Compete for capital!

Who's giving, who's getting.
Oct. 19 2007 7:29 AM

Fantasy Philanthropy Baseball

Compete for capital!

Illustration by Nina Frenkel. Click image to expand.

Over the past 15 years, new philanthropies (the Skoll Foundation) as well as long-established ones (Pew) have challenged the nonprofit sector to act like the for-profit one. The payoff has been impressive. Yet one aspect of a market-based system remains elusive: access to capital based on competitive performance. When private companies outperform competitors, they gain favor from capital markets interested in the promise of more growth. By contrast, when nonprofit enterprises outperform peers, they merely win the chance to make yet another round of one-off proposals to foundations and other donors.

There is no efficient capital market to reward nonprofit performance in part because there are no agreed-upon performance metrics by which to determine winners. Private investors look to profitability, return, and growth; philanthropists and the programs they support don't share metrics to judge who is outdoing whom.

Enter fantasy sports—a billion-dollar market in which players operate leagues whose entrants win or lose based on agreed-upon metrics. The players agree in advance on which metrics to use. For example, fantasy baseball looks to hits, runs batted in, home runs, and stolen bases to rate hitters, and wins, saves, earned run average, and strikeouts to rate pitchers. At the end of each season, more money goes to the players whose fantasy picks have outperformed the others.

So, how would a fantasy league for philanthropy work?

To begin with, a bunch of philanthropists would commit serious capital over a sustained time frame—say, $275 million over five years (or "seasons," to keep the sports metaphor going). The philanthropists select a field, like education or health or housing. Then they recruit a set of nonprofits to participate in the league according to an agreed-upon set of metrics. For example, a league of  nonprofits devoted to prenatal care might select metrics for the number (as well the growth in number over time) of women who get early care, high-risk women helped, healthy births, and, finally, the organization's financial soundness. Once everyone is on board, the philanthropists and the  nonprofits set up a schedule for infusions of money linked to the outcomes of the competition.

Imagine, for example, the philanthropists find 10 nonprofits to participate in their $275 million league. They give each of the 10 a stake at the beginning; say $2.5 million, for a total of $25 million of the original pie. The remaining $250 million is split into five $50 million slices, one for the end of each season. These are to be divided disproportionately based on performance. Each year $14 million might go the winning nonprofit, $11 million to second place, $9 million to third place, and $8 million and $7 million respectively to fourth and fifth place. The last five finishers might split the remaining $10 million (for $2 million apiece) since, after all, all 10 organizations are initially selected based on their successful track records.

To illustrate, let's look at the parenting field. Studies show that one in three kids have emotional or physical problems that arise from bad parenting. In one Canadian study, more than 60 percent of parents questioned their know-how and readiness. In response, scores of  nonprofits are targeting parents or the professionals who work with them. Among the best are the Center for the Improvement of Child Caring, Zero to Three, Invest in Kids, Parents as Teachers, and the United Way. Yet, the performance of these  nonprofits is disconnected from access to the capital they need to grow. Or, put differently: The capital required to meet a growing, urgent crisis—poor parenting skills—isn't readily available to the organizations that have proved they know how to combat it.

A fantasy-philanthropy parenting league can change that. The philanthropists and the nonprofits would agree on metrics that might include the number and growth in parents who use books, seminars, and other services; the results on skill tests for parents after they use the materials; child health and school readiness; and again the organization's financial soundness. The groups that performed best would get most of the pledged money. The others would have the incentive to rethink what they're doing so as to catapult themselves to a better performance next season.

With a committed flow of capital, the winning nonprofits could bet on the strategies for growth that are tried and true in the private sector—like building distribution channels, advertising, and branding. And philanthropists enamored of venture and strategic approaches would reap the satisfaction of transforming inefficient cottage industries into endeavors with much broader and deeper impact.

Fantasy philanthropy doesn't have to be fantasy—it wouldn't take much to get there from here. The Edna McConnell Clark Foundation, for example, makes multiyear investments in building the capacity of youth development organizations. SeaChange Capital Partners (whose managing partner is Slate contributor Lincoln Caplan) will marry major donors to selected  nonprofits based on their long-term performance. NeighborWorks America and Fannie Mae support Achieving Excellence, a program I designed for affordable-housing  nonprofits that uses performance goals and metrics to increase capability and impact.

What's missing here is only the explicit element of competition.  Nonprofits such as Zero to Three, Invest in Kids, and Parents as Teachers need the confidence that their superior performance will be rewarded—not with the mercurial, short-term investment of the grant cycle but with long-term reliable commitments. Fantasy philanthropy makes that link. And, besides, as any fantasy-baseball player will tell you, it would be a blast.

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