Impact of Venture on Foundations and Nonprofits in the U.S.

【Note】

Impact of Venture Philanthropy on Foundations and Nonprofits in the U.S. 米国におけるベンチャーフィランソロピーの助成財団と ＮＰＯに与えた影響

Masayoshi Fukuda 福 田 昌 義

（Abstract） In this paper, the author tries to demonstrate that why the relationship between the foundations and the nonprofits has been so ineffective despite of giving huge amount of grants to the nonprofits for the social change. As a solution to this particular problem, the U.S. foundations conceive the venture philanthropy approach which is beneficial to both the foundations and the nonprofits. The concept and practice of the venture philanthropy derived originally from the venture investment to support new venture creations. Through a detailed case study of the innovative foundation coupled with the author’s sub- stantial experience as a venture capitalist, this paper examines the various critical factors which the contemporary venture philanthropists are currently facing to enhance the de- velopment of social sector. In particular, the concept/practice of venture philanthropy has significantly promoted the importance of “management” and organizational development for the and the nonprofits.

Key Words: Venture Philanthropy, Foundations, Nonprofits, , Social Sector

1. Introduction financed abolitionists, suffragettes, labor Philanthropy is potentially society’ organizers, citizens’ rights groups, hospital s most innovative form of capital, but it is builders and schools for the disabled-often not always deployed effectively. Compared long before the work was understood or to policy-makers and , publicity-validated. However, philanthropy philanthropists assume more risk, maintain was historically viewed through the lens of a long-term focus and support less popu- charity and often practiced in an unsystem- lar ideas. They actually provided the seed atic, even in capricious way（Bornstein & funding for many of the important social Davis 2010）. changes in the history of the U.S. They The term venture philanthropy could

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be traced back as far as the 1960s in the U.S. ity, it was not until 2002 that the UK’s first Its first recorded use was in 1969, when it venture philanthropy organization, Impetus was mentioned during a congressional hear- Trust, was launched5）. The founder of the ing by a representative of old philanthro- organization was Stephen Dawson, one of pist, John D. Rockefeller III, grandson of Britain’s first Silicon Valley-style venture the Rockefeller Foundation founder. What capitalists6）. In continental Europe, there he meant by venture philanthropy was an has been a slow, but steady arousal of inter- adventurous and risk-taking approach to est in venture philanthropy models. It was funding unpopular social causes（Bishop & only in the last five to six years that new Green 2008）. However, it was only during organizations/models of venture philanthro- the 1990s that the term gained popularity py had been created. However, noteworthy and stimulated academia and practitioners’ is that the European Venture Philanthropy discussions on new forms of highly engaged Association（EVPA ） was formed in 2004, grant making by foundations. In particular, which has been the primary vehicle to in the mid-1990s and early-2000s a more encourage the development of venture phi- narrowly focused form of venture philan- lanthropy model/organization throughout thropy emerged, reflecting the techniques Europe7）. Furthermore, a sister network of of Silicon Valley’s venture capitalists. The EVPA, Asia Venture Philanthropy Network leading exponent of this kind of venture （AVPN） was set up in Singapore in 2011 philanthropy is generally reckoned to be by one of the founders of EVPA8）. Paul Brainerd, the cofounder of Aldus, a As far as academic interests/develop- pioneer of desktop publishing, who started ments in venture philanthropy in the U.S. Social Venture Partners in 19971）. Another are concerned, the following two notable exponent is Mario Morino, an early software papers in Harvard Business Review（HBR ） , who launched Venture Philan- must be definitely reviewed. The publica- thropy Partner in 20002）. They were widely tion of “Virtuous Capital: What Foundations admired for their ability to turn quickly Can Learn from Venture Capitalists” in a bright idea into a successful business3）. HBR（Letts, C., Ryan, W. and Grossman A. Another innovative approach to venture 1997） was heralded as the starting point of philanthropy also emerged in Silicon Valley venture philanthropy movement. Indeed, by aiming to show newly wealthy high-tech this work was the first written articulation entrepreneurs how they could be effective of defining principles of venture philanthro- philanthropists. The Silicon Valley Social py model. More accurately, it challenged Venture Fund, launched in 1998 known as foundations to employ concept/tools from SV2 was a notable example of this sort of venture capital to invest in the organiza- venture philanthropy4）. tional rather than the programmatic needs Outside the U.S., considerable interests of nonprofits. As mentioned earlier, ven- in venture philanthropy began to develop in ture philanthropy became exciting concept the UK. While there were several historical during a unique historical moment–one in examples of venture philanthropy-like activ- which significant new was being

