Venture Capital for Charity

Stock and stock options fuel effort to boost giving by new companies

Dave Corbin spends most of his waking hours doing everything he can to build Silicon Light Machines into a thriving high-technology business.

Like many chief executives of start-up companies here in Silicon Valley, Mr. Corbin says he barely has time for his family, let alone enough spare moments to devote to civic or charitable affairs.

That does not mean that Mr. Corbin is unwilling to foster a philanthropic spirit at Silicon Light Machines, which develops high-resolution-display technology, or that he wants to be the kind of C.E.O. who shuns community involvement. Yet he couldn’t think of a way to do good without also doing harm to his company’s chances to grow — and without alienating financiers who might think Silicon Light Machines was wasting time and money on charity when it has yet to turn a profit.

“From a corporate viewpoint, there’s always a list of a thousand things you’d like to have, and philanthropy is on the list,” Mr. Corbin says. “But realistically, you have to be profitable.”

He adds, “Our investors have invested in the company to build these products, not to give it away to charity.”

Mr. Corbin changed his mind about corporate giving, however, when one of Silicon Light Machines’ financiers approached the company with a relatively painless way to make a charitable gift.

Gib Myers, a general partner at the Mayfield Fund, one of the most-prominent venture-capital companies in Silicon Valley, successfully persuaded Silicon Light Machines to donate $100,000 worth of stock options to the Entrepreneurs’ Foundation, a grant-making charity Mr. Myers created to instill young businesses with a spirit of philanthropy.

Temporarily based here in Mayfield’s offices, the Entrepreneurs’ Foundation has so far attracted stock certificates and stock options from nine other fledgling companies. The total amount contributed to date is valued at $850,000.

For the 10 companies — nine of which received financing through Mayfield — that has meant giving the Entrepreneurs’ Foundation about 0.25 to 0.75 per cent of their total stock.

The stock shares and options are being placed in an endowment that will finance what the Entrepreneurs’ Foundation calls “social entrepreneurs” — charity executives who seek new approaches to providing services and solving societal problems. In exchange for the companies’ contributions, the Entrepreneurs’ Foundation offers to help them develop their own philanthropic programs.

Mr. Myers is not the first person to create a charitable organization to tap into the wealth of high-tech companies, but some people are betting that he may succeed where others have failed because as a venture capitalist, he understands the mindset — and the financing — that underpins entrepreneurial ventures.

That understanding prompted Mr. Myers to ask new companies for the one commodity that they can give relatively easily: stock and stock options. Few people have tried that approach — in part because charity executives think that it is not worthwhile to ask companies that have yet to turn any profit to donate stock.

But with 28 years in the venture-capital business behind him, Mr. Myers has had plenty of experience turning new ideas into successful businesses. Since 1969, Mayfield has invested in more than 300 companies that today have a total market value that exceeds $100-billion. Among the businesses Mayfield helped start: Compaq Computer and Silicon Graphics. $200-Million by 2003

Mr. Myers is betting that many of the companies that join the Entrepreneurs’ Foundation will grow to be as successful as Mayfield’s clients. By 2003, Mr. Myers says, he hopes to have attracted 500 companies to the fund, and to have generated some $200-million in cash by exercising options and selling shares of companies that make a strong showing when they go public.

Basing the financial future of the Entrepreneurs’ Foundation on companies that have yet to prove that they can be profitable is chancy, some philanthropy observers say.

But, Mr. Myers says, it is much less of a risk than people think.

“The outside world has a misconception that most ventures fail and don’t make it,” he says. But in actuality, he says, the odds are that out of about every dozen new companies formed in Silicon Valley, only two or three will flop. Inspired by Frustration

Mr. Myers, 59, says the foundation is the outgrowth of his own frustrations when he tried to figure out what causes and organizations to support and found that established philanthropy organizations in Silicon Valley were not able to provide much advice.

“The community isn’t very user-friendly,” he says. “And you hear all these stories about money being thrown out and not going anywhere. As a result, you look around and a lot of time passes before you figure out what to do.”

Finally, after making the rounds and talking to philanthropy leaders in Silicon Valley, Mr. Myers decided that he wanted to do something more than just channeling some money into the local area. So he set up the Entrepreneurs’ Foundation and put his venture-capital expertise to work.

While Mr. Myers wields a great deal of influence among many Silicon Valley companies, he realized that he needed to rally other venture capitalists to support his idea before he started pitching the Entrepreneurs’ Foundation to start-up businesses.

