Donors as Investors not Entrepreneurs

In my guest post on Paul Brest’s blog, I tried to make the case that donors (foundations or otherwise) should be primarily concerned with funding great nonprofit organizations rather than designing social programs. However, both Paul and one of my readers interpreted my post to be arguing against the concept of basing funding decisions on evidence that a program works. So let me clarify my thinking.

For-profit firms are generally built by entrepreneurs and funded by investors. Most investors are “passive” in that they provide capital, but do not influence the day to day operations of the firm. Some investors, especially large, early stage investors such as venture capitalist, do exert influence over how the firm is run. However, at the end of the day, the business plan is crafted and adapted by the entrepreneurs, not the investors. The Internet changed the world not because investors designed grand plans for a wired world and then sought out technology firms who they thought could implement their plans. The Internet was brought to a wide consumer audience by entrepreneurial firms whose great business plans and outstanding leaders attracted investment capital.

Sure nonprofits should have sound business plans that address both operations as well as a Theory of Change for why their programs will affect social impact. While neither nonprofits nor their funders should expect the level of evidence found in science, I do think that nonprofits should base their plans on evidence that they will likely work and accumulate evidence along the way that things are working (or not). My point is the designing of programs and researching of validity should be the domain of nonprofits. The focus of donors should be reviewing nonprofits and selecting those that appear to offer the best opportunity for impact. This is not how foundations behave today.

If you look at the research distributed through PubHub, a Foundation Center service that distributes foundation-sponsored research, most of the research is on specific program interventions, not nonprofit organizations (a recent report on carbon cap and trade systems is about what makes a system work, not which nonprofits are the best options for a funder interested in reducing carbon output). What I’m suggesting (and please re-read my opening comment about this discussion with Paul being a way for me to form my opinion, so I may change my mind on this) is that many foundations are practicing philanthropy with their emphasis in the wrong place. Foundations should be spending most of their time researching nonprofits and then figuring out the best way to fund the ones they chose, rather then spending their time designing programs and then finding which nonprofits they can contract with to execute their plans.

This doesn’t mean that donors cannot have their own ideas about which sorts of programs they are interested in. Just as a for-profit investor in energy companies might favor natural gas producers over oil companies because of beliefs they have about the future of energy use, donors may very well have certain “themes” that guide their giving.

So yes, evidence of social impact is important. Yes, any public benefit activity should be executed according to a plan and progress towards goals should be tracked. But I refute Paul’s assertion that philanthropists are the ones charged with designing a theory of change. Instead, I think their role should be in funding the best nonprofits. It is no wonder that we’ve been so slow to develop social capital markets if the major funders are more interested in designing programs than in providing capital to build great nonprofits.

In my model, donors would have their own beliefs and expertise around what sorts of programs work. But they would be “synthesizing generalists” in the words of philanthropy advisors Lowell Weiss (I need to point out here that Lowell worked with Paul to develop Paul’s 8 step description of Strategic Philanthropy. So in using his name here I don’t mean to imply that he would agree with me). A synthesizing generalist, which is an apt description of most great for-profit investors, does not have the domain expertise to create social impact business models. But they do have the ability to evaluate nonprofit firms across a variety of areas and select the ones who are most likely to have a theory of change that works and the ability to execute their plan.

It seems to me that one objection to this model is that foundations may feel that there are no great nonprofits working on a program that they find attractive. But I believe that problem is a symptom of the current Strategic model, rather than refuting of a more Tactical model.

Last note: None of this is meant to suggest that foundations not engage in advocacy, convening, or any other activity that is not part of the nonprofit researching and funding activity.  Many for-profit investors also engage in lobbying and convening of industry players. My point is just to shift the emphasis of foundation funding from a Strategic approach that puts Theory of Change design and testing as the core activity of foundations to a more Tactical approach where foundations see themselves as investors in the great ideas of nonprofit grantees.

In March of 2008, I speculated on a more Tactical philanthropic future by imagining what it might look like in the year 2033. You can read that column here.


  1. Jillian Vukusich says:

    Not sure if I agree (or disagree) with you at this point. Still formulating my thoughts on this.

    However, I think that one distinction remains untouched. Foundations ARE nonprofits. By separating the funder world from the nonprofit sector, we in fact confirm the notion that power lies in the position. This is adverse to my beliefs as a program officer at a community foundation.

    It is my job to learn, to listen and to assist in recommending requests for funding that fit the mission of our foundation and also meet the criteria established by the donors we represent. I always say that we look to the nonprofits to be the experts in their field of practice but it is the duty of foundation staff to be informed on the issues deemed as priorities by our Board and by our donors.

    There are also distinct difference between an individual donor, an investor and a foundation. Having money to give does not necessarily mean that there is power associated and I think we do a disservice by creating an atmostphere in which foundation staff members are cultivated in the same way that individual donors are.

  2. The power differential between funders and nonprofits is an important issue. I’d like to point out that in the for-profit space, investors hold a certain power over very small companies, but as a company grows the power differential equalizes. The various investors that invest in Google don’t hold power over Google. In fact, because Google has been such a desirable investment, investors have had to compete to get in.

