Philanthropy's Challenge: Building Nonprofit Capacity Through Venture Grantmaking

by Paul B. Firstenberg

What follows are slightly abridged versions of chapters 1 and 2. For a full listing of chapters in the print edition, see Contents.

The Challenge: Changing the Focus of Charitable Giving

Over the last decade, the pressure on nonprofit organizations to improve their performance, particularly to deliver specific, measurable results, has intensified. Now, for the first time, attention is being directed also at the performance of grantors and the impact of the grantmaking process on grantee effectiveness. The way philanthropic institutions and individuals have traditionally gone about their business is being challenged.¹ Today they have a choice between different strategies for grantmaking.

The Tradition of Program Focus

One choice is to continue the traditional mode of grantmaking focused on support of individual programs, with limited ongoing engagement with the organization producing the programs. The alternative is to refocus grantmaking on building the organizational capacity of grantees, employing a process derived from business venture investing. The direction chosen will shape the pace at which nonprofit enterprises are able to enhance their organizational potential and are able to flourish over sustained periods of time.

In essence, the argument is this: increasing the effectiveness of the nonprofit sector requires grantors to devise more productive means of encouraging the organizations they support to improve their performance.

Traditional grantmaking aims at identifying and supporting individual programs. Inherent in this traditional approach is a reluctance to finance organizational expenses. In addition, once a grant is made, there is a strong preference for an arms-length relationship with the grantee, exercising very little, if any, oversight of the operation of the organization and avoiding any active assistance to its management.

The concentration on continually finding innovative new programs often causes grantors to neglect conducting systematic evaluations of whether programs have achieved their intended results or whether the donor’s own performance could be improved.

Focus on Capacity Building

However, experience shows that to foster and sustain effective charitable programs demands building viable, well-managed organizations. To do so, grantors will have to shift their focus from the evaluation and funding of particular programs to assessing the capacity of organizations to perform their missions on a sustained basis. This means being prepared to finance the organizational requirements of entities they wish to support and providing assistance to the management of such organizations. The heart of the matter is a commitment to working closely and continuously with an organization until it demonstrates the ability to thrive on its own, or the reverse, it becomes evident that the organization is simply not viable.

This point of view has been forcefully articulated by Michael E. Porter, best known for his groundbreaking studies of business strategy, and Michael Kramer, president of Kramer Capital Management:

[Grantors] can create more value if they move from the role of capital provider to the role of fully engaged partner, thereby improving the grantee’s effectiveness as an organization.²

. . . management assistance, access to professional service firms, clout and a host of other non-cash resources. It also means they maintain . . . the willingness to engage for the long term.³

Regardless of how imaginative a proposed program may be, its effectiveness will be largely dependent on a variety of other factors. These include the skill of the organization in implementing the program, its financial viability, its capacity to establish effective quality controls and program evaluations, and its ability to provide various forms of administrative support.

As Harvard Business School faculty members Letts, Ryan, and Grossman pointed out in a 1997 article in the Harvard Business Review:

. . . foundations make grants based on their assessment of the potential efficacy of the program. Although that approach creates an incentive for nonprofits to devise innovative programs, it does not encourage them to spend time assessing the strengths, goals, and needs of their own organizations. Thus, they often lack the organizational resources to carry out the programs they have so carefully designed.⁴

The same three authors argue further in their 1999 book that:

Both funders and nonprofits are increasingly recognizing that sometimes even the best programs do not survive, much less grow . . . . Although a variety of forces threaten success in the nonprofit world, one fact is clear: programs cannot stand alone. Even innovative programs alone are a weak foundation for large-scale social impact.⁵

They then maintain that missing in the focus on programs is attention to organizational capacity. Programs, they point out, are developed, maintained, expanded, or modified to meet changing circumstances. In their view:

It is the . . . ability to develop, sustain and improve the delivery of a mission . . . that provides the foundation for lasting social benefits.⁶

In focusing on the appeal of programs, grantors tend to overlook whether the organization has assembled a staff with the requisite skills to maintain the health of the enterprise. Grantmakers should, of course, evaluate the potential social benefit of a proposed program. Grantmakers, however, should be at least as concerned with the development of nonprofit organizations that have sufficient depth and range of professional skills to enable them to remain viable over the long term. This means supporting organizations that not only initiate creative programs but also possess the financial, strategic, and administrative capacity that is essential to the health of an enterprise.

During the past year I interviewed a number of executive directors of newly created nonprofit social service organizations. All of them conceded that, during the process of being organized, they had not addressed whether they had available the full complement of skills required to become a successful, long-term enterprise, or had planned how to acquire such expertise. Among the missing skills were those to provide legal support, financial controls (especially management of cash flow), program quality control, program evaluation, strategic planning, fundraising, recruitment of new staff, human resources management,⁷ and internal management information systems.

