Should grantmakers act more like venture capitalists?

Should philanthropic foundation board members and staff act more like the venture capitalists who fund internet startups?

That’s the question our good friend Jon Stahl posed a few weeks ago. Jon’s focus was on the high level of involvement that venture capitalists often have with the companies they invest in. Lead investors typically have a seat on the board and often participate actively in the company, at least at the strategic level. Jon points out that foundation program officers, with portfolios that often run in the dozens, simply don’t have the bandwidth to engage much with their grantees.

I think it’s a great point; maybe there are ways we could refine the philanthropy model to offer grantees more support from their funders.

But the venture capital investment model has some other qualities that may or may not fit our social sector goals very well. For one thing, the VC model is designed to foster blowout success at the expense of everything else. In financial terms, a 2x ($2 returned for every 1$ invested) or even 5x return isn’t very interesting; the VC model is designed to produce 10x and 100x or even larger returns.

In fact, VCs have a lot of incentive to actually kill companies in their portfolio that don’t knock it out of the park. You probably won’t get funded in the first place unless you’ve got a great idea, a great team, and a great market, but if you don’t show aggressive growth in users or revenue pretty quickly, and then sustain that growth, the odds are decent that your VC will actually be part of shutting you down. A typical venture fund might see half or more of its companies fail outright, thirty percent performing modestly enough that the fund can get its investment back or perhaps make a small return, and only twenty percent doing really well. (The actual numbers are tough to come by, and there’s a lot of disagreement about exactly what they are, but we know that the huge hits are pretty rare and that lots of venture capital funds actually lose money).

The model might make sense on issues where our most desperate need is for a few blowout successes (and where we are comfortable killing off the groups that don’t achieve this level of success). For example, it might be perfectly reasonable for the Gates Foundation to fund malaria eradication programs using a VC-style approach, hoping that one of their high-risk-high-reward investments comes up with the solution we’ve all been waiting for.

But on lots of social sector issues, activists and funders are happy – and reasonably so – with moderate, sustained success. If a VC-style approach on malaria eradication comes at the cost of stable, sustained funding for effective malaria prevention efforts, it’s probably a much less appealing strategy. In fact, those “moderate” successes only look modest by comparison to absurdly high Google-style returns.

And on many issues there probably just isn’t a knockout punch waiting to be uncovered through high-risk entrepreneurial style investment by philanthropic donors. Preventing extinction and recovering endangered species is just hard work, politically and ecologically; there almost certainly isn’t a fantastically successful strategy just waiting to be discovered. We ought to have more sophisticated ways of measuring outcomes, and more effective ways of rewarding nonprofits that craft and implement successful strategies, but success across lots of fields won’t look like the 1,000x return that early Facebook investors walked away with. There may be some radical advocacy innovations waiting to be uncovered, but odds are good that most of our success will come through philanthropic investments with returns that look more like the equivalent of 2x, 5x, and 10x outcomes in the investment world. And even though these numbers look small compared to the superhits, they are still huge success: anytime a foundation invests $50,000 in a nonprofit and gets $100,000 or $250,000 worth of social change value out of the deal we all ought to celebrate.

The VC model also shifts enormous control over the company itself to the investors. It’s one thing for a social sector funder to have detailed expectations about how their grant will be spent, and perhaps to use the size of their grants to influence organizational decisions about staffing and strategy (which itself is enough to make many nonprofits very uncomfortable). It’s something altogether different when the funders actually control the organization itself.

Finally, the idea that funders might play a more active role in managing the organizations they fund carries as many risks as it does benefits. The best program officers offer real expertise about the issues they fund, they can draw on wide experience working with the nonprofits they fund, and can offer a higher-level strategic vantage precisely because they aren’t in the trenches on a day-to-day basis. But even the best are still at a distance from the day-to-day work, they often don’t have much experience on the other side of the funding equation, and they can be very prone to a favorable results bias.

