Cash of the Titans

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When you first walk in the door, Citizen Schools feels like any other kid-friendly nonprofit. The Boston-based organization runs after-school programs in which local citizens teach 1,300 teenagers professional skills—from building robots to cooking to publishing a newspaper. The afternoon I visit, the kitchenette is filled with small gangs of young and animated staff plotting this spring’s programs, amid the stench of burned microwave popcorn.

Citizen Schools aims at that devoutly wished-for and amorphous goal of all youth services: making the kids feel good about themselves. But the staff here have another goal, and it’s considerably less touchy-feely. They’re working to turn this nonprofit into a thriving, entrepreneurial business.

Head over to the corner desk of Eric Schwarz, the group’s energetic president and cofounder, and you’ll find yourself talking to a guy who describes his success in classic marketplace terms—speaking a lingo not unlike that of the high-tech entrepreneurs of the recent giddy boom. For him, the teenagers are “customers” to be served, who’ll “vote with their feet” if they don’t like the “service.” He uses an elite corporate management tool from the Harvard School of Business to track Citizen Schools’s goals, which include launching a $25 million fundraising campaign, maintaining a budget surplus, and achieving an “aggregate quality rating of 4.1 on a 5-point scale… from stakeholders”—those being students, parents, and staff.

Schwarz motions around Citizen Schools’ big, funky office: “I think of this as a very successful start-up,” he enthuses. “We’ve built a bit of a better mousetrap. We’re delivering services in a new and creative way, and getting results.”

In the last two years, Schwarz and his Citizen Schools cofounder, Ned Rimer, have had a burst of support in this goal, from a young Boston-based organization called New Profit. Last year, New Profit gave them the first installment of a four-year, $1 million grant, as well as hours and hours of hands-on input from Monitor Group, a leading management consulting firm. Together they’ve helped craft Citizen Schools’ business plan, done extensive CEO-style consulting with Schwarz, and developed strict performance measures they review quarterly and annually to make sure the nonprofit accomplishes everything it’s promised to.

“We’re helping nonprofits figure out what the economic denominators are, being very rigid and making tough decisions and saying, ‘Should we do this new program, is it cost-effective, is it sustainable?’” explains Vanessa Kirsch, New Profit’s president and cofounder. “Our donors are looking for results. They want to see the nonprofits really thriving.”

The people giving the money, in this case, are known to Citizen Schools as “investors”—a group culled primarily from Boston’s technology-rich venture capital community that is convinced Citizen Schools and the four other Boston organizations New Profit is currently funding will get results for the $11 million they’ve put in so far. At Citizen Schools, results are teens who’ve improved their academic skills. Kirsch expects just two things from New Profit’s investments: that they result in social change, and do it in a big way. “I know there are a lot of hot nonprofits out there,” Kirsch says. “We’re going to help them really take off.” Money in, hard results out; it’s an entirely new type of relationship between a nonprofit and its benefactor. Foundations have traditionally kept an arm’s-length relationship with the organizations they fund, granting money for good works, asking for reports, occasionally commissioning outside evaluations, but mostly keeping their distance—the assumption is that the nonprofit knows best how to run itself. The foundation’s money might have originated in the cutthroat corporate world, but once it’s in the hands of the nonprofits, a separate culture is presumed to take over: nonprofits are supposed to behave differently than corporations, because they’re seeking social change.

New Profit, in contrast, embraces corporate culture and thinks its nonprofit beneficiaries ought to, too. It picks organizations that already have lively, entrepreneurial leaders, puts them through an intense due-diligence process, then ushers them through boot camp in for-profit management techniques, all before handing them their first check. The goal is to help the nonprofits develop their own self-sustaining revenues and grow, grow, grow—citywide, even nationwide.

Kirsch’s way of doing business has come to be known as “venture philanthropy,” a mini-movement modeled on the aggressive practices of venture capitalism. Born out of the pro-market, can-do vibe of the high-tech boom, venture philanthropists don’t merely give money away; they invest it. And, like all venture capitalists, they keep close tabs on how their investments are performing—helping them with administrative planning, but also demanding that the nonprofit produce some serious results. “It’s an investment relationship,” Kirsch says. “We’re producing social capital.”

Venture philanthropy is still a small phenomenon. There are only 37 organizations like New Profit in existence, according to a study by the Morino Institute, a group that researches tech-industry efforts to promote social change. But the movement is growing rapidly; three-quarters of all venture philanthropy funds started up in just the last two years.

Venture philanthropy is suffused with talk of the new, but it’s also a barely disguised backlash against traditional charitable giving. They believe that the foundation world is broken—that traditional foundations are too stingy, and nonprofits too timid in their goals. Both, they say, need the excitement and rigor of the free market.