— — 『商学集志』第 82 巻第2・3号合併号（’12 . 12 ） 72 Impact of Venture Philanthropy on Foundations and Nonprofits in the U.S. created among successful entrepreneurs ments. Their focal points in the article could in the high-tech field. Such wealth coupled be summarized in the following ways（Letts. with the “can do” spirit and the exuberance Ryan & Grossman 1997）: of the new economy led such entrepreneurs ⑴Foundations have been making large to believe that they could use their busi- grants to nonprofits in the hope of meet- ness know-how and newly acquired wealth ing a wide range of society’s most press- to create positive social impact（James & ing and vital needs. Although these large Marshall 2006）. sums of have been put to work, many staffs in the nonprofit field have Subsequently, the article “Philanthropy’s been reporting a growing frustration New Agenda: Creating ” in HBR（Por - that their programs’ goals were not be- ter, M.E. and Kramer M.R. 1999） also chal- ing achieved. In other words, many social lenged foundations to create greater value programs of nonprofits have begun with and to act as more than a passive conduit high hopes and great promise, only to for transferring finance from private sourc- end up with limited impact and uncertain es to nonprofits. prospects. In line with those enlightened move- ⑵Forces beyond the control of either foun- ment on philanthropy, existing foundations dations or nonprofits account for some have been considering how to change some of problems. A notable example of them of their practices in order to assist better would be a scaling-back of funding for the social sector and how to align their social services by federal/local govern- grant-makings/investments with their so- ments. Furthermore, despite their best cial mission. efforts many leaders of nonprofits are finding that social problems persist and 2. Research Question may even be worsening. But part of the In the U.S. foundations and nonprofits difficulty needs to be traced back to the have been working diligently on behalf of relationship between foundations and its society’s needy. However, at the same nonprofits. time it could be said that their progress has ⑶Traditionally, foundations make grants been slow and various social problems have based on their assessment of the po- persisted. How can they learn to be more tential efficacy of programs proposed effective with their limited resources? by nonprofits. Although that approach As mentioned earlier in Introduction creates an incentive for nonprofits to of this paper, an influential HBR article devise innovative programs, it does not by Letts/Ryan/Grossman successfully encourage them to spend time assessing described the critical points of historical the strengths, goals and needs of their relationship between foundations and non- own organizations. Thus they often lack profits. It was also contributable to describ- the organizational resources to carry out ing significant ideas/hints by demonstrating the programs that they have so carefully concepts and tools of venture capital invest- designed and tested. Foundations need

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to find new ways to make grants that 3. Research Methodology not only fund programs but also build up ⑴In order to answer the research question, organizational capabilities that nonprofits the author chose the case study approach need for delivering and sustaining qual- as a research methodology. Because the ity. case study would be appropriate for In fact, many foundations have been research particularly in new issue areas aware of the problem and been trying where the focus is on understanding why new approaches: they have been experi- a contemporary set practices emerges menting with new models of financing in the philanthropic field; the case study that are better structured than past ap- could be also appropriate for detailed proaches to meet the needs of nonprofits. analysis of specific focal points9）. Thus, In particular, some foundations have been The Robert Enterprise Development studying venture capital firms and their Fund（REDF） was chosen as the case techniques for guiding their portfolio study in this paper and examined care- . Their idea makes sense: foun- fully in the following section 5. The rea- dations and venture capital firms face son why author chose REDF as the case similar challenges such as ①selecting the study is that it is one of the pioneers of most worthy recipients of funding, ②rely- using the venture philanthropy approach ing on young organizations to implement in the philanthropic field. REDF was ideas, and ③being accountable to the influenced so strongly by the concepts/ third party whose funds they are invest- techniques of venture capital in the early ing. 1990s that it actually became a venture In line with the awareness of prob- philanthropy foundation. lems and new approach by some promi- ⑵As for conducting case study research on nent foundations as well as valuable focal REDF, author has analyzed; ①interviews points discussed in the HBR article, the with the REDF’s program director/offic- author would like to clarify in this paper ers in 2007 and in 2011 in San Francisco whether venture capital firms（venture in the U.S.10）; ②broke down the REDF’ capitalists） could significantly offer a s annual statements for 1996, 1999/2000, helpful benchmark to solve the ineffec- and 200211）; ③analyzed descriptions in tive relationship between foundations and independent philanthropy publications12）. nonprofits. Through all in this paper, the Drawing from these interviews, docu- author believes that his experience as a ments, research materials and surveys, venture capitalist in Japan and partly in author recognized the bundle of practices the U.S. over more than ten years forms that make up venture philanthropy. Such the basis for insight into various practices specific bundle of practices has been in the venture capital fields（Fukuda gradually understood in the philanthropic 2000）. field; ①Focus on organizational capacity-build- ing

