Blending Business and Charity

Google and other high-tech entrepreneurs look for new approaches to philanthropy

Google’s decision to operate its philanthropic arm largely as a for-profit entity adds new momentum to a growing effort among technology entrepreneurs to blend business and charity. But it also raises vexing questions about whether the approach will benefit charities and the rest of society.

When Google, the search-engine company in Mountain View, Calif., had its initial public offering two years ago, officials pledged 1 percent of the company’s stock — worth roughly $1-billion — and 1 percent of its annual profits to support its philanthropic efforts, which are collectively known as Google.org, over the next 20 years. Since then, the company has put $90-million into a traditional foundation, which will operate as a nonprofit organization.

The company says that the rest of the money that it has promised to use to fight poverty internationally, improve global health, and help solve energy and environmental problems will probably be divided between the foundation and the for-profit entity. Without the constraints that govern the use of foundation money, Google.org would be able to invest in companies and investment funds that produce a social benefit.

“We wanted to give ourselves the flexibility to take any approach that we think will have the highest return,” Sheryl Sandberg, Google’s vice president of global online sales and operations, has said. Any financial returns on the investments made with the for-profit funds would go back to Google.org.

‘Social Purpose’ Businesses

The company’s decision puts Google.org in the company of a small, but high-profile, group of wealthy donors — including Steve Case (of America Online) and Pierre and Pam Omidyar and Jeff Skoll (of eBay) — who are looking to for-profit “social purpose” businesses as another approach for their philanthropy.

“Too many people still act as if the private sector and the social sector should operate on different levels, where one is all about making money and the other about serving society,” Mr. Case, co-founder of America Online, told participants at last year’s meeting of the Social Enterprise Alliance, a national organization that helps charities develop earned-income ventures.

“We can and should integrate these concepts and these missions,” he said. “Instead of all the organizations tending toward the extremes, the most dynamic, innovative zone would be somewhere in the middle, with businesses that are not only for-profit and social-service groups with their own earned income all contributing to positive, durable, meaningful social change.”

Mr. Case has taken that approach to the work he has done in his home state of Hawaii. On the business side, he bought a 40-percent stake in Maui Land & Pineapple, a company committed to community development, environmental responsibility, and nurturing local agriculture entrepreneurs. At the same time, the Case Foundation has been working with the Hawaii Community Foundation and the University of Hawaii to help nonprofit leaders develop business skills.

‘Bold Move’

Google’s plan to invest in businesses that also have a social mission has drawn praise from many in the nonprofit world.

“This is a really bold move,” says Brad Googins, executive director of the Center for Corporate Citizenship at Boston College. He says that he sees Google’s approach as an attempt to take capitalism’s best traits and techniques and apply them to the fight against tough social ills.

“It’s a very exciting experiment in designing a for-profit with social and environmental bottom lines that are more important than the financial bottom lines,” says Mr. Googins. “Even though all of them are important, this sort of flips it a little bit on its head.”

For the past 12 years, Investors’ Circle, a network of investors, based in Brookline, Mass., has been working to connect businesses that produce a social benefit with the capital they need to start and expand their ventures. In that time, members have put more than $107-million into companies that concentrate on energy and the environment, food and organics, health and wellness, community development, and news and entertainment media.

The entry of Google, with its high profile and deep pockets, into the area of social investing can only be a boon to the social-minded companies that Investors’ Circle works with, says Michael Bartner, the organization’s associate director. He says that even as the number of ventures that combine enterprise and social good are increasing, they often run into difficulty finding the financing they need to thrive.

“There’s a lot more demand for investment capital than there is supply,” says Mr. Bartner.

Traditional Charities

Others in the nonprofit world are more cautious in their assessment of the new model’s potential.

Suzanne DiBianca, executive director of the Salesforce Foundation, in San Francisco, thinks investing in for-profit enterprises as a way to foster social change makes a lot of sense in some areas, like microenterprise, where charities and banks make very small loans to people in the developing world to start businesses.

“I just hope that it doesn’t become pervasive in every area,” says Ms. DiBianca. “There are a lot of nonprofits that are really focused on some core issues that just couldn’t be a for-profit entity.” As examples, she points to the disaster aid provided by organizations like the American Red Cross and the United Nations World Food Programme.

The way that the company set up Google.org is an interesting example for start-up ventures, but could only be copied by companies whose stock is tightly held by a few individuals, says Joel L. Fleishman, a professor of public policy at Duke University, in Durham, N.C.

“It obviously only works with people who are keenly interested in doing good who control the corporation,” he says.

The for-profit portion of Google. org is not a separate legal entity, but a unit of the business. Some observers in the nonprofit world worry that in the event of an economic downturn, the company might reallocate the money for its own business purposes rather than social purposes.

