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JUL 2007
Editor’s Note: This column is the first in a two-part series. Chairman Mario Morino describes the evolution of the term “philanthropic investments,” its underlying assumptions, and how these concepts apply to a narrowly defined group of nonprofit organizations. Carol Thompson Cole, President and CEO, will describe VPP’s specific approach to philanthropic investments in the September issue of VPPNews.
 Compared to a decade ago, there is an increased use and greater acceptance of both the term and practice of “investment” in philanthropy. Nonetheless, “investment” used in conjunction with philanthropy remains controversial, often blurred by ambiguity, confusion, misinterpretation, and lack of a common understanding. For Venture Philanthropy Partners and others with similar missions, this often makes our work more difficult as we find the need to explain the “what, why, and how” of what we do as a “philanthropic investment” organization—to our investment partners (the nonprofit organizations in which we invest), our investors (the donors who trust their philanthropic monies to us), and other stakeholders (spanning foundations, government agencies and officials, community activists, and a range of thought leaders).
The Evolution of the Term “Philanthropic Investment”
Consider these definitions from the dictionary:
Investment – the "action of putting something in to somewhere else" perhaps originally related to a person's garment or vestment. A traditional definition is the “investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.” A more generic view is “devoting, using, or giving of time, talent, emotional energy, etc., as for a purpose or to achieve something.”
Philanthropy – the “altruistic concern for human welfare and advancement, usually manifested by donations of money, property, or work to needy persons, by endowment of institutions of learning and hospitals, and by generosity to other socially useful purposes.” Another view is “the act of donating money, goods, time, or effort to support a charitable cause, usually over an extended period of time and in regard to a defined objective. In a more fundamental sense, philanthropy may encompass any altruistic activity which is intended to promote good or improve human quality of life.”
I suggest a derivative of the above:
Philanthropic Investment – an action rooted in an individual’s or foundation’s generosity and altruistic concern to promote good or improve human quality of life that devotes, uses, or gives money, time, talent, emotional energy, etc., over an extended period of time, to gain social returns defined by a specific objective, purpose or result.
I admit I did not always have an informed view of what we now advance as “philanthropic investment.” Back in 1998, I was armed only with my entrepreneurial, business, and venture capital investment experience, six years of working with nonprofits, and virtually no experience in working with foundations. I wish I had been smart enough then to embrace the term “philanthropic investment,” since it appears to be a more apt description of what VPP does than terms like venture philanthropy, highly engaged philanthropy, social ventures, and others.
We might have been better off to have followed the path of Michael Bailin, then President of the Edna McConnell Clark Foundation. Mike and his successor Nancy Roob are good friends, trusted colleagues, and a source of inspiration and guidance for our work. When I first met Mike in 2000, he insisted on using “plain English” to describe their approach as he was transforming the foundation’s grantmaking. For him, the communication was clear—it was about making their grantmaking more effective. This was the right course at the time as they were working within the foundation world, their approach was already provocative, and he was striving to gain acceptance of their groundbreaking work. As the use of the term “investment” became more generally accepted in philanthropy, their website was updated to read “The Foundation believes that significant and long-term investments in nonprofit organizations with proven outcomes and growth potential is one of the most efficient and effective ways to meet the urgent and unmet needs of low-income youth.”
Using “plain English” is something that I will seldom be accused of. First, I probably am incapable of “plain English,” no doubt stemming from my software designer/developer DNA, where creating new acronyms was a daily foot race and defining new terminology the way to lay claim to a brand new market opportunity. But, I like to think there is a more strategic reason. We wanted to influence a change in mindset about philanthropy over the long run. Inherent in our approach was the use of investment terms and metaphors to encourage philanthropic and public funders to think more as investors, when applicable. This implied fewer, but larger, investments (still legally grants with no financial return); more analysis and due diligence in selecting and understanding the nonprofits; investing in organizations and its leadership versus individual programs; a horizon of three to five years (or even longer); using the funds to build stronger, more effective organizations; and being more outcomes-focused.
Our mistake wasn’t in using new terminology, for I will argue we were one of the voices that helped nudge the broader use of “investment” thinking in philanthropy, but our insensitivity to the field at large. We didn’t take the time or give due respect to the experience of others who had plowed these fields before us. We inadvertently conveyed the impression that our approach was a better way of doing philanthropy. As a generalization, that was outright wrong. Now, we believe we can demonstrate that our investment approach is effective in meeting the needs of a narrowly defined class of nonprofits.
Taking An Investment Approach to Philanthropy
Through my work with nonprofits and my own private sector management, acquisition, and investment experience, I recognized there was, and continues to be, a philanthropic and public funding void in supporting the growth needs of a certain class of nonprofits and their leaders. These organizations had achieved a level of tangible success and demonstrated that their approach to meet a core problem worked, had a bold vision to substantially grow their impact, and fit a rigorous set of investment criteria that gave them a reasonable confidence they could achieve their aspiration. If they had access to critical growth capital and strategic assistance, they would be able to take their organization to a whole different level of performance.
