Philanthropy
Donate Like Your Life Depends on It
The idea of giving back is appropriately named; traditional donors often are motivated retrospectively by loyalty or by a desire to repay a gratefully received benefit. There are multiple other philanthropic motivations, like supporting an organization’s perpetuation for future service or enjoyment. Such motivations can be reactive, in recognition of an experience, but can also be proactive for the purpose of ensuring the institution endures to benefit the individual or wider community.
In many ways, healthcare or academic philanthropy can take either of these faces. Benefactors may give to a hospital to recognize a lifesaving service or to enable the purchase of the newest piece of medical equipment. Charity to your alma mater can be nostalgic or futuristic, or it may provide your child with an advantage in the ultracompetitive admissions process.
The common theme of these traditional philanthropy practices is that they’re relatively passive. That’s not to diminish the act or its importance. In many ways, this may be the purest form of generosity. There is certainly interest, but not necessarily a great deal of expectation or involvement, at least not the kind accompanied by tracking metrics and outcomes.
Philanthropists and investors have heretofore demonstrated different philosophies with regard to expected performance after they write their respective checks. Fascinatingly, we are seeing a convergence of their thinking and actions.
There’s an evolving new class of philanthropists defined by two core characteristics: they only look forward, and they keep score. They go by several names, all roughly equivalent: venture philanthropist, philanthrocapitalist, and a term we coined, “pronator,” as in proactive donor.
By nature, the object of the generosity of this new class of philanthropists is just the type of creative conduct taking place on the campuses of academic medical centers (AMCs) and research universities. Venture philanthropists seek high-impact investments, especially where they can measure outcome.
There are three types of venture philanthropist who are not only generous with their gifts but also seek to participate in the commercialization of technologies supported by their generosity:
The eponymous foundation funder
The mission-driven subscriber
The inventor-philanthropist
The Eponymous Foundation Funder
The poster child for venture philanthropy is the high-net-worth family or individual. Names such as Bill Gates, Sir Richard Branson, and Charles “Chuck” Feeney are known internationally, but each city has generous citizens who have endowed assets in the arts, education, and healthcare. Many have established eponymous foundations as the vehicle for giving to solve big problems for large populations.
What defines these individuals as venture philanthropists is their level of involvement in the work of their beneficiaries.1 Venture philanthropists don’t just write the check; their engagement means they also leverage their expertise and resources to produce a desired societal outcome. Lending their names to an issue or opportunity gives it weight and provides a gravitational pull.
The pool of venture philanthropists is growing. The number of billionaires has more than doubled to 1,646 since the financial crisis of 2008.2
The new wealth created by technology-based innovation, combined with this attitude of engaged giving, has created interest in sponsoring mission-driven innovation. For example, the Bill & Melinda Gates Foundation supports projects with potential for big breakthroughs in improving global health and industrial development, enhancing American education, and furthering basic research.3 The theme is unmistakable: innovation is a worthwhile target for giving.
Many philanthropists make gifts to unquestionably worthy causes, such as breast cancer or child welfare; these essentially are the fruits of innovation’s toils. The mission-driven innovation infrastructure is like a fertile farm, and many philanthropists are starting to recognize that. What’s emerging via venture philanthropy is that a donor can direct a gift to the innovation engine itself, essentially investing in the basic soil and water that produces breakthrough advancement in multiple disciplines. Such support for innovation infrastructure can ensure a sustainable pipeline of solutions across many disciplines and diseases.
The impact of this evolving concept could be enormous. There are nearly 75,000 private U.S. foundations, accounting for nearly a trillion dollars in assets and grants of about $50 billion annually. Private foundation funding now ranks below only government grants in supporting scholarly pursuits in AMCs and research universities.4
Some eponymous foundation funders go beyond incentivizing outcomes to sharing in profits generated by the work they fund. The returns do not accrue until the net profits from the development exceed the level of the contribution, but there is a tax benefit at the time of donation. This may be a uniquely attractive avenue for venture philanthropists who seek to “do well and do good.”
