This is my most recent column from the Chronicle of Philanthropy. You can find an archive of past columns here.
Providing the Capital Organizations Need to Run — and Grow
By Sean Stannard-Stockton
October 1, 2009 | Link to Original Article
According to Paul Brest’s excellent book Money Well Spent, strategic philanthropists devise ways to solve problems and select grant recipients who can best carry out the approaches donors think will work best.
Another breed of donors is growing — people I refer to as tactical philanthropists.
While strategic philanthropists seek to solve social problems, tactical philanthropists are social investors.
Investors, in both the for-profit and the nonprofit contexts, provide capital to organizations that solve problems. Good investors take great interest in the solutions deployed by the organizations they finance, but they themselves are not problem solvers.
As many philanthropists have rushed to use the currently trendy vocabulary of financial investments when they talk about giving, the meaning of the word “investment” has become confused. A true investment is not defined by whether the investor earns a profit — whether and how much money is returned are just terms of the deal — but the intention of the transaction.
Tactical philanthropists view their grant-making activity as investing in nonprofit organizations because they are not simply paying organizations to carry out programs, they are providing the capital needed to operate and expand a great organization.
Venture philanthropists represent one approach to tactical philanthropy. They provide capital to support a portfolio of nonprofit groups the way a tactical philanthropist does, but a venture philanthropist generally gets very involved in how an organization works. Venture philanthropists may expect a seat on the board for large capital commitments or expect that the nonprofit organization be receptive to extensive nonmonetary support, such as management training.
Venture philanthropy done well and with nonprofit organizations that welcome a highly involved supporter can produce outstanding results.
But getting donors involved is not automatically a panacea. According to “More Than Money,” a report by the Center for Effective Philanthropy, most foundations that provide assistance beyond a grant provide only limited support.
“Providing just two or three types of assistance to grantees appears to be ineffective,” the report says. “It is only in the minority of cases when grantees receive either a comprehensive set of assistance activities or a set of mainly field-focused types of assistance that they have a substantially more positive experience with their foundation funders than grantees receiving no assistance.”
Tactical philanthropists can also be investors who do not focus on providing assistance beyond a grant. Warren Buffett, one of the greatest investors of all time, is known to ask many questions of the companies he is invested in, but does not dictate how they run their businesses. He invests only in organizations where he thinks management is competent and knows best what decisions to make. Mr. Buffett has said, “When you have able managers of high character running businesses about which they are passionate, you can have a dozen or more reporting to you and still have time for an afternoon nap.”
Both venture philanthropists and social investors who take a hands-off approach have something in common. They put their energy into choosing the organizations in which they invest rather than the problems they wish to solve. Tactical and strategic philanthropists both seek a better world in which the problems we face have been solved, but tactical philanthropists see their role as supporting organizations that can achieve social change rather than solving problems themselves.
As one tactical philanthropist told me recently, “I don’t know how to fix the problems in our city, but I know who knows how to fix those problems and it is our job to support them.”
There is no doubt that we need both strategic and tactical
philanthropists. But in recent years, the phrase strategic philanthropy has begun to be used as shorthand for “effective” philanthropy.
We do not all need to be problem solvers. Many outstanding problem solvers are hard at work in nonprofit organizations around the world. In many cases, the best approach might be for philanthropists simply to invest in these organizations and provide them the capital they desperately need to carry out their solutions and grow.
Sean, Thanks for the insightful blog post.
As an active board member/donor/volunteer consultant at San Diego Social Venture Partners (www.sdsvp.org) I can attest to your statements regarding venture philanthropy. The Social Venture Partners (svpi.org) model has been quite successful with the right “investees”. Organizations with a desire to grow and learn and who really want to partner with the venture philanthropist do benefit and definitely become more effective, sustainable, and replicable. That being said, this approach is not for every organization…and that’s why a one size fits all approach to tactical philanthropy clearly doesn’t work. At the end of the day, there is room for all of these approaches. The trick is to match the approach with the organization.
