Philanthropy Spring 2015

SANDY WEILL SAVES CARNEGIE • CATHOLIC ED EVOLUTION • WHEN GRANTS FAIL A PUBLICATION OF THE

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Donor-advised funds Impact investing Venture funds Public policy Microfinance Asset conversion Marketing campaigns Crowdfunding

new f lavors in

philanthropy

Staffing startups Consulting Charity-run commerce Social-impact bonds

For over thirty years, I’ve prepared taxes out of my home.

But in 2011 the IRS said I needed to pass an exam, pay fees and take hours of classes to keep working.

I fought for my right to earn an honest living without getting a permission slip from the IRS.

And I Won.

I am IJ.

Elmer Kilian Eagle, Wisconsin

www.IJ.org

Institute for Justice Economic liberty litigation

DONOR TEST IMONIAL #3

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a magazine that we read coverto-cover. If you’re serious about your charitable giving, you will too.

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Peter and Carolyn Lynch Founders, Lynch Foundation

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table of contents

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PHILANTHROPY

features

departments

12 Alms Alchemy

4 Briefly Noted

The National Christian Foundation’s ability to turn unusual contributions to gold is creating a new trove of generosity.

By Liz Essley Whyte

16 B usiness Marries Charity!

The hopes and hazards of applying market mechanisms to philanthropy.

By Howard Husock

24 M adison Avenue Mercies The virtues of advertising, overhead, and other wicked ways of doing good.

By Nicholas Kristof and Sheryl WuDunn

30 G iving Made Easy

Donor-advised funds are bringing new convenience to philanthropy.

By Joanne Florino

36 Stronger Together

Donors are increasingly using expert intermediaries to bundle and target their giving.

By Evan Sparks

42 A New Way to Serve

Venture for America is introducing entrepreneurial vim and vigor to unexpected corners of our country.

By Ashley May

48 M icro Lending, Major Impact

How the maker of SweeTARTS is combining friendship and capital in one tangy dose.

By Marques Chavez

Seafaring savior. A long-lost battleship.

Enabling a book thief. Philanthropy vs. charity. Why give operating support?

7 Nonprofit Spotlight

Juma Ventures combines work, school, and play with sports-stadium jobs that earn college tuition.

8 Interview Sandy Weill A king of capital on founding a high-school internship program, building a medical school in Qatar, and rescuing Carnegie Hall.

53 Ideas Changing Hearts, Minds, and Laws History shows that donors can have big, healthy effects on public policy.

By John J. Miller and Karl Zinsmeister Rebounding from Philanthropic Failure Our plan flopped. But we didn’t give up.

We changed course.

By Karen Minkel and Marc Holley

58 Books More Than Just Academics Catholic schools have power and potential beyond book learning.

By Andy Smarick

60 President’s Note An entrepreneurial explosion of philanthropic services.

By Adam Meyerson

SPRING 2015

A P U B L I CATI O N O F THE

Adam Meyerson PRE SI D E N T

Karl Zinsmeister

VI C E P R E S ID E N T , P U BL ICA T IO N S

Caitrin Nicol Keiper E D I TOR

Ashley May

MA NA G IN G E D IT O R

Andrea Scott

A SSOCIAT E E D IT O R

Taryn Wolf

A RT D IR E CT O R

Jarom McDonald I NTE R N

Arthur Brooks John Steele Gordon Christopher Levenick Bruno Manno John J. Miller Tom Riley Naomi Schaefer Riley William Schambra Evan Sparks Justin Torres Scott Walter Liz Essley Whyte

C O NT R IBU T IN G E D IT O R S Philanthropy is published quarterly by The Philanthropy Roundtable. The mission of the Roundtable, a 501(c)(3) tax-exempt educational organization, is to foster excellence in philanthropy, to protect philanthropic freedom, to assist donors in achieving their philanthropic intent, and to help donors advance liberty, opportunity, and personal responsibility in America and abroad.

All editorial or business inquiries: Editor@PhilanthropyRoundtable.org Philanthropy 1730 M Street NW, Suite 601 Washington, DC 20036 (202) 822-8333 Copyright © 2015 The Philanthropy Roundtable All rights reserved Cover: Rusty Hill / gettyimages

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briefly noted

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mission keeps Mediterranean migrants from drowning.

The battleship Musashi lay in secret at the bottom of the ocean—until now.

