Kim Smith, CEO of NewSchools Venture Fund, believes she is “genetically encoded to be a social entrepreneur in education.” Both of Kim’s parents were educators — her mother a public school elementary special education teacher and her father a professor of education administration for over 35 years at Columbia’s Teachers College. She attended Columbia, where she studied political science and psychology and worked for a consulting firm that specialized in creating business-education partnerships. After completing her undergraduate degree, she met Wendy Kopp, founder of Teach for America (TFA). In the summer of 1989, Kim became the third member of the TFA founding team. In Kopp’s book on the early days of TFA, she describes Kim as “smart and spunky [with] education and teaching in her blood.” In 1998, Kim earned an MBA from Stanford and in 2001 was named by Newsweek magazine one of the “strong-voiced activist women who will shape America’s new century.” She recently spoke with Bruno V. Manno, senior program associate for education at the Annie E. Casey Foundation and contributing editor to Philanthropy.

Philanthropy: What is the NewSchools Venture Fund?

Smith: NewSchools is a venture philanthropy fund started by John Doerr and Brook Byers of the Silicon Valley venture capital firm Kleiner Perkins Caufield and Byers. Our mission is to improve public K-12 education by supporting a community of education entrepreneurs. We do this by investing in the most promising, scalable education ventures in the country and by creating a national network of education entrepreneurs, educators, New Economy leaders, and others committed to improving public education.

We’re a public charity that works as an intermediary: on one side we raise funds from individuals and foundations; on the other, we invest our funds in education entrepreneurs; and in between stands our own team of experienced entrepreneurs. Our investments are a mix of for-profit and nonprofit ventures. For example, on the for-profit side, we invested in LearnNow, Inc., an organization founded to create and manage a network of charter schools to serve students from low-income communities. LearnNow went on to be acquired in 2001 by another for-profit, Edison Schools. Another for-profit example is Teachscape, a firm that produces web-based professional development resources for teachers using the case study method. We’ve also invested in a number of nonprofits, including Leadership Public Schools, a California nonprofit charter management organization, and High Tech High, a nationwide charter replication organization. In all our investments we select entrepreneurs based on their ability to build education efforts that can be scaled up, sustained, and have a dramatic impact on improving public education and what young people know and can do.

Philanthropy: What is venture philanthropy in education?

Smith: We want to take lessons learned by successful venture capital firms and apply them to transforming the education system in dramatic ways that will stimulate large-scale improvements in student learning. Let me mention two especially important lessons. The first is to acknowledge the power of entrepreneurs, who are a special kind of change agent. That’s obvious to anyone in venture capital but not as obvious to those trying to improve public education. Entrepreneurs create disruptive technologies or ways of doing things that release new energy and insight. The challenge is to harness that energy — that unique way of approaching problems and tackling change — and focus it on public education’s problems.

The second lesson is related: Venture capitalists recognize that their success depends on the success of the entrepreneurs they fund. This leads the venture capitalists to create wrap-around services and relationships for their entrepreneurs that help the entrepreneurs succeed. The challenge is to develop similar wrap-around relationships for education entrepreneurs. If we can find the right entrepreneurs who are tackling the right leverage points, we want to support them in a way that will help them succeed and thereby drive much larger-scale change.

Philanthropy: What do you mean by “scale?”

Smith: Let me focus on three issues, though others exist. First of all, “scale” or growth is something with which the business sector has much experience, the nonprofit sector little. Traditionally, the nonprofit capital market hasn’t thought much about scale. A second way to think about scale relates to the millions of kids not being well served by public education. While local or small innovation is crucial, it doesn’t reach the issue of how to serve millions of kids not enrolled in one or a few innovative schools. So one way to think about scale is to ask, “What number of students need to be served to have an impact on the system from which they come?”

Third, it’s crucial to ask what the relevant scale is for a venture, because not every project must be national. For example, when a nonprofit wants to operate a group of charter schools in a city, at what point does this system of charter schools become self-sustaining, so that those schools can support the corporate overhead? Sometimes a local or regional focus is appropriate because the capital markets care about one place. NewSchools wants to add value to the scale discussion by bringing business lessons to the table and trying to create solutions that are large enough, systemic, and relevant to all kids not currently being served well by public education.

