REDF – the evolution of a ‘venture philanthropy’ fund

Melinda Tuan

The Roberts Enterprise Development Fund (REDF) was not created as a venture philanthropy (VP) fund. We simply evolved our practice of philanthropy in order to meet the needs of our non-profit partners. It wasn’t until mid-1997 when a Harvard Business Review (HBR) article[1] touted the application of venture capital principles to foundation practice that we realized we were a ‘venture philanthropy’ fund. REDF is now considered one of the oldest VP funds in the world.

The HBR article argued that foundations should share risk with grantees; provide larger sums of money over longer time periods; closely partner with a small portfolio of grantees to build organizational capacity; measure performance; and ensure an exit strategy. Since 1990, REDF’s philanthropic practice has evolved to include each of these aspects.

The founding of REDF

In 1986, philanthropists George and Leanne Roberts created The Roberts Foundation to assist non-profit organizations serving the San Francisco Bay area. In January 1990, after several years of funding youth, education, animal welfare and arts organizations, the Roberts decided to turn their attention to finding ways to employ homeless people and launched the Homeless Economic Development Fund (HEDF).

By 1994, it was clear that non-profit-run social purpose enterprises held the greatest promise for employing individuals with multiple barriers to employment. It was also clear that these enterprises needed more money than the $25,000-$60,000 per year HEDF provided – and they needed more than just money.

If our non-profit partners were to succeed, we realized they needed a funder who was willing to take greater risks, invest larger sums of money over the long term, invest in organizational infrastructure, and provide them with hands-on assistance in building their enterprises. In January 1997, HEDF was reinvented as The Roberts Enterprise Development Fund (REDF).

The REDF approach

REDF’s mission is to create opportunities for homeless and low-income individuals to move out of poverty through training and employment in social purpose enterprises. Our strategy is to strengthen these enterprises and their parent organizations so they can train and employ more people.

REDF makes long-term charitable investments in portfolio members with annual grants ranging from $150,000 to $350,000 in total. These grants provide financing for organizational infrastructure and capital for the enterprise(s). REDF also provides strategic business assistance, organizational development support, access to business networking opportunities, social outcome measurement, and technological tools and training. REDF staff, many of whom have MBAs, and business and nonprofit backgrounds, meet monthly with each portfolio member’s management team as well as providing access to consultants in specific areas.

Signs of success

Since 1997, over 1,500 homeless and low-income individuals have been employed by the 20-plus enterprises in the REDF portfolio. REDF tracks each of these individuals for two years after they are first hired to see whether their lives have improved and whether they are less reliant on public services (see box).

The data show that positive change has occurred for employees across every category in every enterprise in the REDF portfolio and that most have decreased their reliance on taxpayer-funded social services. These outcomes are at least as good as or better than those found in the past two decades of US government-funded job training programmes, even though REDF employees typically have greater barriers to employment than those in government programmes.[2] Portfolio members report that REDF’s support is a significant factor in their success.

Lessons learned

In 1998, REDF conducted a comprehensive assessment of its approach to venture philanthropy, with an independent consultant interviewing key members of REDF staff and each portfolio member’s management team.

While portfolio members were generally positive about REDF, there were clearly a number of critical issues that were undermining our overall effectiveness. These issues included ambiguity about the terms of the relationship with REDF, the power dynamic inherent in the funder-grantee relationship, the pressure REDF placed on the enterprises, and REDF’s one-size-fits-all approach. Over the past few years, REDF has adopted five guiding principles[3] to help address these issues.

Five guiding principles

Clarity
Our portfolio members had little clarity about REDF’s expectations of them, the role different staff members and consultants played, and the conditions of renewing their membership in the REDF portfolio. We are now using a Memorandum of Understanding (MOU), signed by both parties at the beginning of each year, detailing both REDF’s expectations in terms of agency and enterprise performance and what the non-profit can expect from REDF. The MOU spells out the timeframe for investments, the process for making decisions about grants, the frequency and type of communications, and many other aspects of the complex relationship we have with each portfolio member.

Communication
In order to bring additional clarity, REDF has developed more extensive written communications with portfolio members. Twice a year, REDF and the non-profit assess each other across several criteria laid out in the MOU. REDF holds monthly venture committee meetings with each portfolio member to discuss how the agency and enterprises are doing. REDF’s business analysts meet regularly with the business managers, and REDF’s managing director meets quarterly with the non-profit’s executive director and periodically with the agency’s board of directors. This increased communication has proved invaluable in building more productive working relationships.

