Should foundation program officers be more like venture capitalists? (Part 1 of 2)

One of the big unanswered questions in the nonprofit space is how new, innovative, effective nonprofits can raise enough capital to grow big and expand their impact.  At the core of the conversation is the fact that, unlike in for-profit markets, there’s no clear and established way for nonprofits to raise money around a great idea and a great team.

The ideal proxy, in my opinion, is the venture capital business.  Venture investors typically have a specific area of expertise (telecommunications, alternative energy, software platforms) and, within that area of expertise, they find high-caliber people who have assembled teams around a new and innovative idea, and they put up significant amounts of capital to support that team and the idea.  The capital is meant to be enough to get the team past a certain threshold, at which point the business will be positioned to raise capital from another source or have an IPO.

Here’s the interesting part: foundation program officers ALSO have, you guessed it…specific areas of expertise and large amounts of capital behind them.  At face value, they are positioned to act like venture investors, but they don’t typically act this way.

The analogy to VCs isn’t perfect, but I do think it’s worth considering that foundations as risk-takers and “venture partners” would be a welcome shift for the sector (and yes, there are foundation program officers who act exactly like this, but it’s not the norm).

That said, there are a number of features of the venture investing world that will be very unfamiliar to the nonprofit space, and we would have to figure out how to tackle these if we expect to make progress:

1. Acceptance of failure. In a typical venture portfolio, 1-2 of 10 firms is a blockbuster success, 3-4 return capital, and the rest lose everything.  The venture world has acknowledged that failure is a necessary ingredient in creating innovation; in the nonprofit sector, “failure” is a four-letter word
2. Betting on people and teams first. This is what VCs do.  But more often than not, foundations see nonprofits as implementers of a specific programmatic strategy.  Being a delivery vehicle is very different than being trusted to create something new, powerful, imaginative, and groundbreaking.
3. Clear path to exit. When startup firms are successful, there’s a clear path to the next round of funding.  This is arguably absent in the nonprofit world.  (Though George Overholser at the Nonprofit Finance Fund has put forth the idea that certain nonprofits with a built-in income generation model can achieve financial self-sufficiency once they reach a certain size, if only they could raise growth capital.  I agree, but think the concept might be too restrictive since donations are the revenue model for most nonprofits.  So the model might be: Growth → Increased visibility/brand/recognition → Stronger board/donor community → Increased ability to raise funds).
4. Aligned incentives between the venture investor and the entrepreneur. If the venture-backed entrepreneur is successful, the VC and the entrepreneur get rich.  But if a program officer invests in a nonprofit that, through its innovation and ability to listen to its customers, veers off in a radically different direction, in some ways this is necessarily disappointing to a program officer who has a specific (and often somewhat narrowly defined) set of programmatic objectives.
5. We’re in this together. Venture investors typically play a very active (some entrepreneurs would say too active) role in bringing in resources (people, expertise, board members) to support the success of the enterprise.  It is extremely rare that foundations play this kind of active role in supporting the success of their grantees.

So there are lots of barriers, but most of them seem to be of outlook and mindset rather than being structural.

More on this soon…