Mar 27, 2008

Are they Venture Philanthropists, Philantropreneurs or Philanthropcapitalists? Ask the Times

by Laura Starita

In the 2006 edition of the New York Times’ giving section—a special supplement published each November in the newspaper—philanthropy reporter Stephanie Strom coined the term “philanthropreneurs” in reference to new generation philanthropists who are applying business start-up logic to solving social problems. The philanthropreneurs profiled in Strom’s piece, including Pierre Omidyar, founder of eBay, and Sir Richard Burton, CEO of the Virgin Group, were investing both in for-profit initiatives as well as nonprofit ventures, but the goal of both was to inject more accountability into initiatives ranging from improving public schools, to saving the earth, or preventing new transmission of HIV. Fully embracing the role of the upstart, many of these philanthropreneurs were also vocally criticizing what came before them. “We need to be open to bigger, bolder reform because the hard truth is Philanthropy 1.0 hasn’t worked well enough,” Steve Case, co-founder of America Online, was quoted as saying.

This piece was neither the first, nor would it be the last, in which the Times wrote about the emergence of a new group of philanthropists coming into the sector with ideas culled from careers in business. Six years earlier, in February, 2000, the paper published a piece on the spate of Internet millionaires who are “turning their attention to philanthropy in their own hands-on ways.” The piece goes on to say that these newly wealthy givers “describe their activities as ‘venture philanthropy,’ modeled on their business experiences…Rather than giving to traditional charities, they see themselves as investing in programs that will bring about long-term change in fields like education and the environment.”

Most recently the New York Times Magazine devoted its annual money section – published March 9th, 2008 – to philanthropy. Among articles analyzing the motivations behind giving, the trend toward requiring measurement in charity work and the benefits and dangers of celebrity advocacy, there included a profile of Herb and Marion Sandler, San Francisco billionaires who were number two on the Slate 60 list of philanthropists in 2006. The article, written by one of the paper’s business writers, calls the Sandlers “philanthropcapitalists” (a term apparently first used by Matthew Bishop in The Economist in 2006), and focuses with some awe on the couple’s past as owner/managers of Golden West Financial, a history which has caused them to run their charitable giving like a business. Given their rigor and results orientation, the couple has also become public critics of old-school philanthropy.

Philanthropreneurs? Philanthrocapitalists? Venture Philanthropists? (Not to mention social investors, social enterprises and social entrepreneurs.) Clearly we’re struggling with a new vocabulary for the current era of philanthropy.

To be sure, term coining is part of the business of thought leadership, and any individual – or publication – credited with having been the first to use a particular phrase at least has some chance of being considered on the cutting edge of the field. In addition, these labels are not entirely interchangeable. The philanthropreneurs in Strom’s piece were doing as much or more investing in for-profit initiatives whose intent was social return as they were giving their money away. Venture philanthropy, the oldest movement of the three and the one that is most certainly past its peak, refers to a very specific giving movement that coincided with the late nineties Internet boom and shared some of the characteristics of start up venture investment of the time, including hands-on involvement of the investors and a focus on short-term, outsized, measurable returns. Philanthrocapitalism, at least in Bishop’s original usage, refers specifically to the transfer of millions of dollars in private wealth acquired during the last decade to decidedly philanthropic causes, with an expectation that those causes will reap measurable results.

Yet these are subtle differences; the movements these terms refer to are similar in that they are all concerned with injecting some rational return-on-investment rigor to the business of philanthropy. They want, in essence, for philanthropy to act more like a functioning market, with a market’s transparent availability of information, inherent incentive structures encouraged by competition, and accountability for outcomes. The theory, of course, is that by making philanthropy act more like a business the sector will inherently become more effective. After all, the end goal of market transparency and competition is to reap more profits, which creates a measurable focus to a business’ activities that philathropreneurventurescapitalists say the traditional philanthropy sector lacks.

What’s easy to forget in all this is that the ways in which businesses measure their own success – through profit or shareholder value based on sales of goods or services – is itself not immune to ambiguity. Though Enron is an overused example, it is a case in which a company that did not pay taxes for the two years prior to its collapse because of lack of income was lauded nonetheless on the big board for its sales and profit ratios. A more obscure example comes from the fact that goods and services are not today priced to include all the costs of production. This is the case with agricultural commodities, some of which are sold below cost due to the distorting role of government subsidies and the excess power of food processors. Likewise, production costs stemming from such difficult-to-measure outputs as emissions have not been included in the price of a good, because the market to date has not viewed emissions as a commodity that needed to be priced and managed. These examples and other like them point to the reality that the market often provides unreliable feedback on underlying value.

More relevantly, perhaps, is the fact that even in business, increased transparency coupled with profit-seeking sometimes produces unintended negative consequences. The current mortgage crisis is such an example. Banks have been reporting significantly decreased earnings over the past half year not only because high credit risk individuals are defaulting on their loans, but also because the complicated instruments banks designed to package and sell that risk to others have turned out not to be as safe as the market thought. In the 1990s when nearly half of all mortgages sold were considered “standard” according to Fannie Mae/Freddie Mac rules, and real estate was a reliably upward-trending investment mortgage securities were a pretty safe purchase. But when higher risk products enter the bundle and the value held within homes decreases those same instruments become negative in value. None of these factors is a secret, and indeed the range of risk inherent in any given mortgage security is a known quantity. Yet the reverberating impact of loan defaults and securities market drops seemed to have come as a surprise to the people who should have been most aware of its imminence.

