Venturing a Bet on Giving

‘Investment’ grants are booming, but can they bring real change?

In the three years since it was formed, Social Venture Partners has been a leader in the burgeoning field of “venture philanthropy.” It has raised $2.5-million from 250 donors — most of

them young high-technology entrepreneurs in the Seattle area — and persuaded many of them to offer their business and professional expertise to 20 social-service and educational organizations.

The approach has drawn such a following that groups in Austin, Tex.; Dallas; Denver, and Phoenix have copied the Social Venture Partners model, attracting a total of nearly 200 donors so far, and organizations in Calgary, Canada; Kansas City, Mo.; San Francisco, and St. Louis have expressed interest in doing the same.

Even so, Paul Shoemaker, the fund’s executive director, isn’t ready just yet to declare the Social Venture Partners model a success.

“We’re five miles down a 100-mile road,” says Mr. Shoemaker, a former Microsoft executive. “The journey has been successful so far, but I don’t want to have any hubris about assuming we’ve got it right.”

Mr. Shoemaker’s comment captures the prevailing view these days of venture philanthropy, a fast-growing, highly diverse, and sometimes controversial movement that seeks to apply some of the techniques of venture capitalism to the non-profit world.

Dozens of venture-philanthropy and “social-entrepreneurship” groups have sprung up in Silicon Valley, Northern Virginia, Boston, and other new-economy hot spots. The “venture” label has been used to cover a wide range of approaches. Many raise money from technology tycoons and develop long-term, close relationships with grantees. Some also help charities generate revenue — much in the way a venture capitalist would do.

A new report by the Morino Institute, a non-profit organization that studies the influence of the Internet and related technologies on society, says that the venture-philanthropy field is so diverse and unsettled that it “resembles the ‘Wild West.’ ”

As one example of the diversity, the Roberts Enterprise Development Fund, in San Francisco, supports non-profit organizations that operate businesses employing homeless people and others whose lives are unstable.

And the Flatiron Future Fund, a newly formed philanthropic venture-capital fund that was started by Flatiron Partners, a venture-capital firm in New York that focuses on Internet companies, will buy stakes in for-profit businesses that help poor children learn to use computers, foster entrepreneurship among disenfranchised people, and encourage entrepreneurs to work on social problems.

Many advocates promote venture philanthropy as an antidote to what they see as the failings of mainstream philanthropy. They say an unwillingness by many foundations to support innovation among charities, to support their long-term infrastructure needs, and to demand tangible results from grantees has hindered the effectiveness of many groups.

The boom in venture philanthropy is reinvigorating a longstanding debate about the basic tenets of grant making. A session on venture philanthropy last month at the annual meeting of the Council on Foundations in Los Angeles drew an overflow crowd and sparked a spirited discussion about the merits of the approach.

Venture philanthropy also is leading some traditional foundations and community funds to adopt their own venture-philanthropy models. The James Irvine Foundation, in San Francisco, for example, announced last month that it was starting a $6-million “Innovation Fund” that would form partnerships with non-profit groups and businesses.

But many veteran foundation and non-profit leaders have grown increasingly wary of the venture idea.

One especially controversial approach used by some groups involves representatives of venture funds taking seats on the boards of grantees, a strategy that most traditional foundations and many charities regard as intrusive because of the potential for undue influence over the grantees’ missions and policies.

Critics also argue that modeling philanthropy after venture capitalism is wrong because the goals and dynamics of the two endeavors are different. Venture philanthropists “are coming from a world where the way things get done is that you invest, hire bright people, kick butt, crush the competition, take your money, and then go do something else,” says Bruce Sievers, executive director of the Walter and Elise Haas Fund, in San Francisco, and one of the most outspoken critics of the idea.

“That world view doesn’t necessarily apply” to the non-profit domain, he says.

Supporters of venture philanthropy express confidence in its potential, but they acknowledge that it may be years before they know whether the movement can make a big dent in systemic problems like poverty and homelessness.

“Our ultimate test is: Have we picked the right investments to make, and then have we proven that we can help to improve those organizations?” says Mario Morino, a retired software executive and the founder of the Morino Institute. Mr. Morino is starting a fund that he says will make long-term “strategic investments” in a select group of innovative charities and other groups that serve children in the Washington area.