Philanthropy: How would you characterize your relationship to political groups? Do you align with Democrats, Republicans, or somewhere between?

Smith: NewSchools was built to be bipartisan. We intentionally sought founding donors from both the left and right, bringing them to a common space. This wasn’t hard because there are people on the left and right committed to improving education dramatically. We’re a hybrid community, combining lessons and information from the business sector with lessons and opportunities in the public and nonprofit sectors to develop new solutions to problems. Elements in each sector are important in developing solutions to education’s problems. We see a growing community of people moving from sector to sector, able to pull pieces from the sectors and create new solutions that are hybrids — not from any one sector but drawn from multiple sectors. NewSchools tries to be a multilingual liaison among these sectors.

Philanthropy: How do you do this?

Smith: A translation process occurs. Our marching orders are be strategic and create environments that lead to student success. For example, we’re trying to be strategic around the question of whether for-profit or nonprofit management companies should be involved in education. In general, we’re agnostic between for-profit and nonprofit ventures. Having said that, one structure may make more sense for a particular deal or strategy. A case in point is the difficult problem of financing facilities for charter schools, where it probably makes more sense to build a nonprofit institution that looks like a for-profit real estate investment fund (REIT), because charter schools are typically underfunded. An actual for-profit REIT probably wouldn’t work, because there isn’t enough money for profitability.

Philanthropy: What investments have you made?

Smith: Our first fund was $20 million, invested in nine ventures across three leverage areas: choice and competition, human capital development, and accountability for outcomes. It includes Aspire, a nonprofit charter management organization that operates six schools in California and that manages a growing network of charter schools. Our second fund includes a Charter School Accelerator Fund, which leverages philanthropic capital so that we can (a) grow more nonprofit charter school management organizations and (b) find entrepreneurial opportunities that could help charter schools solve their problems with facilities and back-office business management. The fund aims to move the charter school effort from a focus on creating individual schools to a focus on creating scale by supporting individual schools and school networks that demonstrate consistently high student achievement.

In addition to the accelerator fund, we have a Technology Innovations Fund that supports entrepreneurial efforts that grow the technologies needed to improve accountability for outcomes and that use assessments and data in real time to support instruction. Finally, a Performance Related Fund supports human capital efforts like New Leaders for New Schools, trains principals to lead new charter and charter-like schools and currently partners with three major urban school districts: New York City, Chicago, and Washington, D.C.

Philanthropy: Tell us more about these nonprofit management organizations.

Smith: Through our charter accelerator fund we want to support four to six regional organizations that can grow and manage a diverse supply of charter and charter-like schools. Their customers would be students and parents in urban environments who aren’t satisfied with current public schools and want an option. These organizations would help bring to scale the choice movement.

A second set of customers would be teachers and school leaders who want to be involved in a system of schools that is built from the ground up and that has a clear mission to which teachers, parents, and students are committed. From start to finish, the entire system is designed to align all the customers, with everyone there by choice. Of course, different customers will want different things; so education management organizations would create different school brands. The benefit of a brand is that parents, teachers, and others know what that brand means. Our goal is to develop charter management organizations that produce a diverse supply of different brands on a large scale.

Philanthropy: How do you determine which ventures you will support? What is your formal “due diligence” process?

Smith: Kleiner Perkins, the venture capital firm of our founding donors, heavily influences our “due diligence.” We start with our strategic areas of interest and invite organizations to send us their business plans and executive summaries of their proposed work. We take a very close look at their board members and their financial models. We meet with potential investees to discuss their strategy and determine whether they have the hybrid expertise we think they need. We also incubate ventures when something needs to happen and hasn’t evolved naturally. That means we have investments over the life cycles of organizations — i.e., some incubation, some early stage, some start-up, and some scale-up based on a strategic use of capital. What we add to the venture approach is the issue of social impact. As a nonprofit with a social purpose, our key concern is social impact. If an organization is not in a position to have a dramatic social impact, they don’t make it past our first screen.