PHILANTHROPY

The Book Thief Olly Neal, a dirt-poor student at a segregated school in the 1950s, was a troublemaker. He cursed authority. He stole from stores. His English teacher saw that his rebelliousness masked real intelligence and energy, and she tried to reach out to him, but he mocked her until she cried.

One day Neal spotted a book with a provocative cover and slipped it into his jacket. Reading it at home in secret, he couldn’t put it down. When he next visited the library he found another title by the same author on the shelf, and stole that one too. Returning again, he was surprised to find a third volume he hadn’t noticed before, and later a fourth. Soon he branched out into all other kinds of reading, and found himself headed to college and then law school. He became Arkansas’s first

Tyrone Turner

A private rescue

Deep Exploration Another philanthropist engaged in recovery missions on the high seas is Microsoft co-founder Paul Allen. He recently announced that after eight years of searching he has discovered the long-lost ­Japanese battleship Musashi. Among the most powerful vessels of its class ever constructed, the Musashi was sunk by American forces during the Battle of Leyte Gulf, after an estimated 36 torpedo and bomb hits from carrier-based airplanes. She disappeared without a trace into the Sibuyan Sea, along with nearly half her crew of 2,400 men.

Allen and his team used extensive detective work and an arsenal of high-tech gadgets aboard his 414-foot ship Octopus to locate the wreck that has evaded discovery for decades, including a remotely operated vehicle that captured images of the remains. The discovery of the lost battleship is just the latest scientific accomplishment of Allen’s Octopus. The vessel has been used by the Royal Navy to explore the wrecked HMS Hood, by Discovery Science C ­ hannel to capture documentary footage, and by James Cameron on his historic mission to the bottom of the Marianas Trench, the deepest point on earth at nearly seven miles below sea level.

Octopus has also been deployed in rescue missions.

As the final resting place for thousands of men, Allen and his team will work with Japanese and ­Philippine authorities to ensure that the Musashi wreck is treated with proper respect. —Jarom McDonald

Paul Allen; moas.eu

Stepping into a Breach In mid-February over 300 African migrants attempting to enter Europe drowned in the Mediterranean Sea when the inflatable dinghies they had been packed into by unscrupulous smugglers were sunk in winter storms.

Sadly, this happens all the time. The United Nations High Commission on Refugees estimates that in 2014, 3,500 undocumented migrants died trying to cross the Mediterranean in less-than-seaworthy vessels. After a drowning of 366 people off the coast of ­Lampedusa in 2013, Italy set up a specialized search and rescue operation called Mare Nostrum. Last year, over 200,000 people were rescued in the ­Mediterranean, many by the Mare Nostrum operation. But in October the Italian government halted Mare Nostrum amid controversy over whether scooping up illegal migrants in leaky boats and landing them on Italian soil to begin an extended asylum process provides incentives for smugglers to continue their sinister trade.

Christopher Catrambone is an American who relocated to the Mediterranean after his home was destroyed by Hurricane Katrina in order to build a business specializing in high-risk insurance, emergency assistance, and intelligence in combat zones.

While on vacation in 2013, an empty jacket floated onto his peaceful beach, which he realized must have belonged to one of the dead from Lampedusa. He decided to take matters into his own hands.

“No one deserves to die at sea,” he wrote. “When I saw what was happening to people crossing the Mediterranean, I knew I had to do something.”

He and his wife gave almost half of their personal wealth to equip a rescue boat with drones, medical supplies, and personnel trained to respond quickly to calls of distress at sea. The humanitarian effort is known as MOAS, for Migrant Offshore Aid Station.

In 2014, MOAS rescued 3,000 migrants in distress.

Those picked up are handed off to Italian or ­Maltese authorities, who decide the best course of action.

Some are granted asylum, others are repatriated.

In the midst of worldwide migratory pressures and shifting political ground, Catrambone’s effort is yet another demonstration that there is hardly any sector that is outside the scope of philanthropy, not even international search and rescue. While Europeans make hard decisions about the best ways to police and protect

their waters, a private citizen from Louisiana is reducing the number of empty jackets, dresses, and baby blankets washing up on tourist beaches.

Tyrone Turner

Paul Allen; moas.eu

black district prosecuting attorney, and was ultimately appointed an appellate-court judge.

