Unleashing New Resourcesand Entrepreneurshipfor the Common Good

A Scan, Synthesis, and Scenario for Action

January, 1999

CreditsSpecial thanks to those who agreed to be interviewed for this scan and to the early reviewers of thispaper.Also, thanks to the W.K. Kellogg Foundation’s Philanthropy and Volunteerism programming teamfor their help in preparing this report.

AuthorTom Reis

Co-Author/ConsultantStephanie Clohesy

ReviewersMark Albion, Rachel Bellow, Nick Bollman, Greg Dees, Katherine Fulton, Frances Hansford, Barb Kibbe,Chris Kwak, Bob Long, Dan Moore, Cate Muther, Joel Orosz, Sterling Spiern, Shannon St. John, FrankTaylor, Mike VanBuren.

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Executive Summary

Context

A new generation of innovators and entrepreneurs – committed to using market-basedapproaches to solve social problems – is unleashing new ways of using resources for thepublic good.

Facing the contradictory phenomena of unprecedented wealth creation and also a growinggap in wealth distribution among the world’s rich and poor, new innovators are generatingthree major waves of change:

• Social entrepreneurs are changing civic and human services, leadership, and institutionsto encompass market-based approaches for appropriate scale, impact, and sustainability.

• Business leaders are moving from one-dimensional charity to multi-dimensional methodsof achieving corporate citizenship.

• Philanthropists – traditional and emerging – are building on a generation of social invest-ment experiments to devise market-driven and venture capital concepts to intensify thepartnerships and shared responsibility of funders and social action organizations.

The Scan

The W.K. Kellogg Foundation has had a long-standing commitment to promote, expand,and support philanthropy and volunteerism.This interest over several decades has focusedon innovations and infrastructure needed at critical moments of change and growth.Thusthe Foundation sponsored a scan to document current waves of change, to uncover theemergent needs and opportunities, and to propose options for action related to philanthropy’schanging role in nurturing the common good. Some of the key findings include:

Influences

New innovators are motivated by the following values and beliefs:

• Outcomes/impact thinking

• Market concepts as a driver for designing social products and services

• Investment is more effective than charity

• Wealth creation should be balanced with public responsibility

• Sustainability of social change needs to be supported through philanthropic and earnedincome

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Expressed Needs

The needs that surfaced during the scan have been synthesized into three groups:

• Knowledge management – capturing, archiving and using knowledge and learning forinnovations.

• Human capacity development – the development of people and the tools they need forleadership, organizational, financial, and planning challenges.

• Deal-making – the coordination of opportunities for finding co-investment partners.

While great promise can be seen within the many different solo creative efforts of socialentrepreneurs and emerging philanthropists, the biggest opportunity at this point is toconnect these many “tidal pools” of knowledge, resources, and innovation.They need tobecome a “tidal basin” of synergy that catalyzes activities to new levels of productivity andimpact. Right now, there are few places to connect streams of innovative thinking andaction. More shared knowledge about the available pools of capital for new ideas and moreaccess to specialized technical assistance for these new challenges is vital.

Potential Options for Action

Implementing Mission

Create a collaborative effort and the necessary structure to catalyze and enrich the currentcritical mass of market-model activities.This would be done by connecting these activities,creating shared learning, building the collective capacity to innovate and create social value,and identifying opportunities to fund collaboratively.

Proposed Future Activities

• Establish creative places to learn with peers

• Create a knowledge management system to capture, archive, use, diffuse information

• Develop and share effective prototypes and models

• Search and recruitment services

• Provide mentoring, technical assistance, and apprentice-style learning

• Foster connections, deal-making, co-investment

• Ongoing mapping, tracking, and diffusion of good practice

• Share assessment and impact measurement processes and approaches

• Trade and barter “know how” management expertise and products

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The core purpose of a new collaboration would be to promote, facilitate, and invest inmore effective approaches to social development. It may be a new entity or mechanism isneeded for this purpose. Like those it intends to convene and serve, this new entity couldbe formed and function as a marketplace for investors/funders and social innovators/socialentrepreneurs from the public, nonprofit and commercial sectors.The investors/funderswould be a partnership of current and emerging stakeholders including national andregional philanthropic associations; private, community, and family foundations; andindividual philanthropists.

As a community of entrepreneurial developers, investors, partners and learners, the market-place should be easy to access, explicit about its goals, accountable and transparent to thestakeholders, and, most important, a “hot house” and “magnet” for innovation. Over time,with the building of relationships, trust, and a sense of identity, the marketplace couldevolve into a guild – analogous to the craft associations of the Middle Ages – an organiza-tional architecture that is once again re-emerging in the knowledge age with its net-worked economy.

Conclusion

This scan presents an overview of changes and corresponding opportunities related tohow philanthropy and social change organizations and leaders are integrating marketconcepts into their work, value sets, and organizational structures.This paper makes thecase that a critical mass of organizations and leaders is engaging in these opportunities,resulting in a perceptible demand for new learning environments and related services,actions and solutions, and spaces for convening.

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Contents

I. Introduction ..............................................................................................2

Context ........................................................................................................2

II. The Scan ....................................................................................................3Key Assumptions ........................................................................................4

Synthesis ....................................................................................................5Social Entrepreneurship ..............................................................................5

Business and Social Responsibility ..............................................................6

Philanthropy as Social Venture Capital ........................................................8

Matrix of Stakeholder Groups ....................................................................9

Needs ........................................................................................................11Knowledge Management ..........................................................................11

Human Capacity Development ................................................................11

Deal-Making ............................................................................................12

III. A Scenario for Action ........................................................................12Conceptual Framework ............................................................................12

Tasks ........................................................................................................15

IV. Conclusion ..............................................................................................15

Appendices ......................................................................................................17Glossary of Terms ..........................................................................................17

Literature Review ..........................................................................................18

Bibliography ..................................................................................................23

Introduction

How do societal shifts happen? Often it seemsthat change is sudden.

The lily pond can serve as an illustration. Severaldays before the pond is completely covered by lilypads the water is only half covered.And a weekbefore that it is only a quarter covered.And themonth before that only an eighth covered. So,while the lily pads grow imperceptibly all summerlong, only in the last part of the cycle do wenotice their “sudden” appearance.

In the “law of tipping points” – a biologicalchange theory – significance precedes momentum.The “tipping” metaphor of the lily pond providesvaluable insight into the changes occurring nowin philanthropy and the social service/social changearena. Change is happening, but it is difficult tofully perceive and understand until it leaps torecognizable critical mass.

This report focuses on a recent scan and synthesis ofneeds and opportunities emerging from a bubblingup of new resources and innovation devoted to socialand economic development.The wellspring for thisis an entrepreneurial focus on the common good,creating new partnerships among the commercial,public, and nonprofit sectors.Yet the innovation,perspectives, approaches, and resources are still scat-tered. Or are they? Are we at a tipping point ofchange? Are we nearing critical mass?

The scan, conducted in 1998 by the W.K. KelloggFoundation, explored these questions to determinewhat might stimulate the unleashing of these newresources and innovation to address critical needsin our society.Among the most striking attributesof this societal shift are:

• A blurring of traditional sectoral boundaries.

• The opportunity to balance an increasingly pow-erful market sector with a commitment to publicresponsibility.

• The phenomenon of wealth creation.The latetwentieth century is a time of unprecedentedwealth creation, both through earned wealth andthe transfer of wealth from one generation to thenext.At the same time, however, persistent povertyand inequality – especially among women, chil-dren, and people of color – is bringing about agrowing gap in wealth distribution. New wealthcreators and their ideas about balancing marketand public responsibility may provide newresources and innovations to significantly improvesocial and economic change-making and helpnarrow the wealth gap.

This shift also reflects the larger significance of theprofound economic revolution that is occurring aswe move from a production-based industrial econ-omy to a new knowledge-based network economy.Organizations of all sectors need to learn to livewithin this fast-paced network economy. Rapid andturbulent cycles of change are the norm as innova-tion produces knowledge that changes the environ-ment and then requires more innovation.

