The Black Sheep in Wolves Clothing¹

The already heated debate in the nonprofit sector about the emerging field of "venture philanthropy" is getting hotter by the day. It seems that whomever has not yet expressed an opinion about the field is preparing to do so. How has this field, only recently developed into a field at all, managed to generate such a ripple in the nonprofit sector? Venture philanthropy has been both vilified as the black sheep of philanthropy and touted as the solution to the perceived limitations of traditional, "classical" philanthropy. Is venture philanthropy the "sheep in wolves clothing" (i.e., the innocent and healing, albeit hard to swallow, medicine the world of philanthropy has been in need of)? This debate, about the true effects and implications of venture philanthropy, is apace among "classical philanthropists," foundation/trusts and nonprofit sector leaders around the world. Is the professed innovation and revolutionary nature of this "new philanthropy" field as grossly inflated and over-valued as the profitability of the slew of ill-fated dot-coms of late? Can the approaches and tools of for-profit investment and particularly venture capital be applied effectively to the unique organizational and financial needs of dot-orgs? Is there really anything "new" about the new venture philanthropists and their strategies or is the field simply a re-packaging of existing practices in the community venture capital and social investment fields?

Defining the Field of Venture Philanthropy

Venture philanthropy is an emerging field of philanthropic "double bottom-line investment" that combines the policies and practices of long-term investment and venture capital models of the for-profit sector with the principles and public-benefit missions of the nonprofit sector. Venture philanthropy strategies typically combine financial capital "investments" in nonprofit organizations or nonprofit enterprises with some form of additional capacity-building or technical assistance support. (See box for description of venture philanthropy approach versus the "classical philanthropy" approach)

Some of the key distinguishing characteristics of the venture philanthropy approach versus "classical philanthropy" include: Multi-year financing: venture philanthropists provide longer-term, multi-year (and perhaps also larger scale) investments in nonprofits as opposed to single-year grant awards; Tailored financing: venture philanthropists use an "investment approach" (versus a "grantmaking approach") to determine not only the amount and duration of financial support, but the type of financing most appropriate for the nonprofit's needs (i.e., making available an array of financing instruments rather than depending solely on grants/subsidies); "Engaged" philanthropy: Venture philanthropists provide more than simply financial resources to nonprofits. These non-financial "investments" can include: a position on the nonprofit board to assist with organizational development overall; and/or other types of capacity-building, coaching/mentoring, or technical assistance to the nonprofit. Organizational focus: venture philanthropists focus their strategy of support on the overall organizational health of nonprofits rather than on individual projects or programs;

Shared risk: venture philanthropists may encourage innovation and new ideas just as classical philanthropists, but take an invested role in attempting to realize success rather than placing the burden of success (and risk of failure) on the nonprofit; Measurable performance: Venture philanthropists seek measurable results and impact and hold the nonprofits they support to agreed-upon benchmarks for success (and also seek more regular and specific progress reports as opposed to narrative/financial reports at the end of a grant term); Exit strategy: Venture philanthropists define clear exit strategies for disengaging from the nonprofits they support once agreed-upon benchmarks are achieved (or when the nonprofit consistently fails to meet agreed-upon performance benchmarks) or when they are no longer able to "add value" (i.e., the nonprofit outgrows the type of support provided). Excerpted from Not Only For Profit: Innovative Mechanisms for Philanthropic Investment (forthcoming from NESsT, October 2001)

The Peninsula Community Foundation in San Mateo, California claims to be the "birthplace of venture philanthropy." The Foundation's Center for Venture Philanthropy says that they coined the term in 1984, although it was popularized later in the Harvard Business Review article entitled, "Virtuous Capital: What Foundations Can Learn from Venture Capitalists" (March-April edition, 1997). A growing number of venture philanthropy funds have emerged in subsequent years, particularly in North America. However, many use the terms "venture philanthropy" and "social enterprise" to mean very different, albeit interrelated, things. (see box below) Some venture philanthropists "invest" in the organizational development of nonprofit organizations to help them "scale up." Others invest in the enterprise activities of nonprofit organizations to help them generate income or create employment opportunities for underserved constituents. Still others invest in "social innovators" who are addressing a critical social problem in a particularly innovative way. While all of these are noble and much-needed efforts, the lack of clarity of terms has made the field of venture philanthropy confusing to many, if not meaningless to others.

The various faces of "venture philanthropy"

1. Investing in Individual Social Innovators: Organizations like the echoing green foundation (New York, USA) and Ashoka (Arlington, USA) provide targeted financial and capacity-building support to individuals they refer to as "social entrepreneurs" -- individual leaders who address a critical social problem in a particularly unique or effective way.

2. Investing in Social Purpose Enterprises: Organizations like the Roberts Enterprise Development Fund (San Francisco, USA) provide capital, technical assistance and access to other support networks to for-profit enterpriss owned and operated by nonprofit parent organizations to generate income and/or provide employment opportunities for marginalized constituencies (e.g., the homeless, physically/mentally handicapped, etc.).

3. Investing in Nonprofit Organizational Development: Organizations like New Profit Inc. (Boston, USA) provide financial and capacity-building support to nonprofit organizations in an effort to "bring to scale" their successful activities.