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②Highly engaged relationships with capital to grow significantly the scale of grantees（nonprofits ） their social missions, to reach new markets ③Use of performance measures or to be competitive when bidding for gov- ④Increased length of relationship ernment contracts. The “” ⑤Increased amounts of funding with tai- for social innovations is not as efficient or lored financing diverse as it is for developing fully corpora- ⑶Based on the interviews, research mate- tions（Schwab Foundation 2011）. Venture rials and surveys above-mentioned, the philanthropy brings in funding solutions author picked up the three time periods and helps to make the capital market more to examine the points, from which to efficient, especially for rapidly growing non- evaluate the relationship between founda- organizations. It could be summarized tions and nonprofits. The first period, the that venture philanthropy is best described year 1996, marked the time just before not as a blueprint, but rather as a move- venture philanthropy burst in the U.S. ment that is evolving a set of practices onto the nonprofits sector. The second stemming originally from venture capital. period, 1999-2000, was the height of ven- At present, venture philanthropy is still ture philanthropy’s popularity. Shortly an emerging player in the social sector with thereafter, crash of high-tech bubbles and the fundamental challenge of offering new the subsequent downfall of a number of solutions to the promotion and encourage- venture philanthropy organizations took ment of and innovation. place. The third period, 2002, marked the In order to achieve this, the philanthropy onset of venture philanthropy’s current organizations must address a number of phase; it is slightly humbled but focused enabling issues as follows: and resolved to prove that it can be prac- ①Communicating and marketing what ven- ticed on a large scale. ture philanthropy organizations do within social sector to multiple audiences includ- 4. Venture Philanthropy: Motivation, ing nonprofit organizations, statutory Approach and Characteristics agencies and other types of social sector 1Motivation funders. Venture philanthropy organizations ②Developing a range of financial instru- usually position themselves as complemen- ments14） and advisory services15） that tary to other forms of funding available to meet the needs of nonprofit organizations. nonprofit organizations. However, they do ③Measuring the performance and social view the venture philanthropy model as impact of nonprofit organizations（See particularly appropriate for organizations Figure 1）. undergoing rapid growth and develop- ④Collaborating with and learning from ment13）. Venture philanthropy organizations complementary capital providers such as recognize that many nonprofit organiza- private equity and venture capital firms. tions lack the internal capacity, particularly the appropriate business skills and growth

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Figure 1

Source: The Rockefeller Foundation / The Goldman Sachs Foundation, Social Impact Assessment, P18, March 2003, New York City

2Approach （See Figure 2 and Figure 3）. Venture philanthropy provides a blend Donors: Mainly foundations, Venture Capi- of performance-based development finance tal/Private Equity firms, high net-worth and non-financial support as professional individuals（many from Venture Capital/ services to nonprofits – helping them to Private Equity sector or business entrepre- expand their social impact. This is a high- neurs） and . engagement /partnership approach similar Donors expect mainly a social return on "in- to the practices of venture capital in build- vestment"（SROI ）16） ing the commercial value of new ventures

Figure 2

Source: Emerson / Freundlich / Fruchterman（2007）, "Nothing Ventured, Nothing Gained", Working Paper at The Skoll Centre for Social Entrepreneurship, Said Business School, The University of Oxford

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Figure 3 the characteristics of the bundle of prac- tices making up venture philanthropy could be understood in the philanthropic field in the following way. ①Focus on organizational capacity-building Venture philanthropists focus on building the operational capacity and long-term viability of the nonprofits rather than funding individual projects or programs of them. Therefore, they recognize the importance of funding core, operating costs to help these nonprofits achieve greater social impact and opera- tional efficiency. Source: Establishing a Venture Philanthropy ②Highly engaged relationship with non- Organization in Europe（2010） profits EVPA Knowledge Centre Venture philanthropists have a close hands-on relationship with the nonprofits VP organization: Mostly set up as founda- they support, driving innovative and scal- tion funds or a structure that incorporates able models of social change17）. Some may both. VP organizations provide tailored take board seats at these organizations financing and non-financial support to the and all are more intimately involved at target nonprofits and expect a social return strategic and operational levels than in on investment. Any financial return is usu- many other forms of philanthropy. ally recycled into new investments. ③Use of performance measures Venture philanthropy is perform- Nonprofits: Small to medium-sized nonprof- ance-based, placing emphasis on good its at a critical stage in their development. business planning, measurable outcomes, They have some of the following character- achievement of milestones and high level istics: of financial accountability/management - Strong growth potential competence. - Possibility to become financially sustain- ④Increased length of relationships able Venture philanthropist provide sub- - Business models that can be replicated stantial and sustained financial support to on a large scale to archive greater social a limited number of organizations. Sup- impact port typically lasts three to five years, - Management that is receptive to hand-on but timescales may be longer as venture philanthropy in the U.S. develops（Letts, 3Characteristics Ryan & Grossman 2003）. The venture As described in the previous section, philanthropist’s objectives include help-

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ing the organization to become financially self-sustaining by the end of the funding 2Profiles period. The following REDF profile’s informa- ⑤Increased amounts of funding with tai- tion and data consisting ⑴-⑸ was mostly lored financing obtained from the annual survey by Ven- As in venture capital, venture philan- ture Philanthropy Partners, Venture Phi- thropists take an investment approach to lanthropy 2002（pp96-99 ） conducted by determine the most appropriate financ- Venture Philanthropy Partners. ing for each organization. Depending on ⑴Fund Description and Structure their own missions and the ventures they Date of fund incorporation: 1997 choose to support, venture philanthro- Date of first grant: 1997 pists can operate across the spectrum Fund mission: of investment returns. Some offer non- The mission of REDF is to raise the returnable grants, thus accept a purely standards of living and integrity in the social return. While others use loan, nonprofit/philanthropic communities nation- mezzanine or quasi-equity finance, thus wide through development of innovative blending risk-adjusted financial and social approaches to critical social issues. REDF returns（John 2006）. pursues this mission by leveraging strate- gic partnerships that enable it to act as a 5. Case-study of Robert Enterprise catalyst for change through the application Development Fund（REDF ） of business skills and practice. 1Background ・Implementing a venture capital approach The Robert Enterprise Development to philanthropy by building the capacity Fund（REDF ） was launched in January of nonprofit organizations to deliver and 1997 as the successor fund to the Home- sustain quality services to achieve their less Economic Development Fund（HEDF ）, social mission. which existed from 1990-1996. REDF was ・Bringing a portfolio of nonprofit organi- designed to implement the successful zations to definitive growth and market investment and management strategies sustainability to provide transitional and HEDF had developed to support nonprofit- permanent employment opportunities for run（social-purpose ） organizations. With very low-income/homeless individuals. seven years（1990-1996 ） of “research and ・Engaging the nonprofit and philanthropic development stage” and six years（1997- field in dialogue through publishing, pro- 2002） of “implementing stage” what is now viding resources on the website partici- called venture philanthropy, REDF has pating in public forums and serving as a experimented with many approaches to en- convener of interested players. gaged grant-making, made many mistakes ⑵Fund Management and Staffing and learned a lot of lessons while helping Lead executive: Melinda Tuan, Managing a portfolio of nonprofit organizations grow Director and succeed along the way18）. Melinda Tuan co-founded REDF