That suggestion has provoked heated, almost vicious criticism from traditional philanthropists and nonprofit leaders. The whole point of nonprofits, they argue, is to take care of people who aren’t getting served by the marketplace. Venture philanthropists, critics contend, are intolerant of grim, entrenched social problems, and focus only on ones that respond to sunny entrepreneurial optimism—technology training, yes; tenant organizing, no.

“This is just a bunch of people who’ve gotten lucky in the boom thinking they now know how to save the world. But they’re probably more likely to screw up nonprofits than help them,” says Pablo Eisenberg, senior fellow at the Georgetown University Public Policy Institute and a frequent critic of the philanthropic establishment. A granting director at a major New York foundation shares Eisenberg’s dim opinion of for-profit prowess: “Half of these people ran businesses into the ground, and they think they’ve got it figured out? Give me a break.”

At the same time, some of the most enthusiastic adherents to the new management model are coming from the ranks of traditional philanthropy. Starting this year, the influential Edna McConnell Clark Foundation is focusing funding on the institutional growth and development of a handful of organizations, demanding greater accountability and business acumen in return. “The debate is explosive,” says Bruce Trachtenberg, director of communications for the Clark foundation. “The philanthropic community has not had a conversation like this for years.”

There is one thing everyone can agree on: the ways nonprofits currently get funded can be a draining dead end. Just 13 percent of all foundation grants are for general operational support—to pay for salaries, rent, paper clips, the basics. Much of the rest is designated for specific programs that often have more to do with a foundation’s priorities than those of the groups they fund. At most nonprofits, overworked development staff spend their days scrounging for those one-year grants, then twist their goals into pretzels trying to satisfy their narrow terms—inefficiencies that would be unthinkable in for-profit business. Says Neil Carlson, director of communications at the National Committee for Responsive Philanthropy, “That critique is shared by everyone in the nonprofit world.”

From previous experience, Vanessa Kirsch concurs. In 1991, she founded Public Allies, an organization that paid young people to do apprenticeships making a difference in their communities. It quickly grew to six cities nationwide, and Kirsch raised $9 million to make it happen. But her success was won bitterly: by Kirsch’s estimates, she spent over 90 percent of her time fundraising. Foundations preferred to give one-year grants; worse, they were usually designated for special projects instead of what she really needed, which was money for the everyday costs of keeping Public Allies going. Kirsch wanted to “scale” the organization—to keep growing it across the country—but foundations were mostly useless in that objective. On the contrary, they figured that since Public Allies was now well established, it didn’t need help—they wanted to focus on fostering new and struggling nonprofits, not making big ones bigger. “Foundations began telling us that we were too successful,” Kirsch says, incredulous. It was crazy, she thought; why punish success?

Kirsch decided the culture had to change, so that nonprofits could get longer-term funding and support to help them grow. She started researching venture philanthropy—a concept popularized in a 1997 Harvard Business Review article called “Virtuous Capital,” which argued that charitable giving ought to function more like for-profit venture capitalism. In venture capitalism, Kirsch notes, investors don’t just hand over a check to a worthy company; they vet their investments closely and offer their expertise in business-building.

Investors may be willing to pitch in time and money, but they also need to see results. To try and track this amorphous stuff to the satisfaction of her venture-capitalist donors, Kirsch turned to a business tool called the “Balanced Scorecard.” It was originally developed in 1992 by Harvard business professor Robert Kaplan, to help companies measure their performance in similarly nebulous areas—like “innovation” or “customer satisfaction.” Companies, he realized, frequently ignore these areas because they’re not easy to measure, but they’re crucial to running a profitable business.

With Kaplan’s blessings and input, New Profit and Monitor Group spent long hours working with Schwarz and his staff to develop measurements and goals. At the end of each year, Citizen Schools and the Monitor Group would collect data to see whether each measurable goal was met. If so, New Profit would agree to cut the $250,000 check for the next year. And if not? The bottom line is that if an organization misses its goals “in any serious way,” says New Profit investor relations manager Victoria Jette, they could be cut loose. “We’re prepared to have some of our portfolio organizations fail.” The expectation, though, is that investors will have plenty of warning if a nonprofit is in trouble, and can intervene to help fix it.

“The danger,” Rimer admits, “is that you can be seduced by things that are easy to measure, like attendance and grades on tests.” Another longtime staffer, Stephanie Davolos Harden, says she welcomed the shift to hard numbers. “But it wasn’t easy. You’re taking all this stuff that used to be qualitative, and making it quantitative.”