Meanwhile, beyond a few definitive articles and introductory "thinking pieces" on venture philanthropy, much existing literature on the topic has focused on the demand side of nonprofit enterprise development (i.e., the obstacles and challenges faced by nonprofit entrepreneurs and their capacity-building needs), with little focus on the supply side of the equation (i.e., models and strategies for "investing" in the enterprise activities of nonprofit organizations and to capitalize and build the capacity of these social-purpose enterprises). The field remains largely "unproven," much as the micro-credit/finance field - now considered a mainstream economic development strategy -- was viewed a few decades ago. The forthcoming book from NESsT - Not Only for Profit: Innovative Mechanisms for Philanthropic Investment - is the first effort to closely document the start-up and implementation of several of the pioneering venture philanthropy funds around the world and begin to critically analyze their impact and the implications of their work on the nonprofit sector generally. (See box)

NESsT has also been at the forefront of the effort to foster social enterprise in the emerging democracies of Central Europe and Latin America. With support from both European and US donors, NESsTis providing assistance to social entrepreneurs in four Central European Countries (Czech Republic, Hungary, Slovakia and Slovenia) and soon in Latin America throughout the Andean region and southern cone. Through the NESsT Venture Fund, NESsT will also "invest" in a portfolio of social enterprises, providing both financial and technical assistance to help the enterprises grow, expand and become profitable. NESsT is also convening the first International Venture Philanthropy Forum in Budapest, Hungary in October 2001 to bring greater attention to the field of venture philanthropy in the emerging market countries of Europe and Latin America.

Beyond the Smoke and Mirrors

As Neil Carlson recently wrote in his article "But is it Smart Money?: Nonprofits Question the Value of Venture Philanthropy" in Responsive Philanthropy (Spring 2000), "Yet venture philanthropy remains something of a Rorschach test. Depending on whom you ask, it is the future of philanthropy, a passing fad, good grantmaking, or misguided hubris." Undoubtedly, the venture philanthropy field has engaged donors, scholars and nonprofit practitioners in an important debate. Here are some of the key questions still under discussion:

1. Is there really anything new about venture philanthropy? Dorothy Ridings of the Council of Foundations in the US, in her editorial "Venture Philanthropy, new? Hogwash" in Foundation News & Commentary (September/October 2000) states that although everyone is writing about venture philanthropy, it is hardly a new concept. There is some truth in the claim that the IDEA of venture philanthropy is not new. Indeed, these are issues that donors and philanthropists have grappled with for decades. However, what IS new is the unique application of venture philanthropy in recent years. It is only in the last few years that venture philanthropy funds have surfaced and put into practice many of the principles of the field that have circulated for years prior.
2. Should venture philanthropy replace classical philanthropy? While most venture philanthropists are somewhat critical of the "classical philanthropy" approach to grantmaking, very few question the fundamental importance of philanthropic, charitable giving. The venture philanthropy approach is intended to complement (not replace) classical philanthropy. The field has typically attracted NEW resources to the philanthropic sector by reaching out and engaging a new type of philanthropist. As long as venture philanthropy helps to expand the array of philanthropic investment tools and resource flow to the nonprofit sector, it should not threaten current charitable giving.
3. Aren't venture philanthropists creating a market rather than serving one? Some critics believe that venture philanthropists are promoting an investment-like strategy that fails to recognize the unique needs and culture of nonprofit organizations that sets them apart from for-profit businesses. They are therefore forcing nonprofits to reengineer themselves in a way that many are unprepared to do. There is some validity to the former argument, as some venture philanthropists have no true understanding of or experience with nonprofit organizations. However, there is indeed a high demand for venture philanthropy investment in the nonprofit sector. There is a large and unserved market of social entrepreneurs who are ready and prepared to benefit from the venture philanthropy approach to financing and technical support.
4. Is venture philanthropy a passing fad? It is true that much of the cachet of the venture philanthropy field comes from its resonance with the nouveau riche of the technology and e-commerce industry. It is also true that many of the current venture philanthropy funds (in the US at least) depend on the energies, drive and wealth of a single individual. However, the principles and practices of venture philanthropy are now an integral part of the philanthropy industry and it attracted a wider body of proponents and investors. The field is growing, weaving itself into the fabric of the nonprofit sector and slowly becoming recognized as one of several mainstream financial sources for nonprofit organizations.
5. Isn't venture philanthropy a high-risk, resource-intensive model that is unproven? Indeed venture philanthropy is a new and emerging field. But what's to prove? Is classical philanthropy "proven"? The venture philanthropy field owes its origin to the shortcomings of the classical philanthropy approach. Some point to the high risks involved in the venture philanthropy approach with uncertain returns. But the nonprofit sector (no different from the for-profit sector in this case) involves a high level of risk with a corresponding high potential for social impact/return. The high rates of failure among start-up enterprises in the for-profit sector have never been used as a criteria for terminating such investments. In fact, the dot-orgs of the world are generally a safer long-term "investment" than most dot-coms, if one is willing to forego a purely financial return for a social return on investment. The venture philanthropy model may not be appropriate for all nonprofits or donors, but that is not an argument to discredit a field that resonates for many.

The global debate on venture philanthropy debate is just beginning. While the field deserves the same rigorous examination, evaluation and critique as any other emerging field, it is important that donors, scholars and social economy practitioners not quickly dismiss a strategy that can potentially contribute to the ultimate goal: to increase the diversity of philanthropic investment tools and flow of resources to the diverse organizations of civil society. Just as the venture capital field was once the avante garde of the for-profit financial world and now is an accepted financial instrument, the venture philanthropy field will soon join the mainstream of the nonprofit capital market, calming both the nay-sayers and the apostles.

Lee Davis and Nicole Etchart are co-founders and co-directors of NESsT, an international nonprofit organization with offices in Hungary and Chile dedicated to developing new strategies for financing civil society through entrepreneurship. For more information: www.nesst.org.

1. Excerpted from the article "Venture Philanthropy: The Rise of New Philanthropy in the Old World" which first appeared in Philanthropy in Europe (Paris, Spring 2001).