Over the past decade, the concept of “venture philanthropy” has appeared more frequently in conversations about rethinking nonprofit investment. This is the result of the growing exchange of ideas between the for-profit and nonprofit sectors. Events in the economic environment of the past ten years have left us wary of capitalism unbridled from a sense of social responsibility. From the Enron scandal to the collapse of the markets in 2008, we are re-adjusting our view of the American capitalist and entrepreneur. Concepts such as “corporate social responsibility” permeate our thinking, and the rise of the Benefit Corporation (or “B-Corp”) and “social entrepreneurism” evidence a new, more socially conscious approach to thinking about for-profit business. At the same time, competition for government and institutional funding and shifts in individual giving priorities in the nonprofit sector have left the cultural and creative fields needing to define their social value, impact, and ability to earn their keep. In short, nonprofits are thinking more like for-profits and vice versa. The concept of venture philanthropy is very much a product of our time, and in this post we discuss ways of defining this approach to investment in the nonprofit sector.
Venture philanthropy is a broad rubric describing a range of approaches to investing in new programs or organizational business models that produce new sources of revenue that can sustain the program beyond the initial investment. This is true capital: an investment in resources that generates new value and renewable revenue opportunities for the organization. This stands in contrast to the model of sustained philanthropy, a funder or donor who is asked to give year after year to subsidize the same program or operating need. While philanthropy—in particular individual giving—will continue to be a significant piece of the nonprofit business model, there is diminishing appetite for long-term charitable subsidy among institutional funders and high-giving individual donors. Despite the business interest and imperative in exploring a venture capital approach to organization investment, it is easier said than done, in particular within current models of institutional funding.
One of the biggest challenges we face today is the lack of truly responsive funding investment, which is currently available only through individual major giving, and almost completely absent from other forms of institutional giving, such as foundation and government grantmaking. This is ironic, since foundation and government funders have positioned themselves as purely project-based “capital investors,” having over the past few decades mostly exited the business of providing annual general operating subsidies. Despite their new position as strategic investors, the highly process-oriented, panel-driven approach to making decisions (which takes between six and fourteen months) and priority-focused constraints placed on “projects” make funders largely unable to respond to investment needs and opportunities when the time is right. If it takes you more than three months to make a funding decision, you are not in a position to respond to an entrepreneurial and innovation-based opportunity.
True innovation and program investment entails high degrees of risk, the need for considered (and constant) trial and error, and the ability to correct course on relatively short notice. Most funders (and their grantees) spend too much time concerned with the amount of money and expenditure strategy, without enough concern with (or ability to even act) when the optimal moment for investment falls. All organizations are complex, constantly evolving systems, and problems need the right solutions at the right time. This could be accomplished through a much more responsive investor, someone deeply engaged in the development of the organization and able to provide tactical financial support along the way, as investment and research and development priorities and strategies evolve. In this model, it is not about making large, long-term funding decisions, but rather more discrete funding decisions in an incremental and timely manner.
Angel philanthropy – the right money at the right time.
Through Thomas Cott’s listserve, I came across a blog post by Devon Smith, “The Arts are Not in Trouble: Post-dessert Reflections from Dinnervention.” The piece was the result of a dinner conversation held at the Djerassi Resident Artists Program. The discussion, which was wide-ranging, concerned solutions for our beleaguered arts community, in particular individual artists. The conclusion: art and artists are not “the problem,” it is our institutions (organizations and funders) that seem to be failing. In her reflections on the evening, Devon inventories a series of solutions, among which is a discussion of changing the funding model from the somewhat lumbering, panel-driven grantmaking model, to one more akin to venture capital and angel investing.
She advocates for a funding model that resembles more closely “…the stages of start up financing: Angel/Seed Round → Series A (growth capital), Series B (working capital), and Series C (expansion capital) → Initial Public Offering/Exit Round.” These stages are, of course, conventional stages in for-profit investment. “Angel” investors usually provide the first significant funding, or second round of funding after “friends and family.” Angel investors are usually experienced in the industry or field in which they are investing, and generally provide more strategic capital in a highly responsive fashion. As they are usually investing their own money (not other people’s money), they are often more hands-on than later stage, venture capital investors, providing consultation and the value of their own experience in the field.
In contrast, venture capitalists usually take a more formal and analytic approach to investing, and the people making the decisions are usually acting on behalf of a group of investors. The process for seeking funding is structured and subject to rigorous, multi-party review. Sound familiar? It should. Venture capital funding closely resembles grantmaking, a parallel that Devon points out in her post. As noted above this venture capital approach addresses some of the later-stage needs of the sector, but is not appropriate for start-up or change-based investment, owing to its inability to be truly responsive and involved in a highly discretionary manner. To address this need, we need more individual and institutional funders in the mix who subscribe to the “angel” approach.
The term “angel” first emerged on Broadway in the mid 20th Century as an affectionate term for a major investor in a new show. It was introduced more formally in 1978 through the writings of William Wetzel, who founded the Center for Venture Research at the University of New Hampshire and did pioneering studies of early-stage investment approaches. The term quickly jumped the fence into the charitable realm, where it has grown to be associated with the highest level of donor to a particular cause. Unfortunately, the predominant use of angel in the nonprofit sector has accrued a negative connotation, as it is most commonly used—in my experience—to indicate someone who swoops in at the last minute and saves the day with an enormous gift. If I had a dollar for every instance in which I’ve heard the desperate board member cry, “If we only could find an angel!”—I myself would possess the wealth of angel investor. The angel has become a symbol of the breakdown in the traditional charitable model in the United States, the very embodiment of missionary ardor reduced to a melodramatic moment of desperation and heroism. Though we love a good rescue story, the notion of the angel as rescuer instead of investor is a problem. If investment is purely re-active to crisis or failure to adapt (as is the case with many nonprofits today), the chances of long-term change and success are far slimmer than in the case of more pro-active, responsive investment. Preventing crises is better than fixing them…over and over.
Thus we need to redefine the Angel Philanthropist. An Angel is pro-active and responsive with their support of new programs and business models, providing the right money at the right time. Moreover, the Angel brings a high level of knowledge and business acumen to the table, providing critical guidance and feedback, without pushing the organization away from its mission and vision. This level of involvement allows our new Angel to assess and understand critical junctures in a new (or old) organization’s development, so that she can provide financial support and other connections at the precisely the right point of inception. The more structured and process-oriented approach of “venture” philanthropy that foundations and government currently offer has a valuable role to play. But, we need to change the focus of action in certain areas of the cultural sector from one of search and rescue, to one of strategic, long-term, and more fluidly responsive investment. Only then will we be able to set our artists and institutions more confidently on the path toward long-term sustainability.