Ralph Smith
08/02/2004
Philanthropy in general does too little to support innovation or reward risk-taking, hard work and superior performance. Too few dollars go toward strengthening organizations, promoting long-term success or replicating successful programs. Many in the field would readily agree with foundation consultant Lucy Bernholz’s biting critique: “Such a system is so illogical in practice that it is comforting to know that it was not a product of deliberate design.”
But there is good news: a more rational capital market for the social sector is no longer just a utopian dream. Many affluent individuals seem ready to invest more strategically in the growth, development and durability of effective nonprofit organizations. Similarly, a few foundations seem determined to break ranks, change course and commit substantially more dollars to building the capacity of a limited number of organizations and fewer dollars to developing new programs.
A rational capital market for the social sector would attract and match willing investors to the capital needs of at least three types of social purpose enterprises: start-ups, scale-ups and mature, successful organizations. Start-ups need venture funding to develop new products or services. Scale-ups are proven performers needing an infusion of capital to replicate and expand successful efforts. Mature, successful organizations produce good results and function at appropriate scale, but still need to close the gap between expenditures and the income derived from memberships, fees for services and reimbursements. In truth, what many mature, successful organizations might need, even more than general support, is the capital to develop durable, revenue-producing social enterprises.
Impartial Assessments
Many philanthropy experts, however, doubt that much
will change in the foreseeable future. In their view, progress toward a rational
capital allocation process will be slowed by a preference for pluralism, the
inability to agree on even basic terminology and the absence of standards to
evaluate performance, assess risk and measure social returns.
Fortunately,
current trends support a more optimistic view. The new dollars available to
philanthropy in the coming decades will dwarf today’s philanthropic behemoths.
Bernholz, philanthropy authority Jed Emerson and a handful of nonprofit
reformers are no longer wandering in the wilderness huddling together for
warmth. Mainstream organizations, such as the Aspen Institute and Urban
Institute, are building upon the pioneering work of the Roberts Enterprise
Development Fund, which has created a formula that gauges the success of the
nonprofits it backs with for-profit impartiality. We are making significant
strides in developing the concepts, terminology, standards and tools needed to
describe and measure performance, risk and, yes, even social returns.
More
promising than anything else is the growing realization that efforts to make the
social sector more effective will fail without improved access to the dollars
needed to grow and scale social-purpose organizations. The result has been the
development of a number of social investment funds. One such fund is Venture
Philanthropy Partners (VPP), which raised $32 million from private donors to
invest in community-based organizations in the Washington, D.C., area. To date,
VPP has committed $19 million to investment partnerships with nine
high-potential organizations serving children of low-income
families.
Increasing concerns about the uncertainty and unevenness of the
youth development field also prompted a dramatic restructuring of the venerable
Edna McConnell Clark Foundation. The new, improved Clark traded its grant-making
strategy of supporting initiatives seeking to reform large public systems for
multiyear, multimillion-dollar investments in promising, high-performing,
youth-serving nonprofits.
VPP’s regional investment strategy and Clark’s
sectoral approach share much in common. Both expend significant time, energy and
attention in selecting exemplary organizations with strong leaders committed to
growth and quality. Both require well-developed business plans. They provide the
flexible dollars and strategic assistance needed to implement these plans. And,
they work with the boards and executives of these organizations to monitor
management and track performance.
Mario Morino of VPP describes its approach
as “high-engagement philanthropy.” Michael Bailin of Clark says his foundation
must “think and act like a savvy, results-oriented investor.” Call it what you
will. I see a more rational capital market heading this way.
Ralph Smith is senior vice president of the Annie E. Casey Foundation, which works to help disadvantaged children and their families.