“Build Capital.” Inside the World of Venture Philanthropy

Speakers at New Profit’s twentieth anniversary Event.

Speakers at New Profit’s twentieth anniversary Event.

When the field of venture philanthropy emerged two decades ago, fueled in part by the spirit of the dotcom era, its leaders had high hopes. They aimed to reinvent how nonprofits were financed and built. They believed that by borrowing key ideas from business, the lumbering world of philanthropy could create bigger, better organizations that operated with more rigor and achieved greater impact.

Vanessa Kirsch told me that she was motivated to start New Profit in 1998 by a sense that the social sector had stalled out. There were “lots innovations and solutions, but very few that had gotten to any significant scale,” Kirsch said. She wondered: “Why do we have lots of very innovative things, but not a lot of large-scale solutions?”

In contrast, the business world of the 1990s was increasingly dynamic. Entrepreneurs could turn an idea on paper into a major company in just a few short years. The investing strategies that made this possible were hardly a secret: Venture capital firms provided start-ups with large chunks of unrestricted cash, along with other kinds of support like management assistance and access to their networks. They placed huge trust in entrepreneurs chasing a dream—while also insisting on metrics and accountability.

The idea behind New Profit was simple: To use these same strategies to help social entrepreneurs actualize bold schemes to improve the world.

A Movement Emerges

Kirsch wasn’t the only person thinking this way during the go-go dotcom years. In Silicon Valley, the education leader Kim Smith teamed up with venture capitalists John Doerr and Brook Byers to create the NewSchools Venture Fund in 1998, which applies a VC approach to backing entrepreneurial ventures in education. The fund is also celebrating its 20th anniversary this year. The Roberts Enterprise Development Fund, based in the Bay Area, was launched in 1997 by the private equity investor George Roberts.

In the Pacific Northwest, the technologist Paul Brainard pulled together a group to found Social Venture Partners in 1997. It also brought venture investing principles to social change by supporting nonprofits in a range of ways. “Not just money, but time,” said Paul Shoemaker, SVP’s founding president. The group looked to foster “long-term relationships and build capacity,” establishing close relationships with its grantees, all the while being “outcomes-driven.”

In Washington, D.C., three business leaders—Mario Morino, Raul Fernandez and Mark Warner—embraced the same vision for bolstering nonprofits in the region, creating Venture Philanthropy Partners in 2000. The Drapers Richard Foundation was started in 2001 by two venture capitalists, William Draper and Robin Richards Donohoe. Years earlier, the hedge fund investor Paul Tudor Jones had created the Robin Hood Foundation to fight poverty in New York City.

Many other venture philanthropy outfits have emerged over time, and new ones appear regularly. Some of these organizations, such as the New Coast Foundation, which launched earlier this year in Chicago, focus in a geographic area. Others zero in on specific causes, like cancer.

The venture philanthropy movement has faced skepticism from the start. Many nonprofit veterans have sneered at the presumption that complex social problems can be tackled by business tactics—as if the crowd who brought us Google and Amazon could wave their magic wand to ensure that poor kids can read by third grade. But it’s not just the naïveté of venture philanthropy that has alarmed critics: These outfits, with their corporate buzzwords and fixation with metrics, are seen by some as part of a larger colonization of the social sector by business.

Other skeptics have wondered just how different venture philanthropy outfits really are from traditional grantmakers that have long taken risks and provided hands-on support to scale organizations.

But maybe the biggest question around venture philanthropy—one that deserves close attention as New Profit and NewSchools Ventures celebrate their 20th anniversaries—is just how much impact this movement has really had? Where’s the evidence that the venture philanthropy model actually works?

All these questions are worth unpacking. It’s important to keep in mind, though, that venture philanthropy continues to evolve. Leaders in this field see it as still young in some ways, and as a work in progress. New Profit and NewSchools, for example, have both shifted their approaches in recent years—and acknowledged past blind spots, especially on matters of race and empowerment.

“The opportunity to create huge impact is extraordinary,” said Kim Syman, who was part of the founding team that created New Profit and is now a managing partner. “But all this is still really hard.”

Business Lessons

The rise of venture philanthropy is part of a larger story about the growing engagement of business leaders in the social sector since the late 1990s.

Kim Smith was a freshly minted Stanford MBA when she helped to start NewSchools with Doerr and Byers. The group’s current CEO, Stacey Childress, is also an MBA who co-founded an enterprise software company and worked for a decade in a Fortune 500 company. Nearly all of NewSchools’ board members are investors or business entrepreneurs.

