Doing Well and Doing Good: What a Difference a Decade Makes

Throughout the nineties, new phrases like “the new economy” and “new wealth” have emerged, describing the economic, social and cultural changes occurring in high-tech hotspots around the country. These terms suggest an extraordinarily bright future–one built on innovation–that will usher in a new era of boundless wealth, limitless opportunity and an unparalleled pace at which progress occurs. However, many fear the increasing reliance on technology will create a digital divide. Some of the nation’s best and brightest are seeking solutions to bridge this gap by asking the following question: Can we create a new philanthropy that will exist in our new economy and better serve the communities in which we live?

Silicon Valley and similar cities throughout the country have become world renowned for becoming breeding grounds of innovation. One of the most cutting- edge trends emerging in many of these locations is not the latest dot.com company or the new e-something. An exciting new model of philanthropy is being promoted, one that melds the worlds of venture capital investment with traditional philanthropic practices. Coined “venture philanthropy,” this new model could have a tremendous impact, not only on the movers and shakers of these high tech havens, but also on the surrounding communities and the entire country.

New wealth and old poverty are nowhere more apparent than in the Palo Alto area of California. Part of Silicon Valley, the city boasts a huge concentration of local wealth, with start-ups and venture capital firms on every corner. But driving further through the town, a different world is apparent. On the eastside of Highway 101, East Palo Alto is a separate city of close to 24,000 residents who seemed to have missed out on the benefits of the so-called new economy.

Unemployment is high, many residents have bars on their windows and until recently, East Palo Alto had one of the nation’s highest murder rates. The area illustrates the dichotomy of the new economy, and provides many challenges as well as great opportunities. Coming up with innovative and effective ways to include entire communities in the new economy will most assuredly have a tremendous impact on the East Palo Alto area and, ideally, on many other communities throughout the country.

We are all familiar with the Industrial Age giants who supported philanthropic causes: the Rockefellers, Carnegies and Mellons to name just a few. Giving back some of their wealth was important to these very successful industry leaders, who by and large chose to support established institutions such as universities, libraries and the arts. These philanthropists, for the most part, waited until later in life to donate money, with their fortunes amassed and their futures secured.

The foundation community, itself the product of individual and family generosity, has been a valuable resource supporting organizations in communities across the country and across the world. Traditionally, foundation grants are given to charitable and cultural organizations that apply for financial support. Foundations choose those organizations that most closely match funding guidelines. Usually organizations that earn grants have a proven track record of success or present a viable new idea for dealing with any number of social ills or cultural needs.

Federal, state and local government support has also been a source of funding for nonprofit organizations in the past. Myriad agencies provide funding for groups that deal with causes ranging from homelessness, drug abuse prevention, prevention of child abuse to afterschool youth programs. However, government funding has greatly diminished in recent years, placing more of the financial burden on both foundations and private philanthropists. Since necessity often is the mother of invention, the search for money to replace shrinking government support has created new approaches to philanthropy.

Philanthropy has always been a part of American culture, but in today’s society, it has the potential to take on an entirely new role. Fueled by the booming economy, this new model forges a strong link between the private and nonprofit sectors. Venture philanthropy seeks to combine principles of venture capital investment with traditional grant making. Utilizing venture tactics that are often successful with start-up companies, this mode of confronting social ills calls for a new relationship between the funder and the not-for-profit organization.

Typically, venture capital firms invest time and money in their portfolio companies, taking on active roles in the start-up. Investors receive equity in the new company, becoming partial owners. They may assume a seat on the board of directors and often have influence over who the start-up hires, the development of the business plan and how the product comes to fruition. Venture capital firms often provide much more than financial backing, by taking active leadership roles in the progression of the start-up becoming a full-fledged company.

The traditional grant-making process stands in stark contrast to this involved approach. Grants are usually given on a short-term basis to organizations, which may have little contact with the funder until a progress report of some kind is required. Nonprofit groups may not develop close relationships with foundations, which give grants to a variety of different organizations encompassing a wide range of issues.

Venture philanthropy is a creative way to confront social ills by applying a more hands-on approach to grant making. Similar to working with a start-up, VP groups consider their grants investments, not hand-outs. A venture philanthropist might take a seat on the nonprofit’s board, help develop a long-range strategic plan and may facilitate additional professional consulting services.

One of the first venture philanthropy groups was started by a veteran venture capitalist, Gib Meyers, who spent 29 years with the Mayfield Fund. Meyers started the Entrepreneurs’ Foundation (EF) in 1998 as a way to assist Silicon Valley residents in giving back to their community and to promote the overall concepts of philanthropy and volunteerism.

According to Meyers, “getting a company involved in philanthropic activities has always made good business sense. It helps build strong teams, boosts employee morale and raises corporate visibility.” It also makes a significant contribution to the entire community. He believes that sustained economic growth and prosperity depend on inclusion instead of exclusion. His success model strives to lessen the gap between the new wealthy and the rest of the community in order to perpetuate societal progress.

The Entrepreneurs’ Foundation works closely with companies who want to give something back by designing volunteer opportunities that fit into the crazy schedules of its high-tech clientele. In return, member companies allocate a small percentage of stock options to the Foundation. Companies gain the tremendous sense of satisfaction that is derived from volunteering in the community, and EF has the means to support local not-for-profits that work directly to confront societal challenges.