The Mission-Driven Subscriber
Not all philanthropists supporting innovation are multi-millionaires. Perhaps the most promising group consists of your coworkers, neighbors, and friends who support a cause by donating small amounts through vehicles ranging from credit card transactions and PayPal to sophisticated, dedicated crowdfunding sites.
Internet platforms are emerging that link the beneficiary and benefactor. Indiegogo, Kickstarter, RocketHub, and Razoo, to name a few, have developed significant traction in the crowdfunding space. Originally serving the artistic community, the power of these vehicles is beginning to be understood in research and innovation circles. The Internet also has fostered self-directed information gathering and no-pressure decision making regarding investing in a cause, organization, or innovation.
A cluster of thousands can donate an aggregated million dollars to assist an independent movie director in making a film. Can the same tactic be modified so that an innovator can further research toward a commercial outcome and potentially cure millions? How do we identify, educate, and activate the engaged masses already inclined to support innovation? Their bank accounts may not be as robust as the glitterati described earlier, but the zeal for solutions to pressing problems qualifies these investors as cognoscenti.
This new micro-giving community simultaneously seeks connection and convenience. These donors want to feel like they’re uniquely in the know, while being part of something. They’re enabled by the anonymity of technology to satisfy all of these communal, educational, and transactional aspects.
Cleveland Clinic has been investigating how this new economy can be adapted to further innovation. The existing model of crowdfunding is characterized by the interaction of project initiators, funders, and platform operators. Their roles are fairly straightforward, and the basic economics varies little. Essentially, an equity exchange takes place between the initiator and the funder(s), while the platform operators collect a transactional fee.
There is increasing interest in tapping this milieu to gain a fresh source of financial support for embryonic ideas and emerging companies. Concerns about intellectual property (IP) protection, effect on patentability, or risk to proprietary competitive advantage are real but manageable.
While studying this model for adaptability to Cleveland Clinic, we recognized a characteristic that might open up new possibilities. The typical crowdfunding model has an intermediary, the platform operator, which is truly not connected to the projects it represents. Cleveland Clinic suggested that the medium could be the mission5—to link the crowd directly with innovators.
We’re preparing to launch our PRONATE™ platform, which will allow potential givers to peruse a portfolio of projects, follow and support individual innovators, or choose to fund the operational infrastructure that serves all of our inventors. We have disintermediated the platform operators, who were already detached. Only an innovation engine could bring this level of intimacy to the transaction.
PRONATE™ also will combine the worlds of crowdfunding and crowdsourcing. The terms crowdsourcing and open innovation, often used interchangeably, are used here to describe the solicitation of intellectual contributions toward the solution of identified challenges.
The Inventor-Philanthropist
Building a robust commercialization engine is not without its challenges and resource demands. I have yet to find an innovator on the Cleveland Clinic staff or a partner in our global alliance who takes for granted the complex infrastructure and dedicated professionals composing Cleveland Clinic Innovations (CCI). The machinery of innovation described throughout this book is an asset to which all partners have direct access. We’re in constant communication with our clients, the inventors, both about the gestation of their individual technologies and how we can improve our development services.
In less resource-rich environments, it must be challenging and frustrating for prolific creators, especially those with “day jobs,” to advance their innovations to the marketplace. For this subset of inventors, we’ve developed a protocol and mechanism by which they may access the services of CCI and our alliance partners. Because our flywheels are spinning, it’s relatively easy to accommodate spikes in volume.
Our first step in such relationships is to ascertain what IP policies govern the inventors’ contributions. If no policy is in place, or a favorable arrangement can be made that permits the inventor access to CCI’s capabilities, we discuss what form a disclosure may take. In general, the approach can be characterized as commercial or charitable. The former is straightforward and resembles the typical inventor and distribution policies followed by our organization. We have two models for charitably directed IP disclosures: traditional donation and revenue sharing.
Traditional donation. The inventor-philanthropist donates his or her IP to the institution. The benefactor may receive tax considerations for the basis in which he or she invested in development of the IP up to the date of its donation. We always insist that donors consult their tax professionals before embarking on this path.