The program focus also fails to address the initiatives the organization can undertake to diversify its revenues and so reduce its dependence on only its current sources of funding. Reliance on any particular source of funding is inherently risky. Foundations and governments are prone to changing their priorities or eliminating an organization from the list of entities they favor. The change may have nothing to do with the quality of a grantee’s performance; funders often get restless with their current agenda and are anxious to move onto supporting something new. Even as powerful a television program as Sesame Street—at the height of its popular appeal—was threatened with losing its government funding, which it eventually did lose.⁸ Being prepared for the loss of an organization’s current funding and developing plans to cope with this possibility, should be part of every organization’s strategic plan.

A strong organization also will have the talent to develop new initiatives as existing programs are completed or lose their effectiveness or external support. An oft-cited case in point is the March of Dimes, which led the national effort to find a way to eliminate the scourge of polio. Once polio was defeated, the March of Dimes reinvented itself as an organization concerned with birth defects.

A New Model for Capacity Building

Private firms that fund companies based on their business potential rather than the collateral offered by assets, traditionally take an active role in the development of the business. They will stay with their investments for a long time and reward success with more money. They act quickly and with a minimum of bureaucratic interference. These capital providers have long understood that regardless of how intriguing a business idea may be, the key lies in identifying and backing effective organizational management. Venture capitalists that fund the early stages of a business’s development typically see themselves as company builders. Such firms exercise careful review of managerial capability. They believe the first step in the creation of a strong venture is finding the right management talent.⁹

Often the creator of the new business idea may not have the skills to run a successful company. In such cases, the venture firm will recruit a CEO with the requisite expertise. In addition, it will help raise the capital required to fund the business’s development, leveraging its own investment. Once the business is organized and funded, venture capitalists do not withdraw from the scene. They remain actively involved with an enterprise to see that it is well-run and implementing its business plan as intended. If there are shortcomings, there is a readiness to step in and reorganize the business. Private equity funds, while investing at a later stage of a business’s evolution than venture capitalists, adopt a similar posture of active and continuous engagement with the companies in which they invest. Investment based on a company’s profit potential rather than its assets may be described as “venture investing” and provides a model for a new approach to grantmaking—called here “venture grantmaking.”

Of course, as a practical matter, it is not feasible or even desirable that every grant to an organization be subject to this kind of process. It takes a good deal more time to undertake a venture grant than to process a traditional grant. The limited scope of some grants, their small size, the maturity and past performance of the grantee, as well as the sheer volume of grant applications most funders have to review, are factors dictating that certain types of grants continue to be made on the traditional basis. For instance, grants for a quite specific project, limited in time and scope, such as a specific art exhibit or artistic performance or research undertaking, do not call for the venture approach described in the subsequent chapters of this book.

However, improving the overall performance of grantees should enjoy a high priority. Many grantee organizations would benefit from assistance in upgrading their organizational capabilities, enabling them to expand their reach. Assisting grantees to enhance their performance impacts the productivity of a greater segment of nonprofit activity than can be affected by direct program grants. Grantmakers then, should seek opportunities to help develop well-run organizations with depth of skilled management. This requires focusing on building organizational capacity—a process which requires time—and abandoning traditional grantor reluctance to make long-term commitments to an organization or to fund organizational expenses. Part of the process may require developing forms of funding other than the conventional grant.

It also implies changes in the expertise of grantor organizations. In addition to their traditional ability to assess the value of programs, grantors need the capability to evaluate and help strengthen grantees’ organizational capability. A focus on the effectiveness of grantee organizations will also inevitably lead funders to develop close, ongoing relations with grantees, interacting with their management in a combined effort to improve performance.

Maintaining a longer term relationship with grantees can also benefit grantors by keeping them abreast of developments in specific fields, as well as fostering first-hand appreciation of the factors that enable grantees to achieve their missions. It would also position grantors to identify opportunities to draw upon existing organizations whose capabilities they are familiar with to take on other assignments rather than back an altogether new, unproven enterprise.

Building a strong organization takes time. It takes venture capital backers of start-ups anywhere from three to as many as seven years to progress from the their initial investment to the time when their interest in the company is bought by another group or sold to the public through the mechanism of an initial public offering. Even in the case of more mature companies, the time frame for realizing a return on investment will still be several years.

Nonprofit grantmaking time horizons are dramatically shorter and are typically a function of internal grantor policy rather than based on the achievement of results. Many grantors state that they are unwilling to fund any program for longer than two to three years, reflecting a perceived concern that longer commitments will create dependence or tie up grantor funds, constraining the funding of new programs. This kind of short-term funding is inimical to providing the time for program adaptations and for building the skilled management team typically required to create a successful enterprise.

