Something Ventured: Philanthropy With A Venture Twist

August 27, 2003

NEW YORK — The Bill & Melinda Gates Foundation took an unusual step with a recent donation to an educational cause – it gave money to a “venture philanthropy” group.

The Gates foundation in June donated $22 million to the NewSchools Venture Fund, a San Francisco nonprofit organization that promotes charter schools and other education initiatives.

Founded in 1998 by wealthy venture capitalists, NewSchools tries to bring VC principles to the world of philanthropy by nurturing the groups it gives money to and demanding accountability for how the money is spent.

NewSchools calls itself a venture philanthropy firm, a concept that emerged in the late 1990s as a charitable outlet for VCs and others who were enriched by the booming markets.

Venture philanthropy has lost some of its luster since the markets turned south, but the Gates foundation’s donation to NewSchools illustrates this new style of giving continues to breathe.

“There are VCs interested in working and using expertise not just for financial gain but for the social good as well,” said Mark Heesen, president of the National Venture Capital Association, an industry trade group. “They want to make sure the check is going to be well used.”

Venture philanthropy isn’t a form of private equity. For the most part, “investors” in venture philanthropy firms are making donations, and are eligible for the same tax write-offs as traditional philanthropic giving. The investors – VCs, high-net-worth individuals and, in some cases, foundations – don’t expect financial returns but instead seek social returns.

But venture philanthropy firms try to mimic VCs in certain aspects. They may name a representative to the board of a beneficiary. They require prospective recipients to present business plans with a promise of growth, much like entrepreneurs pitch ideas to VCs. And after making donations, venture-philanthropy firms stay involved with the recipient groups, helping them with strategic decisions.

In rare instances, venture philanthropy firms do make equity investments or loans, which generate financial returns. Such returns are usually plowed back into the fund, allowing them to maintain their nonprofit status.

“They want to have a way to engage with the community,” said Tom Donlea, director of Social Venture Partners International, a Seattle network of more than 20 venture philanthropy groups. His group serves as the philanthropic outlet of NVCA members under a partnerships struck between the two groups in March.

Before venture philanthropy emerged in the late 1990s, “most of the vehicles (for giving) were checkbook philanthropy,” Donlea said. VCs and entrepreneurs wanted to become more engaged, lending their expertise to nonprofits in addition to giving money.

Venture philanthropy has had its growing pains. According to the Chronicle of Philanthropy, several funds have stopped making grants due to the downturn in the venture capital market.

The Gates foundation’s donation to NewSchools was a rare foray into venture philanthropy. The foundation, funded by the fortune of Microsoft Corp. (MSFT) Chairman Bill Gates, typically makes donations directly to groups, not through other philanthropic groups. With the NewSchools donation, it’s letting someone else give out the money.

“I actually like having a mechanism for providing accountability for the grantmaking process,” said Jim Shelton, a program director for the Gates foundation, which has a $24 billion endowment. “NewSchools is a partner with the nonprofits, but it also holds them accountable. They do that for me in a way I can’t,” given the sheer magnitude of grants made by the Gates foundation.

NewSchools will use the money to create management organizations to oversee new charter schools. Charter schools receive public funding but are generally smaller than public schools and don’t have to meet the same bureaucratic mandates. NewSchools envisions the charter management groups creating up to 100 schools and serving 40,000 students in New York, California and other “high-need” regions.

NewSchools traces its roots to John Doerr, partner with Kleiner Perkins Caufield & Byers, the Menlo Park, Calif., VC firm that backed dot-com home runs like Inc. (AMZN) and Netscape. He co-founded NewSchools with Kim Smith, an educational entrepreneur who is now chief executive of the firm.

Through its first fund, NewSchools donated, invested or loaned $20 million to 10 ventures. One of its successes was Aspire Public Schools, which operates seven charter schools in northern California. According to NewSchools, an Aspire charter high school in East Palo Alto, Calif., boasts no student dropouts in its first two years despite an 80% poverty rate.

NewSchools isn’t averse to financial returns. It sold its stake in Learn Now, a for-profit educational enterprise, to Edison Schools Inc. (EDSN). The profits were reinvested in NewSchools’ fund, said CEO Smith.

The Gates foundation donation is part of NewSchools’ second fund, which exceeds $40 million.

Venture philanthropy’s focus on accountability is part of a trend towards non-profit self-sufficiency, according to Michael Bisesi, director of the Center for Nonprofit & Social Enterprise Management at Seattle University.

With government funding dwindling and individual giving crimped by the weakened economy, nonprofits are setting up enterprises to generate revenue, which are also consistent with their missions, Bisesi said. For instance, a homeless shelter might open a restaurant staffed by homeless people, or an advocacy group for the blind gets contracts to handle simple manufacturing processes.

“It’s the very unusual, atypical philanthropic donor who takes time to look at budgets and business plans,” Bisesi said. Venture philanthropists can fill this gap, he said.