At a high-school reunion, Neal got to chatting with Mildred Grady, the teacher he had reduced to tears, and told her how he stole those books and how much they had meant to him. She disclosed a secret of her own: She saw him take the first one and let him get away with it, intuiting that he didn’t want to tarnish his bad-boy image by being seen checking out a book. And she went in search of more titles that might interest him, driving throughout Arkansas and Tennessee to buy them (in the days long before Barnes & Noble or Amazon) and sneaking them onto the shelf week after week. Her mercy and gifts of time and resources opened a world to Olly Neal, and literally transformed his life.

Their story is told in A Path Appears by Nicholas Kristof and Sheryl WuDunn, who write on more pecuniary aspects of philanthropy later in this issue.

From Systems to Service As founding CEO of the Bill & Melinda Gates Foundation, Patty Stonesifer directed grantmaking of more than $1 billion per year. This was after her ­mega-career at Microsoft, “building software that would reach around the world.” In both business and philanthropy, Stonesifer spent her first three decades of employment working at a very grand and abstract “systems level.”

But having grown up with eight siblings, and Catholic parents who took her on regular service missions, Stonesifer realized she missed the joys and discoveries of working at a more intimate level. So she walked away from big bureaucracies and took a job as head of Martha’s Table, a D.C. nonprofit that counts its employees in the dozens, and feeds low-income children and adults, encourages early education, and runs thrift stores to supply basic needs and help fund other programs. The group gets 86 percent of its income from private sources.

The bird’s-eye view of high-level philanthropy “often keeps you away from understanding, what are the rocks in the pockets of those you serve?” said ­Stonesifer at the final event of the Hudson Institute’s Bradley Center for Philanthropy and Civic Renewal. Moving from big philanthropy to directly helping people represented a return to her Catholic service roots and to traditional charity, and she reported that “over my first year at Martha’s Table I have worked harder—and ­happier—than in any of my 57 years before.”

A transcript of this event, and others from the Bradley Center’s 12 years of presentations under the direction of Philanthropy contributing editor William Schambra, are available at Hudson’s website.

44%

of American Jews under 30 have visited Israel.

Half of them

did so courtesy of the donor-funded program Birthright. * Pew Research Center

LEADER DISCUSSION: How Important Is General Operating Support to Charities?

A girl helps herself to fresh vegetables from Martha’s Table.

One of the big decisions a donor must make is whether to fund a nonprofit’s general operations or only specific programs. The latter, much more restricted, form of grantmaking is currently far more popular. Yet some donors believe that unrestricted gifts are the most valuable support that a truly excellent charity can be given.

Here, philanthropy executives Peter Bird (Frist Foundation), Wendy Garen (Ralph M. Parsons Foundation) and Donn Weinberg (Harry and Jeanette Weinberg Foundation) discuss when circumstances may favor focused versus unrestricted support. Lynn Thoman, co-chair of the Leon L­ owenstein Foundation, led this discussion at The ­Philanthropy Roundtable’s latest Annual Meeting.

Thoman: Imagine that you’re an entrepreneur and you’re starting a chain of burger restaurants. You meet a potential funder who is very enthusiastic, and then he says, “Well, I’ll support your hamburgers but not your cheeseburgers. And I’ll support your juice drinks but not your sodas. And I’ll give you funding for two years and you have to spend X percent in year one, Y percent in year two. And I love your idea of opening another restaurant but I’ll only fund you if you open it in this part of the city and not in that part of the city.” That’s what we’re talking SPRING 2015

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briefly noted about here—general operating support versus restricted or program funding.

We have a great group of foundation leaders. The Frist Foundation makes about $10 million of grants per year, mostly in Nashville. The Parsons Foundation distributes about $20 million a year, the bulk going to human services in Los Angeles. The Weinberg Foundation, a $2 billion entity that gives away $100 million a year, helps people on the lower end of the economic spectrum—the elderly poor, persons who need jobs, the disabled, the homeless—and also does about 25 percent of its g ­ rantmaking in Israel and the former Soviet Union.

Do your foundations provide general operating support? Why or why not?

Weinberg: About 30 percent of our grants are for general operating support. But sometimes that’s an artificial distinction, because our program grants often have overhead proportionately reflected in their budget.

Garen: The reverse can also be true. I have a colleague who runs a foundation, and if they give a vehicle to a nonprofit, they absolutely will not consider funding the driver, the insurance, the gas. Where is that money supposed to come from? The problem is not always on the donor’s end; sometimes grantees are not in touch with the true costs of a program.