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with George Roberts and Jed Emerson, enterprise. serving first as Associate Director from Exit phase planning process: 1997 to 1999, then Managing Director In case in which a social-purpose from 2000 to 2003. During her tenure, enterprise is expected to generate sig- REDF became known for its rigorous nificant amounts of net income over time, performance measurement practices REDF may exit that particular funding providing the effectiveness of nonprofit relationship, assuming that a enterprise organizations in creating lasting positive can self-finance its continued growth and change in the lives of low-income/ expansion. homeless individuals19）. Grant size range: For the REDF 2001 portfolio, each or- Full-time equivalent staff : Seven （as of Oc- ganization receives on average $200,000- tober 2002） $300,000 each year, renewable based on ⑶Grant Selection, Assistance and Engage- the enterprise’s needs over the length of ment the funding relationship. Focus for grants: REDF grants focus Relationship with investment/grant re- on nonprofit organizations that are run- cipients: ning social-purpose enterprises to provide REDF assists its portfolio organizations transitional and permanent employment by providing financing for organizational for very low-income/homeless individuals infrastructure, access to additional funds in the San Francisco Bay Area in the U.S. for capital expenses, strategic business Process for indentifying grant recipi- development assistance and technological ents: REDF finds appropriate organiza- tools/training. tions through networking with funding Amount of staff time per grant recipi- colleagues, existing social-purpose enter- ent per year: 400 hours prises, the community and other sources. ⑷Outcomes Criteria used to assess investment Success measures for each investment/ choices: grant ・Fit with REDF mission and goals ・Social Return on Investment（SROI ） ・Social-purpose-enterprise fit with non- measures cost-savings to society and profit organization’s mission and goals change in individuals’ lives as a result ・Business impact（solid business plans of employment20）. and strong operating systems） ・Developed by REDF, Ongoing As- ・Social Impact sessment of Social Impact（OASIS ） ・Ability of organization to benefit from is a comprehensive, organization-wide REDF support management information system that Anticipated length of relationship: provides timely, accurate information REDF’s investments/grants are de- about the social impacts of an organiza- signed as long-term relationships based tion. Because of its customization for on the business plan of social-purpose each organization, OASIS helps REDF

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Figure 4

Source: The Rockefeller Foundation / The Goldman Sachs Foundation（March 26, 2003）, Social Impact Assessment, P7, New York City

portfolio makes better decisions by giv- be the most relevant and useful one for ing them21）（See Figure 4）. understanding the stages of change ex- perienced by REDF which is a hybrid Funding sources of for-profit and non-profit philosophies. ⑸Funding sources However, the stages identified by Peter /Donor involvement with re- Drucker are just specific to nonprofit or- cipients ganizations and rather similar to Heifetz’s The individual investor/donor meets and include: Stage 1 Exploring the Envi- regularly with REDF management to dis- ronment; Stage 2 Synthesizing the Learn- cuss how the portfolio is doing and annu- ing; Stage 3 Integrating the Learning; ally or semiannually with REDF portfolio Stage 4 Internalizing the Learning and members. Creating Ownership; Stage 5 Applying Fund’s acceptance of private equity : the New Learning; Stage 6 Reflecting and No Checking; Stage 7 Disseminating. Regardless of which framework cho- 3REDF’s Challenge of Organizational sen, the most important point is that Change toward Venture Philanthropy REDF engages in processes committed ⑴The Stages of Change to ongoing organizational learning. Peter There are various ways to understand Drucker once observed that it is essential and analyze a process of organizational to learn from the process of change in or- change, particularly as reflected in such der to be a successful innovator. Michael a creative and complex developments Heifetz presented a seven-stage process as REDF. In this paper the author chose for effectively creating change in organi- a practical framework presented by zations. His framework for change and Michael Heifetz （Heifetz 1996）. The seven stages he enunciates are derived reason is that his framework seems to from extensive research and experience