The Kellogg Foundation believes that this shift –complete with its paradoxical challenges – couldopen new opportunities for shaping the future ofphilanthropy.The scan, with its bird’s-eye view,reveals a variety of needs and opportunities that, ifmet, could help philanthropy grow and becomemore effective.These needs and opportunities areoutlined in this report, along with some optionsfor action.

Context

In this era of unparalleled economic growth andits corresponding economic disparity, a new gen-eration of entrepreneurs is becoming increasinglycommitted to using market-based approaches tosolve social problems.The combined trends ofwealth creation, wealth transfer, and openness tointersectoral and market-based approaches forsocial change could attract and unleash an

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unprecedented level of new financial resourcesand human innovation within philanthropy.

Three major waves of change are especially relevant:

• Social Entrepreneurship – Social entrepreneurs createsocial value through innovation and leveragingfinancial resources – regardless of source – forsocial, economic, and community development.The expectations for nonprofits to provide servicesand achieve social change at a larger scale whilealso diversifying funding resources are motivatingsocial entrepreneurs to invent organizations thatare hybrids of nonprofit and for-profit structures.The innovations of social entrepreneurs and theorganizational models they are creating requirenew perspectives and responses from traditionalphilanthropy.

• Business and Social Responsibility – Pressures froman active and vocal civil society, along withenlightened corporate leadership, are motivatingmany businesses to reconsider how they can beresponsible about their business and the com-munities in which they work and serve theircustomers. Such responsibility has been shownto lead to increased corporate marketability andprofitability.This is creating new opportunitiesand incentives for the commercial sector topartner with philanthropies, other nonprofits,and government.

• Philanthropy as Social Venture Capital – As govern-ment devolves, as nonprofits adapt to moreentrepreneurial models, and as business reinvigo-rates its role in social development, philanthropyis also incorporating new approaches for socialinvestment and the creation of social capital.Belief in the value of wealth creation in addressingsocial change along with the principles of venturecapital investment is influencing the practice ofemerging philanthropists among the new wealthcreators as well as women’s, youth, and diverseethnic groups’ new philanthropy ventures.Thepractices of these new philanthropists are challeng-ing more experienced leaders in philanthropy to

think about changing roles and relationships withgrantee partners, using new tools and approachesthat stretch philanthropy beyond traditionalgrantmaking and into more opportunistic andmarket-based models.

The Scan

The scan was developed for the following purposes:

• To capture and document a bird’s-eye view ofthe major waves of change relevant to philan-thropy (social entrepreneurship, business andsocial responsibility, and philanthropy as socialventure capital).

• To listen to and record the needs and potentialopportunities of people and institutions engagedin such changes.

• To propose some broadly conceived activities andmechanisms that respond to the opportunitiesand needs.

• To help determine a specific role for the W.K.Kellogg Foundation in this broad analysis.

• To inform and motivate other stakeholders toengage in the development of collaborativeactions that could unleash new resources foreconomic and social transformation.

Scanning was done through interviews and discus-sions with more than 100 leaders, experimenters,and innovators in the following five categories(see Appendix A for a glossary of terms used inthis paper):

• Social entrepreneurs – social change/social serviceleaders who are experimenting with newapproaches to achieve greater scale, impact, andsustainability in their social development work.

• Private sector leaders and support organizationsdedicated to increasing the scale and comprehen-siveness of socially responsible business.

• New philanthropies – donors and philanthropicorganizations that are applying new ideas of

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social investment, social capital, and wealth cre-ation to investing in nonprofit leaders and ideas,especially social entrepreneurs.

• Mainstream philanthropies – established funderswith the readiness and motivation to offerresources and credibility to increase the learningand effectiveness of emerging and establishedphilanthropists and social entrepreneurs.

• Support organizations and individuals servingphilanthropies and social entrepreneurs.Theseinclude financial advisors and institutions, man-agement resource centers, and thought leaders.

The discussions were designed to explore pointsof view and insights about the trends and influencesthat could bring about a burst of human innovationand increased financial resources within philanthropyand social development.Thus, while the waves ofchange are broad in scope and provide situationalcontext, the primary focus of the scan was onneeds and opportunities growing out of individualand institutional experience as they relate to philan-thropy’s role in social development.

A secondary approach included a review of theliterature related to social entrepreneurs, venturephilanthropy, intersectoral challenges, business ethics/social responsibility, systems thinking, and socialand organizational design and structure.The scanwas also informed by a conference at Wingspreadon social entrepreneurship in April 1998 and oneon creating community wealth in Colorado Springsduring November 1998. In addition, reports anddocuments from the W.K. Kellogg Foundation’sexperience influenced the scan.

The scan, as a first-stage process, was focusedprimarily on U.S.-based organizations and experi-ence. Many of the trends and changes transcendnational boundaries, however, and the inquiry willbe expanded internationally in the future.

Key Assumptions

In designing and implementing the scan, a set ofassumptions was developed.These assumptionsattempt to clarify the significance, implications, andpossibilities of change accumulating into a majorshift that will affect philanthropy. Among them:

• The transfer of wealth to the baby-boom gener-ation is providing an unprecedented opportunityfor resources to flow into philanthropy andnonprofit ventures. Estimated to make availableapproximately $1 trillion for philanthropy, thesheer size of the transfer of wealth – as well asthe anticipated distribution of this transfer intothousands of small- and medium-size funds –will change the face of philanthropy.

• Society’s intractable social and economic problemsare not solvable through fragmented, single-sector programs – all sectors need to worktogether, exchanging and sharing traditionallyaccepted roles.

• The rapid adaptation of entrepreneurial solutionsfor sustainability of innovations and financingrequire systems for growing and maintaining ser-vices at a scale proportionate to need.

• A critical mass of readiness and momentumfor new kinds of social investing is emergingand can be catalyzed for greater impact andeffectiveness.

• Without systematic intervention to accelerateand improve what is happening, substantialnumbers of new donors and social entrepreneurscould be discouraged, turned off, and lost fromphilanthropy and social change work.

• Experienced funders are needed as partners withnew funders to create bi-directional mentoringthat leads to a deeper appreciation of lessonslearned from previous experiments as well as tonew ideas, learning, and action opportunities forold and new funders.

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• A useful intervention into this evolution of phil-anthropy and social development needs structureand leadership that is formed collaboratively and“owned” by many stakeholders; it cannot beowned and led by one entity.

Synthesis

While the scan targeted five groups of stakeholders,it was an eclectic and self organizing search forideas.Therefore, rather than tracking or reportingon quantitative patterns in the interviews andliterature, this report summarizes and synthesizesthe main ideas and themes.

This synthesis of ideas and voices from theinterviews and written literature is organized tocorrespond with the three major waves of changementioned earlier.

Social Entrepreneurship

Social entrepreneurship is driven by two strongforces. First, the nature of the desired socialchange often benefits from an innovative, entre-preneurial or enterprise-based solution. Second,the sustainability of the organization and its servicesrequires diversification of its funding streams, oftenincluding the creation of earned income streamsor a partnership with a for-profit.

In response to these different but interrelatedforces, nonprofit organizations and their leadersmake critical decisions to invent or expand intoentrepreneurial models to do their work.

These two forces driving the shift into nonprofitsocial entrepreneurship are best illustrated byobservations from the Roberts EnterpriseDevelopment Fund and from Stanford BusinessSchool Professor J. Gregory Dees:

“We cannot escape from the fact that you donot service people out of poverty.At its core, theability to exit poverty is a question of employ-

ment, asset accumulation, and wealth creation.”Roberts Enterprise Development Fund

“Faced with rising costs, more competition forfewer donations and grants, and increased rivalryfrom for-profit companies entering the social sec-tor, nonprofits are turning to the for-profit worldto leverage or replace their traditional sources offunding. In addition, leaders of nonprofits lookto commercial funding in the belief that market-based revenues can be easier to grow and moreresilient than philanthropic funding.”