In addition to community involvement, EF also actively promotes the venture philanthropy model by investing in local nonprofit organizations that are ready to expand, allowing them to serve more people and have a greater impact. EF staff will take a seat on the board, assume a leadership role in the development of a business plan and work closely with program staff on management issues.

Venture philanthropy does have its critics. Some in the nonprofit sector recoil from the idea of business professionals telling them how to run their programs more effectively, using business school models of strategic planning and return on investment. Skeptics believe that the impact social programs have on the community cannot be quantified like an investment that yields market shares or profit margins.

On the other hand, all too often not-for-profit programs begin with great ideas that cannot fully meet the demands of our society. Venture philanthropy might not be appropriate for every nonprofit organization, but for groups willing to embrace this new concept, the model could have a dramatic impact on the way the nonprofit sector does business.

Venture philanthropy seeks to take full advantage of an era of unprecedented wealth, an era some liken to the California Gold Rush. Its model is to share the fortune-making concepts that have fueled the nation’s economy and help build a more solid foundation for the whole community to share.

Winston Churchill once said “we make a living by what we get. We make a life by what we give.” If the entrepreneurs of this new gold rush believe in such a lofty ideal, our entire community will surely be the better for it.

That was then, this is now.

Venture philanthropy appeared on the philanthropic scene in the 1990s during a time when venture capital investment was increasing at breakneck speed. In 1991, $3.4 billion in venture capital was invested, in 1996, it was $10.0 billion and by 2000, over $100 billion was invested. This period was also characterized by the late nineties Internet boom (and bust) and the overall environment had a tremendous impact on philanthropy.

Many proponents of venture philanthropy called for more hands-on involvement on the part of funders, as well as a greater emphasis on measureable results, transparency and accountability. The overarching goal seemed to be two-fold: not-for-profit organizations could learn a great deal from the private sector in terms of effectiveness and donors should conduct their giving more like investments. And the end result would be more effective non profits and more effective philanthropists.

However, while some of the principles of venture capital investment did indeed add some value to philanthropy, the promise of transforming the sector was not realized. In early 2009, after the subprime mortgage crisis, the credit squeeze and the Bernard Madoff Ponzi-scheme scandal, we all know that the private sector doesn’t have all the answers: calls for accountability in business don’t always equal greater transparency, corporate responsibility or the guarantee of success.

In a slight spin on Venture Philanthropy, one of the latest trends in giving seems to be embracing the spirit of the entrepreneur. “Social entrepreneur” is a term used to describe someone who sees an issue area or problem in society and then employs his or her entrepreneurial skills to confront the problem. They bring innovative solutions to the table. Often social entrepreneurs start their own non-profit organizations to deal with social issues in an entirely new way, becoming founder, chief executive officer and lead fundraiser. Echoing the late 1990s, some define social entrepreneurs as those who bring their business expertise to the sector in order to confront difficult social ills.

What can be learned from the boom and bust years over the last decade or so?

There are certainly some principles of venture capital investment which donors can use as guidelines to make their giving more effective: conducting extensive due diligence, taking an interest in an organization above and beyond a financial gift, considering their grants investments, not hand outs, being willing to make possibly risky investments in start up non profits and looking to organizations to develop long-range strategic plans are some examples.

And social entrepreneurship also has much to contribute to the field. Philanthropists should be open to innovative solutions to challenging problems. Entrepreneurs often have a creative and can-do spirit which makes them ideal candidates for starting new organizations to confront entrenched problems in entirely new ways. Entrepreneurs in the private sector must measure their success in a bottom-line, profit-oriented manner and this can be translated into what’s called a social return on investment in the not-for-profit sector.

Moving forward, donors might choose to combine some of the more effective tenets of both Venture Philanthropy and Social Entrepreneurship in what could be called Adventure Philanthropy.

An adventure is an activity that might be risky or have an uncertain outcome. Although the term is often used in reference to a dangerous physical endeavor, it can also be used to describe an undertaking where the end result is an unknown. The opportunity for success is present, but it’s not a given; the inherent risk contains the potential for a pay-off of some kind, but failure is also a possibility. The tension between these two outcomes is what creates the thrilling part of undertaking an adventure.

Adventure philanthropy means taking risks: investing in start-up organizations, supporting a new CEO in pursuing his or her vision or making multi-year commitments are just a few examples. It could also mean funding areas that many foundations shy away from (such as supporting general operating costs) or providing a matching grant so the non profit can leverage the money to attract other donors. For some foundations, it might mean giving more each year than the required five percent of the average market value of its total assets.

Are these strategies risky? Sure. But does attempting to solve problems in a creative and different way also contain the possibility for great change? You bet. By utilizing principles from both venture capital investment and from the entrepreneurial sector, funders can start to support not-for-profit organizations in an entirely new way and, perhaps, bring innovative solutions to entrenched social problems.

And put the adventure back in philanthropy.

Tarah S. Evans

Community Affairs Manager

Asset Management Company

Palo Alto, California

March 2000