Combining money and assistance can be critical to achieving success. Venture capitalists as well as private equity funders play active roles in the building of a successful organization. Typically such investors will take one or more seats on a company’s board of directors, giving them direct knowledge of the company’s progress and pitfalls. Sometimes investors will actually hold a controlling position on the board or limit by contract management’s freedom to make certain kinds of decisions without the investor’s consent (e.g., to arrange a merger or acquisition, acquire new financing, or to sell their shares). Board seats enable venture investors to help a company shape its strategy, to provide the benefit of their experience and knowledge to company management, and to develop relationships with key personnel that encourage candid and timely disclosure of difficulties the enterprise is encountering. Research has suggested the more successful the start-up, the more likely it was to have had a board controlled by venture capital investors. Many firms seeking venture capital in fact place a high value on attracting support from a fund that not only can provide the required funding but also can add significant value through its participation in the management of the enterprise.¹⁰

In contrast to venture investors, grantors at best tend to create arms-length oversight of grantees whereby they learn about management shortcomings after the fact, when the damage is already done. Most grantors shun the partnership role with management as advocated by Porter and Kramer.¹¹ Few grantors sit on grantee boards or personally provide guidance, coaching, and mentoring to grantees. Assistance is usually arranged in the form of third-party consultants who see their task as advising and reporting to the grantee rather than sharing their observations with grantors; in the case of such consultants, grantors appear to follow a policy of don’t ask, don’t tell. One of the challenges to grantors who wish to adopt the venture-investing approach is to have the kind of talents that can play productive, active roles in helping organizations develop.

The following chapters define venture grantmaking, the characteristics of candidates for venture grants, the expertise required for grantors to make effective venture grants, and the questions grantees need to ask themselves when seeking this form of support.

Venture Grantmaking

Venture Investing Defined

Venture grantmaking is the application of the outlook and practices of venture investing to funding charitable enterprises. Firms engaged in venture investing are referred to as venture capitalists; this category also includes private equity funds. Venture capital and private equity firms employ their capital to invest in companies that represent the opportunity for a high rate of return within no more than five to seven years. They will look at countless opportunities before selecting a limited number in which to invest.

A venture investor may invest to fund the formation of a new business (“seed investing”), may provide capital in a business’s early stages of development (“early stage investing”), or provide capital to an established company to help it grow to a new level (“expansion stage financing”).

Venture investors are by no means passive investors; they take a proactive stance in guiding, leading, and nurturing the companies in which they invest. Such investors seek to add value through their experience in investing in many companies. Many venture investors seek themselves as “entrepreneurs first and financiers second.”

Venture investors do not make an investment without considering how they are going to realize the value they help create within a certain time period. This requires finding a way to sell their holdings as part of an offering of company stock to the public at a substantial gain, or to exchange their holdings for more valuable shares in an enterprise that acquires or merges with the company in which they have invested. The stock sale is commonly part of an initial public offering by the company (an “IPO”), but, while it may be “the most glamorous and heralded type of exit . . . . most successful exits of venture investments occur through a merger or acquisition . . .”

A Venture Grant Defined

There has been a recent proliferation of new grantors describing themselves as engaged in venture philanthropy. There are differing opinions on how to precisely define the term and a range of investment models that claim to fall under the venture philanthropy rubric. An excellent rundown of this growing list is provided by The Morino Institute, Venture Philanthropy Partners, Inc., and Community Wealth Ventures. They have collaborated to produce a series of reports to explore the field of venture philanthropy, the latest of which is the very informative “Venture Philanthropy 2002: Advancing Nonprofit Performance through High-Engagement Grantmaking.”¹ An earlier edition of this report concluded that, “funds that combine strategic management assistance with financial support are more specifically designed and structured to address capacity issues that have been obstacles to successful programs getting to scale.”² Clearly, their conception of venture philanthropy is based on building organizational capacity, but with an emphasis on active partnership with the grantee/investee.

Similarly, as used in this text, the definition of a venture grant is the provision of long-term funding and professional assistance to enable the grantee to develop the organizational capability to sustain and grow its mission, generating high social returns. The concept is of a partnership between grantor and grantee to elevate the capacity and thus the impact of the grantee organization. Aspirations for the organizations are jointly agreed upon. The funding is targeted not just at direct support of a particular program or programs but at assisting the organization acquire the staff, professional advice, equipment, and systems needed to foster its growth. As a consequence, the funding, to be effective, needs to be multiyear in character with disbursements tied to the accomplishment of certain milestones. Thus, a critical element is the establishment of clear measures of successful performance, for both programs and organizational growth. Equal in importance to the funding is the provision of sustained, productive professional assistance of the nature outlined below.