In fact, while investors and entrepreneurs may not (and often don’t) share the same long-term vision, they measure results in a very consistent way: how much money is this company earning and how much is it worth. Philanthropic funders and the nonprofits they support may tend to have better alignment on long-term vision, but they rarely share a consistent and unambiguous approach to measuring outcomes. And this problem is only amplified by the strange power dynamics that characterize most grantmaker-grantee relationship. Deeper involvement by program officers in the nonprofits they fund comes with some real challenges.

I’m guessing the appeal of the VC model for Jon is mostly around the opportunities for nonprofit folks to learn from the experience and vantage of the funders they work with (not to mention the potential for funders to provide other kinds of resources to their grantees), and given how weak nonprofits usually are mentoring and professional development this makes a lot of sense. The trick, as is usually the case when drawing from outside models, is making sure we understand what those external models are designed to do and adjust the ways we mimic and poach from them accordingly.

There are other models worth exploring, as well. Angel investors often contribute much smaller amounts but expect much lower returns, which means that a moderate success can still be a success, and the angel investment model includes a lot of room for investor involvement and support. Crowdsourced funding models, with Kickstarter as a marquee example, might offer some insights. In many ways these models look a lot like traditional membership-oriented fundraising in the nonprofit world, but as federal law expands accessibility to true crowdsourced investment we can expect to see rapid evolution in the mechanics and structure.

I agree with Jon’s basic point that we should look at the venture capital model for ideas about improving philanthropic funding. I do think, however, that the VC model in particular has some significant limitations in a social sector context. The nonprofit world, at times, goes overboard when it pulls from other sectors, missing the nuance and context and overdeveloping some particular element that seems important. But we can learn a lot, too, by paying attention to other sectors, and we’ve got a lot to gain by poaching, adapting, and testing whatever we think might help.

A Brief History of the Environmental Movement

Mardy and Olaus Murie
Or, Why the Enviros are Losing and What We Can Do About It

The environmental movement in the United States, through the bulk of the 20th Century, was characterized by iconic thought leaders and activists – people like Mardy and Olaus Murie, John Muir, Rachel Carson – who took on critical environmental issues and laid the groundwork for the grassroots movement to come.

The passage of The Wilderness Act in 1964 marked the beginning of a decade-long run, fueled by grassroots politics and a growing popular awareness of environmental concerns, which saw passage of nearly every major environmental law we presently enjoy. The widespread popular support provided political capital that was converted into critical legal and policy victories.

The subsequent three decades were characterized, on the other hand, by a shift away from building and sustaining the public support needed for broad and deep political backing for conservation values.

Increasingly, the movement expended the political capital it had acquired on enforcing this new suite of environmental laws while investing less and less in sustaining that capital.

By the 1990s and 2000s, most of the environmental laws of the 1960s and early 1970s had been steadily weakened, in some cases through outright amendment but also frequently through regulatory and policy change. But the environmental community stayed the course, investing heavy resources in litigation, lobbying, and back channel political strategies while continuing to invest very little in grassroots organizing and coalition building.

Now: Conservation values are widespread but thinly held

Today, conservation values rarely serve as determinants in voting behavior or major legislative activity. There have been some bright spots, including initiatives around renewable energy, land use, and transportation. But the language and implementation of environmental laws continues to erode, grassroots political support is as weak as it’s been in decades, and the environmental movement continues to fight largely rearguard actions.

Even where public opinion lies squarely on the side of strengthening environmental protection and even where the often-fractured environmental community is largely unified – the climate change bill comes to mind – the movement doesn’t have the political muscle to close the deal.

We created and earned a great deal of political capital up to and through the huge successes of 1960s and 1970s, in other words, we spent that capital down in the subsequent decades without replenishing it, and here we sit in 2012 wondering why the political and legal strategies (which fundamentally depend on that capital) just don’t seem to work.

I’m pretty sure that the answer is not to continue focusing on litigation, lobbying, and inside baseball strategies at the expense of the investments that actually build political power around conservation values.

It’s not that we should abandon those critical defensive strategies. We have to continue fighting hard in court and inside the Beltway. But those strategies, by and large, don’t create political power, they expend it. So long as we under-invest in the strategies that create sustained political support, our ability to win the political fights will continue to diminish.

