An income of $50,000 per annum! By this time two years I can so arrange all my business so as to secure at least $50,000 per year. Beyond this never earn—make no effort to increase fortune, but spend the surplus each year for benevolent purposes.
-Andrew Carnegie, writing in his diary
In many ways the 1990s were like the 1890s—a decade when great entrepreneurs piled up vast fortunes. Some would extend the analogy, comparing the men and women who made their wealth through computers or the Internet to the great philanthropists of the early 20th century. But a close examination of how the great philanthropists of the past planned their giving shows that they still have a few things to teach today’s wealth builders.
First, there is the matter of scale. Only four of the top 65 donors counted by Slate magazine in its most recent tally, for example, made their wealth principally through computers: Bill Gates and Paul Allen, co-founders of Microsoft; Gordon Moore, co-founder of Intel; and David Duffield, founder of PeopleSoft. Add in Herbert Allen, an investment banker who helps fund telecommunications start-ups, and that’s still less than one in ten of today’s big givers. (In addition, former Netscape honchos Jim Clark and Jim Barkesdale both made nine-figure donations after the Slate list was published.)
Paul Schervish, director of the Social Welfare Research Institute at Boston College, offers several explanations for why philanthropy based on computer and Internet wealth is a story yet to unfold. Most computer-related fortunes, he points out, have been made by people in their 30s and 40s who still have decades of their working life ahead of them. But most major philanthropists, he observes, are “members of the World War II generation of entrepreneurs,” who are not only wealthier than the “Net” millionaires, but have a more pressing need for estate planning.
Then there are the hurdles created by the Tax Reform Act of 1969. John Lahey, a partner with the law firm Bryan Cave, explains that the “excess business holdings” clause of that law generally prohibits donors and the foundations they create from owning more than 20 percent of the stock of a particular company between them. That means that entrepreneurs who want to set up a foundation have to cash in most of their stock from the companies they’ve created, a painful prospect for most entrepreneurs.
The law also goes to great lengths to stanch “self-dealing” between donor and foundation. Unfortunately for some entrepreneurs, this makes it illegal for a donor to advise his foundation’s investment staff to buy into a hot new IPO he is backing. Not surprisingly, most major Net philanthropists (again, with the exception of Bill Gates) have retired from the companies they’ve created.
One thing that’s different about the new high-tech donors is the way they give—or at least talk about giving. Interview enough high-tech types, and it won’t be long before you hear the term “venture philanthropy.”
It is a concept notably slippery to define. “If you talk to 77 people,” says Paul Shoemaker, executive director of a Seattle group of donors known as Social Venture Partners, “you’ll get 77 different definitions. Everyone has a slightly different twist.”
Basically, venture philanthropy patterns itself after venture capital firms. Donors become “partners,” and make “investments” instead of grants. In theory, at least, these “investments” are term-limited, in much the same way that venture capitalists shut off the money spigot once a new enterprise takes off.
The idea of venture philanthropy can be traced to a 1997 article in the Harvard Business Review by Christine Letts of Harvard’s Kennedy School. Letts compared foundations to venture capital firms and noted several VC techniques that would adapt well for foundations. She observed that VCs are careful to judge the risk of potential enterprises, understanding that most would fail and only a few would be highly profitable “moon rockets.” Foundations, by contrast, often fund a proliferation of poor performers, since they aren’t risking capital so much as struggling to meet payout requirements.
Venture capital firms also offer “a range of non-cash, value-added assistance,” such as coaching an entrepreneur on successful business strategies, or working with a new firm on hiring and staffing decisions. This level of involvement is rare among donors and grant recipients—avoiding excessive entanglements with grantees is a way of life for many donors and foundation staff alike. Indeed, with so many grant applicants to choose from, and with the high downside potential of a “grant gone bad,” the idea of stepping in to help a floundering nonprofit seems utterly alien to most foundation program officers.
Letts’s article hit the desk of Paul Brainerd, founder of Aldus Corporation, a software firm best known for its PageMaker desktop-publishing software. Brainerd, who sold his company in 1994 for $130 million, decided to put Letts’s ideas into practice and founded Social Venture Partners (better known as SVP) in 1997. “What I was trying to do here was to create a model that appeals to the younger generation that is in business today. I chose a business metaphor—venture capital—in other words, looking out in the community and finding out what the needs and solutions are, in the same way a venture capitalist would be out there trying to find the innovation and entrepreneurship in new companies.”