In late 1999, the “obvious” became apparent. The high-quality investment partnership my firm (an emerging and growing software business) and I had enjoyed with General Atlantic LLC, a premiere private equity investment firm, could be the model for how investments could help great leaders build stronger, high-performing nonprofit institutions. And, with large investments of capital and strategic assistance, we could help fill the void in supporting the aspirations of nonprofit organizations that have done great things and have the potential to truly scale their impact. Thus, inherent in our approach from the beginning was a focus on specific types of nonprofits, regardless of their organizational stage (stage independent). In effect, a slice along the philanthropy spectrum—never the gamut—where an investment approach would prove of value to gain a higher social outcome and return.
Semantics aside, the true challenge remains in implementing and demonstrating our view of “philanthropic investment.”
Investment is both art and science. At the core of great investing—private/venture equity or philanthropic—are judgment and a touch of clairvoyance. A great investor has the uncanny ability to see opportunity where others don’t and quickly ascertain if the critical conditions are there for the opportunity to be realized. This judgment is then, of course, validated (or rejected) by a more rigorous investment analysis and final due diligence. I can’t overemphasize the importance of keen judgment, following Peter Drucker’s adage that “it is more important to do the right thing, than to do things right.” It not only applies to selecting opportunities with the potential for greatest impact, but it proves to be the most important value we bring to our nonprofit investment partners throughout the investment partnership.
By definition, it is an outbound, not inbound, process. A great investor does research, often focused on particular sectors; develops an investment strategy; and scans the environment to find those investments with the greatest potential for highest returns. In VPP’s case, these are social returns defined by results in the form of healthier, better educated, better supported children and youth of low-income families, with greater access to opportunity and resources. Following the lead of one of the world’s premiere private equity investing firms that seldom accepts incoming business plans, VPP has adopted a policy not to accept applications, although we are always open to input, leads, and suggestions. We work on the assumption that having hundreds of applications draws us into myriad detail that inhibits us from focusing on the big picture that will lead to the highest potential opportunities. Defining our own investment hypotheses and, then, through extensive, often informal scanning and landscaping (the venture capital term), finding investment opportunities with the potential for the greatest social return and long-term impact helps us be more effective.
The grant application process has worked very well for many other levels of philanthropy, as illustrated by the Case Foundation’s Make It Your Own Awards™, a recently announced program which provides funding for “citizen-centered” approaches to making the world a better place.
An investable opportunity is about what “can be” versus what is or what has been. The term “investable opportunity” has created more confusion (and discussion) within our organization than perhaps any other. Why? It is abstract, conceptual, and, therefore, not readily amenable to a grant application or even a well-done checklist of criteria. Framing an investable opportunity is a result of judgment and the ability to factor in the intangibles.
Let me use an example of one of our investment partners, the See Forever Foundation/Maya Angelou Public Charter School. The following is an excerpt from VPP’s Investment Rationale and Recommendation (IRR) memorandum, which was presented to the VPP Executive Committee (acting akin to a private equity firm’s investment committee) in the summer of 2002. The IRR captures the “investment opportunity,” which is described by the organization’s aspiration.
Organization’s Aspirations/Growth Plans: The See Forever Foundation presents a strong a combination of extraordinary leadership, an innovative and effective model and the potential to change a sector and influence public policy on an intractable national social problem. The See Forever Foundation is now looking to establish three new schools in the Washington area over the next five years. Each school would serve approximately 80 to 100 youth, which would quadruple their annual student enrollment to more than 300 students. While the new schools would be based on their original Maya Angelou model, there would be variations based on the neighborhood they enter and the new school leadership. Their plans also include continuing to refine and improve their education, counseling and employment training program, promoting their methods as a national model for other localities to adopt, and influence local and national policy affecting the highest risk students, in particular those that are involved with the juvenile justice system. Likewise, See Forever’s expansion will increase its capacity to develop new curricula and teaching methods, which can then be widely disseminated.
The success and replication of Maya Angelou can also raise the bar for urban public education both here in DC and beyond. The program’s success can influence public policy and funding decisions affecting programs for high-risk youth nationwide. Run as a high-caliber organization with exceptionally successful academic and social results, Maya Angelou is demonstrating what is possible for students who have been virtually written off by others. The success of its replication can help raise expectations of both policy makers and funders.
The great news is not only that the organization will achieve its aspiration, but there is a high likelihood they will exceed the expectations we all had!
