fund raised $30-million — twice its goal — despite incorporating in 2000, just before the stock market’s slide.

Venture philanthropy also is gaining more support among traditional foundations, as evidenced by the Knight investment in New Profit and the Gates investment in NewSchools. And at least one traditional foundation — the Edna McConnell Clark Foundation — has radically altered its grant-making process in recent years, to the point where venture-philanthropy funds consider it kin.

Two Schools of Thought

The newcomers, for their part, are showing more respect for traditional philanthropy. Venture philanthropists generally stand by their ideas — supporting innovation, demanding tangible results, and sitting on the boards of grantees — but they no longer think their approach should be a template for all of philanthropy.

“There’s now a much better level of dialogue between what people think of as the new school and what people think of as the old school,” says Phil Buchanan, executive director of the Center for Effective Philanthropy, an organization in Cambridge, Mass., that examines the workings of grant makers. “We’re out of that strange period where there was a sense that business was king, and that the answer to every nonprofit problem was a market solution.”

It helps that venture-philanthropy leaders have been willing to eat crow for some of their potshots in the early days.

Mario Morino, chairman of Venture Philanthropy Partners, gave a speech in March 2000, called “Advancing a More Effective Philanthropy,” in which he said: “The way [traditional grant makers] support nonprofit organizations doesn’t encourage investment in building strong organizations.” He now calls those early comments “dumb” and his fund’s Web site strikes a conciliatory tone: “We live with a humility that comes from a recognition that we are newcomers to the field, that we have much to learn, and that if the social ills we are confronting were simple to erase, others more talented than we are would have erased them long ago.”

Yet Mr. Morino, who is also a special partner with the private-equity firm General Atlantic Partners, remains confident that grant makers can become more effective by applying concepts from the business world. Venture Philanthropy Partners identifies charities to invest in by talking to trusted sources in the neighborhood or cause where a potential grantee works; grant requests aren’t even accepted.

An ‘Effective’ Relationship

Skepticism remains about whether venture philanthropy is really a new approach.

In a recent interview in Stanford Social Innovation Review, Susan V. Berresford, president of the Ford Foundation, said: “Our field has had strategic, broadly focused partnership models of giving long before the term ‘venture philanthropy’ arose during the dot-com revolution, with all the new donors who made fortunes in this period.”

Leaders of venture funds say that their approach is unique because of certain principles — like helping to pay for a charity’s operating costs rather than programs, and rigorously assessing results — that they adhere to at all times.

“If you really get into the guts of what we do, I think it is different,” says Paul Shoemaker, executive director of Social Venture Partners Seattle. “If you take one piece and say that’s not different, that would be accurate. There are certain funders that focus on capacity building, or on outcomes, or that have long-term relationships. But a venture plan does all that together, in a hands-on relationship with that nonprofit.”

A recent study by Christine W. Letts and William P. Ryan, authors of a 1997 Harvard Business Review article that helped fuel the venture-philanthropy movement, found that the majority of 116 charities that had worked with six so-called high-engagement grant makers considered the relationship “effective and satisfying.”

Beyond the Money

Successful venture-philanthropy efforts involve a lot more than just money.

Educational First Steps, a charity in Dallas that helps child-care centers in low-income areas improve the quality of care they provide, has for the past three years received $50,000 per year (slightly less than 10 percent of its budget) from Dallas Social Venture Partners.

The fund’s members have also bought and installed computers at the centers; worked as volunteers reading to children; coached the charity’s executive director, Susan Peek Hoff, on personal and professional development; paid for a study by a local university that found that children at centers aided by the charity were more successful than the average child in Dallas public schools; and helped the charity craft a five-year strategic plan.

The charity, which had never before had a strategic plan, now aspires to double its revenue within five years, to $1-million per year, and to have all of its centers gain accreditation from the National Association for the Education of Young Children. It works with 33 centers, twice as many as when it began its association with Social Venture Partners in 2001.

Ms. Hoff admits she “had some trepidation” about whether Social Venture Partners would be too intrusive or prescriptive. “I wondered, are these people going to be in my business all the time? But it’s never been that way. The partners have been every bit as interested in learning as in giving direction.”