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in analyzing organizational development benefits of the change were real. The in both business and government22）. process appraisal was intended to provide Heifetz’s seven stages are as follows: formal feedback to all REDF stakeholders Stage 1 Choosing the Target; Stage 2 regarding the effectiveness of venture Setting Goals; Stage 3 Initiating Action; philanthropy approach and offer possible Stage 4 Making Connections; Stage 5 Re- guidance to make refinements. It was Balancing to Accommodate the Change; also intended to lead Heifetz’s Stage 5 Stage 6 Consolidating the Learning; Stage and Stage 6, “Re-Balancing to Accom- 7 Moving to the Next Cycle. Application modate change” and “Consolidating the of his seven-stage process into REDF’s Learning”. case would be as follows. ⑵Implementing Venture Capital Approach In 1997 as the successor fund to HEDF, to Philanthropy REDF chose its next target（Stage 1） The REDF approach to venture capital by focusing on social purpose enterprise practice involves investments in a portfo- development and by choosing to imple- lio of San Francisco Bay Area nonprofit ment a venture philanthropy approach organizations. These investee organiza- to its funding. In establishing its investee tions benefit from the components shown portfolio, REDF set explicit goals for in the following ①－⑧ 25）. In particular, itself and worded with each investee to those components have played a critical set its own business-specific goals （Stage role of raising the standards of excellence 2）. During the first year of REDF imple- and integrity in the nonprofits engaged mentation, action was initiated（Stage 3）. by REDF. The detailed analysis would This action reflected the major compo- be described in the following 3） Strategic nents of venture capital practice; ①core Shifts. financial investments were made in each ① Core Investments organization, ②regular venture commit- The core financial support received tee meetings were held, ③business assist- by each organization in the portfolio ance was provided, ④additional capital comes in the form of an annual capac- and business networking opportunities ity-building grant ranging between were made available and ⑤management $100,000 and $125,000. This grant ena- information system was established23）. bles the nonprofit to hire an enterprise The REDF process appraisal24） was manager and to invest in the human undertaken during the fourth stage of capital required to develop and oversee Heifetz’s seven-stage process, “Making the execution of a business strategy as Connections”. Examples of actions that articulated in their 3-5 year business were typically part of the fourth stage plan. of change include ensuring everyone un- ② Capital Investments derstands how the new approach affects REDF provides additional financing them and scrutinizing the results of the as dictated by each enterprise’s busi- initial change process to determine if the ness plan and auguments that financ-

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ing with other charitable investments sible Business, REDF established the provided by individuals corporations, Farber Interns and Fellows programs and foundations interested in support- to leverage the talent of business ing the enterprise development goals. school students in support of investee ③ Business Analyst organizations. REDF partnered with Keystone ⑥ Partners-for-Profit Community Ventures, a local techni- Partners-for-Profit （PFP） was creat- cal assistance organization specializing ed to address the enterprises’ need for in nonprofit business development to direct market access. The initiative was assist the manager and Venture Com- a focused working group of Bay Area mittee in running the enterprises. The business leaders representing a vari- business analyst is involved in analyz- ety of industries. PFP provides REDF ing the strategic position of the busi- investees with more practical level ness, critiquing the venture’s business of analysis and assistance. In addition plan, evaluating the financial state- to providing advice and guidance to ments（both actual and pro-forma） and investees, PFP members assist in con- providing an objective evaluation of the necting enterprise managers to profes- business. The business analyst directly sional networks within their industries assists management in conducting the and target markets. PFP also provides analysis and assists also the managers opportunities for the hands-on involve- in developing their own skill set in or- ment of business people interested in der to assure that knowledge transfer making a meaningful and direct contri- occurs and the future capacity of the bution to the process of social purpose organization to effectively manage the enterprise creation and expansion26）. venture is developed. ⑦ Access to Technology ④ Venture Committees REDF equipped each enterprise with The Venture Committee consists of the basic hardware/software necessary representatives from REDF, the non- to gain access to the web and commu- profit executive director, the enterprise nicate via e-mail. It partnered with a manager and a Board member from nonprofit computer consulting firm to the investee organization if necessary. build a private website for the REDF The committee meets monthly to re- portfolio organization. view financial and operational perform- ⑧ Outcome Measurement ance to identify areas of concern and In partnership with its investees, to help ensure that these concerns are REDF developed and launched a addressed in accordance with the en- web-based information system called terprise’s business plan. WebTrack which was custom-designed ⑤ Farber Interns/Fellows using standard business MIS tools. It In partnership with The Phalarope contracted with BTW Consultants to Foundation and Students for Respon- work with the enterprise managers in