An example: diverse allies

To offer just one example of the problem: environmental funders and groups tend to think of ‘diverse allies” as folks you recruit to be spokespeople for your cause rather than groups with whom you build long-term relationships around shared interests and values.

The standard action item: “We need to find a fill-in-the-blank who we can quote in this press release criticizing fill-in-the-blank.” Environmental groups often find and use those spokespeople, but at best those efforts put a “diverse voices” sheen on our media efforts. They simply sidestep the really difficult work of building a sustained relationship that advances multiple agendas. And funders often scoff at pitches for investing in relationship building … the timeframes were too long (it will take years!), the potential shared interests and political agenda uncertain (the point of building relationships across broad constituencies is that you don’t know ultimately what shared interests you might uncover or develop), and the outcomes too vague.

The role of funders
NCRP Cultivating the Grassroots
Cultivating the Grassroots by Sarah Hansen.

Earlier this year, the National Committee for Responsive Philanthropy published a report exploring one critical dimension – the role of environmental grantmakers – of this challenge. Authored by Sarah Hansen, a veteran of the environmental philanthropy world with an eight-year term as the executive director of the Environmental Grantmakers Association under her belt, Cultivating the Grassroots: A Winning Approach for Environment and Climate Funders politely but firmly lays much of the blame on the funders themselves.

We are losing, the report argues:

“New environmental initiatives have been stalled and attacked while existing regulations have been rolled back and undermined. At a time when the peril to our planet and the imperative of change should drive unyielding forward momentum, it often seems as if the environmental cause has been pushed back to the starting line.”

And reversing this trend will require fundamentally changing gears by “decreasing reliance on top-down funding strategies and increasing funding for grassroots communities that are directly impacted by environmental harms and have the passion and perseverance to mobilize and demand change.” Her four-part prescription:

  1. Provide at least 20 percent of grant dollars to benefit explicitly communities of the future.
  2. Invest at least 25 percent of grant dollars in grassroots advocacy, organizing, and civic engagement.
  3. Build supportive infrastructure.
  4. Take the long view, prepare for tipping points.

Her analysis fits my own experience and observation (and offered plenty of new insights, as well), and the report is worth a read.

The role of environmental organizations

But I’m also willing to place more of the blame on environmental nonprofits, as well, since we don’t tend to think in these terms, either (yes, of course, some groups do – and hats off to them – but I don’t think that perspective is pervasive among environmental groups).

Moreover, the nonprofits absorbing the lion’s share of grant funding – those with the most ability to push back on funders and best equipped to fund a wider array of strategies independent of grant funding simply because of their size and financial capacity – are by far the most resistant to change. The Wilderness Society’s recent staff purge, becoming even more top-heavy and less capable of supporting on-the-ground grassroots organizing and relationship building, is just one example.

Incidentally, there are some fascinating parallels between the issue Hansen tackles in her report (a focus on top-down policy strategies vs. ground-up grassroots capacity-building) and the challenge to conventional nonprofit models posed by the rise of social networking … organizations that want to remain effective can’t simply layer social networking on top of a deeply hierarchical, tightly controlled organizational culture. As Beth Kanter and Allison Fine argue in The Networked Nonprofit (and as Trey and I argue in the “Social Lipstick on a Networked Pig” chapter of The Nimble Nonprofit), it requires shifting real control and autonomy in a more dispersed, unpredictable way.

Another, parallel read on the history of the environmental movement: isolated visionaries led the way to a powerful grassroots movement which then evolved into a deeply professionalized nonprofit industry.

I don’t think the answer is to abandon the movement’s well-earned professionalization and political maturation. Trying to return to a rosy-hued nostalgic past usually causes more problems than it solves, and the challenges (environmental and political) are too complex and the obstacles too deeply rooted to overcome without sophisticated political strategies and aggressive legal strategies.

