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Management in Practice

How is the new philanthropy different?

The wealth generated by the dot-com boom of the 1990s produced a new generation of philanthropists, determined to use their capital and their business savvy to solve social problems. A decade later, have they transformed the world of philanthropy?

  • James A. Phills
    Professor of Organizational Behavior and Director of the Executive Program for Philanthropy Leaders and the Center for Social Innovation, Stanford Graduate School of Business

Q: Is there a new and different kind of philanthropy that’s grown out of Silicon Valley and the internet era more generally?

To an extent, but the degree to which it really is new is somewhat contested. There was a period at the height of the dot-com bubble during which a lot of new wealth was created and new foundations came into being, and there was a lot of talk about “venture philanthropy.” Some of the notable examples there would be the Roberts Enterprise Development Fund [REDF] and Mario Marino and his group, Venture Philanthropy Partners. Many of these folks saw themselves as practicing a new kind of philanthropy.

Some established foundations also began talking about a new approach. The William and Flora Hewlett Foundation began developing a model of “strategic philanthropy.” The David and Lucile Packard Foundation was concerned with capacity-building in the nonprofit sector.

Some of the underlying themes of these approaches included thinking about philanthropy as investment and the notion that you could evaluate more systematically and, perhaps more importantly, even quantify the return on investment of different kinds of philanthropic grants. Jed Emerson, who was at REDF, really advanced the idea of social return on investment — or SROI — which entailed monetizing a subset of the social benefits associated with certain kinds of philanthropic grants. This also led to efforts to look at ways to leverage or increase the impact of those grants once people began to think of them as investments.

This happened in a context where a lot of grant-makers said, “Our grant money can only go directly to programs to feed hungry children, protect whales, or buy endangered ecosystems.” The venture philanthropy approach said, in effect, “A venture capitalist would never invest in a company and then tell the company it couldn’t use the funds to pay for staff or infrastructure. They invest in building up the capacity of the organization.”

Another new element of this new philanthropy was donors becoming more actively engaged. And again, that’s drawn from the idea that venture capitalists often not only provide money, but also become involved in actually helping the organization develop contacts and relationships in the marketplace. They’re actively involved in helping the organization to succeed. The new philanthropy also has been called high-engagement philanthropy: the idea is that the investor brings not just money, but their knowledge, expertise, and relationships to the organization in order to help it succeed.

Q: Would you say that these trends ended with the collapse of the internet bubble?

I think they evolved. When the dot-com bubble was at its zenith, you had a number of relatively young entrepreneurs who had built successful companies and cashed out at the age of 30 or 35 with hundreds of millions in personal wealth, and they thought, “Well, what do I do next?” Many had an interest in various social problems: for example, in education, poverty, and the environment. These folks said, if we can take our entrepreneurial zeal, ability to innovate, technological savvy, and the market-driven approaches that are responsible for the creation of this tremendous wealth in the new economy, then we could fix education, we could solve climate change. There was this tremendous enthusiasm and I would say, in retrospect, even a kind of hubris, where people who had created tremendous economic or financial value said, okay, now I am going to fix education and fix homelessness, and create social value.

As they began to move into the social sector and started actually working with organizations dealing with these problems, they discovered that it was actually more difficult than anticipated. You couldn’t just come in and be entrepreneurial and start a few charter schools and transform public education at the district or state level. They realized there’s an intractable political, non-market context, and lots of constraints on these systems, so that things that they had been able to do relatively easily in business organizations proved more difficult in institutions that were dealing with social problems.

You can think about the example of charter schools. There was a tremendous fascination with charter schools as they emerged in the late ’90s. And some showed that they could achieve very huge improvement in academic performance with populations of kids that were underachieving. But then people started to say, we have a charter school that serves 300 kids and they’re all doing great, but we have a district where there are 30,000 other kids who are underachieving or underserved. So then the question became, how do you take some of these solutions to scale? How do you actually change the entire system?