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developing indices of operational and hire. with jobs appropriate social outcome against which future for people having little or problematic performance can be measured. WebT- work experience are often in industries rack enabled enterprise managers and with low profit margins. REDF expects REDF to track monthly performance that at any given time, 70% of the on both economic and social terms for enterprises in the portfolio would be the duration of the five-year initiative. profitable, while remaining 30% would REDF also creates the framework for be unprofitable at greater rates than analyzing the Social Return on Invest- planned. REDF’s approach to venture ment（SROI） on each enterprise and capital is also different in that REDF the REDF portfolio as a whole27）. Each invests in nonprofit organizations with of these components of the REDF ven- the capacity and capability to run so- ture philanthropy practice evolved over cial purpose enterprises that may be at time and it is still seeking to improve different stages of development across the support it provides to its portfolio many industry sectors. By contrast, the of nonprofit organizations. There are typical venture capital firm invests in a many ways in which each of these com- portfolio of companies at similar stages ponents relates to standard venture of development in a limited number capital practice. of industries. For example, in 1999 the REDF portfolio consist of 23 different While there are clearly many similari- businesses in a range of industries ties between venture capital practice and from furniture manufacturing to retail REDF’s venture philanthropy approach, and food services. These businesses there are also significant differences that are at various stages of development, should be highlighted as in the following ranging from start-ups to more mature categories. businesses（more than 10 years）. This ① Risk Management necessarily increases the complexity Most venture capitalists ideally look of managing such a portfolio and re- to build a portfolio to minimize their quires a different skill set on the side of risk and maximize their total return on REDF’s management. investment. Although venture capital- ② Amount of Funding ists certainly end up backing many REDF supports a majority of the so- risky investments, they are clearly not cial purpose enterprises’ financial needs looking to fund business that have a for start-up and ongoing operations; high likelihood of failure. By contrast, however, the social purpose enterprise REDF’s approach is risky and limits is usually just one program of an en- financial returns. The purpose of the tire agency whose funding needs far REDF portfolio enterprises is to employ exceed that of enterprise. This makes individuals that private sector compa- for an tension in REDF’s work; similar nies have already fired or would never to what would happen if a venture

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capitalist only funded one division of an dations such as Rockefeller and Carnegie existing by the exclusion of Foundation, venture capital and REDF other divisions. approach across relevant areas of prac- As a summary of discussions so far, the tice28）. The fourth column provides exam- author would like to provide the following ples of how REDF is applying a venture chart（See Table 1）, which making the capital approach in each of these areas29）. comparisons among the traditional foun-

Table 1

Source: Stanford Graduate School of Business Case（October, 1998）, "The Roberts Enterprise Development Fund: Implementing a Social Venture Capital Approach to Philanthropy", P5

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4Strategic Shifts and Future Challenges performance measure, increased length of We have now seen how REDF progres- relationship, increased amount of funding sively moved through each level in its and articulated risk orientation/exit strat- process of executing a venture philan- egies. thropy approach as indicated previously REDF’s challenges remain to be ad- by Michael Heifetz’s seven stages of dressed and its success is not guaranteed organizational change. At the same time, by any means. It actually faces a cross- we can also observe the specific strategic roads: REDF could have maintained the shifts that REDF underwent as its struc- defense of a foundations process that ture evolved from a classic philanthropy worked, but is not achieving its full po- model to a venture philanthropy model tential. It could open up the process itself （See Table 2）. More specifically, over the to examination and transformation. By period of 1996 to 2002, REDF developed having done so, it will be stronger, more similar practices used in venture capital; effective and re-committed to moving for- focus on organizational capacity building, ward to engage the future challenges in high engagement with grantees, use of the philanthropy.

Table 2

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Source: REDF's Annual Report（1997-2002） including HEDF for 1996, "Investor Perspectives", Volume 2（1999）, REDF and Annual Servey "Venture Philanthropy 2002", Venture Philanthropy Partners / Community Wealth Ventures

6. Research Implications and Conclusions attention given to a venture philanthropy A lot of discussions on a venture phi- might be attributed not to its actual results lanthropy in the U.S. have been done, from in practice, but to its creative impact on the its heralded beginning to the troubled philanthropic sector at large. The author times it fell on after the high-tech bubble also found that a venture philanthropy has and to its current state of affairs. However, influenced the practices within traditional a venture philanthropy accounts for only foundations and more importantly devel- 0.2 percent of total US $ amount given in oped a strategic shift across the philan- 200130）, we have to ask the question “Why thropic sector. all the fuss on a venture philanthropy?” To Furthermore, as a problem in philan- answer this question the author has been thropy in the U.S., both foundations and making some research on this particular nonprofits have acknowledged that the lack field, and has tentatively concluded that the of standard principles/practices or a shar-

