Why Aren’t Foundations Actually Helping Their Grantees Like VCs?


Venture Capital firms don’t invest in industries to disrupt — they invest in industry disruptors, and many now support them operationally. Foundations should consider following suit.

Industry disruptor Nancy Lublin, Crisis Text Line Founder. (Photo Credit: Glamour Magazine)

I was recently interviewed by a collaborating team from three high profile foundations/LLCs. Their primary question: “How do we find and cultivate more breakthrough ideas in education?”

This question feels all too familiar from foundations today: a primary focus on ideas and issues, often at the expense of talent support and operational excellence. Grand challenges, RFP’s, and funder-borne calls to serve homegrown theories of change have established an unproductive power dynamic that stunts creative problem solving with grantees, inadvertently (and almost passive-aggressively) steering their efforts. Reporting requirements and restrictions with how dollars are to be used can be distracting, and even crippling.

Grantees are treated as functional subcontractors for a foundation’s vision. Visionary grantees? That often feels like an unsupported category in this new world.

What I’ve learned and relearned since returning stateside six years ago with stints at IDEO, Medium, and now Obvious Ventures is nothing new: ideas are cheap. Execution is where the game is played, and talented, passionate teams that are well-supported play it best — delivering the greatest impact, no matter the sector. Foundations should be bending over backwards to support their grantees’ vision and their execution, yet this is rarely the case today.

How might foundations better find and cultivate — or dare I say, invest in — the people to deliver this impact? While Skoll (community building), Omidyar (promoting open roles at grantee orgs), DRK (board seats), and Arbor Brothers have all been attempting some versions of this, a truly value-add, organizationally-supportive funder has yet to emerge.

Looking to venture capital’s most prolific firms, notably those considered “founder-friendly” with strong portfolio services models, might be instructive here.

A Shared Lineage, Converging: Adventure Capital & The Gospel of Wealth

Modern philanthropy and private equity have the same parents: the Wallenbergs, Vanderbilts, Whitneys, Rockefellers, and Warburgs. In 1946 John Hay Whitney and Benno Schmidt started J.H. Whitney & Company, initially positioning itself as “a lender of ‘private adventure capital’” — and legend has it, Schmidt abbreviated this to “venture capital” so it would roll off the tongue more easily.

While Andrew Carnegie wrote The Gospel of Wealth in 1889, the rise of modern philanthropy in the early-to-mid 20th century mirrored that of venture capital: families of extraordinary wealth seeking new and novel opportunities to deploy that capital to deliver social and financial return. For the latter, one question suffices to determine its success: did the investment make money, and at what multiple?

Within the social sector, the motives and expected returns are multifaceted:

A robust [philanthropic and nonprofit] sector can decentralize the production of public goods, so that the government does not solely decide how to spend tax dollars. It can support those institutions in civil society that mediate between individuals and the state. And it can produce public goods that are more sensitive to local demand and delivered with greater efficiency than would governmental institutions. Yet a primary motivation for charity has always been to provide for the poor and disadvantaged, and to attack the root causes of poverty and disadvantage. [Reich, A Failure of Philanthropy. SSIR, 2005.]

The landscape has become even more dynamic today. The emergence of social enterprise, alternative investment options for foundations, and LLC-based impact outfits have muddied the waters for how to best achieve desired social outcomes — in a good way. We are seeing a wider mix of organizations, including social enterprises, supporting the “institutions in civil society that mediate between individuals and the state” which Reich refers to above, largely due to (1) consumers rewarding social and environmentally responsible businesses, and (2) the failure of federal policymakers to make headway on legislative issues.

Strategy: Industry Disruptors > Industries to Disrupt

One view is that foundations and LLCs are now providers of innovation risk capital to nonprofits, social entrepreneurs, and for-profit businesses. These funders are increasingly investing seed capital in similar ways — and often, in the same companies — as venture capitalists, without the pressure of financial return. Recent examples in education alone include Newsela, LearnZillion, and DreamBox Learning — all initially foundation-funded, and subsequently backed by blue chip venture investors.

Those that get the follow-on venture funding also receive ongoing, operational support from venture firms: recruiting help, marketing and management know-how, and most importantly tapping the venture firm’s deep network.

But what about those that aren’t for-profit businesses, i.e. the overwhelming majority of grantees? As they grow, shouldn’t they too have access to value-add resources? If the lines between a social enterprise and a revenue-generating nonprofit are blurring, shouldn’t foundations also aim to ensure their capital is deployed with impact in the same ways venture firms work to ensure their capital’s financial return via operational support?

Why do the funders’ approaches differ so radically?

There are obvious reasons. Startups typically aim for liquidity events (acquisition or IPO), while nonprofits don’t look for exits. Venture investors will help portfolio companies any way they can and often take action when the company is veering off-course, while program officers tend to steer clear of such practices for fear of undue influence. For-profit boards include investors, while non-profit boards rarely include funders.