Three years later, there are four Social Venture Partners organizations—in Seattle, Phoenix, Austin, and Dallas. Paul Shoemaker says that while SVP staffers helped advise the Phoenix and Austin organizations, the groups are independent, but “we talk to each other all the time.” Other notable venture philanthropy groups are the Silicon Valley Social Venture Fund (a donor-advised fund that goes by the high-tech-sounding moniker “SV2”) and the New Schools Venture Fund, a Redwood City, California-based enterprise specializing in funding innovative public school programs.
The four organizations are all structured somewhat differently. The New Schools Venture Fund, for example, has made one of its four investments in a for-profit enterprise: LearnNow, a New York City-based startup firm that plans to manage and create technology-centered charter schools in inner cities.
And at least one expert, Boston College’s Paul Schervish, thinks that venture philanthropy has the potential to supersede traditional foundations (or what Schervish calls “managerial philanthropy”) in much the same way that foundations replaced individual giving a century ago. Venture philanthropists, he says, “are going to create competition” among existing nonprofits. “Those that are adaptive and creative will thrive. Certain charities will grow stagnant and get smaller thanks to these new entrants.”
How Cutting Is the Edge?
Not everybody is buying the hype, with a number of program officers skeptical that venture philanthropy is the right way to practice charity. “One would like to think that social problems are solvable in the same way that business and science problems are solvable—but they aren’t,” said Bruce Sievers, executive director of the Walter and Elise Haas Fund, in an interview with Wired magazine. “There’s a little hubris involved when you have these technology millionaires saying they know how to fix social problems.”
The evidence suggests that Sievers and other traditional philanthropists don’t have much to worry about. When you strip away the high-tech rhetoric (Paul Brainerd once referred to his program’s second year as “v2.0 of SVP’s model”) it’s plain that the organization’s 222 partners have contributed to strikingly conventional causes, including public schools, a nonprofit that helps tutor lower-income children, a career outreach program for high-school girls at the University of Washington, and the Seattle Children’s Home.
Moreover, the amounts being donated are surprisingly small. In 1998, Social Venture Partners (actually a donor-advised fund that is part of the Seattle Foundation) raised $698,000 and made seven grants totaling $302,000. During 1999, SVP made 13 grants totaling $639,596.
Paul Shoemaker freely admits that SVP is small, as foundations go. “We’ve been at it for two years,” he says. “We’re still in the adolescent stage of foundations.” But he argues that an important function of SVP is to teach its partners about the importance of giving. After making grants, he says, “our second mission is to stimulate, incubate, and catalyze the philanthropic impulse in Seattle. We try to develop the philanthropic potential of individuals. We’re a catalytic organization.”
“We’ve said we’re teaching Philanthropy 101,” Shoemaker adds. “We hope we’ll be able to teach Philanthropy 202 or 303.”
Nor is SVP Seattle’s only “cutting edge” philanthropy that hews toward conventional giving. Former Microsoft executive Ida Cole led an effort to raise $37 million to save the fading Paramount Theatre and convert it into an arts complex. Both Bill Gates and Paul Allen have given buildings to the University of Washington. Gates has given buildings honoring both his mother and father, while Allen has given a wing of the university library.
And the largest recipient of Microsoft’s corporate largesse isn’t a sleek high-tech enterprise at all—it’s the United Way of King County, the nation’s fourth-largest United Way branch. In 1998-99 the charity raised $69.4 million and Microsoft, which matches employee contributions to the United Way up to $12,000, was the charity’s second-largest single donor (Microsoft is on track to edge out Boeing as the charity’s largest single contributor).
Another major beneficiary of the wealth created by high-tech fortunes is Community Foundation Silicon Valley, which has seen its endowment balloon from $190 million in June 1998 to $319 million in late 1999. Among the major firms contributing during the most recent fiscal year were 3Com, Cisco Systems, Hewlett-Packard, and Sun Microsystems. One other major supporter—on-line auctioneer eBay—started out as a minor donor, handing over 107,000 pre-IPO shares now worth more than $20 million.
The Secretary with Her Stock Options
Many Internet millionaires want to pursue philanthropy and have some ideas about what to do. But there are a lot of donors out there who not only seem to have skipped Philanthropy 101, but also flunked the prerequisites.