We became much more comfortable with unrestricted operating support after the crash of 2008. While our own assets plummeted, the meltdown among nonprofits was even worse. Nationally, the Nonprofit Finance Fund has found that 55 percent of nonprofits have less than 90 days of reserves and 22 percent have just one month of reserves or less. It’s difficult for these fragile charities to innovate because they’re worried about payroll. They’re scrambling to stay open. In that context, unrestricted support can be really helpful.

Thoman: When you say unrestricted, can the organization use it for anything?

Garen: I mean really unrestricted. We’ve begun making grants, sometimes on 6

a matching basis, even to help build reserves. We know great nonprofits need long-term working capital, direct program expenses, and administrative and operating support. I think Jim Collins summed it up best when he said that “to make the greatest impact on society requires first and foremost a great organization, not a great single program.”

Bird: Our foundation gives about $10 million a year, and about 55 percent of that is general operating support. Most of it goes to sustain a visual arts center in downtown Nashville that we started and we trust.

That’s what unrestricted giving says. We trust them.

When our foundation began we surveyed the landscape and saw a lot of things that were missing in Nashville: a community foundation, a volunteer center, management consulting for nonprofits.

So we launched all those things. And our board felt very strongly that if we started something, we had a permanent responsibility to help sustain it. Other donors have joined in—in cases where we provided 100 percent support for some of those organizations 20 years ago, now it’s only 5 percent—but we haven’t abandoned them.

Sometimes the impact of an organization is so broad that it’s really difficult to unbundle and say we want Program A and not Program B, C, D, and E. There are about 20 organizations that get unrestricted support from us either because their missions are so broad or because we helped start them up.

Weinberg: Sometimes grantees write to us and say, “We’d like to add two new staff people to do this and that.” Really, what they want is an increased general operating budget. So we won’t make a restricted grant for those specific staff people, but if we like everything else about the organization then we may make a general operating grant.

Sometimes we get a request for a general operating grant from an organization that has ten programs, and only three programs are relevant to our mission. In that case we’ll support those three programs, includPHILANTHROPY

ing a portion of the overhead (assuming we’ve looked at the organization as a whole and feel that its overhead is appropriate).

Bird: We’ve found that many organizations just don’t know how to account for their overhead properly. In those cases, we will throw in extra money and say, “You haven’t accounted for any overhead here, you haven’t accounted for the driver or the insurance,” as Wendy was saying, so we take the initiative to do that.

Thoman: Do you give multiyear general operating grants?

Garen: We do. If the recipient is just going to come back in 12 months, it’s simpler for both of us to fund more than one year. Typically we don’t go beyond two years, but this longer payout is helping to stabilize the sector.

Weinberg: If the organization is new to us, we’ll test it with a one-year grant. If it’s an organization known to us, or has a reputation that makes us feel comfortable, we’re more likely to give a two- or three-year grant. We have a provision in our contracts that if we’re at any point dissatisfied after the first year, we reserve the right to cancel or modify the grant.

Garen: When we’re supporting overhead and making general grants to an organization, it’s usually because we know them thoroughly, have reviewed their financials, have met their leadership, and have seen them work on their own turf.

Bird: Each year we invite every Nashville nonprofit to ask us for technology money.

We end up making about 100 grants a year of a few thousand dollars each. Those grants not only help agencies keep up with their tech needs, but they also give us a doorway into who they are, how they operate, and if they can be trusted. I’ve found that incremental kind of trust-building to be helpful. Those relationships grow over time. And it’s hard to trust an organization with a big grant if you haven’t first trusted it with a little one.

nonprofit spotlight Take me out to the ball game!

Juma students hone their work ethic and save for college by peddling snacks in the stands.

JUMA VENTURES Jonny Alejandre didn’t want to go at first.

But his mother urged him to attend the Juma Ventures presentation at his high school. “I don’t know what would’ve happened if I hadn’t agreed,” says the 17-year-old junior.

“It’s so surreal that one small event can drastically change your life.”

“The best social-service program in the world is a job,” says Juma’s chief operating officer Adriane Gamble ­Armstrong. “If we can connect a youth to ­workforce-development skills and an actual job with income, he or she has the ability to become a productive member of society.”

The organization started in 1993 employing homeless teens at its own Ben & Jerry’s franchise in San Francisco. Over the next few years it branched out to other scoop shops and then the sports-stadium concession business. In 1996 it earned a contract to sell food and drink at San Francisco’s ­Candlestick Park, employing 40 youths.