Read your timely column about funding that grows great organizations after returning from a lunch here in Charleston, S.C., where David Hunter of the Alliance for Effective Social Investing delivered much the same message to some influential community leaders mulling the future of philanthropy.
Hunter, who pulls no punches, declares that there are way too many “crappy nonprofits” and “sentimental funders” who say they want to make the world a better place but lack evidence they help people much at all.
Hunter’s rallying cry is “fund organizations not programs” and drive more investment to high-performing nonprofits that can prove their impact.
He gave us a lot more to chew on than chicken!
I (very respectfully) disagree with your thoughts on investors in this post.
You say, “A true investment is not defined by whether the investor earns a profit… but the intention of the transaction.” Conversely, I believe investment IS defined by financial return.
For starters, all major dictionary definitions include “financial return.” Moreover, the general connotation for most is that investment means some kind of financial return. This is why Kiva and MFIs can say investment but why very, very few charities offer this: their donors will expect return if they says “investment”.
As a matter of usefulness, I think it’s important to draw a distinction between donors and investors based on financial return. If there is no difference in “the deal” then what’s the difference between the two? Just a catchy name? I fully understand and respect the idea of being tactical and very involved in your donations (it’s very powerful!). If that’s the case, however, let’s make a definition that describes tactical and involved. Namely, tactical donors or involved donations.
Investments, however, are a widely new and powerful form of philanthropy that deserve their own definition! One that means financial return. This is different from strategic donations and particularly effective for a few main reasons:
1. If you’re receiving a financial return, you’re investing in an organization that is profitable or at least sustainable. You’re investing in a cause that uses business principles (namely, selling products and services).
2. When selling products or services, people value them more (than if it’s free).
3. When selling products or services, you’re forced to deliver products people need and want (or they won’t buy them).
4. When selling products or services, you don’t need to raise donations. You can continue to operate indefinitely without being dependent on outsiders.
5. MOST IMPORTANTLY: if you’re receiving your money back, you can invest it again. And again. And again. It’s like a energizer bunny version of a donation. THIS is the true power of microfinance, social business and ultimately social investment.
As a final note, I’m a long time reader of your blog, and a huge fan. Keep it up. I would, however, cast a vote for more stories and info around social causes that pay for themselves. I think we’ve seen some exceptionally strong examples of organizations that can have far more social impact by accepting business principles.
Thanks for your take on SVPI. I certainly see the SVPI model as a great example of excellent beyond the grant support!
Nick, thanks for the very thoughtful response. I think that you can also make an investment in a friendship or an investment in a child’s future or an investment in society. All of those produce a return (some of which can be captured in financial returns, some of which can’t), but importantly the accrue to other people, not the social investor. These are all investments however in that they are designed not as an exchange of equal value (ie. here’s $1, give me $1 worth of product/services in return), but as an exchange is made that has an expected positive return with some amount of risk.
My point is that calling a grant an “investment” doesn’t make it one unless you are delivering the money in a way that is attempting to enhance the organization’s future ability to create social returns.
To the extent that a financial transaction can produce both social and financial returns, so much the better. But I don’t think these sorts of investments are superior to those that just create social returns. It all depends on your goal.
Thanks so much for being a long term reader and offering your criticism.
When I think of your definition for 2.0 I think of SVP. Our 2000+ partners are the voices of many who believe in enlightened self interest, are focusing on solutions, funding smaller “bottoms up” organizations that deliver impact. We really no longer think of ourselves as venture philanthropists but more as philanthropic investors.
Glad you agree Alan. Venture philanthropists are simply early stage philanthropic investors. I see SVP as “tactical philanthropists”. I also see SVP as being examples of philanthropy 2.0.
Since you’ll be leading SVP, I’m glad to know we see things the same way!
I love David’s “pull no punches” approach. He certainly pulled no punches when he wrote scathingly about some of my remarks during the Performance vs Impact debate, but I think that at the end of the day, David and I have very similar views… although we may talk about them a bit differently!