J. Gregory Dees

Following are some illustrations of how variousforms of social entrepreneurship are taking hold:

Fifteen years ago, when the Ashoka Foundationcreated its programs to find and support “socialentrepreneurs,” the term was little understood andwas assumed by many to be simply a synonym forcivic leadership.Ashoka has demonstrated that socialentrepreneurs invent social reforms and servicesthrough the leveraged use of intersectoralresources without limiting themselves to traditionalsocial service or charitable models.Today, the lan-guage of social entrepreneurship is accepted in thenonprofit sector and is gaining the understandingand support of other sectors.

The National Center for Social Entrepreneurs hasalso been operating for more than 12 years, traininghundreds of nonprofits to develop market-basedstrategies for social development.The Center hasdeveloped decision-making and assessment toolsto enable nonprofits to more systematically deter-mine their readiness for implementing market-basedapproaches in their work.

Throughout the country, nonprofits are usingentrepreneurial models and language to designtheir services, organizations, and partnerships.Theyare creating complex organizational structures tolink an array of nonprofit and for-profit entities.There are hundreds – and perhaps thousands – of

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examples throughout the United States of organi-zations that are experimenting with enterprise ormarket-based approaches for solving problems.Many of these are based within traditional organi-zations such as Goodwill, Salvation Army, Boy andGirl Scouts, community food banks, etc. Some ofthe newer examples include:

• Bill Strickland of Pittsburgh founded andoperates the Manchester Craftsmen’s Guild, a“traditional” nonprofit that rescues at-riskschoolchildren by using the arts to teach themlife skills. He also runs the Bidwell TrainingCenter Inc., an innovative partnership with localcompanies to train displaced adults for real workin real jobs. In addition, he has developed a jazzconcert hall and created a Grammy Award-winning record label, all for the purpose ofturning young people with potentially dead-endlives into productive workers.

• Gary Mulhair of Seattle founded PioneerHuman Services, a nonprofit agency with anannual operating budget approaching $50 millionfrom contracts and partnerships with commercialsector companies like Boeing and Microsoft.Pioneer employs more than 800 people, providingopportunities for those at the margins of societyto realize personal, economic, and social devel-opment through training, employment, housing,rehabilitation, and treatment services.

• Yolanda Rivera operates Banana Kelley in theBronx, a multi-million-dollar community rede-velopment organization. Structured as a networkthat includes real-estate ventures, a paper-manufacturing company, sweat-equity opportu-nities, citizenship development, training, andemployment, Banana Kelley touches the eco-nomic, social, and civic dimensions of life for itsparticipants and neighborhood.

• Vanessa Kirsch is founder and president ofNew Profit Inc., a start-up organization forgrantmaking, technical assistance, and venture

capital promoting the development of organiza-tions that straddle both nonprofit and for-profitsectors.

In addition, nonprofits are moving beyond theirtraditional partnerships with government to inventnew relationships with the private sector. Forexample, the Boys and Girls Clubs of Americanegotiated a $60 million marketing contract withthe Coca Cola Company, widely believed to bethe most lucrative marketing deal ever negotiatedby a charity.The senior VP at Boys & Girls Clubsof America said,“The debate is over on whethercause-related marketing is a good thing or not;those standing back are going to watch the worldmarch right on by.”

With all the optimism and hope that surroundsmarket approaches to social needs, it is tempting tothink of market ideas as a panacea. However, manysocial issues will require complex solutions thatblend market approaches with direct charitable andeducational services. J. Gregory Dees, in his 1998article,“Enterprising Nonprofits” cautions nonprofitleaders that:

“The drive to become more business-like, howev-er, holds many dangers for nonprofits. In the bestof circumstances nonprofits face operational andcultural challenges in the pursuit of commercialfunding. In the worst, commercial operations canundercut an organization’s social mission.Toexplore the new possibilities of commercializationand to avoid its perils, nonprofit leaders need tocraft their strategies carefully.”

Business and Social Responsibility

In the belief that social change partnerships can begood for business and the common good, increas-ing numbers of businesses are working with non-profits to help solve human, social, and economicproblems. For example,American ExpressFinancial Advisors teamed with South Shore Bank

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to bring investment products – like stocks, bonds,and life insurance – to South Shore’s largelyAfrican-American customers in Chicago.Thisnew alliance is one of the most significant part-nerships between a Fortune 500 company and aneighborhood development organization. Inaddition, there are hundreds of long-standingschool-company partnerships, with new partner-ships emerging every day. One of the newest isthe Welfare to Work partnership, which in barelytwo years has gained the participation and supportof 7000 corporations.

In its Summer 1998 issue, The American Benefactorcriticized private industry as a whole for allocatingonly 1.3 percent of pre-tax earnings for charitablepurposes. However, the journal found some positivetrends in the making. Companies that advertiseheavily tend to give more than the average.Women entrepreneurs are especially generous,contributing an average of 5.2 percent of pre-taxprofits to charity. Family-led firms make a strongphilanthropic commitment. And, in large publiccorporations, there appears to be a trend towardmore strategic philanthropy to align self-interestwith the larger public good.

The Business Ethics Journal monitors corporationsfor more comprehensive approaches to responsiblebusiness. Increasingly, companies are reportingefforts to understand and improve their overallimpact in society and in the environment. Forexample, Monsanto has created a new environ-mental accounting system that enables the companyto track and report on the impact it has on theenvironment. British Petroleum America hasannounced that it will publish its first “social report”showing the company’s new policy statements onenvironment, employees, relationships, and ethics.Many companies are engaging in ethics and socialresponsibility audits to determine the overallimpact of their policies and practices.

Business coalitions such as The Conference Board,The Council on Economic Priorities, andBusiness for Social Responsibility are activelyengaged in facilitating new dialogues on themeaning of corporate citizenship and the balanceof market pressures with public responsibility.

The next generation of business leaders also istaking on the challenge of doing well on thebottom line by doing good in society and in theircommunities. Ethics is now an accepted and usuallya required part of the curriculum in most businessschools.A new organization, Students forResponsible Business, has emerged to inspireand facilitate the commitment of business schoolstudents to a future as responsible business leaders.

Many of the renewed efforts relating to sociallyresponsible business have been sparked by thegrowing awareness of the blurring of sectoralroles and the increasing need for intersectoralpartnerships to solve thorny problems. But thedisappearance of strict sectoral boundaries issparking another trend in the commercial sector asincreasing numbers of private sector entities, suchas industrial giant Lockheed Martin, are enteringthe traditionally nonprofit business fields of directhuman care and service. In effect, traditional busi-nesses also are engaging in social entrepreneurship.

The privatization of health care represents thelargest transition of business from nonprofits andgovernment to for-profit institutions. But otherfields such as youth services also are beginning tosee transition. For example, Res-Care of Kentucky,a for-profit corporation providing residential careand counseling for youth, has acquired the assetsof three nonprofit groups. Most of Res-Care’s 1,500employees are from the nonprofit world. It has beenranked one of the 200 best small companies inAmerica by Forbes magazine and pays its CEO$440,000 per year with stock options worthapproximately $12 million. Other examplesinclude: Children’s Comprehensive Services in

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Nashville ($90 million annual revenue), Maximusin Virginia ($128 million annual revenue),YouthServices International in Florida ($108 millionannual revenue).

For-profit corporations also are creating philanthropylook-alikes. Fidelity’s Charitable Gift Fund andMerrill Lynch’s and Vanguard’s donor services aresimilar to donor-directed funds that have beendeveloped by community foundations. Fidelity’sfund has grown rapidly since it was established in1992, earning a spot for the first time among thetop 10 fund-raising organizations ($456 million)this past year.While the funds are popular withdonors, they have their share of critics, who seethem competing perhaps unfairly with communityfoundations.

