I recently received a report from our foundation’s investment manager explaining the latest quarter’s performance and describing his strategy for the future. The report analyzed recent market conditions, effect of interest rate changes and Federal Reserve Chairman Alan Greenspan’s fiscal policies, loss of investor faith in two sectors of the economy in which the Walter and Elise Haas Fund was invested, comparative advantage of one product, productivity gains in two other areas, and effects of worldwide energy pricing.
The report also profiled three companies: a struggling biotech firm, a company that provides important technical services to financial institutions, and a telecommunications “sleeper.”
Unsurprisingly, whether biotech or telecommunications, the analysis focused on similar sets of numbers: percentage gains in market share, flattening productivity curves, interest rate spikes, P/E ratios, and cash flows. Nowhere was there mention of the benefits (or dangers) of drugs developed by the biotech company nor the social effects of the concentration of communications media. Nor should there have been. The report was, after all, about investment performance, not improving the human condition.
This manager has a fairly good track record relative to his peers, and his analyses of the performance of the portfolio’s companies are convincing. We rely heavily on his advice to guide investment policy. This being said, the question arises: How much of the manager’s analytical perspective can usefully be carried over into the world of social problem-solving, change, and enhancement that is the bread and butter of philanthropy? My answer is, not much.
Why? The answer lies in the fundamental differences between the two kinds of human endeavor. Business and philanthropy (or for-profit and nonprofit enterprises) diverge in goals, aspirations, assumptions, and criteria for success. To take just one example, the concept of a volunteer—so central to the nature of nonprofit work—has no application in the for-profit world, unless one is referring to people who give up overbooked airline seats. Each world performs a vital social function, but they are different social functions.
There are important lessons to be gleaned from the for-profit world—mostly about management and operating efficiencies—that can and should be beneficially applied to nonprofit work. Many nonprofit managers could benefit from new management techniques and approaches to client service, or by deploying some of the creative problem-solving strategies that burst forth periodically from the business world. These are valuable contributions that experienced entrepreneurs and venture capitalists can make to help improve efficiencies in the nonprofit sector.
On the other hand, there are fundamental areas in which business knowledge simply does not translate into social problem-solving, and the nature and extent of these limits lies at the center of the “venture philanthropy” debate. At least four elements of philanthropic practice can be neither enlightened nor enhanced by the venture capital experience. In fact, as strange as it might seem to a newly minted MBA, the reverse might even be true—nonprofit practice may have something to teach business professionals when they venture into the social problem-solving arena.
I. The Bottom Line. The ultimate goal and test of success of a business investment is the level of profit. But what does this mean when translated into the social world? There is plenty of talk about “social metrics” and similar attempts to measure numerically the results of philanthropic investments—seeking to create a proxy for profit—but such efforts are inherently flawed. For while money is the single medium of exchange for business, it is not for philanthropy. Nonprofit activity has a complex and often intangible range of aims—from creating an exciting new work of art to shaping social policy to catalyzing a change in someone’s life that may play out over decades. This is not to say that attempts to measure outcomes of nonprofit work are useless, just that they only tell part (and some times a small part) of the story. Nonprofit work is more like “investing” in a marriage or raising children than it is like producing a product.
II. Going to Scale. The drive toward increasing market share, which some tout as the key to success in the Darwinian world of business, bears little relationship to the nonprofit world. I was told recently of a successful businessperson seeking advice about philanthropy who seriously posed the question, “In the nonprofit world do we crush the competition?” We smile, but this is what philosophers call a classic category mistake—misapplying a concept from one frame of reference to another. While large nonprofits perform valuable roles, a primary purpose of nonprofit organizations is not to gain market share at the expense of the competition but to meet highly differentiated and pluralistic social needs.
III. Control. The relationship of the investor (donor) to the investee (donee) raises the delicate matter of control. Unlike venture capitalists who gain an ownership role in their companies and rightly assume a strong role in management, a philanthropic donor supports an enterprise that has a pre-established mission (unless of course the donor created the organization) that is the product of a vision of a founder, board of trustees, and sometimes a group of members. Philanthropic dollars are a necessary ingredient but not the point of the undertaking, and a strong-willed funder can be inordinately intrusive in an organization’s decision-making process.
IV. Exit Strategy. In venture capitalism, the return to the investor typically occurs at the time of a successful public buyout; in an ordinary business, investors reap their returns from profits on sales. Since neither happens in the nonprofit world, at what point does the investor withdraw support? This has long been a difficult question for foundations, but it does not appear that venture philanthropists have any new answers. Among the three possible income streams for nonprofits—government, earned income, and contributed income—the first two have obvious limits. Government funding does not have significant growth prospects, while earned income is limited by the very definition of the nonprofit mission. This leaves contributed income. And just who is supposed to pick up the tab when the venture philanthropists leave? A reasonable guess would be that it is other foundations—not exactly a novel solution to the age-old problem of funding duration.
While the nonprofit arena can benefit from the application of business techniques in many ways, the worlds of nonprofit and business enterprise are sufficiently different to require very different approaches to the use of resources. The power of the market does not necessarily translate into social wisdom, nor does social wisdom often translate into market success. When it comes to venture philanthropy, it turns out that an intuitively obvious insight may be the correct one—both business and philanthropy exist for different purposes, and each has a distinctive contribution to make. To this, I urge us all to say, “Vive la difference!”
Bruce Sievers is executive director of the San Francisco-based Walter and Elise Haas Fund and is a member of the board of directors of the Council on Foundations.