Over the past decade, a new wave of philanthropy has gathered
strength in America. The early force propelling this wave
was the long economic boom of the 1990s, with its unprecedented
pace of innovation, wealth creation, and globalization.
At a time of great prosperity, a new generation of entrepreneurs
saw a stunning paradox: Even as our world grew closer together
and a host of men and women grew fabulously wealthy, our
economic and social divides were widening, moving us dangerously
close to cementing a permanent underclass in our country.
Some of these entrepreneurs turned considerable energies
to the social sector, not just by writing large checks but
also seeking to contribute to experimentation and innovation
in the philanthropic and nonprofit world.
This interest in experimentation was by no means unique
to these entrepreneurs. Even before the height of the economic
boom of the 1990s, groups of established philanthropic institutions,
nonprofit-sector leaders, and academics were doing pioneering
work to help the rest of us see the importance of assessing
the social outcomes of nonprofit work and building the capacity
of nonprofit organizations to achieve greater outcomes.
These pioneers recognized early on that the federal government,
while still a major funder of social services, was moving
to pass off the responsibility for delivering those services
to nonprofits. They saw that thousands of organizations
that were already stretched thin were being called upon
to do even more in their communities. They knew that helping
to build the effectiveness of organizations—not the
output of programs—had to become a high priority.
The impetus for increased effectiveness and innovation has
only grown greater in recent years. In the aftermath of
the September 11 terrorist attacks, a number of economic
and political storm fronts collided, further increasing
the demands on nonprofit nonprofit organizations while
simultaneously shrinking the supply of funding. While many
forms of charitable giving are likely to rebound when the
economy does, federal and state funding, which account for
a larger portion of nonprofit revenues than does charitable
giving, are a major long-term concern. More than five trillion
dollars in projected surpluses were erased from the federal
books between 2001 and 2002, significantly altering the
budget outlook for years to come. At the federal, state,
and local level, core social services and education programs
are on the chopping block.
These difficult circumstances provide the spark for our
society to engage in a soul-searching examination of ways
we can more strategically support the work and expand the
impact of nonprofit organizations struggling day in and
day out to meet the great and growing needs in our communities.
We and many other organizations that aspire to contribute
to the new wave of philanthropy believe that one of the
biggest opportunities lies in changing the funding system
itself.
Strong organizations are the backbone of effective services.
Strong organizations can make long-term plans and absorb
tough blows. Their managers are better able to focus on
mission. They invest in management, staff development, and
infrastructure that allow them to better define goals, measure
progress, and be accountable for outcomes. They have the
tools for continuous improvement and for growing the organization
to scale.
But the way we fund nonprofits prevents them from doing
these things well, or, too often, at all. Executives must
focus too much on fundraising, not management. Their horizon
is often the next grant cycle, not the next performance
goal for those they serve. The standards they are forced
to follow deal with programs and process, more than social
outcomes. Perversely, their funders—rather than the
people they really seek to serve—can end up becoming
their primary clients.
Because givers often insist on low overhead, nonprofits
are limited in their capacity to build strong organizations.
They cannot invest enough in the management, technology,
and other tools that are the keys to delivering effective
services.
For the most part, nonprofits rely on a single financial
instrument, the charitable donation. Charitable donations
and those who offer them are often very good at helping
to start and nurture nonprofit organizations for the
first few years, these resources often peter out over time
as funders move on to newer program initiatives rather than
helping to build further what they started so well. This
creates a gaping hole in funding for established organizations—even
those that have excellent leaders and that are already doing
very good work in their communities.
The approach VPP and others are taking to address these
issues has been called “venture philanthropy,”
“high-engagement grantmaking,” and “highly
leveraged philanthropy.” These terms are relatively
new and have no single commonly agreed-upon definitions.
We tend to describe them as the process of adapting strategic
investment management practices to the needs and culture
of the nonprofit sector to help good organizations grow
in size, strength, and impact.
In the commercial world, the most successful investors
are true strategic partners to the enterprises they fund.
Their work starts with the funding instead of ending there.
They develop relationships and build trust with the people
of the organizations in which they invest. Instead of intruding
and directing, they support and consult. Instead of controlling,
they become vested partners that share risk. They provide
management advice. They help managers deploy technology
that helps them achieve their missions. They make long-term
commitments that enable businesses to invest in capacity
for the long haul rather than simply surviving to the next
quarter. More than anything else, they help build great
organizations that, in turn, create great value.
Our experience at VPP and the experience of other organizations
around the country involved in similar work suggests that
many nonprofits can benefit from a similar approach of strategic,
engaged, highly leveraged investing.
For nonprofits, this approach offers the chance to reach
their potential and realize their dreams. They gain the
support they need to move toward sustainability. Their leaders
are able to focus more on results rather than securing short-term
grants for the next funding cycle. With increased capacity
and a stronger organization, they can become more effective
in their delivery of services. And they are able to use
those results—and this support—as an engine
for continuous internal improvement.
For donors, it offers the potential for a better—and
more accountable—return on their philanthropic investments.
It accommodates their desire for more direct involvement,
their hunger to contribute beyond just writing a check,
and their thirst for knowledge about how to give more effectively.
But, ultimately, the most important beneficiaries will be
the children and families who depend on the strength of
the nonprofit sector. The organizations that serve them
will be able to make long-term plans and be agents of long-term
hope. When leaders focus more on long-term results rather
than short-term grants, children will have more effective
resources—resources like affordable preschool upon
which parents can depend or access to quality mental health
services that are culturally sensitive and contribute greatly
to their development.
We recognize that the strategic, engaged, highly leveraged
investment approach does not fit the needs of all nonprofits.
And instead of replacing existing philanthropy, it must
work with it, complement it, and create a means for cross
learning. We believe that many emerging donors have important
insights to offer, but we also know how much we have to
learn from—and how much we have to admire about—what
established funders and nonprofits already do. At a time
of reduced resources and growing needs, we need both established,
proven approaches and innovative new ones to support nonprofit
organizations.