Image credit:
The future is coming (we should get ready)

But there isn’t any reason why the movement can’t begin investing substantially in community-based and grassroots organizations, in strategies that emphasize long-term relationship building across sectors, in organizations that emphasize environmental justice and other issues differentially impacting marginalized communities, and in efforts that build sustained political power around environmental values. And unless we do, it’s tough to see how we’ll start winning.

Innovation v. Effectiveness

Innovation is just a whole lot sexier than do-more-of-what-we're-already-doing.
One of the peculiarities of the philanthropic foundation world is its energetic enthusiasm for supporting innovation among the organizations they support. Everyone loves innovation, for one thing, and we know that many of the challenges we face probably aren’t solvable with traditional approaches. And funders are as susceptible to the temptations of organizational ego as everyone else … what funder wouldn’t want to get credit for breakthrough innovations in providing key community services, securing a durable change in political values, dramatic improvements in nonprofit organizational structure, or solving an important social problem?

But sometimes the right answer isn’t to create something new but to scale up something you are already doing, or to copy an approach someone else already nailed. The problem: the idea of innovation can be so sexy that it comes at the expense of effectiveness. If a funder conveys through their grant application or awards process that being innovative trumps being effective, it’s not hard to see how the nonprofits themselves might slide in the same direction. If you’re trying to solve a social change, advocacy, and community challenge, sometimes imitation actually is the best solution.

(Photo by Flickr user Jules Antonio).

The “Ship It To Everyone We Can Think Of” Strategy

One of the more curious funder-driven outreach strategies we’ve witnessed over the years involves funding someone to write a book, funding the publication of that book, and then funding distribution primarily through a “ship it to everyone we can think of” approach. Back when the approach was more novel (for enviros the “Clearcut” book might be a good example), it might have had some impact, but I’m guessing it was mostly limited to keeping the activists themselves fired up. Many of the photos in that particular book still stand sharp in my mind, and I remember being impressed that I had friends whose photos made the final version. But even then – with a novel strategy and a dramatic vehicle for implementing that strategy – I’m pretty skeptical that the book was very effective at persuading undecideds or converting members of targeted audiences (were there even well defined targeted audiences?). I’m not convinced it had a meaningful impact on my own effectiveness as an advocate, for that matter.

I’m guessing that there have been some exceptions over the years, but in general the strategy seems too unfocused, too dependent on users actually taking the time to engage with the book, then too dependent on that particular book having just the right message for that particular reader, and too expensive to make much sense. And if it didn’t make much sense then, it really doesn’t make sense now.

It was with some surprise, then, that I received yet another unsolicited book in the mail just a couple of weeks ago thanks to a presumably generous foundation grant. I don’t know if they commissioned the book itself or if they simply funded the distribution, but either way I now have a no-doubt well written text, with an inspiring message, that I will never, ever read. At least the coffee table photo books lent themselves to quickly skimming the images, but the likelihood that an unsolicited book written by authors I’ve never heard of will compete favorably with the already-overflowing pile of books that I selected and acquired and placed in that pile, well, the odds are basically nil.

I think about Seth Godin’s admonition that marketing be relevant, anticipated, and personalized; this was none of the above. If an impressive open rate on marketing that is all three of those things is 10% or 25%, and a good conversion rate substantially less than that, what percentage of the recipients are likely to do anything with their fresh copy, not to mention actually change their behavior in some mission-oriented meaningful way?

What’s more is that the book was addressed to me as the executive director of the Nooru Foundation (one of my less demanding roles since our hiatus began in late 2008), so I’m assuming their target was environmental funders. For those few recipients that do actually read the book, and the even fewer that are truly inspired by it, what are the odds that it will actually change behavior in a mission-relevant way? How many will become better funders as a result? How many will have more impact?

I don’t want to be overly harsh about it because the effort was no doubt well intentioned, and perhaps there is a more subtle and effective strategy at work here that I’m just missing. But in every respect it feels like a dated approach that probably wasn’t very effective even when it had everything going for it. And in the year 2011 it really doesn’t feel like a particularly thoughtful strategy or effective way to burn limited resources.