Philanthropy as Social VentureCapital

In the May 1998 issue of The Economist, an article,“The Challenge for America’s Rich,” said:

“For if 1900 marked the high point of one eraof wealth creation, with enormous riches for thosewho seized new national markets just thenopening up, 2000 may mark another with theopportunities flowing this time from globalization,new technology and corporate restructuring.America at the last count, had 170 billionaires,compared with 13 in 1982.”

In addition to the 170 billionaires, The Economistalso noted that the United States boasts 250,000decamillionaires and 4.8 million millionaires.Observing that today’s new rich have the oppor-tunity to be benefactors of extraordinary generosityand to shape the U.S. – and the world – just asprofoundly as Carnegie and Rockefeller did intheir time, the article also notes that few of thenew rich are yet fulfilling their potential asphilanthropists.

But many of those philanthropists who are emerg-ing from the new fortunes define themselves associal entrepreneurs.They want to solve definedproblems in a specific way.They don’t want tosimply earmark money for “some vaguely benevo-lent purpose.”They focus on performance.Theytry to make projects self-sustaining. If manufacturingproducts has been part of their wealth creation,they often make these products part of their giving.They believe strongly that equipping people withtools and investing in them to go out and create“wealth” is a vital part of their philanthropy.Theirinterpretation of the age-old equity and accesschallenge revolves around information and knowl-edge as the new currency and driving equalizer.While this may smack of naïve optimism based ontheir own success, these wealth creators want theirphilanthropy to come out of the paradigm of a“hand up, not a hand out.” Right or wrong, theydon’t want to hear about the have-nots and thenegativity associated with this dependency syn-drome.Their philanthropy is often targeted tobroad economic and educational improvementfirst, with the belief that other forms of social andspiritual wealth will follow.

“Through high-tech computer and biotechindustries, entrepreneurs have had a transformativeimpact on the economy and on the society,”said Catherine Muther, who created a women’sfoundation using a venture model.“When theseentrepreneurs turn their attention to social issuesand philanthropy, nothing less than transformativesocial change is expected.”

Muther’s philanthropy, the Three Guineas Fund, hasa highly focused strategy to help women developnew technology ventures. She has decided not tojust spread money throughout the systemic issuesthat affect women and their access to opportunities.Instead, Muther is choosing to work explicitly onmodeling a venture capital process that would pro-vide access to needed resources for women who

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are high-tech innovators in the for-profit world.She believes if these women entrepreneurs succeedin the for-profit world they will in turn apply someof their wealth to the public good and contributeto society in general as high producers, or as shesays,“leveraged philanthropy.”

The Roberts Enterprise Development Fund(REDF) is another bold example of a funder witha targeted focus (wealth creation and economicdevelopment for homeless) using a social venturecapital practice with social entrepreneurs toachieve impact.The practice of using a conceptlike “social venture capital” requires a new languageto describe this blended approach of both businessand community constructs. In a Stanford BusinessSchool case study about REDF, the shift from oldlanguage to new includes terms like:

“The shift in language used by REDF and,increasingly, others in the field represents a funda-mental re-definition of roles, responsibilities andapproaches to the funding relationship....Theprocess of change that has led to the emergence ofthe ‘new social entrepreneur’ and the ‘social venturecapitalist’ has taken place not as a result of theefforts of one or the other. It has happened througha process of individuals on both ‘sides of the table’concluding that the traditional approach is lacking.”[Stanford University, May 1998]

In their article,“Virtuous Capital” Christine Letts,William Ryan, and Allen Grossman propose thatrecent traditions of philanthropy have been basedon “program efficacy” and that new approaches to

philanthropy are more focused on “organizationalcapacity.” New approaches to philanthropy, espe-cially venture philanthropy, are moving away froman emphasis on demonstration programs as solutionsand moving toward an investment model forinnovative ideas and solid organizations that canget the innovations “to market.”

Roots for this venture approach to philanthropyare not totally new. Foundations and individualdonors have experimented steadily over manyyears with market-style ideas and the need fororganizations to sustain themselves and to movegood ideas to scale. Using grants, loans, and pro-gram-related investments, private funders havehelped to create breakthrough economic conceptsfor social development: Charitable organizationslike Salvation Army and Goodwill have a longhistory of selling products to both generate rev-enues and provide benefits to their target clients.The Grameen Bank micro-loan program has revo-lutionized global thinking about micro-enterprisedevelopment.Women’s World Banking has openedresources and set new standards worldwide forcommunity banking, while dealing with deep-seated opposition to extending credit to womenand women’s economic development.

What is new about the emerging generation ofphilanthropists is their potential size and number(there will be many more small- and medium-sizefoundations in the future); and the values, beliefs,and approaches they bring to the field.

Matrix of Stakeholder Groups

The following matrix provides another way ofviewing the growing influences that are convergingto create a new paradigm for philanthropy and thenonprofit sector.All names and ideas in this matrixare meant to be examples and serve to illustrate. Itis not an exhaustive list.

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Old New

Grants Grant equity

Funder Investor

Grantee Investee

Evaluation Measurement

Grant proposal Business Plan

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StakeholderGroups

Social Entrepreneurs and Social Innovators

People, Leaders:Examples of Change

Bill Strickland

Bill DraytonBilly ShoreVanessa KirschRick Little

Raul YzaguirreRachel BellowJohn MayConnie Evans

Gloria Guerrero

Institutions

• Danali/ManchesterCraftsman Guild

• Ashoka• Share Our Strength• New Profit, Inc.• International Youth

Foundation• La Raza• Project 180• New Vantage Partners• Women’s Self-

Employment Program• Rural Development and

Finance Corporation

Commonly-Held Values, Beliefs, Theories,“Drivers” of Change

• Wealth creation is part of the solution ofmany social and economic problems

• Social entrepreneurs are innovators in creat-ing and using financial, social, and spiritualcapital and value

• Social entrepreneurs pursue a vision of eco-nomic and social empowerment through thecreation of nonprofit enterprises to provideexpanded opportunities for those on themargins of economic and social mainstream

• Social entrepreneurs use hybrids ofprofit/nonprofit ideas and structures to sus-tain their work/ organization

Government Harris Wofford

Eli Segal

• Corp. for National andCommunity Service

• Welfare to Work

• Devolution of government to local control• Partnering with other sectors to deliver ser-

vices

Philanthropy Peter KaroffTed TurnerJim PitofskyEd SklootSterling SpeirnSteve RolingG. Myers/P. BurnessHelen HuntJohn AbeleCatherine MutherMarie WilsonDrummond PikeMario MorinoJed EmersonPaul Brainerd/

Paul ShoemakerMorgan Binswanger

• The Philanthropic Initiative• Turner Foundation• echoing green• Surdna• Peninsula Comm. Fdn.• Kauffman Foundation• Entrepreneurs’ Fdn.• Sister Fund/El Suemo• Boston Scientific• Three Guineas Fdn.• Ms. Foundation• Tides/Thoreau Center• Morino Institute• Roberts Ent. Dev. Fund• Social Venture Partners

• Creative Artists AgencyFoundation

• Investment is preferred over charity• Philanthropy/giving back is something

everyone can do – regardless of class andamount of wealth. We are a part of an inter-dependent society, not a one-directionalflow of charity.

• Venture philanthropy is a charitable endeav-or based on risk-taking, innovation, andentrepreneurial spirit

• Venture philanthropy and social venture cap-ital emphasize long relationships; operatingand program investment; risk managementand accountability performance measures;exit strategies

• Network grantees working in similar issueareas to share knowledge and practice

Business andBusiness Networks

Bob DunnGreg SteltenpohlKim CranstonKatherine FultonJames Wolfensohn

• Bus. for Soc. Respons.• Odwalla Juice• Soc. Venture Network• Global Bus. Network• World Bank

• Knowledge is the driver of the new networked economy

• Need civil society for vital customer/marketbase

• Joint ventures• Growing support for comprehensive/strate-

gic rather than fragmented approach tosocially responsible business

• Social responsibility makes good businesssense – can increase profitability

Consultants andIntermediaries

Richard SteckelLisa SpinaliJuanita BrownGail TaylorFrancine BrodyJerr Boschee

• AddVenture• Ripple Effects• Whole Systems Assoc.• KnoWhere Company• Brody & Weiser• Nat’l Center for Social

Entrepreneurs

• Changes in organizational design and struc-ture require changes in organizational lead-ership

• Leaders facilitate and network; they don’tcontrol

• PRI/Corporate Partnerships

Needs

The needs that surfaced during the scan are inter-related and overlap. Nevertheless, they can besynthesized into three groups:

• Knowledge Management – Capturing, archivingand using knowledge and learning for innovation.