— — 『商学集志』第 82 巻第2・3号合併号（’12 . 12 ） 86 Impact of Venture Philanthropy on Foundations and Nonprofits in the U.S. ing of best practices. As a head of promi- to ignore the correlation between the rise nent philanthropy organization once noted, of objective–based thinking and the rise of Good Work Project 200231） also indicated venture philanthropy from 1996 to 2002. It that “Philanthropy is amazingly fractured could be said that venture philanthropy at …it is a fractured cottage industry…and it a minimum provided a base for the ongoing is still as random as it was 100 years ago”. discussions on the importance of using man- Researchers on a venture philanthropy has agement tools and establishing standardized argued that this problem stems from the good practices for the philanthropic sector. philanthropic sector’s resistance to using It should also be noted that the author the knowledge/skill contained in the man- agree with the recent arguments that the agement discipline. In 1974, P.F. Drucker individual pieces of venture philanthropy stated that the service institution does not practice are really nothing new to philan- differ much from a business enterprise in thropy（Eisenberg 1999）. Business moguls any area other than its specific mission and in the times of Rockefeller and Carnegie it faces very similar challenges to make tried to bring business ideas to the phil- work productive and the workers achiev- anthropic sector, which led to Carnegie’s ing（Drucker 1974）. However, the nonprofit famous statement that “it is easier to make sector has never brought in to the concept money than it is to give it away32）. How- of management – because it has always ever, we can say that the venture philan- viewed management theory as a tool of thropists of today actually bring a different business rather than a tool of organizations. framework than the business moguls of the As an innovative contributor to nonprofit past, because the formers’ private sector organizations, P.F. Drucker also observed ideas are grounded not just in business but of charitable organizations: they are not also in management–a discipline of knowl- so much mismanaged as non-managed… edge that did not exist in Rockefeller’s and they believe that spending money produces Carnegie’s time. results. Their strength is that they have a Finally the author believes that a ven- clear focus. Their weakness is that they do ture philanthropy is acting as a conduit not define results（Thomasen and Balda between nonprofit organizations and the 2002）. wealth of knowledge that resides in the However, for probably the first time management discipline–an impact that may in the last 100 years, many major philan- promote the nonprofit sector to achieve thropic organizations have been attempting social results which have never been seen to achieve social ends by using the organi- before. zational tools that have served wealth – creation entities（Brower 2001）. The author in this paper tries to examine that this shift has been partly fueled by the ideas and practices of venture philanthropy. As analyzed in the case of REDF, it is difficult

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Notes

１）Social Venture Partners, http://www.svpseatle.org ２）Venture Philanthropy Partners, http://www.venturephilanthropypartners.org ３）Interviewed with Paul Shoemaker, Executive Director, Social Venture Partners in Seattle, Washington in September 2006 and with Nancy A. Osgood, Chief of Staff for Mario Morino, Venture Philanthropy Partners in Cleveland, Ohio in September 2006 ４）SV2 was founded by Laura Arrillaga – Andreessen, a second-generation philanthropist; her fa- ther is one of the largest donors to Stanford University, having earned a fortune from owning much of the land in Silicon Valley, http://www.ssireview.org ５）Impetus Trust, http://www.impetus.org.uk/what’s-special-about-impetus ６）For detailed description on S. Dawson and the historical development Impetus Trust, Rienstra, D., “Everything ventured, everything gained” Philanthropy in Europe pp129-142, Alliance Pub- lishing Trust, 2008 ７）Interviewed with Beate Truck, Managing Director, European Venture Philanthropy Associa- tion（EVPA） in Brussels, Belgium in September 2011 and http:www.evpa.eu.com ８）Asian Venture Philanthropy Network, http://avpn.asia/index.htm The author participated in their augural symposium in Tokyo in November, 2011. ９）For the appropriateness of the case study as research methodology the author refers to Ko- dama, M. “Managing Organizational Boundaries: New Organizational Architecture through Teams of Boundaries, Information Science Studies No 20, pp12-13, Institute of Information Science, College of Commerce, Nihon University, 2011 10）Interviewed with Cynthia Gair, Portfolio Director, in August, 2007 and with Carla I. Javits, Pres- ident in January, 2011, REDF. Both interviews were conducted at their office in San Francisco, California. 11）In addition to those annual statements, Investor Perspective Volume 1, Volume 2 and Volume 3 were provided as a kind of internal information of REDF’s activities/developments of venture philanthropy approach. 12）Venture Philanthropy Partner’s annual survey of organizations involved in venture philanthro- py and high-engagement grant-making. These surveys were conducted in 2000, 2001 and 2002 for the improvement of effectiveness in the field. Venture Philanthropy Partners is a nonprofit social-investment organization that was created by the Morino Institute in partnership with Community Wealth Ventures. 13）Same interview with 7） 14）Philanthropy emerged initially as the transfer of cash or other assets in the form of grant. How- ever, at present venture philanthropy funding instruments are broadly similar to those used in the commercial sphere. The available funding instruments for venture philanthropy organiza- tions covers such financial spectrum; guarantee, loan, mezzanine-finance, equity and grant. 15）Major advisory services provided by philanthropy organizations to nonprofits generally include strategy consulting, marketing/communications, information technology, fund-raising strategy,