‘Measurable Results’

Nearly all of the venture-philanthropy funds publish research on their results on their Web sites. The Roberts Enterprise Development Fund has gone further than most, with a “social return on investment” measure that attempts to quantify not only the revenue generated by its nonprofit businesses, but also the benefits that society derives from its activities, such as getting homeless people into paying jobs (and thereby generating income-tax revenue).

Bruce E. Sievers, former executive director of the Walter and Elise Haas Fund, in San Francisco, says the focus on results among venture philanthropists is beginning to influence all grant makers — and he doesn’t view that as a positive development. He notes that a youth-development program might be assessed based on test scores — even though the test results have only a vague correlation with the program’s goal of building self-esteem.

“Everywhere you look, people talk about accountability in terms of meeting measurable results,” says Mr. Sievers, now a visiting scholar at Stanford University. “If you talk to grantees, they’ll tell you they think it’s another one of these games that comes out of the foundation world. Everyone scurries around to find measurable outcomes, whether it means anything or not.”

Differences in Strategy

Venture-philanthropy funds say they focus on results because they want to make the best possible use of their money. Most of the funds have at least once cut off financial support for a charity that they had originally intended to work with over a longer period. Social Venture Partners Seattle has cut short grants with three or four nonprofit groups after finding them resistant to working on strategy with the venture fund.

“What they really wanted was the money and they didn’t buy into the rest of the gig,” Mr. Shoemaker says.

Mr. Sievers and others fear that venture-philanthropy groups in particular will use the power that comes with being the grant maker to sometimes steer charities in a direction they would rather not go. But nonprofit groups that have rejected advice from a venture fund haven’t always suffered financially as a result.

For example, Social Venture Partners Seattle worked for more than a year with the Institute for Community Leadership, a nonprofit group that works with school districts in several states to help students learn leadership through poetry, to help the group determine its long-term strategy.

The organization initially agreed with the venture fund’s recommendation to expand the program to produce more revenue and become less reliant on grants. But the charity — which is run mainly by civil-rights activists — eventually became uncomfortable with the proposed expansion, fearing that it would hurt the quality of its workshops. In the end, the charity decided to stay on the same path it had been pursuing before it got help from Social Venture Partners.

“I can honestly say that it was a very good process for us,” says Karen Bohlke, the charity’s development director. “We had to go through that exercise to get the clarity.”

Social Venture Partners was disappointed with the charity’s choice, but stood by it nonetheless, providing financial support for another 18 months after the rift over strategy.

Grant Makers’ Influence

Many officials at venture-philanthropy funds continue to take seats on the boards of charities, a practice that critics believe will make charities even more likely to defer to the wishes of their benefactors. Most leaders of venture funds, however, say that grant-maker influence is inevitable, regardless of whether a board seat is taken.

“I’ve watched a lot of youth-development programs suddenly become youth-pregnancy-prevention programs,” says Kim Smith, co-founder and chief executive officer of NewSchools Venture Fund. “They’re following the capital. As fads in funding change, people who want to have an impact on lives will mold their program to fit what funders are demanding.”

Indeed, some say that having a grant maker on the board — as opposed to whispering in an executive director’s ear — ensures that strategic suggestions will be open for debate.

New Leaders for New Schools, a nonprofit group that recruits talented people and trains them to become urban-school principals, has received grants from a handful of venture-philanthropy funds, and representatives of both NewSchools Venture Fund and New Profit serve on its board.

The charity, founded just three years ago, says it had a hard time managing the conflicting advice it received from grant makers before it established a solid board structure. A third grant maker pushed NewSchools to expand aggressively in its first few years — a strategy it didn’t embrace. For now, it is concentrating on getting its model right by grooming principals in only three primary metropolitan areas: New York, Chicago, and Baltimore-Washington.

“If I were giving advice to nonprofits,” says Jon Schnur, cofounder and CEO of New Leaders, “it would be this: ‘Don’t just get one venture funder — get at least a couple.’ That way, you don’t have one funder’s perspective driving things.”