• Human Capacity Development – The developmentof people and the tools they need for leadership,organizational, financial, and planning challenges.

• Deal-Making – Coordinated opportunities forfinding funding/co-investment partners.

More specifically, the needs within these groupingsinclude:

Knowledge Management

• New philanthropists and social entrepreneurswant to learn from each other and from moreestablished foundations.They want and neednew networks that they have helped to create.

• New philanthropy and social entrepreneurshipconcepts still are only partially formed.There areneeds for more research, documentation, dialogue,

etc. Exposure to ideas and theory-from-practicesynthesis needs to be embedded within existinglearning venues (conferences, intranets, casestudies, etc.) as well as the possible developmentof a more formal “information to knowledge”organization.

• Assessment, evaluation, and dissemination areneeded so that many can learn from others’experiences.This will require conceptualizingnew ways for capturing, archiving, tracking,synthesizing, and diffusing information.

• Funders need realistic exit strategies and socialentrepreneurs need to devise more options forsustainability.

• There is a continuing need for mapping theemergence of trends, changes, innovations.

Human Capacity Development

• New organizational models and structuresdemand new leadership, organization building,management, and financial development solutions.

• Individual innovators and isolated organizationsneed to connect with others to create morementoring opportunities.

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StakeholderGroups

People, Leaders:Examples of Change

Institutions Commonly-Held Values, Beliefs, Theories,“Drivers” of Change

Thought Leaders Lester SalamonJ. Gregory DeesChristine LettsPeter DruckerCharles Handy

• Johns Hopkins Univ.• Stanford Bus. School• JFK School of Govt.• Drucker Foundation• London Bus. School

• Multi-sectoral solutions• Enterprise models• Virtuous capital • Use all resources for a civil society• Enlightened selflessness and purpose

MediaDisseminators

• Harvard Bus. Review• Who Cares Magazine• Fast Company• Wired• Fortune/Forbes• Chronicle of

Philanthropy• Bus. Ethics Journal• Websites

• Entrepreneurial solutions to social problemsis news that’s fit to print (if it has a market)

• New approaches to giving need ongoingmonitoring and diffusion

• Philanthropy needs to open its relationswith the media

• Leaders, particularly funders and other gatekeepersof resources in all sectors, need opportunities toget to know each other, to better understandtheir various perspectives, to build trust, and todiscover common interests and goals.

• New tools are needed for more sophisticatedcapital markets leveraging as well as bettermeasurement of social return on investment.

• Consultants, trainers, and outsourcing partnersare needed to work effectively with these newtools and entrepreneurial approaches.A networkedeconomy in the nonprofit sector requires morepartnering and alliance-building and will intensifythe need for quality outsourcing, rather thanowning all expertise within the boundaries ofthe organization.

Deal-Making

• New philanthropists need opportunities to col-laborate and co-invest (when appropriate) witheach other and with experienced philanthropists.

• Convening is needed so that individuals andinstitutions can find their common ground.

• New financial and human resources need to beconnected to new social innovators.This willrequire connecting mechanisms, mentors, androle models.The work requires one-on-oneopportunities that develop trust and credibility.

• Opportunities and resources are needed forincubating ideas and networked activities.

• There is a need for developing and testingprototypes of financial tools and instruments thatdirectly serve the business of social development(e.g., charitable component mutual funds,investment in for-profit subsidiaries, etc.).

In summary, while great promise can be seenwithin the many different solo creative efforts ofsocial entrepreneurs and emerging philanthropists,the biggest need at this point is to connect thesemany “tidal pools” of knowledge, resources, and

innovation. They need to become a “tidal basin”of synergy that catalyzes activities to new levels ofproductivity and impact. Right now, there are fewplaces to connect streams of innovative thinkingand action. More shared knowledge about theavailable pools of capital for new ideas and moreaccess to specialized technical assistance for thesenew challenges is vital.

A Scenario for Action

In the scanning process, it was often suggested thata conceptual framework for action was needed sothat a more focused dialogue about acting on needsand opportunities could begin. Participants sug-gested the development of some options for actionthat could be critiqued and shaped through dialogue.The following section is an attempt to provide thatbeginning conceptual framework based on learningsof this scan. It is being offered in the spirit ofstimulating creative dialogue.

A Conceptual FrameworkVision

To unleash and leverage new resources dedicated to socialdevelopment, driven by a blend and balance of marketmechanisms and public responsibility.

Implicit in this vision statement is the desire toreach and inspire donors – large and small – whoare experimenting or want to try new partnershipand market approaches to philanthropy.Withinthis aspiration is a picture of the future in whichthe meaning of wealth is leveraged to includesocial, spiritual, and community capital – all ofwhich are resources necessary for developing andsustaining the common good.

Implementing MissionCreate a collaborative mechanism to catalyze andenrich the current critical mass of market-modelactivities.This would be done by connecting theseactivities, creating shared learning, building the

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collective capacity to innovate and create socialvalue, and identifying opportunities to fund col-laboratively.

Goals

• To convene leaders who can initiate and beginorganizing a collaborative effort among estab-lished and emerging philanthropists.This wouldbe done to meet the categories of needsexpressed in the scan (knowledge management,human capacity development, and deal-making).

• To provide “space” and opportunities for theessential conversations that will build newknowledge to accomplish more effective socialservices/social change.

• To prioritize and create an array of services tomeet the three major categories of needs(knowledge, human capacity, and deal-making).

Principles/Values to Guide a FutureCollaborative Mechanism

• An effort to build on the work of both existingand new organizations if they are meeting orhave the potential to meet critical needs andopportunities. (Don’t re-invent the wheel!)

• A commitment to experiment with market andentrepreneurial models while balancing commongood, equity, and access with market efficiency.

• A desire to create social investment partnerships.

• A commitment to quality practice, efficiency andmentoring; a humility for learning, a hunger fordiscovery; and a willingness to share ideas.

• A commitment to redefining and expanding themeaning and application of wealth and to work-ing with organizations – old and new – that canfurther effective models for social development.

Proposed Activities for a FutureCollaborative Mechanism

• Create a knowledge management system tocapture, archive, use and diffuse information (viatechnology and person-to-person mentoring).Both successes and failures need to be understoodand used.

• Create peer-learning opportunities.

• Develop and share prototypes and models thatwork.

• Search and recruit staff, board members, advisors,and consultants for donors and social innovators.

• Provide mentoring, technical assistance, andapprentice-style learning.

• Foster connections, deal-making, co-investing.

• Map, track, and diffuse good practice.

• Disseminate the story of evolving philanthropyand social development practices.

• Share assessment and impact measurementprocesses and approaches.

• Trade and barter “know-how,” managementexpertise, and products.

Ideas for Structure/Design of aFuture Collaborative Mechanism

The core purpose of a new collaboration wouldbe to promote, facilitate, and invest in more effectiveapproaches to social development. It may be a newentity or mechanism is needed for this purpose.Like those it intends to convene and serve, thisentity could be formed and function as a market-place for investors/funders and social innovators/social entrepreneurs from the public, nonprofit andcommercial sectors.The investors/funders wouldbe a partnership of current and emerging stakehold-ers including national and regional philanthropicassociations; private, community, and family foun-dations; and individual philanthropists.

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As a community of entrepreneurial developers,investors, partners and learners, the marketplaceshould be easy to access, explicit about its goals,accountable and transparent to its stakeholders,and, most important, a “hothouse” and “magnet”for innovation.