Philanthropy: How do you measure social impact in education?

Smith: Think about social impact in layers. The first layer is how many kids are being served plus the type of impact the organization is having on those kids. In particular, what’s the quality of that impact as measured in increased test scores, increased attendance, increased graduation rates, and so forth. If you’re using a quantitative model of social return on investment, you add questions about what those improvements mean for long-term financial impact. The bottom line with social impact involves asking and answering such questions as, “Who are the customers?” and “How are they affected?”

A further perspective on social impact involves Jed Emerson’s “blended value” proposition, which suggests every organization has both social and profitability effects. This approach interests NewSchools because we want to invest in firms that have a dramatic impact on improving schools. So we try to blend the traditional measures of a firm’s success — did they build a successful business model; have they had successful sales; what’s the revenue and the bottom line — with the organization’s intended social impact and their approach to measuring that impact. We want to invest in an organization which, as a natural byproduct of its being a successful company, will dramatically improve the lives of the children it’s serving and also have an impact on the larger public education system.

Look at one of our investments, Carnegie Learning and its Amazing Algebra curriculum. When it sells the curriculum to a district, the company is succeeding as a business. But the next layer brings us to the positive test results that the product produces for low-income kids. The blended value proposition puts these parts together, showing the total impact of what’s occurring.

Philanthropy: What are the major challenges you face at NewSchools?

Smith: One challenge is helping entrepreneurs build and scale up their entrepreneurial ventures, which is tough. Our job is to marshal support to help ventures succeed. Another challenge involves fundraising and our role as an intermediary. The business world uses intermediaries. For example, a venture capital firm aggregates funds from investors and then invests this capital in entrepreneurs. In the nonprofit world, some foundations use intermediaries, particularly in the community development finance area. But most of the foundations that invest in education don’t typically use intermediaries. So it’s a challenge to explain to potential funders the added value we bring to their giving. Our fundraising has evolved, switching from all individual donors in the first fund to more foundations and institutional funders investing in us as an intermediary in the second fund.

Philanthropy: What’s wrong with most philanthropy today?

Smith: Let me focus on three issues, from the perspective of a grantee. First, it’s very frustrating to work with foundations that take a simplistic approach to funding and say, “We don’t want to fund your corporate overhead. We only fund “direct service.” That’s telling me they don’t want to invest in an organization’s capacity. I understand the need for nonprofits to be efficient. But we know from the business side that you can’t invest in a business for “direct service” and have no corporate infrastructure.

Second, philanthropies are structured in a way that makes it challenging for the staff to take risks and be dramatically successful. The incentives aren’t there. Staff are not in a performance-based pay environment where people are rewarded for dramatic success. At the same time, people are often punished when projects don’t work out. That creates an environment where staff are risk averse. At NewSchools our success as a group is tied to how much we’re able to help our entrepreneurs be successful in dramatic ways. Part of our strategic design is not to be an endowed foundation; so we must go out in each cycle and explain to people what we’re doing and how we’re adding value and measuring our social impact.

Third, risk aversion leads foundations to place many small bets rather than a few large bets. In placing many small bets, you diversify risk and minimize downsides. But you also minimize upsides. I hope that in working with more traditional endowed foundations, NewSchools can create opportunities for them to place some large bets.

For example, philanthropies should more actively try to move the nonprofit capital market. I’m fortunate to have individual donors and foundations who are creative and strategic in the way they think about social change, which allows us to use a variety of mechanisms to leverage dollars. We use debt, equity investments, grants, and so forth to achieve what’s needed in the given situation. More endowed foundations should use program related investments, particularly debt, as a tool that can leverage their impact on the nonprofit sector. Lastly, it’s frustrating to think that many large foundations whose mission is to have a social impact often use only 5 percent of their capital to have that social impact, letting 95 percent of their financial capital make money on itself. I’d like to see that change so that a higher percentage of those dollars go to achieving social impact.