“I’ll never forget my second night out at Candlestick,” writes one early student vendor. “It was about 30 degrees and raining.

I was standing behind this cart, freezing.

For the first half of the game I was standing there doing nothing. Then I looked up and I had this long line. My fingers curled up from holding the scoop, but I kept working.

I was able to pace myself and get through

the day, get my line down, get everything back to normal. I felt like I accomplished something that day.”

The concession model took off, and since then, more than 4,000 kids have earned over $4 million at stadiums throughout the U.S., gaining real work experience, money, and intensive life coaching from Juma staff, all at the same time.

Juma recruits students through partnerships with schools, social services, and other nonprofit organizations, choosing kids who face obstacles but have the drive to take advantage of its programs. Those it accepts get help in three areas—employment, academic support, and financial literacy and asset building.

Participants hail from low-income families with no experience of higher education. Absent intervention, many would never graduate from high school, never mind enroll in college. And among those who do make it to college from this demographic background, only a fifth actually complete a degree. By contrast, 97 percent of Juma students graduate from high school, and 70 percent earn a college degree within five years.

Before Juma, Alejandre says “something ‘umph’ was missing” from his life.

Now he’s getting his “umph” by running up and down bleachers selling pizza and popcorn at AT&T Park in San Francisco, saving his paychecks for college. “The sporting venue is a hook for many young men, especially,” says Armstrong. “Once SPRING 2015

they’re in, we can involve them in our other programs.” The students learn personal responsibility, cash handling, punctuality, prioritizing, dress, and communication.

“I learned so much at Juma Ventures— stuff I can use for the rest of my life,” writes Loretta Gomes, another former Juma student. “If I would not have taken the class seriously I would have probably lost my job…. When I graduated Juma I not only walked away with new skills and a better attitude, a brighter future. I walked away with pride in myself, a confidence of knowing that I could handle every task given to me at work.”

Students put their paychecks in individual development accounts, with matching funds of up to three-to-one offered by Citibank, BlackRock, and other donors. The funds can be used for higher education and other approved expenses.

Juma also provides tutoring, SAT prep, and application and financial aid guidance to get kids into college. And it offers continuing advice, services, and counseling once students are on campus.

The Roberts Enterprise Development Fund and the Charles and Helen Schwab Foundation have supported Juma from the start. Along with monetary gifts, supporters have pitched in with pro bono services to help Juma thrive and grow. Gap Inc. gives professional development workshops for the group’s staff. The Surdna Foundation is helping Juma open new sites in Sacramento and Los Angeles. This assistance now allows Juma to serve 1,200 teens in cities stretching from San Diego to Seattle to New Orleans.

“Going through the program has really made me think about what I want to do, and how to use what I have in order to achieve those goals,” says Alejandre. “It takes you out of your comfort zone and pushes you to be better, and grab the most potential out of yourself that you can.” Along the way, Juma is cheering him and his peers on—as enthusiastically as football fans in the stands.

—Claire Sykes 7

SANDY WEILL

Sandy Weill was at various times CEO of Citigroup, founder of an investment f irm, and president of American Express, but his high-powered career in f inance began at low wattage—in a “back-office” job at Bear Stearns performing calculations and running messages while studying for his broker’s license.

Weill’s early days at the bottom of the organizational chart never left him. In 1982 he started the National Academy Foundation to offer career training and internships in finance and other fields to high-school students. He’s also a major medical philanthropist, serving for two decades as chairman of Weill Cornell Medical College, where he’s given over $600 million. Weill led the recent major renovation of Carnegie Hall and launched its music outreach program; after serving for 24 years as chairman of the board, he recently became president of that cultural mecca. Weill and his wife are signatories of the Giving Pledge and have personally resolved to give not just half but almost all of their wealth to charity.

Philanthropy sat down with Weill to discuss the causes closest to his heart.

Philanthropy: Your first major foray into philanthropy was to start the National Academy Foundation, which originally trained students for entry-level jobs in the financial sector. What need was this program designed to meet?

Weill: I went into the financial business before computers. We used to do it all by hand, including stock certificates, and deliver them from one place to another.

Later, when I was an executive, a lot of companies were talking about moving their back offices out of New York City because there was very high turnover and they didn’t know where new employees were going to come from. Yet when I drove around the city I saw all these kids in the street. I realized that we’re not educating young people for the jobs that are here.