Valerie Jacobs of Family Philanthropy Resources, a San Diego-based philanthropic advisory firm, talks to all sorts of donors. The ones who need the most education, she says, aren’t those who come from a wealthy family but those whose stock options have suddenly made them rich and who “act like they’ve just won the lottery.” Jacobs advises them to stick to less flashy ventures that provide services to the poor.
It’s sound advice, but not everybody takes it. Take Darren “Hal” McCabe, a self-described “mediocrity” who landed a job at America Online in 1995, just before the firm’s massive expansion into one of the world’s largest enterprises. By staying on for four years until his stock options became vested, McCabe was able to retire in 1999 with a cool $2 million. At age 28, he hopes never to work again.
Like many newly rich, McCabe’s first impulse was to go on a spending spree. There was $300,000 for a house in upstate New York and $120,000 for a house for his mother. McCabe rented an 18th-century performing arts center for his retirement party and brought 13 of his relatives to Washington, D.C., depositing them in suites at the posh Hay-Adams Hotel. Then there was the Eddie Bauer Ford Explorer and the top-of-the-line Ducati motorcycle.
And there was philanthropy. McCabe has given to more than a dozen organizations, including NOW, NARAL, PETA, and the Sierra Club—generally in small amounts. As McCabe explains, that way “I can invest the other money, and let it grow, and maybe wind up being able to dole it out over my whole lifetime, not nickel and dime stuff.”
Like many Net millionaires, McCabe seems unsure how to give effectively. For starters, having worked for a nonprofit and seen “the horribly inefficient way they are run,” he worries about the effectiveness of the programs that seek his support. Like many new donors, he also worries about being hounded by prospective grantees. “Each different type of organization I give to opens a can of wormsÉ. [If I give to the] AIDS Awareness Project, all of the sudden every AIDS charity in the world sends me a letter asking for money. So sometimes, based on this, I don’t open that can of worms.”
Hal McCabe may not have given much thought to his philanthropy, but it would be a mistake to ignore him. As attorney John Lahey notes, a major difference between the wealth-creators of the 1890s and the high-tech magnates of today is that the Net has made all sorts of people well-to-do. Only a few people besides the Rockefellers made their fortunes from Standard Oil, but Microsoft, America Online, and other great Net companies have suddenly enriched tens of thousands of regular folks just like Hal McCabe. “It’s not just what Bill Gates does with his wealth that matters,” Lahey says, “but what the secretary with her stock options does that’s important.”
Secretaries and plutocrats alike can learn valuable strategies from the lives of three of the great philanthropists of the early 20th century: John D. Rockefeller, Andrew Carnegie, and James Buchanan Duke.
All three men grew up dirt-poor. William Rockefeller, a traveling salesman, abandoned his wife and children when John D. was a teenager to pursue a life of drunkenness and debauchery. Washington Duke began his cigarette company (which son James would transform into a giant enterprise) as a Confederate veteran who returned from the war with 50 cents in his pocket. Andrew Carnegie grew up in the slums of Dumfermline, Scotland.
But Rockefeller, Duke, and Carnegie, even when they were in their 30s and 40s, had turned their minds to good deeds. Rockefeller’s first known charitable gift was made in 1863, when he was 26. In the 1870s, he gave small sums to his fellow congregants at Cleveland’s Euclid Avenue Baptist Church. He then gave larger gifts to establish the University of Chicago and to several black colleges (particularly Spelman College, named after his daughter-in-law) until becoming a full-time philanthropist upon his retirement from Standard Oil in 1897 at age 60.
Like Rockefeller, Andrew Carnegie did not become a great philanthropist until late middle age. But in an 1866 letter, written at age 31, Carnegie already knew that he wanted to help the “poorer classes.” His goals, he wrote, were to “settle in Oxford and get a thorough education, making the acquaintance of literary men” and “settle then in London and purchase a controlling interest in some newspaper or live review and give the general management of it attention, taking a part in public matters, especially those connected with education and improvement of the poorer classes.”
Carnegie never bought control of any journals, but by the time he wrote The Gospel of Wealth in 1889, he had already written two books and contributed frequently to the leading journals of the day. Throughout the remainder of his career, Carnegie delighted in inviting leading editors to his castle in Scotland or his mansion in Manhattan to argue about the topics of the day. Moreover, much of Carnegie’s later philanthropic work was concerned with both improving schools and creating ways to aid the poor without encouraging dependence on private or public doles.