An aspiration cannot and should not be fabricated for a funder—it must be defined and “owned” by the nonprofit, it must be theirs. Although VPP will always have a view of what a particular organization can achieve, in the end, our opinion is not relevant. The organization’s aspiration (the investable opportunity) can’t be VPP’s vision for change or what folks at VPP think possible. Rather, and emphatically, it MUST be the aspiration of the nonprofit’s leadership. But, this can present a real conundrum. The historical relationship between donor and grantee is often driven by the donor’s needs, with the recipient organization adjusting, sometimes bending like a pretzel. Thus, when we hear “tell us what you want,” we know we have not clearly conveyed our investment approach. And, this is made more difficult as great nonprofit leaders, seeking the kinds of funds an organization like VPP can provide, begin to craft a vision to this end alone. Sadly, even if they become an investment partner, chances are it will be less than successful as the right principles of ownership were never established.
An aspiration is bold, plausible, and benefits from the deep conviction of its leaders. First and foremost, the aspiration focuses on how the lives of children and youth, relative to core needs, will be improved. Increasing numbers of children served, opening new locations, building a stronger, high-performing nonprofit are all great “process” achievements, but ALL must be viewed as a means to an end. The end result is judged in terms of the improved lives of children and youth of low-income families and, ultimately, the impact these children and their families have on their communities, our region, and society overall.
Because a VPP investment generally involves several million dollars in funding, the projected social return or impact must be very high—positively affecting thousands of children. This impact can be a change in direct service, e.g., VPP Investment Partner Mary’s Center for Maternal and Child Care has been able to provide healthcare for another 4,800 children. But, the impact can also result by “resetting the bar” for performance or what is possible in the field, where sheer achievement can send a ripple effect across scores to hundreds of other nonprofits and, hence, benefit thousands to tens of thousands of children and youth. We believe that the work of See Forever Foundation, described earlier, and Friendship Public Charter School, showing that an urban school can succeed, are two such examples.
Bold change is not for the faint of heart. Just as in the private sector, nonprofit leadership must believe strongly in their future. And, yes, the leader or leadership that is obsessively compelled or, even in the eyes of some, irrationally driven, is a necessity as it takes this extreme commitment to fully succeed. Fortunately, we see this type of leadership in a number of VPP’s investment partnerships, and it is these nonprofits where the gains and achievements have been the greatest.
There also must be the reasonable likelihood of securing funding sources to allow for stable and sustainable ongoing operation and the willingness and organizational culture that can absorb the difficult change such a transformation requires. Leave no doubt, a bold vision for change in impact means nothing short of organizational transformation, which I believe is the “secret sauce” of great institutions that are able to re-invent themselves to respond to changing times.
Bottom line: There must be bold vision for change, clear indicators that the readiness to grow and build is present, and the leadership that will take the organization from what it is to what it needs to be to fulfill its mission and aspiration.
Different Mindsets for a Remarkable Era To Come
The act of philanthropic investment is grounded in a different attitude toward philanthropy, not universally applied but appropriate to the types of nonprofit organizations VPP engages and supports. It requires a bold and highly trusting mindset from our investors—as they are often putting their own recognition second to knowing that their philanthropic monies are having greater impact. It requires a radical mindset change by the nonprofit leaders who choose to accept our investments, for expectations are high as they grow to think differently about what is possible, exert greater managerial rigor, establish transparent accountability, and learn to leverage the investment partnership with VPP, all while holding true to mission. Similarly, it is a different mindset on the part of co-investors and other partners as we see true collaboration, grounded in a common acceptance of our investment approach and practice, as vital and critical to our investment partners and our own success. And, it is even a different mindset for those who make up the VPP team. Each member of our team shows care and concern for the lives of children, but each must also believe in the VPP vision that this is about a different way—philanthropically—to have impact for children while maintaining a respect and appreciation of the work and achievement of the conventional field.
Philanthropic investment has always existed. In its most basic sense, John D. Rockefeller defined it in the Golden Age of Philanthropy. But, the more intense version that now applies some of the practices of the venture and private equity worlds (which themselves only came of age over the past 30 to 40 years) holds great promise for the field. The level of wealth creation, the interconnectedness of a “smaller world” made possible by technology, and the sheer volume and velocity of change is creating a new era that will ultimately impact public policy and funding and has potential for even greater social impact.
We all need to do more to move beyond terminology and focus more on the substance of our respective work. We need to move beyond allowing differences to keep us from working together and leveraging our complementary resources and purpose.
The long-established and traditional foundations and philanthropic families need to do more to move out of their comfort zones to benefit from the important lessons being learned by the newer players and different approaches that can be more broadly applied.
And the newer players must keep being entrepreneurial, driving change. But, we should also step back to better understand the needs and values of those we seek to serve, recognize the complexity of social issues and communities, and have a greater respect for the legacy of experience and achievement that has plowed the way to where we are today and is giving those of us in this new philanthropy “the gift” to make a difference for others.
- Mario Morino
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