So we started with one high school in Brooklyn. It was a two-year program of classes and internships, in addition to all the normal high-school courses, ­introducing 8

students to the f­ inancial-services business, mainly the securities industry. We knew that mentoring would be important, and connecting the kids with places they could intern, so we recruited an active board to assist with this.

These kids turned out to be terrific employees. The people in the companies loved working with them, and students even came to school dressed as if they were going to business. It was great for the companies that got involved too, improving internal morale. And it helped the standard of living in the surrounding communities.

The National Academy Foundation is an example of a public-private partnership model that works.

Philanthropy: Then what happened?

Weill: When I sold my company to American Express—which, besides being in finance, was also in the travel ­business— the National Academy ­Foundation set up a program in hospitality, our second themed academy.

Then in 1999 with the Internet explosion, we were able to raise $10 million in one breakfast from high-tech companies and Web-related businesses to create an Academy of Information Technology.

Seeing the same dearth of qualified workers in the high-tech industries that we’d observed in the financial business, we eventually started an Academy of ­Engineering, which is very popular. While national statistics on women and minorities in engineering are pretty dismal, NAF engineering students are more than three quarters minorities and one third female.

As employment in health care continues to skyrocket, we most recently launched an Academy of Health Sciences.

Our five academies are now in 667 schools in 38 states. We have over 80,000 students in training at a time, and are shooting to get to 100,000 by 2020.

Philanthropy: What does a NAF program cost, and what are the student outcomes?

Weill: The only entrance requirement is that students have to be at grade level in math and English. When you watch PHILANTHROPY

the progression from ninth to twelfth grade, their GPA and credits earned outperform non-NAF students in their districts. Last year our graduation rate was 96 percent—and these schools are in the same neighborhoods where the normal graduation rate is maybe 50 percent. Over 90 percent of our graduates plan to go to college. Many of them take ­c ollege-level courses so that they are more prepared when they do go.

The Manpower Demonstration Research Corporation did a study on students in the NAF program and two others like it and found that their later earnings grew at a compound rate of double digits, better than their non-academy peers.

It costs each district $1,000 per year to run an academy, so the cost to the schools per student ends up being about the cost of a cup of coffee. From the philanthropic side, it costs about $500 a student per year plus in-kind mentoring. It’s an incredibly low cost for high value, and most importantly, a young person has a chance for a bright future. I always tell people that NAF is the country’s best kept secret.

Philanthropy: What are alumni doing with their lives?

Weill: One member of our first graduating class in the Academy of Hospitality and Tourism was Erich de la Fuente, a Cuban immigrant to Miami. He had to take two buses and a train to reach his internship, but he persevered and got the experience and went on to found and lead a multi­ national public relations company. He’s now a member of NAF’s board of directors and runs our alumni leadership council.

One young lady by the name of Jackie Burgos was the first person in her family to go to college, and recently graduated from Har vard Business School. She is now working at Warner Brothers in her dream industry. I tried to hire her to come work for me, but she wouldn’t do it! In fact, I offered full-time jobs to the whole first class in Brooklyn when they graduated from high school, but they were dreaming bigger—they wanted to go on to college. Although our

Bloomberg, contributor / gettyimages

interview

Bloomberg, contributor / gettyimages

programs are intended to train students in a marketable skill whether or not they pursue higher education, we do encourage college and almost all of them head in that direction.

There’s another young guy I really took a liking to by the name of Justin Morant who wanted to go to Cornell.

When it came time for him to take the SATs, knowing that kids who can afford test prep do much better, we paid for him to take a course. He did well enough to get provisionally accepted to Cornell, which means that if he went to another college first and excelled they would take him in his sophomore year. He went to Saint Vincent College in Philadelphia, worked hard and received good grades, and transferred to Cornell. He found it very tough at the beginning and really had to work hard, but he made the dean’s list his senior year.

I’ve watched NAF programs turn around the lives of whole families. Most of these kids come from unstable home environments. Recently I met with a mother of a NAF student in Miami. She just sobbed Having worked his way up from back office to the executive suite, Sandy Weill became one of talking about how much of a difference it America’s most prominent financiers­—founding firms, acquiring or merging with competitors, spinning off subsidiaries, and starting all over again. In philanthropy as in business, he has focused made—not only for her son, who she was on growing institutions into powerhouses. sure was going to end up on the streets, but also for his two younger siblings. They But Isaac refused to accept my resigI started asking questions about what now realize there’s a much bigger world they were doing. And the more questions nation and it turned out that people did out there.

