Venture philanthropy—what is it?

Who's giving, who's getting.
Nov. 13 2006 7:29 AM

Grant Away

Why venture philanthropy is important, even if it sounds ridiculous.

Click here to read more from Slate's philanthropy series. 

A war of words and egos broke out in the philanthropy world a few years back, one that paralleled a similar clash in the business world. On one side were the new "venture" philanthropists, who, flush with cash and confidence after revolutionizing the technology industry, were hellbent on triggering a similar revolution in philanthropy. Whatever traditional philanthropists were doing, the venture philanthropists concluded, wasn't working—society was still brimming with problems. Clearly, if you really wanted to save the world, you had to do more than write checks: You had to act. You had to find great people, help them build great social-service organizations, and then hold them accountable for theirresults. In other words, you had to attack social problems the way venture capitalists and entrepreneurs attacked business problems—with hands-on, we're-in-this-together, failure-isn't-an-option partnerships between investors and investees.

On the other side of the argument were the traditional philanthropists—the Establishment. For a century or so, they had given time and money to innumerable causes, and, in so doing, had made the world a better place. True, they hadn't fixed everything, but unlike some private-sector windbags, they had at least tried. Traditional philanthropists knew that they were often better at providing capital than doing actual social-service work and, therefore, that it was often best to give high-quality nonprofits the money and the room to do their thing. Traditional philanthropists also knew that you couldn't "measure results" at nonprofits the way you could at software companies—"reducing illiteracy," for example, was a harder objective to track than "selling licenses" or "generating free cash flow." Traditional philanthropists knew that much of what the venture philanthropists were espousing wasn't new and that some of what was new was also harebrained. The more support and adulation venture philanthropy garnered, the more traditional philanthropists took offense.

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And no wonder: Reading some early treatises on venture philanthropy, circa 1999, brings back unfortunate memories of the dot-com era: There's lots of self-importance, hot air, and conviction that an enlightened few had discovered a revolutionary secret that had forever eluded the benighted masses. Some early venture philanthropists who waxed passionately about "investing like venture capitalists" had never been venture capitalists, nevermind philanthropists. And some weren't advocating a new styleof philanthropy—they were just describing philanthropy that works. Thankfully, when the market crashed, much of the revolutionary rhetoric disappeared.  

But the grandiose adolescence of the venture-philanthropy movement doesn't mean it should be dismissed as a silly fad. The movement is still small: One study found that in 2001, approximately $50 million had been distributed by 42 venture-philanthropy foundations, a tiny fraction of the billions distributed by all philanthropic organizations that year. But it has matured much since its early days.

One of the leading VP organizations, Venture Philanthropy Partners, has analyzed the ongoing development and refinement of VP techniques since 2000. Its 2004 report points out that unlike large nonprofit hospitals, museums, and universities, small and local nonprofits are often underfunded and understaffed. They need the longer-term capital commitments, strategic advice, and professional relationships VPers provide. It's a point taken by traditional foundations such as the Edna McConnell Clark Foundation, which has shifted from giving out grants to providing a greater level of support and guidance to a smaller number of organizations.

That's one example of how the venture-philanthropy movement has had an impact not only on the nonprofits it has supported but on giving in general. It's like the late-'90s technology boom. A decade ago, confronted by a wave of innovation across multiple industries, GE's Jack Welch launched destroyyourbusiness.com—a directive to all GE managers to get competitive with Internet startups or get out. Venture philanthropy has provided the same sort of motivational kick in the ass to the larger philanthropic Establishment. Foundations like Rockefeller, Carnegie, and MacArthur now fund, for example, the Center for Effective Philanthropy, which researches new ways of measuring social-service results and designs tools to help foundations improve their effectiveness.

To be sure, the two worlds have not yet entirely merged. The Establishment has so far refused to use the word investee to describe a grant recipient—or other venture-philanthropy terms like investment portfolio, growth capital, and social return on investment. But there are some changes in Establishment rhetoric: A spokeswoman for one major foundation, for example, was horrified when I referred to a grant as a "gift"—a word that conjures condescending images of rich people handing out cash in the street. Effective foundations don't make donations anymore: They provide financial resources designed to achieve social aims—and then they make sure that the recipient organizations achieve them.

The venture-philanthropy movement has also, arguably, greatly expanded the pool of philanthropic dollars and talent by making the field exciting to a generation of entrepreneurs who made their fortunes by subverting the Establishment. Venture philanthropy originated on the West Coast, in freewheeling Seattle and Silicon Valley. It's no surprise then that VP enthusiasts are bored by the thought of endless passive proposal-reading and check-writing. And it's got to be good news that philanthropy now sports the competitive fire that drove tech moguls like Larry Ellison and Bill Gates to forever try to one-up each other in the software business. So far, Gates is the undisputed king of philanthropy, but perhaps we've not heard the last from Larry. (Larry?)

Like "new economy" and "old economy" businesses, venture philanthropy and traditional philanthropy have now become incorporated into a more diverse continuum. Fortune 500 companies are notoriously bad at exploiting revolutionary startup opportunities; most venture capitalists, meanwhile, wouldn't last 10 minutes at a multinational corporation. In the nonprofit world, too, both styles of philanthropy have strengths and weaknesses, and both have their places. So, long live the VP revolution.

Henry Blodget is the founder, editor, and CEO of Business Insider. Follow him on Twitter.