There are some not-so-obvious reasons as well. VCs don’t invest in industries to disrupt — they invest in industry disruptors, with high levels of risk and a portfolio approach which, over time, favors more successful investments. Foundations on the other hand tend to treat the majority of grantees similarly (outside a binary yes/no on grant extension) despite their promise or lack thereof.

I find these reasons insufficient to explain the experimentation gap by foundations in how they support grantees, and how they structure themselves to do so.

Org Shift: What a Grantee-Friendly Foundation Could Look Like

Back to that question at the top: “How do we find and cultivate more breakthrough ideas in education?” I suggest that is precisely the wrong question.

Foundations might consider building teams that can ask and answer this reframed question instead: “How might we find and invest in world class teams to create meaningful, sustained in economic mobility among the bottom 50 percent?”

So what might that team, organization structure, and process look like?

I. Operators as Grantmakers

Just as the venture community now deploys former operators as investors (as opposed to investment professionals exclusively), so too should foundations consider hiring more world-class operators as grantmaking leaders. (It’s worth acknowledging that foundations sometimes hire operators, but rarely deploy them in ways that support grantees. Putting them in a position to do so is outlined in #2 below).

Many of the top venture firms now count operators as leaders: Ben Horowitz and Marc Andreessen, Sarah Tavel (early at Pinterest, now a partner at Benchmark), and Josh Elman (worked in product management at LinkedIn, Facebook, and Twitter — now a partner at Greylock) to name a few. Partners at my firm, Obvious Ventures, have experience founding, funding, or operating companies like Patagonia, Plum Organics, and Seventh Generation.

What if you could have Jessica Jackley (Kiva) or Charles Best (Donorschoose) leading your grantmaking? How might their perspective on what it takes to build a successful, impactful organizations change whom they give money to and what the grant structure looks like? Seems like they might know a thing or two about building and running a highly functional, impactful organization.

II. Specialized Support Teams

This is related but distinct, and even more critical. The extreme within venture capital is Andreessen Horowitz, having built a team of 100+ across categories including executive recruiting, technology recruiting, marketing, market/business development, corporate development, and operations.

What if you could have Matt Wahl, who spent five years at Khan Academy leading product, helping your grantees with their mobile strategy? Or Tyler Riewer of charity: water working with them on storytelling and marketing? If I were building a support team for grantees I’d want them on my team.

Currently many foundations simply outsource this by funding nonprofits to hire consultants of all varieties. There are ways to respect nonprofit leaders’ independence while delivering real value, especially when grantmakers and grantees have trusting relationships and grantees aren’t living paycheck-to-paycheck. Which brings us to the last point.

III. Policy Refreshes: Pro Rata, Board Seats, Exits, and Extended Runway

While the field of venture philanthropy has explored elements of this, there remains much to be desired. Might foundations consider committing to funding a percentage of an organization’s budget in success or subsequent fundraises, as venture capitalists stake out pro rata rights in future rounds? Wouldn’t that be an extraordinary vote of confidence in the grantees and enable breathing room, potentially impacting outcomes?

Should program officers and foundation trustees consider taking board seats, increasing their commitment to an organization?

Could foundations consider taking more of a portfolio approach, acknowledging that (and we all know this already) many of their grants simply won’t have the impact they hope? This would allow them to more realistically make bets while serving as a forcing function to failing organizations, and even drive constructive M&A activity in the sector — something much discussed and sorely needed given the sheer number of redundancies. Funders can and should use their leverage to move more nonprofits toward mergers.

In some ways, it’s the nonprofits that might be forcing the conversation with foundations. Nancy Lublin, one of the most successful nonprofit leaders and operators today (Dress For Success, DoSomething.org), decided to raise a round for Crisis Text Line like a tech startup would — her most recent one coming in at $25.5M, giving her runway for years. While this is the extreme, it is illustrative nonetheless.

Imagine what others could do if they had access to unrestricted funds for longer periods of time, strong operational resources, and a board made up of those funders with skin in the game.

It’s worth noting that The Bridgespan Group’s Michael Etzel and Ford’s Hilary Pennington effectively articulate the broader challenge of program-driven funding models, and the call for foundations to back foundational capability building. Darren Walker’s leadership here has also been met with much fanfare, yet it remains unclear how this is being operationalized within the Ford Foundation, specifically with staff makeup and organization structure.

It seems there’s much left to be explored on what it really means to support nonprofit and other mission-driven grantee organizations.

Limitations (But Not Excuses)

There are numerous limitations to this analogy, especially funders not wanting to inappropriately influence grantees’ activity, preferring a more hands-off approach.

But aiming for the “success” of each grant may be impeding foundations from their and our collective goals: progress on our most pressing social and environmental challenges. Perhaps it’s time to reflect on their own organizations in service thereof.

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