Vanessa Kirsch spent years in the nonprofit sector before starting New Profit, but the organization wouldn’t have gotten off the ground without early backers from private equity, most notably Mark Nunnelly, a managing director at Bain Capital. The group long had offices in donated space in Boston at Monitor, a consulting firm that has since been absorbed into Deloitte. Many of New Profit’s board members are private investors.

A common critique of philanthropists from business—from Bill Gates on downward—is that they grossly underestimate how hard it is to solve entrenched social problems and greatly overestimate the value of their own talents in doing so. It’s also said that these donors rarely acknowledge, much less challenge, key underlying drivers of inequity in America—like structural racism and today’s predatory form of capitalism. Anand Giridharadas argues in his new book Winners Take All: The Elite Charade of Changing the World, that business elites tend to favor a form of social change “that not only fails to make things better, but serves to keep things as they are.” These elites are said to prefer market solutions, often at the cost of public institutions.

Venture philanthropy, especially in its earlier days, has often been cast in this negative light. For example, NewSchools drew fire from critics during its first years as a leading investor in charter schools—a favorite idea of the wealthy donor class.  

But if you dig into the wide range of grantees backed by a diverse set of venture philanthropy groups over two decades, you’ll find that this movement has never been about a wholesale application of market ideology to social problems. It’s had a far more narrow agenda: to use the well-tested methodologies of private investing to accelerate the pace of existing change efforts and help incubate new ones.

These practices are hardly new to philanthropy; they’ve been used by funders since the days of John D. Rockefeller. What’s more, many critics and reformers in the nonprofit world have long agitated for grantmakers to do many of the things that venture philanthropy groups have done from the start.

Building Capacity

Providing general support is a linchpin of the venture philanthropy approach. Such financing is the norm in the private investing world, but it’s hard to come by for nonprofits. Despite years of calls for more unrestricted funding, a large majority of foundation grants still take the form of project support. Vanessa Kirsch described such funding as “buy capital,” in that funders are giving grants to achieve specific outcomes they favor. What New Profit and other VP firms offer, she said, is “build capital”—the resources that nonprofit leaders need to scale organizations and achieve their goals. New Profit typically commits $1 million to the groups it backs, paid out in $250,000 grants over four years. That support can grow for some grantees, to more than $2 million over another four-year period.

Venture Philanthropy Partners also provides backing to scale organizations. Carol Thompson Cole, the group’s president and CEO, told me: “We are really a capacity builder, and I think that distinguishes us in the [Washington, D.C.] region.”

In contrast to other venture philanthropy groups, which tend to focus on start-ups or young organizations, Thompson Cole described VPP as a “mezzanine” investor. It often funds groups that have long worked in the trenches on issues of poverty and opportunity, but are still struggling. “Even organizations that have been around for years have never gotten growth capital,” she said. “They got stuck. Which is why we provide the growth capital.”

Management assistance is another hallmark of the venture philanthropy approach. While plenty of traditional grantmakers also offer such support—and have the since the dawn of foundations—venture funders have made this central to their strategy, inspired by the intensive ways that VCs and private equity firms work with their portfolio companies, often taking a board seat.

Thompson Cole said that VPP works closely with its grantees to develop their program strategies and track results. It even pays for evaluation, “which many funders would like to see happen, but they aren’t willing to pay for it,” she said. “And it really is expensive.”

Stacey Childress told me that providing money is just one way that NewSchools helps its grantees succeed. The larger package is also about “expertise, time and support. And it’s about connections to other donors and other supports that can help with other specific challenges they may be facing.”

Childress said that this kind of help is especially important for groups that are just starting up, with founders who may lack experience. “Entrepreneurs need lots of support and coaching and connection to really be able to live out the vision they have and achieve the kind of outcomes they’re hoping for.”

In Silicon Valley, venture capitalists see management assistance as a way to offset the risks of investing in green leaders with untested ideas. Venture philanthropy groups think along similar lines. NewSchools sees its role as backing newcomers to the educator sector—to “support ideas or people that are a little bit more risky by traditional standards,” said Childress. These investments are more likely to turn out well if NewSchools’ staff are engaged in helping grantees succeed.