In the end, a venture grantmaker is committed to staying the course until the enterprise it funds achieve the goals jointly set by the grantmaker and grant recipient. However, there is a danger in pushing an organization to expand to the point where it becomes so large that it is no longer able to function as it did originally. Organizations can attain a scale where they no longer operate with the drive and zeal that first marked them as highly promising enterprises. The aim of venture grantmaking is to help create superb organizations, not necessarily large enterprises.

Venture Philanthropy Partners is in the process of launching a series of funds designed to have a significant impact on the organizations in which it invests, the first of which is “The Children’s Learning Fund for the National Capital Region.” Six investment principles are to guide the fund:

• Investments will be made exclusively in building the organizational capacity, focusing on leadership and management development, human resources and technology deployment.
• Investments will include both financing and active, ongoing strategic management support and assistance.
• Investments will be multi-year and substantial. The relationship with investment partners will be long-term (four to six years). All investments will have performance standards that must be achieved to be fully funded.
• Exit strategies will be addressed with and by each investment partner, signified by their achievement of strategic objectives and financial sustainability.
• Investment partners will be selected and supported to achieve a leadership position in the development of effective approaches to the problems facing children.
• Investment partners will establish outcomes to drive their own continuous improvement management while providing accountability to investors for their social return on investment.³

When to Make a Venture Grant

The basic argument of this book is that there should be a bias in the direction of applying more grantor resources and energies toward building grantee organizational capability. Still, as noted earlier, it is neither practical nor sound policy to apply the venture grantmaking process to every grant. Hard and fast rules don’t help in making this choice. Case-by-case judgments have to be made to determine whether it makes policy and practical sense to adopt the venture grant approach in a given situation. Certain factors should prompt this choice; they are actually the flip side of the factors, noted earlier, which push a grantor in the direction of the traditional form of grantmaking.

In the end three factors will primarily drive the decision to engage in venture grantmaking:

First, where the organization, its mission, and programs have such substantial potential social benefit that its importance warrants a grantor becoming engaged in the organization’s development. Organizations advancing pattern-breaking ideas will have appeal. Also appealing will be organizations the value of whose work has been established but who have stumbled because of managerial, financial, or other weaknesses that can be rectified. Restructuring such enterprises can have a big pay-off.

Second, where the organization, if successful, can become a model for a host of other organizations engaged in the same or similar work. Organizations frequently claim their programs are widely replicable. This assertion ought to be greeted with a certain skepticism, but practices learned by one enterprise can be passed to another, especially if a grantor establishes a mechanism for passing on the best practices of one organization to others.

Third, the potential grantee organization has certain characteristics which increase the likelihood that it will achieve the expectations set for it. These characteristics are described below.

Illustrations of Capacity Building

Paul Connolly, writing in “Building to Last: A Grantmaker’s Guide to Strengthening Nonprofit Organizations” (The Conservation Company) states that “capacity building can occur in virtually every aspect of an organization including programs, management, operations, technology, human resources, governance, financial management, fund development and communications.”

A review of how the Vera Institute of Justice works to launch new programs as independent nonprofit organizations illustrates that a grantor can help launch an organization through participating in the selection of its initial management team and defining the organization’s strategic niche. As noted, in the Vera case the parent organization plays an active role in the initial selection of the board of trustees, executive director, and senior financial officers and in setting the original strategy for the organization. This can be critical in placing the organization in a niche where it will enjoy a competitive advantage. Vera also participates as a member of the board for a number of years until it is comfortable that the organization can stand on its own. There is uniform response among executive directors and board members that Vera’s board participation helped their organizations over many bumps in the road. Doubtless, Vera’s role helps explain why all its spin-offs continue to operate today, years after their formation.

A venture grantor can help expand an organization’s capabilities, both in the program and administrative areas, by making targeted investments that directly contribute to the ability of the organization to expand its reach on a continuing basis or to improve its operations.

Take the case of a fledgling center for assisting children with learning disabilities. The organization has been funded since its founding mainly by its principal benefactor and his friends, a number of contracts with local school districts to provide teacher training, and statewide educational conferences for teachers. It also provides assistance to a local college to work with learning disabled students. But it has not developed a program to assist businesses whose employees, or their family members, may have learning disabilities. If it could develop such a program it would extend its reach into a sector where there is often no program of assistance. In addition to businesses, governments have similar problems which they largely ignore. At present the center lacks the financial resources to devote staff to developing a program responsive to the needs of business and government. An investment of funds in research and development could enable the center to develop appropriate programs. Armed with such programs, the center may well be able not only to extend the scope of its services, but also attract a new source of support— employers willing to pay for this kind of health care for their employees and family members.