    I think a far greater power differential exists when funders use nonprofits to execute the funders strategy. But as nonprofits are built up into strong, robust firms, they are able to break free of the cycle of dependency on specific funders.

    Yes, foundations are nonprofits, just as both investors and companies are for-profits. But the role of the grantmaking foundation should be to capitalize (fund) entrepreneurial nonprofits, not to design their own programs and then use nonprofits to execute them (at least that’s the argument I’m advancing).

  3. Tony Macklin says:

    Sean, thanks for the thoughtful exchange with Paul and others. Part of the issue may be the depth and implementation of the “theory of change” used by a donor or family foundation.

    A basic version of a theory of change is: 1) defining goal of the impact (what impact for whom over what timeframe), 2) thinking about what building blocks (conditions, programs, policies etc.) need to be in place to achieve the goal, and 3) finding the organizations that are delivering on those building blocks (or are best positioned to). Depending on the situation, those organizations may be nonprofit, government, business, or loose citizen alliances.

    Like any theory, it is meant to be tested and modified as you learn more (in fact it works best if you’re willing to listen and learn). But it does give you a framework to focus your giving and learning, and a means to clearly say no to things that don’t fit. It can also provide framework for a donor’s volunteer and advocacy time.

    Any donor or foundation can start with this basic strategy. And, they can implement the theory through general ops or strategic growth grants to efforts that provide the most impact, rather than trying to design their own programs.

  4. Thanks Tony, what I’m arguing is that funders are not the ones who should be designing step two. Funders should be defining their goals, such as combat global warming, reduce poverty, improve k-5 education, etc. But then they should be looking for great nonprofits who are working on these areas and funding the ones who they think are doing the best job.

    The designing of conditions, programs, policies etc, should be done at the nonprofit level and funders should evaluate the evidence and arguments made by each potential grantee. But the current practice, which you do a good job of laying out, gets things backwards (or at least that’s the argument I’m advancing). By designing their own theory of change and then “contracting” with organizations who can deliver the building blocks, the funders are maintaining a situation where most nonprofits are under-capitalized because they only get short term “revenue” in exchange for program execution rather than long term “equity” funding that can help them build their organizations.

  5. Jillian Vukusich says:

    “I think a far greater power differential exists when funders use nonprofits to execute the funders strategy. But as nonprofits are built up into strong, robust firms, they are able to break free of the cycle of dependency on specific funders.” Agreed and sustainability/capacity is (should be) in fact one of the goals of grantmaking.

  6. Tony Macklin says:

    Sean, in general I agree with your points. The issue may be in how you’ve seen foundations execute theories of change or how much detail they have.

    Say a donor wants to reduce poverty for single-parent families in a certain zip code. In a metro area, you’d see probably 100+ organizations claiming to help in some way. A donor ought to be able to have at least a starting theory that explains their bias towards, say, post-secondary educational attainment as a key pathway out of poverty. This can at least help them narrow the field of opportunities and better test their assumptions.

    I think there isn’t any reason a donor can’t have that type of basic theory and then fund organizations in the way you describe. I’d advocate for your position on long-term equity funding for organizations that then fall into that chosen pathway (presuming they’re well-run etc.).

  7. I think you and I are close in our thinking, Tony, but have a different emphasis. As I wrote I do think it makes sense for investors to have certain “themes” in their investing and of course certain programs will be more or less convincing to different donors.

    But my point in all of this is to argue that donors should place the analysis of the organization ahead of the analysis of a specific type of program. Why should a donor (whose biggest asset is the fact they have assets to give/invest) have their own theory of how to affect social change? Are not the nonprofits on the ground, who are domain experts, better positioned to make these decisions? Especially if they have the internal resources to evaluate their activities well?

    That doesn’t mean that funders should just decide to let nonprofits do whatever they want. But for-profit investors in retail companies (for example) do not design business models and then go looking for companies that fit them. They examine companies and decide which ones seem to make the most sense.

  8. ani hurwitz says:

    sean–what makes you think that most foundations don’t put the “capacity” of the nonprofit first? i think most do. and of course foundations have their own theories of change. staff, after all, are generally hired for their expertise in the area they’re funding. But after you’ve been doing this for some time, you realize that it takes far more money, political clout, and time to move the needle on many of the issues we care about.

  9. Well Ani, lots of evidence shows that they don’t. Here’s a report from Grantmakers for Effective Organizations. Key quote “Survey finds persistent gap between nonprofit needs and grantmaker practices”.

    What I’m saying is foundation staff’s core expertise should be in evaluating nonprofits. They should also have expertise in the area they are funding, but I’m arguing that the emphasis should be on building great nonprofits, rather than an emphasis on evaluating the program area and designing strategies to affect change.

    Evaluating organizations is the role of an investor. Crafting plans to create change is the role of the social entrepreneur(and I use that phrase in the sense of nonprofits who try to tackle new problems without any reference to profit making or any “new” social enterprise movement).

  10. Tony Macklin says:

    Great points Sean. Thanks, as always, for dedicating your expertise and time to thoughtful giving stratgies, and to engaging the rest of us in the conversation.