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Applying venture capital model to grant-making can better serve nonprofits

Tuesday, June 04, 2002

By Carol Savage and Bob DiBella

As government-funding sources shrink and foundations seek to lessen the long-term dependence that many beneficiaries have on them, a fundamental shift is starting to take hold in the world of nonprofit organizations. In the future, it may no longer be enough for nonprofit organizations to rely simply on a strong mission and keen sense of purpose to continue their work. To survive and thrive, nonprofit organizations will need to learn to think more strategically, to operate more innovatively and efficiently, to more proactively and effectively form partnerships, and to more aggressively pursue alternate sources of income. In short, they will need to become more entrepreneurial.

Traditionally, nonprofit leaders and funders have not had to concern themselves with investing the time, talent and financial resources required to build increasingly effective and efficient organizations. The historical model has been to continue funding programs and focusing on services with little emphasis given to strengthening the organizations themselves. This must and will change. Fortunately, a new breed of philanthropist and a new model of giving have emerged to address the growing need for nonprofit organizations to improve their operational capabilities in a more entrepreneurial way.

With an unprecedented creation of wealth in today's knowledge-based economy, a change in thinking about philanthropy has taken place among many Americans. Shifts in our economy and growth in technology sectors have led many to view giving with a renewed, more entrepreneurial focus. Private foundations are being created at an astounding rate. For many philanthropists across the United States, giving has become synonymous with investing, as people seek ways to give back to their communities and make philanthropy more personal. This new form of more personal grant-making is known as venture philanthropy.

What is venture philanthropy? Simply put, it is applying the venture capital model to grant making, thus enabling a nonprofit organization to better achieve its mission. Sometimes referred to as "engaged grant-making," venture philanthropy requires the investment of both financial and human capital -- money and time -- on the part of partners in order to improve the efficiency and effectiveness of the nonprofit organization. The belief is that a more efficient, effective and better-managed organization is more likely to achieve its mission, grow to scale, and in some cases experience "explosive growth." Whether the nonprofit seeks to eliminate homelessness, reduce poverty or teach kids to read, investing in capacity building is critical in venture philanthropy. By combining the social services skills of the nonprofit community with the diverse skills of venture philanthropists, the result is a more effective means of resolving social issues.

What makes it different from traditional philanthropy?

Principle 1: Close relationship between investor (funder) and nonprofit (investee). Venture philanthropy is much harder work for both the funder and the nonprofit. It requires a great deal of time, effort and honesty, all transparent to the nonprofit's mission. In venture philanthropy, fit is absolutely key in making a successful investment.

Principle 2: Long-term commitment to a nonprofit. Building capacity cannot be done overnight and often requires a three- to seven-year commitment from the funder. It is important in venture philanthropy that the funder and recipient become engaged in order to achieve mutual success. A longer-term relationship also allows the funder and recipient to move from the tactical to the strategic.

Principle 3: Focus on Organizational Capacity & Infrastructure Building. Venture philanthropists generally have a strong business background. Their talent and experiences can greatly benefit a nonprofit by applying business principles that enable it to be more efficient and effective. The purpose of venture philanthropy is not to change the mission of the nonprofit -- just the opposite. Venture philanthropists seek to strengthen the organization so it can better meet its mission.

Principle 4: Focus on Outcomes. Identifying a Social Return on Investment is very difficult, but very important to a venture philanthropist. If the outcome can't be measured, how does the venture philanthropist know if the investment is having an impact? Venture philanthropists seek to measure both the means and the ends through critical self-examination and a review of the nonprofit's effectiveness in reaching its target population.

The difference between venture philanthropy and traditional philanthropy is similar to the difference between venture capitalists and banks. In the private sector, there have been banks (analogous to foundations) for decades and will be for decades to come. Over the past several years, venture capitalists (analogous to venture philanthropists) sprang up in response to an unmet need. VCs focus on emerging organizations (analogous to entrepreneurial nonprofits) that need more than money; they need expertise and support in building their organization's infrastructure. Banks don't focus on capacity-building as directly or intensely as VCs do. As organizations mature, they often transition from VCs to more traditional institutions such as banks. Foundations and venture philanthropists need to coexist and work together just as banks and VCs do.

Venture philanthropy is important to the community. Pittsburghers are very giving people. They have a long history of volunteerism and philanthropic leadership. Venture philanthropy is an attractive form of giving and volunteering for many people. Investing time, talent, experiences and money into our neighborhoods will help make our community a better place to live, work and play, creating another tool in our region's economic development toolbox.

A new organization, Pittsburgh Social Venture Partners, is providing individuals with an easy way to get started in engaged grant-making. The organization has a dual mission of practicing venture philanthropy while seeking to grow a whole new generation of philanthropists. Partners pools its human and financial capital to help address the capacity building needs of selected nonprofit organizations in Allegheny County. Partners has the opportunity to be educated on critical issues facing at-risk populations and to be exposed to the wonderful work that Pittsburgh's nonprofits are doing. As a result, Partners is learning that you don't have to be a millionaire or wait until you die to be a philanthropist. It can see the impact of its financial contributions and know that it is making a difference.

On Sunday and Monday, Pittsburgh will host more than 100 venture philanthropists from across the country and Canada. They will converge on our city to participate in the first Social Venture Partners International Conference. This conference, being hosted by Pittsburgh Social Venture Partners, will probe how the venture philanthropy movement has taken hold and grown, how to measure its social return on investment and how to more effectively grow a new generation of educated philanthropists.

Pittsburgh Social Venture Partners is an exciting, growing and learning philanthropic organization. In less than two years, we have attracted 90 philanthropists as partners, invested in two dynamic nonprofit organizations -- Kids Voice and Child Watch -- and hosted numerous education programs. The partners believe that venture philanthropy improves the effectiveness of nonprofit organizations, contributes to the health of the community and enhances the personal enrichment of the individual partners. We have made a few mistakes, learned from them and continued on our way. We believe that with the community's strong history of giving and deep-rooted entrepreneurial spirit, Pittsburgh is destined to become a leader in venture philanthropy.

Carol Savage and Bob DiBella of Pine, who are husband and wife, are partners with Tatum CFO LLP and are two founding members of Pittsburgh Social Venture Partners.