Perhaps the best-prepared of all the great philanthropists was James Buchanan “Buck” Duke. As devout Methodists, the Duke family believed in helping the less fortunate, but the family tradition was that Buck Duke made the money while his brother Benjamin handled the family charities.
In 1893, when James Duke was 37, Benjamin Duke wrote about his charitable donations: $7,500 to Trinity College and $4,016 to other charities and churches including “Oxford Orphan Asylum, current expenses of our church of every kind. Colored School of Kittrell N.C. $500. Worn out Preachers of the N.C. Conference $500. To poor people all over the state & c & c &c . . . . Of course, this does not count money that I have given kin people.”
As historian Robert Durden observes, “the amounts of money mentioned were yet small, but there would be a striking continuity between the small-scale gifts of the 1890s, the larger donations of the 1900s, and the enormous bequests of the 1920s.” Trinity College, thanks to James Duke’s generosity, is now Duke University. And when James B. Duke created the Duke Endowment in 1924, all of the causes mentioned in his 1893 letter—Trinity College, orphanages, black institutions, Methodist churches, pensions for retired ministers—were (and still are) recipients of Duke Endowment funds. With the addition of hospitals, these causes, thanks to a well-written indenture, are still receiving Duke’s help nearly a century later.
The Foundation As Barricade
Today’s high-tech givers can also learn from some of the mistakes the great philanthropists made. Turn off the bells and whistles of the “venture philanthropy” movement and you’ll find that, at its core, venture philanthropists act from an admirable impulse: to practice hands-on giving without creating the layers of red tape that far too often make grantmaking (and grant receiving) a chore rather than a pleasure.
But the wealth creators of the early 20th century created large, impersonal foundations precisely because they were swamped by people demanding aid. In the best-documented case, Mrs. E. H. Harriman (mother of diplomat Averell Harriman) received 6,000 requests for aid totaling $267 million in 1910-11—this in an age when total annual giving amounted to $270 million.
Frederick T. Gates, who engineered the creation of the Rockefeller Foundation, noted in his memoirs that, as early as the 1880s when John D. Rockefeller was worth only $5 million, Rockefeller could not handle the flood of people demanding handouts. “Neither in the privacy of his home nor at his table, nor anywhere else, was Mr. Rockefeller secure from insistent appeal,” Gates wrote in his memoirs. “Mr. Rockefeller was constantly stalked, hounded, and hunted like a wild animal.”
The great philanthropists tried all sorts of ways to keep recipients at arms length. Henry Ford loudly announced that he did not believe in charity, all the while pouring millions into the Henry Ford Hospital and Greenfield Village (a living history museum). George Eastman refused to set up a foundation and gave away much of his fortune anonymously. But in his later years, even Eastman found that nearly every visitor to his home wanted to leave with some of his money.
The great philanthropists could teach today’s high-tech millionaires two final lessons, the first being that philanthropy should be a lifelong practice. Most of the wealth-creators of the 1890s did not become rich until they were in their 50s and 60s. But even when they were still piling up their fortunes, Rockefeller, Carnegie, and Duke were thinking about which causes they wanted to support—and which to ignore.
Second, the experience of the great philanthropists shows that it’s quite difficult to practice large-scale philanthropy without creating at least some of the bureaucracy that high-tech givers deplore. Venture philanthropy may work well on a small scale, but what happens when payout requirements force a foundation to give away $200 million per year instead of $2 million? Can philanthropists find program officers and foundation executives who will follow the wishes of an energetic living donor when the same staff members could be doing what they want with a dead man’s money?
The men and women who will be the titans of 21st century business should begin to practice their giving now—working with nonprofits, learning what aid makes the world better and what aid ensures dependency. They also should learn from the great philanthropists that the best way to ensure that their wishes will be followed is to spend their fortunes within their lifetimes or to put term limits on their foundation’s lives.
Philanthropy isn’t something that can be learned overnight; it’s an art that takes decades to perfect. But if the magnates emerging from computers and the Internet start now and start small, it’s likely that in 20 years, Gates and Allen will have done as much to change our times as Carnegie, Rockefeller, and Duke did in theirs.
Martin Morse Wooster is contributing editor to Philanthropy and the author of Should Foundations Live Forever? and The Great Philanthropists and the Problem of Donor Intent.