Program officers at foundations do their own fair share of hand-holding and door-opening, of course. They can be especially helpful to grantees by making introductions to other funders. A key difference, though, is that venture philanthropy groups tend to have fewer grantees than foundations and thus, its staff can invest more time in helping out with management challenges. Childress said that NewSchools’ staff is chosen with an eye on playing this role. “All of us have some kind of experience on the operating side. We’ve done it ourselves. We can provide expert support and coaching.”

It’s often said that philanthropy needs to take more risks. What gets less attention, though, is how funders can increase the odds that their risks will work out. Venture philanthropy has important lessons to share on this score—but ones that aren’t easy to operationalize at foundations that spread their money around widely, as opposed to concentrating bigger bets on fewer grantees.

Course Corrections

Since its start, venture philanthropy has been closely aligned with the social entrepreneurship movement. Vanessa Kirsch described herself to me as a “serial social entrepreneur” who fantasized about creating “the foundation of the future”—one that better served change agents from her world. “It was an original volunteer team that came together [to create New Profit] and said, ‘What do we as practitioners want a foundation to look like?’”

Many of the organizations New Profit first supported were founded by people not unlike Kirsch: savvy and educated operators, often from privileged backgrounds, who aimed to solve social problems in new ways—typically working outside the more established worlds of human service providers or community-based organizations. The NewSchools Venture Fund, meanwhile, emerged as a key funder for a generation of hard-charging education reformers who were intent on disrupting traditional K-12 systems with charter schools, teacher accountability schemes, and new technology.

A longtime rap against social entrepreneurs is that they tended to parachute into communities where they don’t have deep ties, offering silver bullets to tackle entrenched problems. Critics argued that this movement put way too much focus on heroic individual problem-solvers and standout organizations. A bunch of clever white kids from Yale and Brown weren’t the answer to systemic challenges, they said. What was needed were more collective efforts led by leaders within communities, including to build power and shift public policy.

Today, the leaders of New Profit wouldn’t dispute that view. The group now talks about investing in both “breakthrough leaders and systems change initiatives.” And it has done hard work to reexamine its assumptions of who is a social entrepreneur, trying to look beyond the well-educated and often privileged folks who can feel most familiar. “We have been thinking deeply about bias inside our sector which actually limits our ability to solve social problems,” said Kirsch. The result has been a greater focus on “capitalizing diverse leaders who are proximate to the problems.”

Likewise, New Profit is less focused on building up this or that hotshot organization and more on nurturing ecosystems of groups that are coming at problems in different, but complementary ways. There’s much more attention to “shifting a field of practice,” said Kim Syman. The goal is “scaling impact, rather than scaling organizations.”

NewSchools Venture has traveled a similar path in some ways, especially on issues of diversity and inclusion. For years, the school reform movement was criticized for being composed of privileged white outsiders who ran roughshod over local stakeholders in communities of color. Separately, new research emerged showing that minority students do better when taught by educators who look like them.

When Stacey Childress took the helm of NewSchools in 2014, she led the development of a new strategy that put a major focus on diversity. “We believe that the next wave of education innovation will be more effective and sustainable if it includes more Black and Latino entrepreneurs and leaders,” Childress wrote in a blog post last year.

NewSchools not only set out to shift what kinds of leaders it supported, but also the makeup of its staff and board. As part of these efforts, it undertook new research on diversity and inclusion in the education sector, captured in a major report on this topic, “Unrealized Impact.” Last October, Grantmakers for Education released a case study of NewSchools’ successful effort to become a more diverse organization.

Organizing Donors

Venture philanthropy groups don’t have endowments. They operate as funding intermediaries, which means that their leaders spend a lot of time raising money. Vanessa Kirsch estimates that she’s pitched nearly 2,000 donors, in person, since starting New Profit. And while most of those prospects turned her down, New Profit has a striking record of retaining the donors who have come on board. Many of its earliest donors are still involved, including Mark Nunnelly of Bain Capital, whose support was so critical to launching the group.

The initial backers of the NewSchools Venture Fund are also still engaged in that organization—the only difference being that they are now a lot richer than they were 20 years ago. John Doerr remains on the board, and so does Brook Byers. Both men, along with their wives, have given millions to the organization.

A great many other loyal donors have fueled New Profit and NewSchools, along with the broader array of venture philanthropy groups over the years. The role of these organizations in corralling and educating emerging donors isn’t talked about very often, but it’s hugely important.