This marketplace would be expansive and open,yet smaller than the overall aggregate of organiza-tions and activities that are functioning now asventure funders, social entrepreneurs, and sociallyresponsible corporations.The intent would be toserve the larger body of social entrepreneur/socialventure capital ideas and activities and expandover time as dictated by demand.

At one level, the marketplace would fulfill therigorous needs of learning from each other, sharingbest practices, disseminating information to others –producing and using knowledge. It could also be aplace to co-invest in specific social change effortsthat make more sense to do in collaborative fashion(such as large scale systems change efforts requiringsignificant assessment costs and multiple site loca-tions). Different investors and social innovatorscould partner and sponsor sites based upon theirlocal desires and priorities and yet reap added valuefrom being part of a larger systems change effort.Although investors and innovators might not sit atthe same table all of the time, the inclusion of bothcould enrich the learning and begin to model anew “investment philanthropy” that is a moreseamless exchange between money and action.

At another level, the marketplace could openopportunities for participants to act on policyor regulatory issues collaboratively. For example,partners might want to work together to developnew capital market financial instruments thatwould require government and commercial sectorcooperation or even policy change.

Like any marketplace, the decision-making processof choosing to partner, collaborating in a groupeffort, or “going solo” would be self-determinedand vary depending upon the opportunity athand. Over time, with the building of relationships,trust, and a sense of identity, the marketplacecould evolve into a guild – analogous to the craftassociations of the Middle Ages – an organizationalarchitecture once again re-emerging in theknowledge age with its networked economy.

Getting Started – Next Steps

Using this report as the starting point, the KelloggFoundation is willing to help take the next step inconvening funders/investors and social innovatorsin some creative planning and formation sessions.The purpose of these meetings would be to con-sider a set of activities for working together.Participants in this first stage of convening andplanning would be those from any sector whoalready are experimenting with market approachesto solving social and economic problems and whocome with a developed sense of motivation and“readiness” for continued collaborative experi-mentation and learning.Through experience, thesepotential collaborators understand that:

• Social development/social change is difficult toachieve and requires the efforts of many playersusing a variety of problem-solving models.

• Successful use of market-based approachesrequires leverage and shared investment.

• Achieving success means that innovations needto be replicated and expanded to a scale that isproportionate to the problem.

• Their work will be improved by creating ashared environment for knowledge, humanresource development, and deal-making.

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Key questions to be resolved in this series of meetingsinclude:

• How can we create new kinds of relationshipsbetween funders and implementors – beginningwith these initial convenings?

• What kind of initial “partnership” support activitiesand investments should we pursue? Should wedrive this simply by the passions of the investorsand innovators? How should priorities beestablished?

• When and how are emerging philanthropistswilling to work together? Are they willing towork with established philanthropies?

• How will funding beyond program activities beshared? At what level will partners be willing toshare costs for ongoing learning, dissemination,human capacity development, staffing, etc.?

Tasks

A task list for the next six months would be to:

1. Begin to build a collaborative group of partners –

• first circulate this report, asking for feedback to refine action options and determine levelsof interest

• work with those that respond with significant interest to convene a first formation meeting/retreat (could be a series of smaller group retreats if the group is too large for this first-stage discussion, with a total group retreat later)

2. Develop a start-up partnership structure

• decide on the level of formality

• determine roles, resource needs and sources,and priority activities

3. Establish a start-up implementation plan

Conclusion

This initial synthesis of needs and opportunities asa result of conducting this scan leads to several keytake-aways:

• The level of creativity and potential for newsolutions to old societal problems is trulyimpressive.While this cadre of innovators stilloperates mostly in solo fashion, the growingawareness of the value of collaborating is excitingand a major opportunity.Yet this momentum isonly beginning to be recognizable and thus theoptions for catalyzing and nurturing it must stayin sync with the pace of change and readiness,tracking learning and opportunities as theyemerge.The challenge at hand is not one ofstrategy development, but rather one of imple-mentation planning and action phasing accord-ing to “market momentum.”

• While this scan has helped to identify a set ofneeds and opportunities, much work remains todetermine the incentives that will push themforward.We now need more framed and direct-ed dialogues that hone in on identifying thebenefits and constraints around entrepreneurialcollaboration.

• We have a beginning articulation and conceptualframing of opportunities at hand – a proposedabstract and rationale. Once the concepts andframeworks for action are refined through dis-cussions we will need to identify activities as away of pragmatic engagement. One path toaddress this challenge is to determine whathypotheses and questions we want to pursue andthen find activities to answer them.

• This scan for the most part has involved the morecurrently visible new philanthropists, dominatedby white male leaders from mainstream America.The social entrepreneurs we have engaged, how-ever, are a much more diverse group of people

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emerging from community-based leadershiproles. Some of the interviews in the scan revealedthat the philanthropy emerging from women’sfunds, youth, and communities of color is highlyinnovative and ripe for increased support andimpact. Future action needs to include bothmainstream and emerging innovators.This maywell include those entities long interested inincreasing philanthropy or working with donorsto assist them in achieving their goals.

In summary, this scan presents an overview ofchanges and corresponding opportunities related tohow philanthropy and social change organizationsand leaders are integrating market concepts into

their work, value sets, and organizational struc-tures.This paper makes the case that a critical massof organizations and leaders are engaging in theseopportunities, resulting in a perceptible demand fornew learning environments and related services,actions and solutions, and spaces for convening.Questions and issues that now need to be pursuedinclude:

• How do we proactively leverage this tippingpoint of change?

• How will we find the way to collaborative action?

• How will we improve the common good as weunleash and integrate market mechanisms intosocial development efforts?

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For further discussion, sharing, or follow-up, please contact:

Tom ReisVenture Philanthropy DirectorW.K. Kellogg FoundationOne Michigan Avenue EastBattle Creek, MI 49017-4058

Email: tkr@wkkf.orgVoice: (616) 969-2160

Feel free to copy this report and send it to others. If you want acopy sent to someone, contact Tom Reis.

Appendix A

Glossary of Terms

Following are some of the key definitions beingoffered for the various conceptualizations ofventure philanthropy, social ventures, socialentrepreneurs, etc.

Scan:An informally structured (self-organizing)survey to gage the current movement or changeswithin an area of interest.

Social Entrepreneur: Plays the role of changeagent in the social sector by:

• relentlessly pursuing opportunities to create andsustain social value,

• applying innovative approaches in their workand their funding,

• acting boldly without being constrained by theresources currently in hand, and

• exhibiting a heightened sense of accountabilityto the various constituencies they serve (com-munities and investors) for the outcomes theycreate. (Greg Dees)

Nonprofit Enterprise: A revenue-generatingventure founded to create jobs or training oppor-tunities for very low-income individuals, whilesimultaneously operating with reference to thefinancial bottom line. Nonprofit enterprises arevariously known as social purpose businesses,community-based businesses, community wealthenterprises, etc. (New Social Entrepreneurs,Roberts Foundation)

Beyond enterprise specifically created for economicdevelopment there also income-producing enter-prises developed by nonprofits primarily for theirincome streams. Some examples of these include:museum stores, eco-tourism, and co-branding ofproducts. (Greg Dees)

Venture Capital: Builds an investment model forinnovative ideas and capable organizations to getthem to market.

Venture Philanthropy: Strong leaders with boldideas plus a venture approach yield effective com-munity organizations.The venture approachincludes funding social entrepreneurs in organiza-tions with scale-up potential. Support is long-termand the funder makes substantial commitments toa few rather than smaller commitments to many.Support includes board participation, team building,and a resource network.

Intersectoral: The blending of two or moresectors working collaboratively and using theirresources, inherent perspectives, experience, andmanagement tools to achieve common goals.

New Profit Sector: A new sector of theAmerican economy composed of individuals,foundations, corporations, and other entities thatstraddle both the existing nonprofit and for-profitsectors. (New Profit Inc. business plan)

Social Capital: Social capital begins with humancapital: the development of self-sufficient individ-uals who are mutually supportive and have thegenerosity and skills to create the structures,organizations, and resources needed for healthyand equitable communities. Ultimately, the abilityof social structures and systems to help peopleachieve their goals for the common good isperceived as “social capital.”