All this is simply to say that even the most transparently run businesses are vulnerable to obscurity where there should be clarity. In philanthropy the potential for confusion is even greater, since we aren’t talking about something as impersonal as sales and profits. We are often talking, instead, about lives. How does one put a price on, for example, two more years of public education, or a half-decade of living gained through anti-retrovirals, or the feeling of personal value a woman gains from contributing to the family through a micro-business?

By posing the question I do not mean to say that it is unethical to assign value to these things – or at least I am not saying it is only that. On the contrary, as objectionable as life-value pricing might be to most people, philanthropy should nonetheless be making more of an effort to assign value to outcomes as a way of focusing money in areas where it will do the most good. By making a concerted effort to measure the value of specific outputs nonprofits might find, hypothetically, that two more years of public education do nothing to change the prospects of a poor child, whereas three increases lifetime earning potential. Or conversely, that the difference between two and three years is nonexistent. A piece of knowledge such as that could dramatically influence policy, and help redirect millions of dollars in education funding to help more children get those two years.

The problem is that “accountability” as articulated by the vast majority of results-focused donors, and as executed by the vast majority of philanthropies, is rarely as nuanced as measures of life-impact must be. Examples are hard to come by of donors investing heavily to make sure their measures are valid, useful and appropriate, even among those most devoutly dedicated to improving philanthropy’s track record. Instead, measurement efforts are usually asking how many lives have been touched. There are reasons for that, the most obvious of which is that the number of people touched is easy to count; impact is not.

And yet there is danger in assuming that because a beneficiary was touched by a particular intervention that she necessarily benefited from it. A worthwhile example of this danger comes from Helen Epstein’s fine book The Invisible Cure: Africa, the West and the Fight against Aids. In a chapter on AIDS-affected children, Epstein introduces Elizabeth Rapelung, a woman who runs a small organization outside Johannesburg which provides, among other things, a drop-in center where AIDS-affected children go to receive a free meal, a place to play and socialize, and some adult support. Rapelung receives a little bit of money from the South African government to support the children who come to her, but she estimates her services reach only a fraction of the children who need them in her township. Nonetheless, her hands-on scope has made her program less attractive to high-level donors looking for “sustainability.” That has not stopped a number of local PEPFAR-funded programs from trying to take her organization over or sign it up for “consulting” services so that they can count the children she cares for in the numbers they report to the US government. To sum up the dynamic she says, “When the Americans come we sing, we dance, they take our picture, and they go back and show everyone how they are helping the poor black people. But then all they do is hijack our projects and count our children.”

The reporting in the Times sometimes acknowledges these tensions between desiring better results and not knowing whether business-oriented philanthropy is in fact producing them. The writer of the Sandler profile raised this question of effectiveness, and in the same magazine issue appeared an article on measurement that more fully explored the challenges of applying metrics to something that cannot reliably and consistently be represented by a number. So the problem is not that the Times ignores these complications. The problem instead is that these debates about business thinking as applied to philanthropy and the difficulty of measurement have been circulating in the nonprofit sector for nearly a decade. And during that decade the Times, The Wall Street Journal (whose year-end philanthropy coverage was so derivative it could have been written in 1998), the Economist, Slate and many others have been circularly writing stories about them, neutral repetitive stories that observe the phenomenon and maybe apply new names to it, but do little to move the discussion forward or acknowledge the other pieces their own colleagues have written on the same subject. It seems, in fact, that the reporters of the Times Magazine pieces did not even read the stories written by their colleagues at the paper.

Not to sound ungrateful. After all, part of the project of Philanthropy Action is to promote intelligent discussion about the philanthropic sector and ways to improve it. Dedicating an entire edition of the Times Magazine to giving certainly indicates that the mainstream time has come for these subjects. But part of what we mean when we use the word ‘intelligent’ is that the discussion be forward-moving, and that it add value and thoughtfulness to the way in which donors think about and act on their giving initiatives. This kind of thoughtfulness is what readers expect from their elite media and it is not what the Times, or its cohorts, are delivering.

So let us here acknowledge that more wealthy people are looking to apply business discipline to their philanthropic donations. More importantly, let us acknowledge that it is not yet clear that this rigor will produce better results than what came before. It is my suspicion that what is happening in philanthropy now is similar to what happened in business in the late-nineties when Internet-only varieties of brick-and-mortar businesses were launched with great fanfare and claims of putting their “dinosaur” competitors out of business. With the exception of a few outliers such as Amazon and eBay, most of those Internet-only entities have since gone bankrupt, been acquired or been reintegrated into their brick-and-mortar parents with much money wasted and both sides changed for the fusion. While philanthropy is going through similar growing pains it might be more constructive to talk about what these growing pains are bringing to the top and less about the fact that they simply exist. I’d even like to hear about a full-blown success in this arena, as well as about the failures of applying business logic to philanthropy and where old-fashioned charity might have had a role. I want to hear not from a new convert to the church of philanthropy and capitalism, but from one who criticized the old school only to fall back to the middle. Instead of writing about the fact that measurement is becoming important to foundations can we talk instead about specific measurement efforts foundations have taken or, better yet, what they’ve found out about their effectiveness? Those questions are worth a full magazine edition that I, and many others, would thankfully read.