“Many entrepreneurs have said they couldn’t get active in the community because the venture capitalists would never stand for it,” says Kirk Hanson, a senior lecturer at Stanford University’s graduate business school and an adviser to the Entrepreneurs’ Foundation. “In some cases, that was an excuse. In other cases, that was completely true.”

To counter the impression that all venture capitalists frown on philanthropic involvement, Mr. Myers enlisted 15 prominent Silicon Valley venture capitalists and five venture-capital companies to spread the word about his new effort and recommend prospective companies to it. All have promised to offer their support if a company they helped finance is considering whether to join the foundation.

Some of those same venture capitalists, as well as investment bankers, lawyers, accountants, and other donors, have demonstrated their support for the Entrepreneurs’ Foundation by pitching in $547,000 in cash and $50,000 in stock options to help the organization pay its operating costs.

The group has also recruited as board members and advisers such influential people as John W. Gardner, Secretary of Health, Education and Welfare under President Johnson; Susan Packard Orr, chairman of the David and Lucile Packard Foundation; and Carol Bartz, chief executive officer of the Autodesk software company. These advisers say they believe the Entrepreneurs’ Foundation will be a beneficial tool in spurring future corporate philanthropy.

But some organizations that have tried to encourage high-technology companies to become philanthropic have not been able to persuade them to give anything beyond products.

Josef Woodman created the Lightworks Technology Foundation in 1996 to raise money from high-tech businesses. The fund planned to make grants to non-profit groups that were in need of high-tech equipment and training in how to use it. While the organization was able to encourage companies to give their products, it could not raise enough cash to keep operating; as a result, it has been dormant since February.

“I’m not the least persuasive person in the world,” says Mr. Woodman, who was head of Ventana Communications, a computer publishing company, until he sold it in 1995 to International Thomson. “But I was not able to persuade folks to part with their cash.” Giving Without Sacrifice

For many of the participating executives, the appeal of the Entrepreneurs’ Foundation goes beyond the ability to give without sacrificing cash. They are attracted by the chance to get help in developing their corporate philanthropy.

James Olson, chief executive of SkyStream Communications, which makes broadcast-technology products, says his 22-year tenure at the Hewlett-Packard Company helped convince him that corporate philanthropy was important. Mr. Olson says that he was always impressed that the company’s founders began a tradition of corporate and personal philanthropy in the business’s earliest days but that he had no idea how to do the same thing at SkyStream.

He saw the answer when the Entrepreneurs’ Foundation offered “to help us figure out a philanthropy mission statement and a three-year plan,” he says. “We just don’t have the time or the money to go and hire somebody to do that.”

But major corporate-giving programs will not necessarily spring up overnight.

At most companies, the Entrepreneurs’ Foundation is starting simply, offering them ideas they can implement quickly, like sponsoring a food drive or a day’s worth of volunteer activities.

“It’d be silly to talk about more sophisticated kinds of giving — setting up a corporate-community-relations department, setting up a fund at a community foundation, or doing matching grants,” says Patty Burness, executive director of the Entrepreneurs’ Foundation. “You really have to start slowly and help them see, Hey, this is all doable.”

In addition to working with companies on their philanthropy programs, the Entrepreneurs’ Foundation is also starting to figure out what it will do with earnings from its own endowment.

While the specifics are still sketchy, Ms. Burness says that the Entrepreneurs’ Foundation, like venture capitalists that “look for an individual with a bold idea,” will seek innovative non-profit leaders who want to come up with new approaches to dealing with education or youth development.

The Entrepreneurs’ Foundation not only is seeking out non-profit leaders with the entrepreneurial spirit, but it also plans to apply venture-capital business practices to its grant making.

It will provide what venture capitalists call “mezzanine” financing — enough money over seven to ten years to make sure a group does not fail in its early years.

Unlike many grant makers, which earmark money for specific projects, the Entrepreneurs’ Foundation plans to encourage charities to use the money to expand their operations and increase their effectiveness — by allowing them to do things like hire new staff members or buy new technology.

Officials of the Entrepreneurs’ Foundation also plan to sit on the boards of the non-profit organizations that they finance.

Many grant makers shy away from doing that — largely because they feel it would be an inappropriate intrusion into the way charities work. But venture capitalists tend to work very closely with new companies and get involved in all aspects of their operations.

“It’s a way of doing business,” says Ms. Burness. “You’re there to do everything in your power to make it work.” And at the Entrepreneurs’ Foundation, she says, “That’s our M.O.”