Socially Responsible Business: The practice ofintegrating ethical behavior and proactive positiveconcern and action for the public good by privatesector entities whose main purpose is the creationof enterprise and profit.

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Appendix B

A Review of the Literature

Documentation and reflection about entrepreneurialand market practices in philanthropy and nonprofitshave been increasing as more organizations andfunders venture further into experimentation.

This review of the literature attempts to summarizeseveral insightful materials in circulation nowamong social entrepreneurs, philanthropy, andbusiness leaders.

• In his article,“Enterprising Nonprofits” (HBR,Jan-Feb.’98) J. Gregory Dees describes five majorpressures and influences that are pushing nonprofitsinto entrepreneurial models or commercialization.

These include: 1) A “pro-business zeitgeist”throughout the world; 2) Nonprofit leaders arelooking to deliver social goods and services inways that do not create dependency in their con-stituencies; 3) Nonprofit leaders are searching forfinancial sustainability and view earned-income-generating activities as more reliable fundingsources than donations and grants; 4) The sourcesof funds available to nonprofits are shifting to favormore commercial approaches, as few foundationswant to provide ongoing funding and most want toinvest for short periods in an effort to press granteesto become self-sufficient. 5) Competitive forcesfrom for-profits are leading nonprofit managers toconsider commercial alternatives to traditionalsources of funding. Dees offers a model called “TheSocial Enterprise Spectrum” which describes thecontinuum from the purely philanthropic to thepurely commercial.This model follows:

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General Methods:

Key Stakeholder RelationshipsPrimary Beneficiaries:

Capital Sources:

Work Force:

Suppliers:

Governance:

Purely Philanthropic

Appeal to goodwillNon-pecuniary rewardsMission-driven

Unclear or needynot required to pay

Philanthropicdonations/grants

Volunteers with highcommitment to socialmission

In-kind donations

Mission-constrainedself-perpetuating boardstewardship

Hybrids

Mixed motivesSome subsidy

Subsidized pricing Price discriminationThird-party payers

Mixed debt and donationsor subsidized investments

Mixtures of representationand self-selection balancingconstituencies

Discounts, or mixture ofin-kind and full price

Mixtures ofrepresentation and self-selection balancing

Purely Commercial

Impersonal exchangeArms-length bargainingMarket-driven

Customer able to payPriced for profit

Capital market rateEquity and debt

Paid employees, focus on financial rewards

Charge market prices

Board elected by ownersProperty rightsFiduciary responsibilities

Dees also cautions that,“Nonprofit leaders canbenefit from finding effective ways to harnesscommercial forces for social good. But misguidedefforts to reinvent nonprofits in the image of busi-ness can go wrong. Nonprofit managers are onlybeginning to learn what it means to search fornew solutions to social problems and for effectiveways to deliver socially important goods. Strategicand structural innovations should focus on improv-ing mission-related performance. Caught in thecurrent wave of commercialization, nonprofits riskforgetting that the most important measure of suc-cess is the achievement of the mission-relatedobjectives, not the financial wealth or stability ofthe organization.”

• In their article,“Virtuous Capital” (1997, HBR)Christine Letts,William Ryan and Allen Grossmanobserved that a number of foundations are usingthe term “venture philanthropy” to explain theirstrategies and to emphasize their interest in entre-preneurial action.They describe three majorforces pressuring philanthropy to find newimagery and strategies: 1) The retreat of the federalgovernment from funding and delivering socialservices is increasing the demands on nonprofitsand their funders…and increasing the demands foreffectiveness. 2) New players in philanthropy areraising new questions, particularly those whobelieve that traditional charity is too focused on

the satisfaction of the giver and not intensivelyenough on social change and results. 3) Largefoundations are searching for new ideas andmethods to create, bring-to-scale, and sustaineffective social programs.

They propose that foundations need to find newways to make grants that not only fund programs,but also build up the organizational capabilitiesthat nonprofit groups need for delivering and sus-taining quality.They highlighted five relevant andadaptable venture capital practices: risk manage-ment; performance measures; closeness of therelationship; amount of funding; and length ofthe relationship (usually about seven years).Theauthors are careful to point out that the venturecapital model is not appropriate for all instancesof grantmaking. Rather, funders should be able toopt – when appropriate – for a venture model.Some appropriate instances include helping toscale-up a proven young nonprofit; or to bringdepth to a shallow organization with effectiveprograms and potential.

The following chart presents a side-by-side compar-ison of venture capital and traditional foundationpractice.The information in this chart is adaptedfrom the “Virtuous Capital” article and a subsequentpresentation by Allen Grossman at the NorthernCalifornia Grantmakers Association annual meeting.

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• In their paper,“Assessing Venture Philanthropy”(1997) Christopher Capers, Michael Collins, andShahna Gooneratne (students of Professor JamesAustin’s Harvard Business School Course:Entrepreneurship in the Social Sector) test the Lettset. al. ideas about venture philanthropy by inter-viewing a cross section of philanthropies and offer-ing some analysis of the spectrum of philanthropicpractice. Some interviewees held the view that non-profits have emerged in U.S. society as the indepen-dent voice of society to defend against both thestate and the for-profit sector.Therefore the involve-ment of a foundation in the internal working of anorganization (as is called for in the venture philan-thropy model) would be inappropriate. Otherinterviewees expressed their frustrations with whatthey perceive as the disappointing outcomes ofcurrent philanthropy and supported major shiftstowards the venture philanthropy model. UltimatelyAustin concluded that venture philanthropy is anexciting and innovative practice that holds promisefor both the philanthropic and social enterprise

sector. But venture philanthropy is not reasonablefor every foundation.

The Austin team identified several components ofa venture philanthropy approach that already arein place in some foundations.These include: 1)Close relationship between the foundation andthe grantee; 2) Length of relationship; 3) Size ofinvestment; 4) Risk management and accountability;5) Performance measures; 6) Exit strategies.Theyalso identified both barriers and supports for ven-ture philanthropy in the environment.

“Perhaps the growth of social entrepreneurs is themost important reason for adopting the venturephilanthropy approach. Just as there is a continuumof social enterprise, ranging from purely volunteercharitable organizations to for-profit businessesthat pursue a social mission, there is a continuumin philanthropy.There is a range of strategies avail-able to donors and social entrepreneurs seeking abetter society.”

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Relevant Practice

Risk Management

Amount of Funding

Duration/Length ofRelationship

Terms of Engagement

Organizational CapacityBuilding

Performance Measures

Exit Strategy

Results

Venture Capital

High degree of shared riskFunds are lost when projects fail

Substantial commitment to raise necessary capital

5 – 7 yearsLinked to success

Joined at the hipSmall portfoliosPartnership

Funding to build capacity to successfullyexecute business plan

Clearly defined rewards and risks for all

2 stars, 2 failures, 6 walking dead orwounded

1% of capital for all start-ups but 30%of companies that reach IPO stage

Foundations

Low risk for foundationHigh risk for non-profit organization(NPO)Funds themselves not at risk (must be spent)

Partial commitment – management must continue fundraising

1 – 3 yearsArbitrary

Arm’s lengthLarge portfoliosOversight

Funding primarily for programs, not personnel,infrastructure, overhead

Funder: reward is in grantmakingNPO: reward is in outcome

“Myth” of government take-out. Burden onnon-profits

Harder to know. Not quantified. Same potentialto support organizations to scale?

