Nothing has roiled the philanthropic world in recent years as much as the notion of “venture philanthropy,” which emerged from a 1997 Harvard Business Review article, “Virtuous Capital: What Foundations Can Learn from Venture Capital.” For many, venture philanthropy’s stock price has fallen along with the fortunes of the hot young business thinkers of the tech boom with whom it is associated. Nevertheless, having worked for years with clients in the for-profit and nonprofit worlds, I believe that venture philanthropy remains viable for certain types of nonprofits and can contribute to progress in philanthropic thinking even if it falls short of the paradigm-shifting potential ascribed to it.
In its most common form, theories of venture philanthropy claim that contributions should be treated like investments, not handouts, and that the nonprofit world needs to make use of venture capital principles such as benchmarking, return on investment, and exit strategies.
Proponents of venture philanthropy argue that applying these principles to things like the delivery of social services will result in “higher yields” such as reduced occurrences of child abuse or welfare dependency. Skeptics counter that venture philanthropists are trying to fit a square peg into a round hole, and that notions like “exit strategy” seem downright silly when the mission of an organization is to deal with “human” problems. I have seen nonprofit board members roll their eyes when their foundation backers announce that they want to see hard evidence of a program’s “return” or “yield.”
For many, the fundamental question is whether business principles and philanthropy are inherently incompatible or whether they can share some of the same turf. The question is complicated by the historical enmity between the nonprofit sector and the business world, with nonprofits viewing the business world’s alleged greed and unequal distribution of rewards as a cause of the social ills the nonprofit world aims to treat.
To think about this issue, let’s start at the macro level by asking, “Is the enmity between the nonprofit and business world justified?” The best consideration of this question I have read is the 1996 book Business as a Calling by Catholic social critic Michael Novak. This insightful book’s principal argument is that the marketplace is fundamentally and morally a “good” thing—no less or more so, I would say, than the nonprofit world. To Novak, business is a morally serious calling, the responsibilities of which include satisfying customers with goods and services of real value; making a reasonable return on funds entrusted by investors; creating new wealth, jobs, and opportunities for upward mobility; and respecting the rule of law. He finds support in no less an authority than Pope John Paul II, who in his 1991 encyclical Centesimus Annus defended the moral integrity of a capitalist system that “recognizes the fundamental and positive role of business, the market, private property, and the resulting responsibility for the means of production … circumscribed within a strong juridicial framework.”
In short, the business and the philanthropic sectors both contribute to the reduction of poverty and to social progress; there is no fundamental incompatibility between the two. Skeptics should read Novak’s book.
At the micro level, the question is whether applying these business principles to charitable enterprises improves the quality of the programs and services. The micro level is where the rubber of venture philanthropy hits the road, and it should be examined from two perspectives: process and mission.
“Process” encompasses the mundane paper-shuffling that is a part of any human enterprise—payroll, personnel, accounts payable and receivable, and so forth. Good “business” practices for dealing with these matters are of equal currency in both the business and the nonprofit worlds. For example, in the early 1990s, many nonprofit hospitals in my area adopted Total Quality Management or TQM (a set of principles that first emerged among Japanese manufacturers), which helped bring about significant operational efficiencies and cost savings.
The “mission perspective” is more complex. It involves the substantive activities for which a nonprofit organization exists—whether it be to provide succor to the homeless, rehabilitation services to the addicted, or an art museum for the public. My consistent counsel to both proponents and opponents of venture philanthropy is not to deal with this area in sweeping generalities, but to match carefully specific business principles with suitable nonprofit programs—and to feel free to disregard the rest.
For example, it probably is a stretch to find a philanthropic home for terms like “IPO” and “exit strategy.” On the other hand, while the term “return on investment” may not translate when dealing with an art museum, it may work well in the context of social service agencies attacking homelessness, inner-city blight, or drug addiction. After all, the venture philanthropist is not looking for profit, but for some empirical benchmarking mechanism that tells him how well the funded enterprise is performing. (Of course, this assumes that the benchmarking methods are set only after it’s been determined that what the nonprofit is doing is, in fact, the right thing to do). True, it’s much easier to measure a business’s return on equity by examining a financial statement than it is to ascertain the number of human lives improved by charitable activity. But that doesn’t mean we shouldn’t try to develop criteria to use in weighing different philanthropic approaches. It is not untoward to hold the nonprofit world’s collective feet to the fire—especially if the long-term goal is the reduction or elimination of the social conditions at issue.
These are exciting times in the philanthropic world. While things like President Bush’s faith-based initiative make headlines, behind the scenes the Internal Revenue Service has shown increasing flexibility for groundbreaking new philanthropic configurations like joint ventures between for-profit and nonprofit organizations. The jury may still be out on venture philanthropy, but the practice nonetheless deserves its seat at the philanthropic table.
John M. Horak is an attorney and a senior fellow at the Yankee Institute for Public Policy in Hartford, Connecticut.