Non-profits in ventureland

Bruce Sievers

Venture philanthropy’s attempt to apply venture capital investment principles to social problem-solving has exerted strong appeal to the foundation world during the past few years. I do believe there are important lessons for the non-profit world to learn from the for-profit world – mostly in the realm of management and operating efficiencies. However, there is a real danger that seeking to translate the complex normative and institutional dance of social change into a simplified model of economic transfer will result in a corresponding loss of some of the uniquely defining characteristics of civil society.

The potential contributions of the venture capital model are clear. Many non-profit managers can gain from improving the use of technology, employing more sophisticated management techniques, financial instruments and approaches to client service, and adopting creative problem-solving strategies. Imposing the strategies and disciplines of business on non-profits can yield greater attention to organizational strength and desired results than occurs in many traditional ‘grantor-grantee’ relationships. These are valuable contributions that can help improve efficiencies in the non-profit sector.

An inappropriate conceptual framework

The downsides of venture philanthropy are somewhat less obvious. The conceptual framework of the market comes with its own assumptions and requirements: the investor begins to see his or her commitment of funds as requiring a return, if not in monetary terms, at least in some measurable terms – hence the quest for ‘benchmarks’, ‘metrics’, and other forms of quantifiable outcome. The means become much less important than the ends and the ends themselves become ‘proxies for profit’ – outputs that justify the monetary inputs. Why does this matter?

The answer lies in the fundamental differences between the two kinds of human endeavour. Business and philanthropy (or for-profit and non-profit enterprises) diverge in goals, aspirations, assumptions and success criteria. To take just one example, the concept of a ‘volunteer’, so central to the nature of non-profit work, has no application in the for-profit world (unless perhaps referring to those who give up overbooked airline seats). Each world performs a vital social function, but they are different functions.

Four specific areas stand out in which the translation of business practice into social problem-solving does not work well or at all. The nature and extent of these limits lie at the centre of the venture philanthropy debate. Further, I submit that these are areas in which the reverse may be true: non-profit practice might actually have something to teach business professionals when they venture into the social problem-solving arena.

The bottom line

The ultimate goal and test of success of a business investment is the level of profit. But what does this mean when translated into the social world? Although there is much talk of ‘social metrics’ and similar attempts to measure numerically the results of philanthropic investments – seeking to create an equivalent for profit for social enterprise – I suggest that such efforts are inherently flawed. The transferability of the business model is limited by the simple fact that, while money is the single medium of exchange for business, it is not for philanthropy. Non-profit activity has a complex and often intangible range of aims – from creating an exciting new work of art to shaping social policy to catalysing a change in someone’s life that may play out over decades. This is not to say that attempts to measure outcomes of non-profit work are useless, just that they tell only part (and sometimes a small part) of the story. Non-profit work is more like ‘investing’ in a marriage or raising children than it is like producing a product.

Going to scale

In the business world ‘going to scale’ implies a drive towards increasing market share, which some tout as the key to success in the Darwinian world of business competition. This has little relationship to the non-profit world. I was told recently of a successful businessperson seeking advice about philanthropy who seriously posed the question, ‘In the non-profit world do we crush the competition?’ We smile, but this is what philosophers call a classic category mistake – misapplying a concept from one frame of reference to another. While large non-profits can perform valuable roles, a primary purpose of non-profits is not to gain market share at the expense of the competition but to meet highly differentiated and pluralistic social needs.

This is not to deny that there are in many cases economies of scale and great efficiencies for non-profits that can grow and move beyond very parochial or localized interests, perhaps to have national impact. There’s nothing wrong with a non-profit growing sufficiently to face large-scale issues; the problem is what it may have to give up to get to that position. Some non-profits – as illustrated recently by the difficulties faced by the Red Cross in the US –have really got so large that they’re bureaucratic, ponderous, slow moving. In fact, they’ve lost many of the characteristics that they had when they started off as small, visionary non-profits. So it’s a matter of trying to maintain the balance between size and economy of scale on the one hand and the nimbleness, pluralism and local responsiveness typical of the emerging non-profit.

Control

The relationship of the investor (donor) to the investee (donee) raises the complex issue of control. Unlike venture capitalists, who gain an ownership role in their companies and rightly assume a strong role in management, philanthropic donors are supporters of enterprises that have a pre-established mission (unless of course the donor creates the organization) that is the product of a vision of a founder, board of trustees and/or membership. Philanthropic dollars are a necessary ingredient but not the point of the undertaking. A strong-willed funder can be inordinately intrusive in an organization’s decision-making processes, and wresting control from a non-profit is not good philanthropic practice.

Exit strategy

Last is the issue of exit strategy. In venture capitalism, the return to the investor occurs at the time of a successful public buy-out. This does not happen in the non-profit world, so at what point does the investor withdraw support?

This has long been a difficult question for foundations, but the venture philanthropists do not have any new answers. Among the three possible income streams for non-profits – government, earned income and contributed income – the first two usually have clear limits, often already reached by the organizations. This leaves contributed income. Who is supposed to pick up the tab when the venture philanthropists leave? I suspect it is other foundations, which is not exactly a new solution to the age-old problem of long-term funding.

The nature of civil society

Ultimately, the issue comes down to the purpose of philanthropy. Is it an investment by a wealth-holder aimed at achieving a product or outcome that creates a return that satisfies the investor’s requirements or a form of support for complex work in society? At stake is the nature of civil society. The defining elements of civil society include: the continuing formation and redefinition of ends and purposes (resisting translation into narrow bottom lines), pluralism and responsiveness to the differentiated needs of communities (resisting ‘going to scale’), the democratic nature of governing structures in civil society (maintaining a degree of independence from investors and state authorities), and a desirable reliance on volunteer and donations as a means of being steered by other than political or commercial forces.

While the non-profit arena can benefit from the application of business techniques in many ways, the worlds of non-profit and business enterprise are sufficiently different to require very different approaches to the use of resources. The power of the market does not necessarily translate into social wisdom, nor does social wisdom often translate into market success. Along with mutual learning, it is important to understand the distinctive contribution of each.

Bruce Sievers is Executive Director of the Walter and Elise Haas Fund, San Francisco, USA. He can be contacted at bruce@haassr.org


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