Revenue sharing. The mechanism to establish value for the donor’s tax purposes is identical to the traditional donation and is based on the inventor-donor’s basis in the donated technology—not its market value at the time of the donation. The difference arises in revenue distribution from subsequent commercial activity, and will depend on the individual circumstances and the prevailing tax law. After the inventor’s basis is eclipsed by the net proceeds from transactions, (i.e., a royalty-bearing license or sale of the company), we are exploring the potential of dividing the proceeds according to a prescribed formula, usually derived from existing inventor distribution policies.
The reason to explore this new field at the nexus of philanthropy and innovation is that many inventors don’t have ready access to the mid- to late-development apparatus that institutions like Cleveland Clinic have established. The innovator with a charitable penchant may realize short-term benefits from favorable tax consideration. The innovation function and host institution receives something of value that they are uniquely capable of enhancing through our professional processes.
The revenue-sharing option, if approved by the IRS and exercised by the donor, satisfies both the philanthropic and entrepreneurial spirits. It’s the cousin of the venture philanthropist profit-sharing option described earlier, but the inventor-philanthropists donate IP rather than funds. They remain involved strategically and financially, while creating tangible advantage for Cleveland Clinic. It’s also attractive to alumni motivated by loyalty to an academic institution, as well as furthering innovation.
The inaugural example of the inventor-philanthropist model was the donation that my wife, CeCe, and I made in 2011. We donated a suite of IP developed while I was away from Cleveland Clinic for a decade. Preparing to return as the organization’s first chief innovation officer, I sought to organize my inventor/entrepreneur portfolio and was particularly sensitive to potential conflict-of-interest issues. I had a cohesive collection of more than 30 patented medical devices that would benefit from CCI’s development process. I had documented costs of legal, engineering, prototyping, and regulatory opinions. I also had independent market valuations of the IP performed, which well exceeded my basis of investment. To reiterate, the present tax laws will focus on the inventor’s investment in the development of the technology prior to its donation, not the perceived market valuation. It is imperative that each individual contemplating a donation of this type consult with his or her tax professionals.
CCI established the model by which I, as inventor, would donate the IP to Cleveland Clinic and be credited with the amount of my previous investment for tax purposes. In addition to an increased number of patents, the benefit to Cleveland Clinic was that I had previously absorbed much of the initial development cost. My initial benefit was that the IP received professional development assistance from acknowledged leaders in the innovation field, as well as favorable tax consideration for the donation related to the amount I had invested.
Already, this has stimulated others to donate over $2.5 million of valuable IP. The concept is working for everybody, especially the patients who will be served ultimately by a new infusion of IP having greater likelihood of reaching the market and their bedside.
Conclusion
We often hear that an individual has a “gift for innovation,” reflecting an innate capacity or talent for relevant creativity. In this chapter, I described the “gift for innovation” in a different context. Linking the innovator and the generous benefactor is making an important margin of difference at Cleveland Clinic.
A recent example from Cleveland Clinic represents such an engaged, passionate giver. The work of immunologist Vincent K. Tuohy in developing a breast cancer vaccine so inspired Iris and the late Mort November that they endowed a research chair for $1 million. They learned about his ground-breaking research, contacted Dr. Tuohy, and funded the chair, adding to their considerable generosity to Cleveland Clinic that has included the Debra Ann November Pediatric Airway and Pulmonary Mechanics Lab and the Debra Ann November Wing at the Center for Autism at Cleveland Clinic. Highly engaged in Dr. Tuohy’s work, the Novembers made an investment in his game-changing endeavor to increase its chances of improving and saving human lives.
Philanthropy directed toward innovation is a novel way to express generosity. It’s also a logical funding target for individuals enriched by technology-sector success, the motivated and informed advocate for certain issues, and the inventor inclined toward philanthropy.
In addition to generosity, the other trait that links these philanthropists is their level of engagement. These are active givers who want to see discipline exercised around the handling of their funds but still understand that the vicissitudes of innovation don’t always produce success.
CCI has been a pioneer in uniting innovators and philanthropists. We shall continue to find ways to give forward—the unique capability of innovation and the philanthropists who support it—to donate like your life depends on it.