Customization
When we began our work in 1997, we had an unspoken desire that every group would use everything we had to offer. When groups did not take up our proffered support (or felt coerced into using assistance they felt they didn’t need), it created tension and resentment in our working relationship. We now assess each organization’s ability to benefit from each type of support REDF provides and customize our approach and expectations accordingly.

Collaboration
Over time, we have moved from pressuring the non-profits to aggressively grow their enterprises to developing appropriate financial and social outcome goals together. We emphasize partnership in problem-solving. Key to this is creating an environment where problems can be discussed openly. We have worked hard to minimize the traditional funder-grantee power dynamic by seeing ourselves as facilitators rather than authorities. We continually critique our organizational and individual attitudes and interaction styles and ask for feedback from our partners.

Consistency
In our early years, we were not consistent in the messages we sent to the non-profits. Different REDF staff would communicate conflicting expectations. We have worked hard to ensure that our communication with portfolio members is consistent. We hold weekly ‘portfolio review’ meetings with all REDF staff who interact with portfolio members to discuss the status of the organization/enterprise(s), the message that has been communicated and needs to be communicated with the organization, and the appropriate person to convey that message.

Unanswered questions for the future

Many questions remain unanswered. How much of the success of the enterprises and non-profits can be attributed to REDF’s involvement? Could these results have been achieved in another way? What is the true impact of REDF’s work with individual portfolio members? What impact, if any, did REDF have on the organizational effectiveness of non-profits that left the REDF portfolio? How can REDF increase its impact on organizational effectiveness? In 2002 and beyond, REDF will be pursuing the answers to these and other questions, and by continually sharing what we learn, we hope to contribute positively to this evolving field of venture philanthropy.

Melinda Tuan is Managing Director of REDF. She can be contacted at mtuan@redf.org

1 Letts, Ryan, Grossman, ‘Virtuous Capital: What foundations can learn from venture capitalists’, Harvard Business Review, March/April 1997.
2 51% of REDF Portfolio enterprise employees are homeless or at risk of homelessness at time of hire, 44% had mental health issues at time of hire, and 32% had been convicted of a crime at some point before they were hired.
3 See Melinda Tuan, ‘REDF: Reflections on five years of venture philanthropy implementation’, in Venture Philanthropy 2002, pp25-27, available through the Venture Philanthropy Partners website at http://www.venturephilanthropypartners.org

For more information The following are all available through the REDF website at http://redf.org/pub_other.htm

Social Purpose Enterprises and Venture Philanthropy in the New Millennium (1999) esp Chapters 2, 3 and 6.
New Social Entrepreneurs: The success, challenge and lessons of non-profit enterprise creation (1996).
Kim Alter et al (2001) Time to Say Goodbye? Exit strategies andventure philanthropy funds.
REDF’s SROI Reports, detailing the SROI of 11 REDF portfolio enterprises.
REDF’s SROI Methodology.
REDF’s SROI Excel Model.

REDF statistics

2002 budget $3.6 million.
Typical financial investment $150,000-$350,000 per year.
Length of investment 2–13+ years.
Current portfolio Seven non-profits running 20 enterprises.
Investment tools Grants, cash guarantees, cash flow advances, recoverable grants, revolving loan fund (3% interest rate).
Financial return on investment (ROI) expected None.
Social ROI expected See below.

Social return on investment

REDF believes the social and economic value created by the non-profit sector has not been appropriately tracked. As the non-profit sector continues to compete for charitable dollars, it will be increasingly important to go beyond evaluating whether a programme is a ‘good cause’ to analysing if it can be considered a ‘sound and smart investment’.

Therefore REDF attempts to calculate the social return on investment (SROI) of its portfolio of social purpose enterprises. It does this by:

  • describing and analysing the impact of these enterprises on the lives of individuals;
  • calculating the tax dollars saved by helping people reduce their dependency on public assistance, homeless shelters, and other government-supported services.

In order to measure the impact on individuals, REDF collects social impact data on each individual employee to assess whether employment in a REDF social purpose enterprise is associated with improvements in their lives. This is done through a baseline survey at the time of hire and follow-up surveys every six months for up to two years.


Comments (0)

Leave a Reply

Your email address will not be published. Required fields are marked *



 
Next Special feature to read

Funding civil society in tough places

Alliance magazine