An attractive area for a venture grantor to support is the creation of a research and development unit within a grantee organization. One of the great strengths of the Vera Institute of Justice is that it operates a research department that designs and tests new ideas. It is a major fount of the organization’s creativity and innovation. Other nonprofits would benefit from having a similar capacity, but few can afford to unless a third party subsidizes it until it becomes an established and sustainable part of the organization.

Another area in which the venture grantmaker may be able to help build a nonprofit’s capacity is in enabling the grantee to identify and exploit business opportunities that can generate meaningful earned income. Most nonprofit executives have little experience in business and may simply not be aware of the possibility of generating earned income from the activities or assets of their organization. Their lack of business experience may also make them overeager to try a business venture that is far too risky or that is too removed from their basic activities to make sense to pursue. Venture grantmakers with business acumen can provide vital guidance and critical judgment in this area.

I have also come across situations in which nonprofit staff lack the financial sophistication required to manage the enterprise. As a result, an organization’s finances may be inadequately managed, leading to deficits, sudden cash flow crises, the underfunding of pension plans, or the build-up of liabilities that the board is unaware of. Equally, the staff financial group may lack the skills in investing funds and substantial cash may be in checking accounts rather than invested in higher yielding instruments. It may be that with training and guidance the staff can learn to handle such matters, or it may be that some changes in personnel are required. In either case, a venture grantmaker can be of invaluable help in identifying such shortcomings and making sure the organization’s financial staff has the requisite expertise.

Assistance designed to build organizational capacity is not likely to be the product of a quick operational review of an organization and provision of initial guidance. The best ideas and assistance may well come from immersion in the life of an organization over a period of time, as one develops an informed assessment of the effectiveness of key personnel and programs. That is why this book talks about an ongoing engagement with an enterprise as a vital part of promoting the growth of organizational capacity.

For instance, an organization may offer an innovative program on the local or state level. Over time, the program becomes increasingly effective as the staff sharpens its sense of how to make it work and becomes expert in its subtleties. At some point, the organization has enough expertise in the program potentially to offer it to other states in response to a visible demand from other regions of the country. A venture grantor can step in and help launch the expanded effort through a combination of judicious leadership and initial funding.

The story of the role of the Ford Foundation in the early growth of Children’s Television Workshop is another illustration of how continued focus on the development of an organization, not just support for its program, can help create an enterprise that has the capability to make a sustained contribution to the public good.

Characteristics of Venture Grantees

What organizational qualities and characteristics identify candidates for venture grants?

Generally, venture grantees will not be start-ups but have some operating history. Their track record will show the capability to deliver programs that achieve their intended outcomes. They will make efficient use of their resources, maximizing the amount of their total funds expended on programs.⁴ The management will have the skill and depth to expand the reach of their efforts, with the capability to establish the more formal systems of administration and control required to manage more staff operating in more locations with more extensive systems of administrative support and human resources management, as well as the initiative to raise additional resources to fund its expansion.

Usually, the organizations will be supported by a committed, active core group of trustees, outstanding in their own fields, and dedicated to the welfare of the organization. The board of trustees will meet at least three times a year with a majority of trustees present.

The most compelling candidates will show promise to become an outstanding force in their field and to sustain their leadership position. These enterprises will be committed to expanding their organizational capacity.

Developing Organizational Capacity

Building organizational capacity encompasses:

• Revisiting the organization’s overarching goals, its mission statement and strategic plan for achieving its goals and mission.
• Assembling a staff with the full range of professional expertise required to deliver high-quality service, provide the administrative support the organization requires to maintain a superior operation, and raise the revenues to sustain the growth of the organization.
• Devoting management time, energy, and resources to examining how to improve the quality of the organization’s programs and eliminating unnecessary costs and inefficient means of operation.⁵
• Measuring performance and identifying, through research or other means, shortcomings as well as practical means of improving programs.
• Developing innovations in program, administration, and revenue generation on a continuous, sustained basis.

Such a culture places a premium on excellent performance. The key staff of such an organization will be professionals grounded in expert knowledge of program areas and dedicated to continually improving the quality of their work. Indeed, it is the motivation to excel on the part of the entire organization that is fundamental to its continual improvement.

A key quality will be the ability to recruit new talent as existing staff moves on to other opportunities. Turnover is a genuine problem in many nonprofit organizations. They do not have the size, scale of operations, or financing of organizations possessing great depth of personnel. Most nonprofits tend to have short career ladders, that is, a limited number of positions between the top and bottom of the executive rung. This limits their ability to develop and promote talent from within. It is a fact of life that most nonprofits need to be able to continuously recruit replacement talent. An organization’s record in this regard will impact overall performance.