I asked the deeper I got involved, to the respect me. Philanthropy kept me busy Philanthropy: This morning I was over point where they asked me to co-chair through that uncertain period and showed at glorious Carnegie Hall. It’s shocking to the capital campaign along with Carnegie me that there was something more to life think that 50 years ago it was almost torn Hall’s chairman Jim Wolfensohn. I didn’t than just business. So we raised the money down to build a hotel, and that even 20 know anything about fundraising, and my to fix up Carnegie Hall, and afterward years after it was saved it was still operat- background in music was that I played the Isaac asked me to be chairman of the ing on a shoestring. Tell us what happened bass drum in a military-school band and board. At that time, we had an endowment thought the best composer in the world of about $4 million and we have worked when you came along. tirelessly over the last 24 years to grow it Weill: When I was working at ­American was John Philip Sousa.

When I decided to move on from to over $320 million now, which is about Express, one of my colleagues was on the board of Carnegie Hall and thought I might American Express, I offered to resign four times our annual budget.

Carnegie Hall is plain bricks and enjoy getting to know more about the insti- from the campaign. I didn’t know how I tution and Isaac Stern, its legendary savior. was going to raise money if nobody would mortar, but inside it we’re building relaHe wanted to raise $60 million to take my calls. I asked myself: Were people tionships with world-class artists. Isaac renovate the hall. The bathrooms were friendly with me because of my position, was a very good friend of mine and I leaking into the boxes and the place was or did they like me as a person? When you learned so much from him. He used to say in a terrible state of disrepair. He had live that kind of life, you don’t know. It was that when you sit in Carnegie Hall, you raised about $28 million, but most of the like being able to read your own obituary can feel Tchaikovsky, Shostakovich, and Toscanini in the walls. And when you’re on money came from the state and the city. while still being alive.

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the stage, you feel like you’re captured by Weill: At first I hesitated to get involved their spirit—there’s a close, warm feeling. because I can’t stand needles and I hate the sight of blood! But I got to know a lot of Philanthropy: You’ve said that education doctors whose work is important to supis the common theme of all your giving. port and I got the chance to work hand in What can you tell us about the education glove with then-dean Tony Gotto, one of programs at Carnegie Hall? our world’s real treasures when it comes Weill: We really believe that education is the to leadership in health care. Feeling like key that can unlock the door to one’s future. you’ve had something to do with saving a We kicked off the Weill Music Institute, our person’s life or just making the quality of suite of education outreach programs, at a someone’s life better, it’s a great feeling. seventieth birthday party that Carnegie Hall We have a three-part mission: Eduthrew for me with about 700 people. My wife cation, clinical services, and research. The and I said that we would match all the gifts first gift we gave was to hire young scithat our friends gave to create an endowment entists, because there really wasn’t much for music education. And lo and behold, they of a medical school research effort at that donated $30 million. So we started with $60 time. The second campaign was to expand million in one night. It was the most expen- clinical services, which resulted in the cresive birthday party that I have ever had! ation of the Weill Greenberg building, Now there’s a $100 million endow- where you can get multiple health issues ment dedicated to music education. addressed at the same place, like quality Three years ago we started the National one-stop shopping. It’s like having the Youth Orchestra, which is preparing for a Mayo Clinic in Manhattan. tour to China this summer. We have masAnd then the third big push, which ter classes where great artists work with we announced right at the onslaught of really talented young people. We bring the Great Recession, was the first camin music teachers and have them prac- paign that any medical school ever ran tice creating an orchestra from scratch, so to raise a billion dollars. We raised $1.3 they can do it when they return to their billion and put up the Belfer Research high schools.

Building, which is already staffed with The biggest program is called Link some terrific people. I could not be more Up, which is reaching about 450,000 excited about Weill Cornell’s future. young people around the world. We have We have a terrific new dean in ­L aurie partnerships with about 80 orchestras that Glimcher and an outstanding new board expose third- to fifth-graders to classical chairwoman (I must admit, I am biased) music, some of them for the first time, let- in my daughter, Jessica Bibliowicz. ting them get a feel for the instruments and hear an orchestra play.