• In the book, New Social Entrepreneurs:The Success,Challenge and Lessons of Non-Profit EnterpriseCreation,The Roberts Foundation and itsEnterprise Development Fund, 1996, describe fivetypes of nonprofit enterprise represented amongtheir projects.These types also are to be found inmany communities and include: 1) A SHELTEREDenterprise is one that benefits from formal con-tracting priorities of federal or local government.2) An OPEN MARKET enterprise is one whichreceives no preference or priority in the award ofcontracts. 3) A FRANCHISE enterprise in oneestablished though the granting of a franchise fromanother, usually nationally active corporation. 4) APROGRAM-BASED enterprise is one that isgrown directly out of the program activities of asocial service organization. 5) A COOPERATIVEis a commonly owned corporation wherein workerscontrol a share of the business and maintain votingand other rights while also receiving wages forwork performed.

The book also draws out of its own experiencethe attributes of the successful nonprofit businessenterprise:

• Nonprofit organizations have the potential toplan, create, and manage profitable businessventures.

• In order to realize this potential for enterprisecreation, the nonprofit must have access to thetechnical expertise and capital resources necessaryto support an effective business planning andenterprise start-up process.

• Successful job-creation efforts must be effectivelylinked with the provision of housing and supportservices.

• Economic development in the form of enterprisecreation is in many ways rooted in a history ofcommunity economic development, and where-as job creation efforts must be pursued as partof a continuum of housing and support services.Thus, the practice of social entrepreneurshipconstitutes a new evolution of thought and

technique. Simply because one is engaged in thecreation of affordable housing or the provisionof support services does not mean one has theskills required for business development.

• A key factor in the creation of successful non-profit enterprises is the presence of a new socialentrepreneur.

• Nonprofits should be supported in their effortsto explore their potential for engaging in socialpurpose venturing. However, all those involvedin such a process must recognize that getting toNO may be more important than getting to YES.

• Caroline Williams, in her article “FinancingTechniques for Nonprofit Organizations:Borrowing from the For-Profit Sector,” (for thePresident’s Committee on the Arts andHumanities, 1998, Creative America Report)examines basic financial techniques and transactionsin the for-profit sector and explores their applica-tion in the nonprofit sector. The categories shecovers include: Equity financing, debt financing,mergers, acquisitions, and sales.

She notes,“The corporate world knows that thereare finance techniques other than raising equity.The very large nonprofit organizations know thisas well. Hospitals and universities issue bonds andcan borrow funds for working capital.…Ironically,some convert to for-profit status in order to makebetter use of finance techniques, including raisingreal equity capital.

“Medium- and small-size nonprofit organizationsgenerally do not have the luxury of using financetechniques beyond fundraising.What is missing inthe nonprofit sector is financial expertise.

Organizations need assistance in creating, structuringand implementing more complex financial struc-tures. It is not just a matter of the for-profit types onthe board telling the organizations to become morebusiness-like.The nonprofit organization, like thefor-profit, needs access to expert assistance.”

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She proposes that there is a range of creativefinancing options for nonprofits:

• Creation of charitable component mutual funds.

• Program-related investment loans for workingcapital purposes—for program innovationsand/or infrastructure.

• Use of PRIs for debt restructuring.

• Use of PRIs for capital to acquire for-profitsubsidiaries that complement the nonprofit’smission.

• Creation of debt-funding vehicles.

• Mergers that improve a nonprofit organization’sability to carry out its mission.

• In his paper,“The U.S. Nonprofit CapitalMarket: An Introductory Overview ofDevelopmental Stages, Investors and FundingInstruments” Jed Emerson characterizes the flowof resources into nonprofit organizations as “capi-tal investment” for educational and human ser-vices.Traditional fund-raising devises of grants,annual campaigns, direct mail, endowment cam-paigns are all ways of raising “capital” for essentialservices and social change activities. However,Emerson proposes,“At a minimum…theNonprofit Capital Market of the past will not bethat of the future.”

The paper presents a basic framework for under-standing the nonprofit “capital market,” discussesthe types of organizational players active within it,and outlines various capital instruments used tosupport the sector as a whole. Describing levels offunding from seed support through intermediate

and then senior stages (e.g. self-capitalization andearned income) the paper also describes tradition-ally known as well as new sources of funding.Most intriguing among the new options aregreater use of loans and lines of credit, as well asopening up equity options such as market-basedbonds and investments.

While advocating for a greater use of venturephilanthropy practices, the paper acknowledgesthat financing the growth of nonprofits and/ortheir for-profit start-ups is difficult. Emersonclaims that the nonprofit capital market is furtherhobbled by numerous issues including: absence ofmarket standards; lack of proven methods fordemonstrating return on investment, and lack ofknowledge by both nonprofits and funders aboutcapital options available.

This paper serves as a good introduction to theNonprofit Capital Market, its players and invest-ment instruments. Pressures and demands on thenonprofit sector require that leaders and funderswork creatively to deliver the best service at theappropriate scale, while making use of the capital-ization method that is appropriate to purpose andstrategy.The paper enables both leaders and fundersto begin thinking in these terms.

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Appendix C

Bibliography

The scan was informed by a variety of materialsand publications. In addition to directly substantivesources on social entrepreneurship, philanthropy,and business social responsibility, references wereconsulted on organizational design and theory;business development; economic trends; leadershipdevelopment; and ethics.

The following bibliography includes most of thebooks and articles consulted either for compre-hensive study or for reference.

Philanthropy & Social Venture Capital:

“The Challenge for America’s Rich.”The Economist, May 30, 1998, 15-21.

“The Glories of Philanthropy.” Editorial, BusinessWeek, October 6, 1997, 182.

Barrett,Amy K., Regan Good and Manny Howard,“America’s 25 Most Generous Companies.”The American Benefactor. Summer 1998.

Crutchfield, Leslie,“Investors, Manna fromHeaven.” Who Cares, January/February 1998,37-38.

Frumkin, Peter,“Candor Comes First.” FoundationNews & Commentary,

Geier,Thom,“Average Americans, not the super-rich, are the real givers.” U.S. News & World Report,December 22, 1997, 68-71.

Gray, Susan,“A Former Insider’s Crusade toTransform Thinking About Corporate Giving.”The Chronicle of Philanthropy, June 4, 1998.

Letts, Christine,William P. Ryan, and AllenGrossman,“Performance Counts.” FoundationNews & Commentary, July/August 1998, 26-31.

Letts, Christine,William P. Ryan, and AllenGrossman,“Virtuous Capital:What FoundationsCan Learn from Venture Capitalists.” HarvardBusiness Review, March/April 1997, 2-7.

Hammonds, Keith H., Paul Judge, Richard A.Melcher, and Brad Wolverton,“A New Breed ofPhilanthropist.” Business Week, October 6, 1997,40-44.

Havemann, Judith,“Philanthropy:The NextGeneration,Young Millionaires Seek InnovativeWays to Donate Their Dollars.” The WashingtonPost, July/August 1998, 34-35.

Klingenstein,Andrew D.,“Hold Your Nose.”Foundation News & Commentary, July/August 1998,32-33.

Langley, Monica,“How to Succeed inPhilanthropy Without Really Giving Anything.”The Wall Street Journal, May 29, 1998.

Maclean, Charles B. and Jana B. Greenberger.1998. Philanthropy Now: Seeding the NewGeneration of Entrepreneurial Givers – Messages fromPhilanthropists and Could-Be-Philanthropists.Portland, Oregon.

Mannix, Margaret,“A How-To Guide for theSerious Giver, Of Trusts, Pooled Income, andFoundations.” U.S. News & World Report,December 22, 1997, 75.

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Other Resources:

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Business for Social Responsibilityhttp://www.bsr.org

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Cone Communicationshttp://www.conenet.com

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Fast Company Magazinehttp://www.fastcompany.com

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Joint Venture: Silicone Valley Networkhttp://www.jointventure.org

National Center for Social Entrepreneurshttp://www.socialentrepreneurs.org

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National Foundation for Teaching Entrepreneurshiphttp://www.nfte.com

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Newtithing™ Grouphttp://www.newtithing.org

Nonprofit Enterprise and Self-Sustainability Team (NESsT) http://www.nesst.org

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Wisconsin Women’s Business InitiativeCorporation http://www.wwbic.com

Women in Community Servicehttp://www.WICS.org

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