Should foundation program officers be more like venture capitalists? (Part 2 of 2)

(This post first appeared on the Tactical Philanthropy blog, as part of a conversation Sean Stannard-Stockton kicked off on creating a ‘capital market’ for philanthropy.  It is the continuation of my earlier post on whether foundation program officers should be more like venture capitalists.)

One of the big problems we need to solve as a sector is how to find ways to scale highly effective nonprofit organizations.  Kudos to Sean for raising this question and also for highlighting the power dynamic that can often exist between funders and grant recipients.  (I particularly like George’s reference to the need to be a “chameleon”, which captures the issue very nicely).

At Acumen Fund, about two years ago we realized that we were in a position for a major scale-up of our work, and we also recognized that the best way to do it would be to raise a large pool of unrestricted philanthropic capital that would take us to the next level.  We set out to raise $100M over two years in unrestricted capital in May of 2007, and by the end of 2008 we raised $85 million against this goal.

One of my reflections having led up this effort is that individual philanthropists are typically much more prepared than institutions (foundations and corporations) to make large, long term, multi-year, unrestricted gifts.  (That said, there are some institutions that are exceptions to this rule, and I do believe that when programmatic goals of a nonprofit align closely with those of a foundation, large gifts with some restrictions can provided needed growth capital that allows for the kind of organizational investment that growing nonprofits need to make.)

Where things get really tricky is when a nonprofit that might be ready for tens of millions of dollars of growth capital (the $10-$30M that George Overholser suggests is a good reference point) finds itself mostly able to raise programmatic grants (often narrowly restricted) in $50,000-$100,000 increments from foundations.  Programmatic grants like this can create the two-headed hydra of not having sufficient funding for “overhead” (a.k.a. non-program staff), combined with the communications, relationship and reporting challenge that can come with having 100 individual $50,000-$100,000 grants (an absurd number, but this would get you to $5-$10 million) – the “chameleon” problem.

The irony is that in other lines of work – venture capital; executive search; etc. – being able to find and invest in a world-class team of people is seen as THE differentiator between good and great firms.  Yet all too often, foundations seem unwilling to invest in people and organizations, instead seeing nonprofits as a means to a programmatic end.

The problem with a world in which the most proactive, risk-taking philanthropists are individuals (rather than foundations) is that it has the potential to limit severely the types of new nonprofits that will be successful at growing to scale – namely, the winners will be those organizations that are run by individuals who are capable of building strong and deep relationships with ultra high net-worth individuals. Nonprofit CEOs who can do this bring together a unique combination of skills, but if this is only real way for anyone looking to grow a new nonprofit, then we as a society have a problem. (though large scale retail fundraising using Web 2.0 tools is a potentially interesting solution).

The potential I see is to have foundations bring together both know-how about what it takes to solve major social problems AND a risk appetite to put capital behind organizations (and not just programs) that have a real chance at building those solutions.

For now, at least, it seems like we’re coming up short on the appetite for risk and for openness to the idea that investing in great teams and building great institutions will be what brings forth the next wave of groundbreaking nonprofits.

6 thoughts on “Should foundation program officers be more like venture capitalists? (Part 2 of 2)

  1. Sasha,

    This is one of my favorite posts of yours. I think your point about nonprofit CEOs who know how to network being the winners is dead-on. It’s great when leaders have that capacity, but if that’s the only way to get that funding, we have problems. I wrote about this here: http://socialentrepreneurship.change.org/blog/view/founders_syndrome

    I think that part of the answer is measurement. The better we can measure outcomes, the less we have to rely on story-telling, however important and compelling that story-telling is.

    I also think that, as you’re mentioning, part of this is fundamentally shifting the way we think about and view overhead. We need to get comfortable with spending money on great people, period. Working with undergraduates, I can say for a fact that we’ll lose a lot of great people if we force so much financial sacrifice onto the field.

    Thanks for writing!
    Nathaniel

  2. The core skill of innovators « Sasha Dichter’s Blog

  3. Nathaniel, thank you for this comment and for your great post. I agree with all the observations. I have to push you, though, on your assertion that the solution is better measurement of outcomes. If I were being provocative (which I’m not🙂 I’d say that is wishful thinking. Here’s my shorthand argument: if the most sophisticated, connected, wealthy individuals in the world are ready to hand over millions of dollars to Bernie Madoff without so much as reading a prospectus, than to what, exactly, do we aspire in the philanthropic sector…?

    I’ll write a full post about this and would be very interested to hear your thoughts here and continue this conversation.

  4. Madoff was the classic negative example.
    Indeed the prospectus is not being read….

    My personal view – as mentioned here earlier – has always been that the application is not very interesting.

    The applicant is the interesting part.
    We are indeed putting too much emphasis on the pictures, colours and graphs of the aplication.
    But who is going to do it ?
    Said differently; I can train an 18 year old to write a great application on a community development programme in northern Uganda.

    But can he implement and/or monitor etc. …… No.

    But I know quite a few people who can get a job done well, but don’t ask them to write about it.

    But whatever we do > do not copy ten years too late ( ‘scale’ etc.) what made us go wrong in the financial world recently…..

    May I suggest we look not only to scaling up etc. but we try to be ‘great’ and become ‘small giants’ … (read more here: http://vanstokkom.blogspot.com/2008/09/good-to-great-social-innovation.html )

  5. Hey Sasha

    You’re absolutely right to call out the wishful thinking element of measurement solving the problem. That said, I do think that if there were a better way to do two things:

    1) help organizations find, adapt, or create measurement systems that let them understand how they were making and improving upon their ability to make an impact
    2) see, within specific spheres of activity, the common threads and variables in how organizations measured their impact

    -we would have a far great ability to have minimum quality standards. My understanding is that this is a bit of what’s going on with the evolving Pulse project..

  6. Sasha,

    I am the founder and editor of “Manifest”, a quality print-on-demand magazine.

    I have had the chance to interview various people in the NGO and humanitarian field such as Jonathan Reich of Edurelief in Mongolia and Amanda John on her work in Tanzania for the UNHCR. (http://manifestmagazine.files.wordpress.com/2008/12/manifestn10.pdf)

    I was wondering if I could re-publish this particular post on Manifest N14 on 1st Feb? At the same time, I will also put an insert on your opening at Acumen Fund.

    Let me know,

    Wahyd

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