In response to that, people doing this work have gotten more sophisticated and are doing things like partnering with other organizations and partnering across sector boundaries — nonprofits partnering with business and governments and foundations. I think we are increasingly seeing more complex and nuanced solutions and approaches that I think reflect better appreciation of the multiple dimensions of the underlying problems.

Now, if you look at many of the large, relatively new foundations — the Skoll Foundation [created by former eBay president Jeffrey Skoll], Omidyar [created by eBay founder Pierre Omidyar], Moore [created by Intel founder Gordon Moore] — and then also at many of the established private foundations — like Ford and Rockefeller and Mellon — some of these ideas are still present and are permeating how people think about their grant-making. The idea of capacity-building, I think, has diffused within the world of philanthropy and grant-making institutions in general. The idea of thinking about grants as investments is also there. The interest in leverage, in investing in solutions that actually change the system — those ideas are still there. I think there’s an enthusiasm for approaches like the proverbial, we are not going to give a man a fish; we are going to teach him to fish — and then, as Roger Marting and Sally Osberg of the Skoll Foundation have noted, we are going to go further and revitalize the whole fishing industry. We see activists embracing microfinance, as opposed to foreign aid or relief. Those kinds of sustainable — or at least what are sometimes seen as sustainable — and system-changing approaches are more appealing to this new approach in philanthropy.

Q: Is there a blurring of the line between investment and philanthropy, between the idea of investment in nonprofit organizations and the idea of investment in social entrepreneurship, in money-making organizations that have a double bottom line?

Probably the organization that’s most salient for that is the Omidyar Network. Omidyar actually changed its name and modified its legal form from the Omidyar Foundation to the Omidyar Network precisely so that it could invest in social-purpose, for-profit businesses. I would say that concurrent with the development of venture philanthropy there was also a growth of interest in the idea of social entrepreneurship and social enterprise.

Now, the definition of these terms is fundamentally contested. If you look at who gets the social entrepreneurship awards, it tends to be organizations that are nonprofit and organizations that are relatively new, but some people are saying that social entrepreneurship shouldn’t exclude organizations that are for-profit, if they’re creating substantial social value. Social enterprise, on the other hand, tends to be earned income activities or for-profit activities undertaken by a nonprofit entity in order to support its social mission both operationally and financially. You can think of the Salvation Army store or Girl Scout cookies.

One of the things about social enterprise that’s appealing to funders is that if you have nonprofits generating revenue, you then can reduce the amount of philanthropic or contributed income that you provide to them. People look at organizations and say, wouldn’t it be great if they basically could become self-sustaining? That’s part of the appeal of microfinance, right? The idea is that at a certain scale, under certain conditions, a microfinance entity can actually generate sufficient profit or surplus to not require any more philanthropic capital, and that’s really appealing.

A number of people, like economist Burt Weisbrod and Jeff Bradach of the Bridgespan Group, have written about the dangers and pitfalls of this. One is that when organizations that are primarily created to pursue a social purpose engage in commercial activities, those activities can either distract the organization from its fundamental social purpose or can push it to do things that may be at odds with its mission-related objectives. The other concern is that as nonprofits move into commercial activities, they’re competing with for-profits that have an easier time raising capital and have experience operating in markets.

I’d come back to the example of microfinance. There are a number of microfinance institutions over the last 5 to 10 years that have been converting from nonprofits or NGOs into for-profit entities. The logic is that that will allow them to tap the regular capital markets and raise more money so that they can make more loans to poor entrepreneurs. But some people are very concerned that once you are for-profit, that that will change the way you conduct business. First, you’ll start charging higher interest rates than you would if you were just a nonprofit or NGO. Then you’ll stop making loans to the riskier and the needier — basically you are going to skim the cream off the top of the microcredit markets. Those are all very legitimate concerns.

Q: How have these ideas played out?

I would say that if you looked at the late ’90s through 2001 or 2002 there was tremendous enthusiasm and optimism about financial sustainability, the idea that we’re going to create these profitable businesses in social-purpose organizations. And then what happened is there were a number of instances where the businesses failed. You were supposed to make money doing something but you actually ended up losing money on it. So the social enterprise was actually sucking money out of the core social programs to educate kids, feed the hungry, or house the homeless. And so I think in the last three or four years, people have also begun to take a step back and be somewhat circumspect about these commercial activities.