“The question is,” Mr. Morino says of venture philanthropy, “will it really change something?”

Already, one venture-philanthropy group has closed.

The Community Ventures Fund, which was begun in 1995 by the corporate-philanthropy department of the pharmaceutical giant Pfizer, shut down last year after making a series of grants to 35 social-service groups in New York City.

Pfizer’s aim was to provide seed capital and business assistance for specific projects to help the organizations generate income and become financially self-sufficient. But in 1996 Pfizer began to shift most of its grant making to areas outside New York, says Christopher Perez, a program officer at the Pfizer Foundation. Pfizer decided that the fund’s focus didn’t fit into the company’s grant mix in health care and science education, he says.

Mr. Perez describes the fund’s results as “mixed.”

“Some organizations successfully launched businesses or diversified their earned-revenue streams,” he says. “Others tried and failed.”

Some of the failed projects simply couldn’t make money, Mr. Perez says, but some were canceled for other reasons — one charity merged with another non-profit group, for example. A few organizations used Pfizer grant money to conduct feasibility studies that concluded that starting a project to generate revenue “wasn’t a realistic goal,” Mr. Perez also says.

The demise of the Pfizer fund contrasts starkly with the high expectations that surround venture philanthropy.

The movement’s proponents argue that most traditional foundations are too program- and project-driven and that they wrongly view the long-term management and revenue-building needs of their grantees as extraneous overhead. Foundations, they assert, don’t do enough to help charities recruit and train qualified staff members, improve their computer and accounting systems, or develop sophisticated tools to track the results of social-service programs.

As a result, critics say, many non-profit groups that rely on foundation money — even organizations with good leaders, worthy missions, and vast potential — are chronically undercapitalized and often struggle to survive.

Proponents of venture philanthropy also contend that typical foundation grants are too short-term to help struggling charities get on a sound footing.

Of more than 35,000 grants made in 1995 in the five states with the most foundations, only 5.2 percent were for more than one year, according to a 1997 Harvard Business Review article that is widely viewed as the manifesto of the venture-philanthropy movement.

The article, “Virtuous Capital: What Foundations Can Learn from Venture Capitalists,” said that multiple-year grants lasted an average of just 2.5 years.

Venture philanthropy “is an ongoing dialogue that extends over years” between grant makers and charities, “not a one-shot grant application in which money is sent out the door and you hear later how things are going,” says Carol Welsh Gray, director of the Center for Venture Philanthropy, a part of the Peninsula Community Foundation, in San Mateo, Calif.

The center operates two funds — one designed to help poor people increase their assets, and another that supports a program that encourages parents to read to their preschool children.

Together the funds have raised $4-million from foundations, corporations, and individual donors. Each fund has an “investment council” that includes donors, grantees, and people from the center. The councils help charities that get money from the funds meet goals that are laid out in long-term business plans.

Ms. Gray says the Center for Venture Philanthropy has the advantage of being part of a community foundation. Because venture philanthropy can “cause damage or have incredible results,” it must be carried out with a thorough knowledge of the non-profit world, she says.

Like Ms. Gray, many other grant makers say that they already are paying close attention to the long-term financial and management needs of their grantees. Next year, “at least half of our funding is going to be for core support and strengthening the capacity of non-profits,” says Gary L. Yates, chief executive of the California Wellness Foundation.

Mr. Yates and many other foundation executives agree that more should be done to support charities’ long-term needs, and they say that some aspects of venture philanthropy can be beneficial. But they worry that venture philanthropists who advocate such steps as taking seats on the boards of grantees could wind up putting bottom-line concerns ahead of their grantees’ social missions.

“Many people in the venture-capital world are willing to invest in 10 things or 20 things to have one hit big,” Mr. Yates says. “We can’t do that in this world.” What’s more, he says, venture capital involves “looking for money to be made,” while non-profit groups are looking for different sorts of outcomes. Sometimes, those outcomes are hard to measure, he says.

Proponents of venture philanthropy defend their approach, saying that their aim is to catalyze a new generation of donors and encourage them to build the capabilities of non-profit organizations.

They point out that theirs is a niche endeavor, not one intended to supplant traditional grant making. “Not everybody needs us, and not everybody needs to be like us,” says Mr. Shoemaker of Social Venture Partners. “We’re fulfilling different roles.”