The political value of statistical goals is easier to see. “You can go to people and say, ‘4.2 out of 5 parents like what we do.’ That’s powerful!” Nagraj says. School boards, Rimer adds, are deeply impressed by the measures. “Even if there was no funding from New Profit, I’d still want to do a Balanced Scorecard. Because at the end of the year, you can go to employees and say, ‘We had a good year.’” Indeed, when they met their goals for 2000, Citizen Schools staff got bonuses of up to $2,500.

There is also more serious money to be made with the numbers. New Profit is showing Citizen Schools’s Balanced Scorecard to other venture philanthropists, as a way to help Schwarz hit his fundraising goal. The day after I met him, Schwarz headed to San Francisco, where New Profit had brokered a meeting with the Pisces Foundation. “It’s something you always see in the for-profit world,” notes Michelle Boyers, who heads New Profit’s New York office. “It’s syndicate funding. A venture capitalist takes a company, does its due diligence, checks out all the fundamentals and then invests in it. Then it takes it around to all its friends and says, ‘Hey, this company’s great, you should get in on it’.” This sort of networking relies on everyone trusting the first investor to have done the hard work and number crunching that “proves” the company is a good bet.

Venture philanthropy, some critics argue, exhibits a dangerous arrogance toward nonprofits, regarding them as know-nothings in need of the free market’s saving graces. By pushing measurement and accountability so fervently, they suggest that most nonprofits are slackers in need of babysitting—soft-headed liberals wasting money on dubious feel-good projects.

It’s not as if traditional foundations simply hand over checks, points out Rick Cohen, head of the National Committee for Responsive Philanthropy; they also ask for results. While he agrees with some of Kirsch and company’s criticisms, he thinks venture philanthropists overstate how hapless most nonprofits are. “They have to run very tight ships. They have to be accountable, or they won’t get funding,” he notes. “They’re more careful than most businesses, actually.” If they don’t seem to be quickly and dynamically “solving” poverty or inequality, he says, it’s because those problems are deeply ingrained; if the attention spans of high-tech donors can’t handle that, that’s their fault, not the nonprofits’.

The for-profit world is hardly a paragon of success. Quite the contrary; it relies on a constant slew of dismal failures to produce a few occasional winners. It’s a business axiom that eight out of 10 entrepreneurial enterprises collapse in barely a year or two. “If business, with its enormous capital, can’t produce a success, then how the hell can you expect a nonprofit to do so, following the same model?” asks an angry Pablo Eisenberg.

Critics wonder about the bias in venture philanthropy toward revenue-generating models. What about social problems with less obvious—or nonexistent—sources of revenue, from poverty to violence against women? “The whole point of foundations is that they serve people who’ve been abandoned by the marketplace. How can you suggest the marketplace can come in and help them out?” asks Cohen.

Judgment about what is or isn’t viable in the marketplace can also become highly political. Another philanthropic worker recalls sitting in on a meeting of venture philanthropists who shied away from funding any group with radical views on social justice—they felt the groups were not looking at “solutions,” and that they didn’t have sufficiently entrepreneurial leaders. “The idea of social entrepreneur is, to be frank, very much about race and class,” he contends. “Because when you look at who’s getting all this money, it’s very much the upper-middle-class people, the college grads who have a great social conscience. And that’s great. But you have to be able to talk MBA talk, about scaling and all that—and in, say, the South Bronx, there are few people with a social commitment who talk that way.”

Mind you, the venture philanthropists themselves don’t refute these charges. Quite the contrary: They go out of their way to note that their approach isn’t always suitable. They are not, they say, presuming to solve every social problem, or shoving the free market at everyone. “We are not in the business of injecting entrepreneurship into organizations,” Boyer says. “We pick ones that already have it. It has to be a ‘fit.’” Indeed, a recent study of venture philanthropy by the Morino Institute, otherwise supportive, warned that one serious problem is this very “fit”: finding nonprofits that won’t crumple under the weight of striving for aggressive growth. Growing too quickly has killed many for-profit companies, and the danger is similar for nonprofits.

Venture philanthropists are becoming keenly aware of this hazard. Joe Shoemaker, executive director of Social Venture Partners in Seattle, says they have to be careful when working to help a nonprofit develop business plans. “We can screw things up if we don’t listen to what they need,” he admits candidly; an organization needs not only to have a growth plan, but staff and leaders who fully support it.

This abbreviated version of “Cash of the Titans” is reprinted with permission. The full-length version originally appeared in City Limits, April 2001.
See Community Wealth Ventures, Inc. 2001. Venture Philanthropy 2001: The Changing Landscape. Washington, D.C.: Morino Institute and Venture Philanthropy Partners, Inc.

Clive Thompson is the technology columnist for Newsday.