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financial management and accounting/legal service, human resources management, etc. 16）The Social Return on Investment（SROI） analysis was developed by REDF in 1996 for making grants to a portfolio of nonprofit agencies. SROI places a dollar value on ventures in the port- folio with social as well as market objectives, combining tools for cost-benefit analysis （used by economists） and tools of financial analysis. SROI has also been used by other organizations in a modified form. 17）Clark, C. and Rosenzweig, W., “Double Bottom Line Project Report: Assessing Social Impact in Double Bottom Line Ventures（Method Catalog）, January 2004, pp17-35, The eight major meas- urements for social change（impact） are as follows; Theories of Change, Balanced Scorecard, Acumen Fund Scorecard, Social Return Assessment, Ongoing Assessment of Social Impact, Social Return on Investment, Benefit-Cost Analysis, and /Social Impact Analysis 18）Tuan, M., REDF: “Reflections on Five Years of Venture Philanthropy Implementation”, Venture Philanthropy 2002 – Advancing Nonprofit Performance Through High-Engagement Grantmak- ing, p25, Venture Philanthropy Partners（prepared by Community Wealth Ventures, Inc.） 19）REDF, http://www.redf.org/about-redf, particularly for their professional careers of M. Tuan and J. Emerson; enormous contribution for developments of venture philanthropy in the U.S. 20）same as for 16） 21）According to a brochure An Information OASIS redf（2002） prepared by REDF, “in partner- ship with several other funders, REDF launched the Ongoing Assessment of Social Impacts （OASIS） project in 1999 for the purpose of building customized, comprehensive, social manage- ment information system（MIS） within nonprofit organizations. REDF also reported that it was excited to follow the lead of four of their portfolio nonprofit organizations – Rubicon Programs, DVE, Inc., Golden Gate Community, Inc and Juma Ventures – in creating OASIS. 22）[email protected]/Heifetz Halle Consulting Group 23）same as for 18） 24）Investor Perspective（Volume 2: Social Purpose Enterprise and Venture Philanthropy in Millen- nium） pp23-30, REDF, 1999 25）same as for the above, pp4-6 26）The author acknowledges that such PFP activities based on the hands-on involvement of busi- ness people for the social purpose enterprises could be understood as “Pro Bono Publico” which means For Good Public. 27）same as for 16） 28）Chart adapted from Stanford Graduate School of Business case “The Roberts Enterprise Devel- opment Fund: Implementing a Social Venture Capital Approach to Philanthropy”, p5, October, 1998 29）Please see the above case on REDF, pp11-19 for more detailed discussion of REDF’s venture capital approach in each of these practice areas. 30）According to a survey Venture Philanthropy 2002（p10） by Venture Philanthropy Partners/ Community Wealth Ventures, venture philanthropy grants totaled $50 million in 2001, making up only 0.2% of all foundation grants.

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31）The Good Work Project（http://www.goodwork project.org） is a collaborative research and educational venture created by H. Gardner, M. Csikszentmihalyi and W. Damon in 1994. 32）John D. Rockefeller founded the Rockefeller Foundation in 1913 with $35 million and Andrew Carnegie established the Carnegie of New York in 1911 with $125 million.

References

Bishop, M. and Green, M.（2008 ） pp88-89, Bloomsbury Press Bournstein, D. and Davis, S.（2010 ） Social Entrepreneurship pp108-109, Oxford University Press Brower, B.（2001 ） The New Philanthropists and the Emergence of Venture Philanthropy p51-59, CSIS Press Drucker, P.F.（1974 ） Management: Tasks, Responsibilities, Practices, Harper & Row Eisenberg, P.（1999 ） “The New Philanthropy Isn’t New-or Better”. Chronicle of Philanthropy, January 28 Fukuda, M.（2000 ） Dynamics of New Venture Creation「ベンチャー創造のダイナミクス」 pp187- 217, 文眞堂 Heifetz, M.（1996） Leading Change, Overcoming Chaos, Irwin James, C. and Marshall, P.（2006） “Journeys in Venture Philanthropy and Institution Build- ing” in Taking Philanthropy Seriously pp110-111, Indiana University Press John, R.（2006） “Beyond the Cheque: how venture philanthropists add value”, Skoll Centre for So- cial Entrepreneurship, Said Business School, University of Oxford Letts, C.W., Ryan, W.P. and Grossman, A.（1997） “Virtuous Capital: What Foundations can Learn from Venture Capitalists”, pp36-44, Horvard Business Review, March-April Letts, C.W., Ryan, W.P. and Grossman, A.（2003） “Filling the Performance gap, High-engage- ment Philanthropy, What Grantees say about Power, Performance And Money, Stanford Social Innovation Review Schwab Foundation for Social Entrepreneurship（2011 ）, The Social Investment Manual pp28-51. This manual is the first of its kind providing nonprofits a comprehensive guide- book on how to develop relationships with foundations. It was created with the research support of Technical University of Munich（TUM ） Thomsen, M. and Balda, J.（2002 ） “The Next Society: A Conversation with Peter Drucker about the Future”. The Flame 3（ Spring） pp13-17

（要旨）

本稿で筆者は先ず、米国においてより良い市民社会の変革・構築へ向けて数多くの助成財団 よりNPOに提供された多額の資金が、両者の関係が有効でないため十分に生かされていない

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経緯を指摘する。有効な関係作りの打開策として、ここ10数年来米国では助成財団が、ベン チャーフィランソロピーという新しい助成/投資の形態を生み出し、両者の有効な関係づくり に寄与している。ベンチャーフィランソロピーの基本的な考え方・実務は実は、ベンチャー企 業へ投資するベンチャーキャピタルの手法から多くの示唆を得ている。本稿の目的は、筆者の 長年のベンチャーキャピタル投資の実務経験から得られた知見を活用しつつ、米国の革新的な 助成財団の事例を詳細に分析することでベンチャーフィランソロピーが両者の良好な関係作り とソーシャルセクターの活性化に貢献してきたことを明らかにすることである。とりわけ筆者 は、同事例がベンチャーフィランソロピーの助成財団とNPOの双方に、“マネジメント”と組織 的展開の重要性を促したことも指摘している。

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