What’s more, venture philanthropists say that they are not trying to force-fit charities into a template of spreadsheets and quarterly profit statements.

“We are not a venture capitalist’s answer to philanthropy,” Mr. Morino said last month in a speech to high-tech executives. “Venture capitalism is, for the most part, a mercenary business. It is focused on fast investment and even faster returns, and it imposes dramatic consequences for falling short of either. Venture capitalism serves its purpose. But it is not our purpose.”

Mr. Morino says his new fund is raising money mainly from high-tech executives in the Washington area and will provide long-term financial and management support to help its grantees become self-sufficient and more effective.

The fund, which is provisionally called Youth Social Ventures, will function like an investment-management group, with “partners, principals, and associates who will be working investments the same as a venture organization would,” Mr. Morino says

Those people will work with grantees over four to six years, helping them set goals, providing management and technical advice, and monitoring performance.

Mr. Morino says he wants representatives of the fund to sit on the boards of grantees. His goal, he says, is to help the organizations become stronger.

“We would want to create a symbiotic partnership with the president or executive director of that group,” Mr. Morino says. “We would want to be an extension of that person.”

But whether taking a seat on the board of grantees is appropriate is a matter of contentious debate, both within the venture-philanthropy movement and in the broader foundation world.

Kim Smith, president of the New Schools Venture Fund, in Redwood City, Calif., says that being committed to serving on the board of a grantee and working with the charity over time “injects discipline” into the fund’s work. “It means you have to take more seriously every decision you make,” she says.

Gib Myers, a 30-year veteran of the venture-capital business who runs the Entrepreneurs’ Foundation, in Menlo Park, Calif., agrees. “The board is an important part of an organization, and if you neglect it, you’re not really a team player,” he says.

Mr. Myers, a former general partner in the Mayfield Fund, a venture-capital firm that invests in startup technology companies, created the Entrepreneurs’ Foundation in 1998.

So far 69 companies have donated stock options to it, building the fund’s portfolio value to about $10-million. Last summer, a sister group started up in Austin, Tex., and 30 companies now participate. In May, the Entrepreneurs’ Foundation named its first chief executive officer, filling a post that will help the group expand nationally, Mr. Myers says.

The Entrepreneurs’ Foundation made its first grant last fall: an initial $325,000 outlay to help Partners in School Innovation, a San Francisco-area group that works to improve student performance in low-performing public elementary schools in poor neighborhoods. When the grant was made, Mr. Myers joined the group’s board. “If you’re not on the board,” he says, “you’re not really taking enough responsibility.”

But many people disagree.

“Having a board seat, which is about mission and does things like hires and fires an executive director, could kind of confuse roles and make it a little bit harder to build trust” between charities and grant makers, says Mr. Shoemaker of Social Venture Partners.

Many executives of traditional foundations also worry about the implications of grant makers’ taking seats on the boards of charities that they support.

Henry Allen, program director of the Hyams Foundation, in Boston, cautions against making “automatic assumptions that because you have wealth that you therefore can bring something to the non-profit organization.”

Mr. Allen acknowledges that many business executives serve on non-profit boards. But, he adds, “they don’t come to the organization and say, Because I’ve invested a certain amount of money I deserve and require a seat on your board and will exercise a degree of control over this organization.”

Mr. Morino bristles at the notion that his fund would try to exert inappropriate influence. “If you’re trying to control [an organization], you’re going to lose,” he says. “If someone doesn’t want us there, we sure as hell wouldn’t want to be investing in it.”

The debate over governance underscores the broader tensions that have arisen over the growth of venture philanthropy — tensions that could grow or dissipate, depending on whether the movement proves itself in coming years.

For now, Mr. Morino says, the business and non-profit worlds often are “dealing with ghosts” in the way they view each other’s methods and motives, making it hard for the two to work together.

“In one case, the business group too often assumes that the non-profit sector is dysfunctional, and that’s not true,” Mr. Morino says. “There are good executives and managers in the non-profit sector. They lack support, and there may be fewer of them, but they’re there.

“Conversely, the non-profit assumes that the business guy is going to come in and just apply all the business rules and therefore break their mission, break their spirit, and break their soul. And that’s not true either.”