Business-oriented venture philanthropists

Listen to this article

00:00
00:00

At the height of the internet boom, venture capitalists and entrepreneurs, disappointed with the failures of traditional charity, started a new philanthropic movement. They quit their jobs in Silicon Valley and on Wall Street, opened foundations and gave money to schools and shelters using the same tactics they applied when investing in technology start-ups. They called themselves venture philanthropists.

Ten years on, the venture philanthropy movement is all but dead. Many of its early proponents, intimidated by critics and frustrated by fund-raising, have dropped out. But as a philosophy – in which grantmakers pour time and money to improve a non-profit organisation’s management practices, growth and performance – venture philanthropy is thriving. Many even argue that the strategies it championed are transforming the sector.

“Venture philanthropy seems to be catching fire in a population where it wasn’t catching fire before,” says Joel Fleishman, a Duke University professor and author of The Foundation: How Private Wealth is Changing the World. “There is so much fuel now in the form of accumulated money.”

Some experts, including Fleishman, argue that the tenets of venture philanthropy predate Silicon Valley, and that the dotcom do-gooders simply recycled ideas first voiced by philanthropic pioneers Andrew Carnegie and John D. Rockefeller. But most agree that the debate they sparked in the 1990s has injected philanthropy with a healthy dose of business smarts.

Grantmakers now conduct extensive due diligence before investing in non-profits, much like an investor would before buying a company. Instead of just writing cheques, foundations offer management advice to the non-profits they fund and teach them how to raise money and grow. The lines between non-profit and for-profit have blurred, as philanthropies invest in companies that make “green” fuel, while malaria clinics charge for vaccines to help support themselves.

Donors have also become more demanding and increasingly expect detailed accounts of how their dollars are spent.

“Giving away blindly and saying ‘the church is responsible’ – people realise that’s not working any more,” says Troy Wiseman, a former entrepreneur who now spends his time and money making donations to help children in the developing world. “This generation is about seeing results.”

The language has changed too. Insiders refer to donors as investors, and they talk of social return, performance metrics and scalability. The reigning ideals are transparency and accountability.

These changes have trickled from the tiny portion of strictly defined venture philanthropists – who command a few hundred million dollars in annual grants – all the way to the large foundations that give away $30bn each year.

The Edna McConnell Clark Foundation, started 30 years ago by an Avon heiress, illustrates how change has reached the mainstream. In 1999, the foundation tested some venture philanthropy tactics and was so pleased with the outcome that the approach now guides all of its $36m in annual contributions.

“We went through a dramatic transformation,” says Nancy Roob, president of the Clark Foundation.

The foundation now makes bigger bets on 20 non-profits that can prove their results, instead of scattering grants across dozens of smaller projects as most traditional foundations do.

Clark helps run the non-profits it supports and only renews funding when certain performance goals have been met. When measuring the impact of after-school mentoring programmes such as Citizens Schools, for example, Clark counts how many children regularly attend, how many move on to better high schools, and how many make it to the 10th grade.

Roob predicts that the increased focus on transparency and accountability will transform philanthropy over the next decade. “The emergence of these practices is definitely having a positive effect on grantees,” she adds.

However, the Clark Foundation does not like to call what it does venture philanthropy. In fact, most organisations, including many who started the movement in the 1990s, now eschew the label.

Venture philanthropists ruffled a lot of feathers when they burst on the scene during the internet boom.

Beaming from the pages of business magazines and promising a better fix for tough problems such as poverty, they triggered a fierce backlash from traditional foundations that had toiled in the trenches for decades.

“The term became so loaded, it was almost a pejorative,” says Paul Shoemaker, a venture philanthropy pioneer who runs the rapidly growing Social Venture Partners in Seattle. “A lot of people used it to mean: ‘I’ve got a lot of money and I’m arrogant.’ ”

Even Shoemaker now prefers to call himself an “engaged philanthropist”.

Venture philanthropists still have their share of critics. In addition to those who complain that the movement simply rehashed old ideas, others say that its use of business strategies is hurting charitable causes.

“This fixation on the bottom line, as people are trying to find a proxy for profit, has some real problems. The social world doesn’t easily lend itself to that kind of calculation,” says Bruce Sievers, former head of the Walter and Elise Haas Fund, who now teaches at Stanford University.

The obsession with measuring results forces non-profits to “teach to the test”, he says, pushing them to follow numeric goals blindly instead of creatively tackling specific problems they encounter. The focus on large-scale impact, he adds, often leaves smaller organisations with narrow missions – those that combat a rare disease, for example – struggling for support.

“The kind of things that would be normal for a venture capitalist to look at, when you translate them into the world of non-profits, just make life miserable for the non-profits,” says Sievers.

Non-profits rarely complain about venture philanthropists, but that may be because they are reluctant to criticise their benefactors. Critics argue that the imbalance of power between grant-makers and grantees often means that non-profits feel obliged to follow an “engaged” grantmaker’s lead, even if that lead is faulty.

Venture philanthropists counter that they never meddle in an organisation’s mission, only in its management practices. Social Venture Partners’ Shoemaker says he only helps non-profits with their accounting, legal tangles or with personnel problems.

While funding Wonderland Development Center, a disabled children’s programme in Seattle, for example, Shoemaker overhauled the finances, helped recruit a new director and shored up board support. He says he never told the non-profit how to serve the children.

“We would never tell a non-profit how to pursue its mission. We help them build a stronger organisation in pursuit of that mission,” says Shoemaker. “We are not issue experts.”

Beyond organisations such as Social Venture Partners and the Clark Foundation, which apply venture philanthropy practices as they were defined in the early 1990s, are dozens of other organisations that are finding other ways to inject business into charitable work.

Geneva Global, a for-profit advisory based in Pennsylvania, for example, functions as an investment bank of sorts for donors. For a 15 per cent commission on donations (which start at $250,000) Geneva Global’s analysts find successful charities in developing countries that meet the donor’s criteria.

The group conducts due diligence on behalf of the donor, presents him with a pre-investment report detailing the charity’s finances, management practices and performance history, and monitors progress at the non-profits after donations have been made.

The Omidyar Network, started by Ebay founder Pierre Omidyar, has blurred the lines between for-profit and non-profit more than most grantmakers. Omidyar’s mission is to help people “make life better for themselves”, and in that spirit it has invested in companies such as Linden Lab (creator of Second Life) and Meetup.com, while also making grants to the Grameen Foundation and Ashoka.

In the end, it is not clear whether these new approaches to philanthropy have made a tangible difference in the lives of the needy.

Melissa Berman, president of Rockefeller Philanthropy Advisors, a consultancy that helps private clients and foundations give away $135m each year, says old and new forms of philanthropy each have their benefits and drawbacks, and should be used for different purposes.

The new philanthropists, meanwhile, are not claiming to have won any battles yet.

“We’re not suggesting that there’s no other approach to philanthropy,” says Lance Henderson, head of programmes at the eight-year-old Skoll Foundation, which funds grantees who find entrepreneurial solutions to social problems. “It would be hubris to suggest we have found the magic formula to all philanthropy.”

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.