The McKinsey Study of Effective Capacity Building in Nonprofit Organizations

The observations derived from my own experience are supported by work commissioned by Venture Philanthropy Partners. In 2001, they retained McKinsey & Company to identify examples of successful capacity building experiences at nonprofits across the country and to come up with a set of characteristics of successful capacity building. The McKinsey report, available from Venture Philanthropy Partners (www.venturephilanthropypartners.org), developed seven essential elements of capacity building:

• Aspirations: An organization’s mission, vision, and overarching goals, which collectively articulate its common sense of purpose and direction.
• Strategy: The coherent set of actions and programs aimed at fulfilling the organization’s overarching goals.
• Organizational Skills: The sum of the organization’s capabilities, including such things (among others) as performance measurement, planning, resource management, and external relationship building.
• Human Resources: The collective capabilities, experiences, potential, and commitment of the organization’s board, management team, staff, and volunteers.
• Systems and Infrastructure: The organization’s planning, decision-making, knowledge management, and administrative systems, as well as the physical and technological assets that support the organization.
• Organizational Structure: The combination of governance, organizational design, inter-functional coordination, and individual job descriptions that shapes the organization’s legal and management structure.
• Culture: The connective tissue that binds together the organization, including shared values and practices, behavior norms, and most important, the organization’s orientation towards performance.⁶

“. . . the organizations in this study that experienced the greatest gains in capacity were those that undertook a reassessment of their aspirations . . . and their strategy. Closely linked to this sense of purpose was the integrated set of actions designed to achieve the organization’s overarching goals.”⁷

Effective Leadership

At the center of a motivated, talented staff will be a singularly effective leader whose personal standards and work ethic set the benchmark for others performance, whose knowledge of the business is second to none, and whose message, repeated over and over, sets the tone for the organization.

Christopher Stone, president of the Vera Institute of Justice, before assuming command, served the organization overseas and then returned to the United States to turn around one of its major spin-offs, which was floundering. He combines superior knowledge of the field of criminal justice with a talent for identifying new program concepts and creating new organizations to implement new ideas. His seemingly limitless energy and enthusiasm for Vera’s mission inspires all those engaged in Vera’s efforts.

William G. Bowen, as president of Princeton, had as his mantra “excellence,” calling day in and day out on everyone in the university to perform at their very best. No one who encountered him could fail to appreciate the standard he set both for the faculty and administrative staff.

Quite different styles of leadership can be effective. Bill Bowen, for instance, was on top of virtually every detail that affected his administration. Bowen’s successor as president of Princeton, Harold Shapiro, has drawn praise for his ability to remain undistracted by day-to-day details and keep focused on the issues that would make the greatest difference. As one his officers put it: “He properly assumed that if he gave strategic direction, the smart folks around him would figure out how to get it done.” Another of his team added: he had the ability, “to pick a few issues that were overwhelmingly important to him and stay focused on them so as to effect real changes.”⁸

Effective leaders will genuinely understand their business and what makes it work and what could damage it. They are to establish an overall direction and a set of values that are well understood. They have the ability to focus their attention on the one objective which they view as pivotal to their organization’s success. Amid the myriad issues and challenges they face, they never lose sight of this objective, and they direct their greatest energies and talents to its pursuit.

To these qualities I would add a “positive outlook” for the future of their organization. Effective leaders aren’t naïve about the difficulties they face or the possibility that the rug could be pulled out from under them in some unexpected fashion. Effective leaders radiate confidence that challenges can be overcome, troubled programs can be made to work, new funding found to replace or expand existing support, and new talent recruited when necessary. In short, they do not give in to defeat and their conviction that the future will improve sustains the morale of their organization. Joan Cooney, founder and CEO of Children’s Television Workshop, was faced with the decision of what to do when a series of pilot programs for a new show about science for eight- to twelve-year-olds failed to interest or inform its test audience. She ordered the pilots tossed out and work to begin again on the development of the show, infusing the production staff with new talent. The result: the second time around a successful series emerged.

It is important to underscore, however, that effective leaders can do more than talk the talk. They can make the necessary decisions, choose a superior staff, and envision the strategy required for successful performance. Leaders may be visionaries with a gift for attracting support for their ideas. But an organization needs not only visionaries but skilled executives who can manage the organization. In its report on capacity building, McKinsey stated that: “. . . visionary leadership should not be confused with visionary management.”⁹ Visionary managers—like Chris Stone of Vera, who has a creative sense of vision but also created and ran programs—have a depth of first-hand knowledge about the business, being skilled in the work of their organization. They are committed to the task of driving the organization to grow and gifted at directing others to perform at their best.

At the same time, even the best leaders have their flaws. In some cases their strengths are also a source of weakness. Keeping a close eye on all aspects of an organization’s operations, for example, can help insure quality performance but also prove to be excessively controlling and undermine initiative. In evaluating potential grantees, the sophisticated grantor will be aware of both the exceptional qualities of its leader and his or her limitations.