Q: Has there been an evolution in the way in which new philanthropists have interacted with traditional foundations?

I think so. I don’t think that it was intentional, but there was a certain sense among the new philanthropists: “We’re doing something different. We venture philanthropists take more risk, we make long-term bets, we don’t just write checks, we’re engaged.” But I think the reality is that, if you look at the established foundations, many of those entities were also doing more in those domains than one would think given the way that they were caricatured.

I also think that many of those new foundations found it was harder to do all those things. If you were really thinking in terms of investment, there’s this fundamental problem: When you’re thinking about investing money, there is a metric that you use to evaluate what you get back — your return — and that is money. For the most part everyone can agree on what the value of a dollar is; there is what Mike Jensen described as the “single valued objective function.” That doesn’t exist in the world of social return. And the reason is that while there is a portion of the social value that’s created that is monetizeable, there’s another element, like social justice, which my colleague Paul Pfleiderer calls “intangible,” that isn’t monetizeable. In fact, it almost offends our moral sensibility to monetize it. And, in fact, you can’t even do it because people place different values on these intangibles. What is the value of feeding a hungry child, right? What is the value of alleviating discrimination and ethnic cleansing? Clearly greater than zero, but you can’t put a price on it.

Having said that, I do think there are things that the philanthropic community in general is learning from the business world and in particular the world of investment. Here again, I’m drawing on some of the insights of Paul Pfleiderer, about what the social capital market — the world of grant makers — can learn from the capital markets. There are a number of things, if you look at the capital markets, that make them relatively efficient. Many of those things don’t exist in the social capital markets, but I think you see trends where they are starting to appear.

Aggregation is one — the fact that I can pool together with other individual investors and buy a mutual fund is tremendously efficient. Because you’ve got lots of people together, it reduces the transaction costs for me. I think there are philanthropists who are beginning to think about pooling resources in places and in ways that make it more efficient for grant-seekers to get that capital.

One of the important things in social investments that will pay off is having great information. So there are organizations like GuideStar and others that basically are investing in creating the kind of background information that, in the for-profit capital markets, analysts are generating.

I think you also see examples of organizations using technology to facilitate individual grant-making at relatively low costs. An example is this organization Kiva, which allows individuals to do microfinance. I have an account and I can go online and make a microfinance loan to a farmer in sub-Saharan Africa to buy a goat. I’m now, with my 50 or 100 dollars, a grant-maker.

Q: The Gates Foundation also comes from technology money. How does it fit into the history that we have talked about? Are there some of the same themes?

That’s a good question. The big thing that distinguishes Gates’s strategy is scale. Just being so big allows them to have a more systemic impact; I think that’s the way they think about it. They’re also building a huge base of knowledge and expertise within the foundation. There are some foundations whose approach to grant-making is doing really thorough due diligence, selecting the best organizations to fund. Gates, I think, wants to have deep expertise in education or in poverty; they are recruiting and hiring people who are leaders in those fields.

Q: It seems that in the last 10 years or so philanthropists are more interested in having a direct impact. Does that create a problem in that donors are not pooling their resources and their efforts, and that can be inefficient?

I think that is potentially true. It depends on whether you believe a centralized approach to doing things is more efficient than a decentralized approach. And I think one of the things we know in business is that it really depends. It really is a function of the nature of the task or the problem that you’re trying to solve.

I do think that there is some redundancy in having a bunch of different foundations out there, and you do see mechanisms emerging to coordinate the efforts of grant-makers. Increasingly, you’ll see grant-makers in a community agreeing on, for instance, a common application for grant proposals, so a nonprofit doesn’t have to write five different proposals.

The other argument you could make is that, when you have more individual choices in philanthropy, when you’re connecting people more directly to their dollar, it is more gratifying and you actually increase the amount of philanthropy. So, I would say there are tradeoffs and there’s a tension there, but I don’t think there’s a clear answer about which is better.

Interview conducted and edited by Ben Mattison