When Venture Philanthropy Partners was first created, said Carol Thompson Cole, one of its core missions was creating a “community of engaged and informed investors in the Washington metropolitan area.” She said the group has succeeded in doing exactly that and now is often a first stop for new philanthropists looking to make a difference in the region.

Engaging in thoughtful philanthropy isn’t easy for newcomers to the social sector. Groups like VPP offer a less risky way to give money and learn at the same time. Thompson Cole said about the group’s donors: “They like the fact that we have measurable results. They like that we go into organizations and they value the strategic assistance we provide. And they also value the work we do with them to help inform their individual philanthropy.”

Paul Shoemaker told me that empowering donors was a primary focus of Social Venture Partners from the start. Much of its work is aimed at activating and supporting donors. “We get people engaged beyond just their money,” Shoemaker said. “So that means human capital, social capital, intellectual capital. The other thing we do is connect the hell out of them. We connect them to nonprofits and to each other… We believe these strategies lead to more effective civic and philanthropic leaders.”

Venture philanthropy groups have served as a training ground for a range of donors who later moved on to create major foundations. Most famously, many Wall Streeters have gotten started in their giving through the Robin Hood Foundation, which has long worked to create a learning community and help donors strike out on their own.

Meanwhile, donors also exert influence over venture philanthropy groups. The fact that these groups must raise their own money creates a dynamic that sets them apart from private foundations. Stacey Childress said that it fosters a greater sense of accountability and urgency than might come from “having an endowment pot of money that is there, come what may.” Like private investment firms, venture philanthropy groups need to show they’re getting returns in order to keep the money coming.

That means making sure that grantees achieve their goals, said Vanessa Kirsch. “If our entrepreneurs don’t succeed, then our donors don’t fund us.”

What About Impact?

And just how much impact have venture philanthropy groups achieved over the past two decades? Has this movement really borne fruit in terms of moving the needle in more dramatic ways than traditional grantmakers?

These questions aren’t easy to answer.

All the top venture philanthropy groups make a strong case for their impact, pointing to organizations they have scaled and lives that they’ve touched. NewSchools, for example, says it’s invested “$300 million in 350 education ventures.” Social Venture Partners, which operates as a decentralized network, now has over 40 affiliates in nine countries that are engaging over 3,400 partners. It says it’s moved $70 million to 900 nonprofits.

New Profit’s website offers up a host of metrics of its impact—although Vanessa Kirsch said, “Personally, I’m never satisfied. Entrepreneurs are never satisfied.” She added: “The biggest lesson is: Man, does change take a long time to happen. It just takes a while.”

When she started New Profit, Kirsch expected that the organization would grow faster than it has. As it turned out, growth came slowly—although steadily. And that’s been true for the venture field as a whole, which remains a small part of the overall philanthropy world. For example, if you add up all the grant money that New Profit and NewSchools together have moved over the past two decades, it’s less than what a top foundation like Robert Wood Johnson gives away in a year.

Ultimately, though—and ironically—hard metrics probably aren’t the best way to measure the impact of venture philanthropy. These groups have been leaders in evangelizing a set of ideas about grantmaking to emerging donors and within the larger philanthrosphere. Today, it’s now almost conventional wisdom that funders should offer more long-term general support to strengthen nonprofits. To be sure, most foundation grants are still made for project support. But judging by shifts among leaders in the sector, like the Ford Foundation, and the strategies of top emerging mega-givers like Steve and Connie Ballmer, some of the core ideas of venture philanthropy have made major inroads. That’s especially true within the new donor class, many of whom have had direct involvement with venture philanthropy groups. Looking ahead, it’s these donors who are likely to build and preside over the largest foundations in the U.S.  

Much is said about how traditional grantmakers need to change. But with trillions of dollars set to flow into philanthropy in coming decades, and many of America’s 600-plus billionaires now turning to giving, the bigger prize is influencing how tomorrow’s funders operate—which has been an animating mission of venture philanthropy all along.

In coming years, the reach of venture groups is likely to only expand. A growing influx of donors has been a good thing for funding intermediaries of all kinds—including community foundations and commercial donor-advised funds. Many emerging givers are still engaged in their careers and don’t have the bandwidth to set up their own grantmaking operations. At the same time, more donors want to give in a strategic fashion, and venture philanthropy groups offer a way to do exactly that. These organizations are also now drawing support from larger, established foundations that value their methodology.

In other words, it could be that whatever impact the venture movement has had so far may be nothing compared to what lies ahead.