The Venture Grantor as Catalyst

The hallmarks of a potential venture grantee are programs that provide important social benefits with the potential for increased impact over time, superior execution to achieve intended outcomes, the potential to expand programs, a staff motivated by the drive to excel, outstanding leadership, and a commitment to devote time and resources to improving efficiency and effectiveness. The case for making a venture grant exists when these factors are present. The funding and support offered by such grants can significantly enhance the organization’s ability to achieve its goals.

A grantor can assist grantees by stimulating its management to expand its thinking beyond putting out day-to-day fires. An example can be found in the experience of a nonprofit CEO I interviewed some years back.

A social service organization was created in 1989 through the merger of two projects servicing New York City. The first, initiated in 1967, was designed to assist young felony offenders’ build productive lives, and the second, created in 1979, offered chronic misdemeanor offenders the opportunity to engage in community service in place of serving short-term jail sentences. The costs of both activities were and continue to be paid for under fee for service contracts with the city.

In talking this past year with its executive director, who came on board shortly after the new organization was created, he made it clear that for the first six years of its existence, his sole focus was on the day-to-day running of the first two core programs and stabilizing funding. Then in the mid-1990s the city completely changed the way it related to the organization, interposing an intermediary agency between the courts, with which the organization had previously dealt directly, and the organization. The direct working relationship with the courts was considered to be critical to the effectiveness of the organization’s program. The change came as a shock and was viewed by the staff as a knock against the organization. There was no strategic plan to fall back on which might have established an objective of expanding programming and diversifying funding.

With the interposition of a third-party agency, the executive director told me, he and his key staff realized they could not put all their eggs in these two program baskets and began the process of looking for ways to diversify their efforts. Challenged by its original funder to think freshly, the organization’s management shook loose from absorption with daily administration, freeing up a great deal of entrepreneurial energy, leading to the creation of new programs and a search for private foundation money. A little over $1 million in such funding was raised during 2001.

In recent years, the organization has added new programs, one for the treatment and support of offenders suffering from mental illness, and a second, for drug intervention for first-time misdemeanor offenders. Two potential new programs are currently under investigation. The organization now services over 4,000 youths a year, employs some 175 people, and has an annual budget of over $11 million. Most of its work is funded by contracts with city agencies.

The executive director believes that a continuing relationship with a grantor, even after an organization is able to stand on its own, can be quite valuable. A grantor, he offered, could have knowledge of a wider substantive terrain than an individual grantee, an eye for program innovation, as well as specific functional skills such as fundraising and program evaluation. The latter, he observed, is an area most grantees overlook and in which they have little expertise. He further suggested that a grantor could serve as catalyst for the development of new ideas by the grantee.

“It is easy,” he said, “to get stuck in one’s own program. You need to be encouraged to think outside the box and to find a safe place to do such thinking.”

Grantor as Investment Banker

In the business world, companies seeking acquisition or merger opportunities retain skilled professionals, known as investment bankers, to find and facilitate such transactions. The bankers’ broad knowledge of companies, their analytical abilities, their expertise in structuring and negotiating such transactions, and experience in approaching prospects enables them to significantly assist their clients. These bankers also bring to the table know-how in raising capital for their clients. Their fees for work are very high but clients are willing to pay them because they value the results.

In the nonprofit world there isn’t going to be the opportunity to earn large fees for facilitating mergers or acquisitions. Such transactions may also be more difficult to consummate in the nonprofit sector. There is no financial benefit to shareholders to lubricate business mergers and acquisitions. A nonprofit merger requires the approval of boards of trustees, and if a board is unwilling to support the transaction, it is hard to force their hand. In a business merger the stockholders have the final say and their votes may be had if they see enough potential financial benefit. Nevertheless, there are cases in which nonprofit institutions have merged and even, as part of a merger, converted into a for-profit institution.

The untapped opportunity is to proactively look for situations in which a stronger nonprofit institution could emerge from the joining of two independent entities; or instead of funding new organizations to develop new program ideas, assign the project’s development to an existing organization with proven management and a strong track record. At present no nonprofit plays this kind of investment banking role, despite its potential as one means of strengthening the organizational capacity of nonprofit enterprises. Grantors that develop large portfolios of grantees could be alert to such opportunities.

Bailing Out a Charity

No charity has an inalienable right to survive. Just as some businesses, even with good products, may fail, some worthy charities may not make it. But there may be some charities, on the brink of failing, whose work is vital and with an infusion of funds and a well-conceived restructuring plan, might revive. In situations in which the economy is in a sharp downturn, or government support has been withdrawn, some failing charities may present a compelling case for assistance.

