Philanthropy as Social Venture Capital

An article that appeared in the Harvard Business Review (Letts, Ryan, and Grossman, 1997) has sparked a great deal of discussion about a distinctive way of understanding foundation philanthropy. “Virtuous Capital: What Foundations Can Learn from Venture Capitalists” advances the thesis that philanthropy should be perceived as social venture capital, somewhat analogous to commercial venture capital. Under the traditional philanthropic model, say the authors, a foundation makes a grant based on the efficacy of a program, in the hope of making that program a model that can be eventually brought to scale. The “venture philanthropy” approach, by contrast, operates on principles borrowed from the marketplace. The foundation regards itself as an investor. It invests not in a program but in the organizational capacity of the entity operating the program. This involves securing multiple investors and developing the organization toward self-sufficiency, so that its program innovation can be rapidly brought to scale. In order to protect the investment, the investor must be personally involved. Just as a venture capitalist will demand a seat on the board of a business start-up that he or she is financing, so should the grantmaker-investor demand a seat on the board of the nonprofit organization being funded.

Proponents of venture philanthropy offer it as a much better model for achieving impact than that presented by traditional philanthropy. Foundations, they say, focus on ideas rather than on organizations. No matter how good the ideas may be, they often wither when the organization itself cannot survive after the foundation stops funding it. Foundations therefore are great at the “research and development” of ideas but lousy at bringing these ideas “to market” (that is, to scale). Foundations not only prematurely pull the plug on support but also do too little to be helpful while they are supporting the ideas. The grantee organizations need guidance, TA, even “tough love.” Grantmakers who do not get deeply involved in the success of their grantees are squandering their foundation's investment.

In sum, then, traditional philanthropy focuses on ideas instead of organizations, takes a hand-off approach when it should take a hands-on approach, terminates its support too soon, and does not do enough to secure other investors for the organization. The result is too many good ideas going to waste instead of going to market.

Critics of the venture philanthropy approach counter that placing the focus on the organization rather than the idea is hardly guaranteed to succeed. Just as venture capitalists have failures as well as successes, venture philanthropists will also spend much time and money developing organizations that will ultimately go out of business. This may be particularly true of those venture philanthropists who pride themselves on avoiding the “bureaucratic” decision making of foundations. For example, one such grantmaker, the chairman of a high-tech company foundation, was quoted in the New York Times as saying, “Some of the checks I have written have been after one-and-a-half minute conversations” (Myerson, 1999). Just because foundations focus on sustainability does not guarantee that they will actually achieve it.

Deep involvement can be problematic in two ways. First, it is not possible for program officers to make such a major investment of time in more than a small handful of projects. If the foundation is to meet the 5 percent payout requirement, it follows that these few projects would have to be very big-ticket items. This means that venture philanthropy could inadvertently shut the door on foundation support for smaller, riskier, community-based organizations. The second problem with intense involvement lies in its dictatorial potential. Having the major funder on the board—or having a board with several major funders sitting on it—would put control of the project not in the hands of the organization doing the work but rather in the hands of the funders. Critics say that this would be an example of the “golden rule” in action: those who have the gold make the rules. Some nonprofit organizations will openly resist this level of donor control, most will at least passively resist, and the project will be caught in this cross fire over who is in charge. Such a level of control by investors is a part of the culture of the commercial sector, but it most decidedly is not part of the culture of the nonprofit sector, in which organizations prize their independence. One might also question whether every program officer is qualified to manage in such a way as to be helpful to their grantees.

Finally, critics also raise the “kicking a dead horse” scenario: that foundations, having heavily invested both time and money in an organization that is not making the grade, will continue to throw good money after bad while hoping for a miraculous turnaround. Venture philanthropy, say the detractors, would take too much time, and spend too much money, on organizational development that may or may not deliver programmatic dividends. It would crowd out smaller projects, make the funders unnecessarily intrusive in project management, and offer some disincentives for the foundation to cut its losses in a timely way. The result will be too many good ideas going to waste instead of going to market (that is, to scale).

The truth probably lies somewhere between the extremes of these two arguments. Venture philanthropy will probably fail to bring as many great ideas to scale as its proponents predict, but it will probably not do nearly as much damage as its critics fear. It is good to remember that venture philanthropy is, in many ways, a refinement of a style of charitable operation that has been with us for quite some time, a style that has proved to be neither a panacea nor a problem. Nonprofits like Goodwill Industries and the Girl Scouts have a long history of selling products to sustain their activities. Grantmakers have experimented with loan funds and program-related investments, and have supported microenterprise efforts such as the Grameen Bank. Although it is hardly new, venture philanthropy is in some ways distinctive, especially in its unabashed embrace of the methods and mores of the market.

Both the proponents and the opponents of venture philanthropy have strong arguments to offer. Detractors are right to point out the danger of foundation employees acting in a high-handed fashion while on the board of a funded project, but most of the rest of their criticisms can be neutralized with careful management. Venture philanthropists' assertions that program officers often do too little to help a funded project and then pull out too early are regrettably sometimes accurate. The determination of venture philanthropists to provide hands-on help over the long term is laudable, so long as appropriate limits are set and respected in order to avoid inappropriate levels of foundation control and also to prevent the grantee organization from becoming too dependent on the foundation. Although it is true that venture philanthropy can lead to a focusing on larger grantees at the expense of the smaller ones, there is no reason why some foundations should not dedicate themselves to the venture philanthropy approach, while others follow more common styles. Just as the Council on Foundations feels that there should be room in philanthropy for both time-limited and perpetual foundations, so too should there be room for both venture philanthropy and traditional philanthropy.