Given the news-media attention the company’s philanthropy has garnered, that scenario seems unlikely, says Carol L. Cone, founder of a Boston company that helps corporations with their giving programs. “If they dipped into that money, they would absolutely be crucified,” she says.

Making a Difference

Discussion about the structure of Google.org misses the most important point, which is whether the company’s investments, nonprofit or for-profit, bring about social change, says Curt Weeden, chief executive officer of the Association of Corporate Contributions Professionals, in Mount Pleasant, S.C.

His only concern is how much Google.org will disclose about its efforts, given that it won’t be required to file a 990 informational tax return about its for-profit activities.

“Unless there is some openness to what they’re doing, it’s going to be suspect even if they’re not doing anything wrong,” says Mr. Weeden.

Jed Emerson also hopes that the company will be open, because he thinks it will have a lot of lessons — and war stories — to share. By focusing on financing business, he says, Google.org will take on a higher level of risk than it would as a traditional grant maker.

“Almost by definition, if you’re carrying greater risk then you’re carrying greater liability for failure,” says Mr. Emerson, a senior fellow at the Generation Foundation, in London. “And so the point for me is less, Gosh, are they going to hide things, than it is how could they be encouraged to use this process as a way to share knowledge and to fail forward.”

Frustration with the way the nonprofit world works and the slow pace of social change is one of the key drivers leading donors to look at ways that businesses can solve social problems.

“Imagine how much money for charity and philanthropic purposes has been moved, and when you look at some core issues, one could argue we may not have moved the needle much in some of those areas,” says Mario Morino, chairman of Venture Philanthropy Partners, a group of business leaders and foundations that invest in nonprofit organizations that serve poor children in the greater Washington region.

He says that when new donors from the corporate world start working on what seem like intransigent problems like poverty and realize how difficult it is, some migrate to the business approach that they are familiar and comfortable with.

Two years ago, Pierre and Pam Omidyar reorganized their philanthropy, creating a new umbrella organization, the Omidyar Network. The nonprofit entity that had been the Omidyar Foundation was moved under the auspices of the for-profit network, creating what officials at the network describe as “two checkbooks” — one nonprofit and one for-profit. The Omidyars provided $200-million for each fund.

“Certainly one of the challenges is being really thoughtful about how do you deploy the for-profit checkbook, how do you deploy the nonprofit checkbook,” says Marnie Sigler, a director of investments at Omidyar Network, in Redwood City, Calif.

In the area of microfinance, for example, the network has made both nonprofit and for-profit investments. In July, it awarded a $1.5-million grant to the International Development Law Organization, in Rome, to train lawyers and government policy makers to be more active in the microfinance industry. The money came from the nonprofit checkbook because training lawyers is unlikely to be profitable, but will build the capacity of the microfinance field as a whole.

On the for-profit side, the network has made investments in microfinance equity funds on which it expects to make a financial return.

Because the supply of for-profit capital is nearly unlimited compared with the supply of philanthropic dollars, donors in an area like microfinance need to think carefully about how charitable resources are used and make sure those funds don’t distort market forces, says Ms. Sigler.

“If you have philanthropy essentially crowding out private capital or more commercially minded actors,” she says, “then you’re not going to see the kind of scale that you would otherwise see.”

Blurring the Lines

The divisions between the nonprofit and for-profit world are blurring, says Ben Binswanger, chief operating officer of the Case Foundation, in Washington, which Steve Case and his wife, Jean, established in 1997.

The foundation is experimenting to see how it can use business approaches in its giving. It made an investment in MissionFish, a charity auction site owned by the Points of Light Foundation, that gives it the equivalent of an equity stake in the business. If MissionFish becomes profitable, the returns that the Case Foundation earns will go into a donor-advised fund that the foundation can use to make additional grants.

Entrepreneurship is also something the foundation looks for in the organizations it supports with traditional grants.

Last week, the Case Foundation announced a $5-million grant to PlayPumps International, a nonprofit organization in Johannesburg.

A PlayPump is a children’s merry-go-round that is attached to a water pump that provides access to clean water for schools and rural villages in Africa. As the children play, water is pumped to an above-ground storage tank. Billboards on the tanks provide public-service messages and revenue to maintain the water system.

The project shows how business, charities, and governments can work together to solve a problem, says Mr. Binswanger. Philanthropy pays for the PlayPumps, local governments help install them, and the people who are trained to maintain the pumps and change the billboards work for a for-profit company.

“It all becomes what are your end goals and how are you going to get to them,” he says. “If there are social problems that we’re trying to address, maybe some of those need to be addressed in a different sphere, and maybe they can be addressed more quickly and more flexibly by employing for-profit dollars in conjunction with nonprofit dollars.”

Ian Wilhelm contributed to this article.