I am not aware that any grantor has adopted a deliberate policy of aiding such organizations, but it may make sense for a funding organization to develop the expertise to assist such organizations. It would take work to position a grantor to undertake to aid failing charities. Most grantors lack the management skills to engineer a turnaround. But the world of business is filled with restructuring specialists. Private investment firms are typically practiced at assembling such skills when they want to salvage an investment. Such skilled personnel could be recruited to aid a grantor that wants to try to salvage certain charities.

Naturally, no grantor will want to be overwhelmed by pleas for bailouts. Criteria for selecting candidates for assistance will have to be established and hard choices made. And such grantors may want some form of social or even financial payback if their assistance results in a successful rescue. As difficult as such a mission may be, investment to assist troubled charities may be a worthy endeavor.

Notes for "The Challenge: Changing the Focus of Charitable Giving"
¹ Porter, Michael, and Mark R. Kramer, “Philanthropy’s New Agenda: Creating Value,” Harvard Business Review, November–December 1999; Letts, Christine W., William P. Ryan, and Allen Grossman, High Performance Nonprofit Organizations, Managing Upstream for Greater Impact, New York: John Wiley & Sons, Inc., 1999.
² Ibid.
³ Ibid.
⁴ Letts, Christine W., William P. Ryan, and Allen Grossman, “Virtuous Capital: What Foundations Can Learn from Venture Capitalists,” Harvard Business Review, March–April 1997.
⁵ Letts, Christine W., William P. Ryan, and Allen Grossman, High Performance Nonprofit Organizations, Managing Upstream for Greater Impact, New York: John Wiley & Son, Inc. 1999, p. 3.
⁶ Ibid.
⁷ Human resources management encompasses recruiting techniques, compensation structure and administration, systems for evaluating the performance of personnel, and benefit programs.
⁸ See Firstenberg, Paul B., The 21st Century Nonprofit: Remaking the Organization in the Post-Government Era, New York: The Foundation Center, 1996, pp. 118–120.
⁹ “What is Venture Capital,” National Venture Capital Association. See Appendix A.
¹⁰ Bygrave, William D., and Jeffery A. Timmons, Venture Capital at the Crossroads, Boston: Harvard Business School Press, 1992, p. 217.
¹¹ Porter, Michael, and Mark R. Kramer, “Philanthropy’s New Agenda: Creating Value,” Harvard Business Review, November–December 1999.

Notes for "Venture Grantmaking"
¹ “Venture Philanthropy 2002: Advancing Nonprofit Performance through High-Engagement Grantmaking.” Venture Philanthropy Partners, 2002.
² “Venture Philanthropy 2001: The Changing Landscape.” Venture Philanthropy Partners, 2001.
³ www.venture philanthropypartners.org
⁴ One measure of efficient use of resources may be found in The Council of Better Business Bureau’s Standards for Charitable Solicitations. The CBBB declares: “Reasonable use of funds requires that: a) at least 50% of total income from all sources be spent on programs . . . b) at least 50% of public contributions be spent on programs described in solicitations . . . c) fundraising costs not exceed 35% of related contributions, and d) total fundraising and administrative costs not exceed 50% of total income.” (See www.give.org.) Other sources of a standard may be derived from other organizations that evaluate the performance of charities, such as the Charity Ratings Watchdog Service. It maintains that to be rated as “good” or better a charity must spend less than $25 to raise $100 and allocate 75% of the money raised towards charitable programs, not fundraising or administrative costs. A review of the operations of other organizations in the grantor’s portfolio may provide useful guidelines. It would be a productive endeavor if grantors maintained a database compiling performance statistics from their portfolios, perhaps even creating a joint database with other grantors. One wants to be careful in not automatically applying external standards of efficiency because accounting practices of different organizations may distort comparisons.
⁵ For various means of improving the effectiveness and efficiency of an organization, see Firstenberg, Paul B., The 21st Century Nonprofit, Remaking the Organization in the Post-Government Era, New York, The Foundation Center, 1996, pp.23–114; Letts, Christine W., William P. Ryan, and Allen Grossman, High Performance Nonprofit Organizations, Managing Upstream for Greater Impact, New York: John Wiley & Sons, Inc., 1999, pp. 37–106.
⁶ “Effective Capacity Building in Nonprofit Organizations,” prepared for Venture Philanthropy Partners by McKinsey & Co., 2001, pp 33–34.
⁷ Ibid., p. 70.
⁸ J. I. Merritt, “Teaching, Learning and Financial Aid,” Princeton Alumni Weekly, October 10, 2001, p. 20.
⁹ “Effective Capacity Building in Nonprofit Organizations,” prepared by McKinsey & Co. for Venture Philanthropy Partners, 2001, p. 71.