Philanthropy: There’s also a campus in Research shows that music education Qatar. How did that come about? enhances brain development. The odds Weill: We were approached in 2000 by are that a person with some exposure to a the Qatar Foundation and a member of musical instrument will do better in sub- the royal family about building a medijects such as languages and science. If one cal school there. We spent a year talking thinks about all the money that we spend about governance issues because we on education in the United States, only a weren’t interested in doing anything that tiny fraction of it goes to music education, conflicted with our values. That meant and it’s one of the first things to be cut. But co-ed classes, which were unheard of it’s one of the things proven to motivate in the Middle East. But they agreed to young people to learn. it, and our current class is a little over 50 percent women. Beyond the obvious Philanthropy: Let’s talk about the third benefits of expanding medical training big pillar of your giving, Weill Cornell and care, we strongly believe that the way Medical School, where you’ve given about to bridge cultural differences between $600 million. people is through education.

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Doctors who felt they had to leave the region because there were no research opportunities or peer support are now coming back. Most of the graduates have scholarships that require them to return to their home countries for a certain period of time. We’re the only U.S. medical school that grants an American medical degree outside the country and we have a wonderful partnership. In fact, after Texas A&M agreed to build a branch campus in Doha in 2003 to focus on energy and engineering, former U.S. Secretary of Defense Robert Gates— who was president of Texas A&M at the time—told me that we gave them the guts to do it.

In partnership with the Catholic Church and the government of Tanzania, we also built a medical school in Mwanza.

We’re now graduating 100 doctors a year in an area that has about one doctor for every 50,000 patients, the lowest ratio of doctors to patients in the world. We’re particularly focusing on burn care, which is an area of expertise for Weill Cornell and a real problem in a region with regular open fires in homes full of children.

Philanthropy: You’ve also had a hand in the new Cornell Tech on Roosevelt Island.

Weill: It would never have happened without Chuck Feeney, who went to school at Cornell with me. Back then, he sold sandwiches outside the fraternity, and he remembers that I turned him down.

But though he couldn’t get me to buy a sandwich, he did get the mayor to take Cornell’s bid. During the competition, I thought it was certain that Cornell wasn’t going to get the opportunity. All the talk was about creating another Silicon Valley on Roosevelt Island. Well, Ithaca is not Silicon Valley. Stanford is. But if you want to talk about making a gift that’s transformational, Feeney’s $350 million gift got Stanford to drop its bid.

I helped put together the deal between the Technion and Cornell. I was involved with Rambam Medical Center, the hospital that’s connected to the Technion, so I set up a conversation to talk about the institutions coming together. It’s a perfect marriage between Cornell’s strength in education and

Jeff Goldberg / Esto

interview

Jeff Goldberg / Esto

the Technion’s translation of that education Carnegie Hall, a cultural treasure from its opening in 1891, narrowly escaped demolition in the 1960s into new companies. It is an incredibly thanks to the tireless efforts of violinist Isaac Stern. But after being saved, it scraped along decrepitly exciting project with a f­orward-thinking for decades until Stern teamed up with Sandy Weill to raise $60 million for its restoration. presence in biotech, medical research, and advanced engineering. now in the process of expanding. They heard a voice from a shadowy entryway have education programs for people of all yelling “Hey, Joanie!” It was a guy with Philanthropy: How has your wife, Joan, capabilities and ages, from summer camps cardboard and a blanket, one of her budfor disadvantaged kids to a bachelor of fine dies from the hospital. She used to joke influenced you in your philanthropy?

Weill: She went on the board of the arts program with Fordham that educates that I’m in charge of culture and she’s in Alvin Ailey American Dance Theater dancers for when their performing careers charge of the streets.

20 years ago when it was operating hand are over.

We have always believed that philanto mouth. They had a tiny little rented Joan was also the first president of thropy is much more than just writing a place to rehearse. As chairwoman she was Citymeals-on-Wheels, and she used to check. It’s devoting one’s time, energy, instrumental in putting together a board of volunteer at the Bellevue psychiatric intelligence, and enthusiasm to the causes people who really cared about the mission ward. I remember one night when we one is really passionate about. Joan and and grew the endowment from nothing to were walking home from a restaurant I have been partners in everything that about $65 million. They’re probably the to our apartment. This was when there we’ve done and we have learned a lot best-funded dance company in America, were a lot more people living on the from one another. We will celebrate our and have the largest building for dance in streets in New York, who would often be sixtieth wedding anniversary this June New York, on 55th Street. People love to at Bellevue during the day but sent out and Joan, to my good fortune, still puts walk by and watch the dancers. They’re to fend for themselves at night. And I up with me! P SPRING 2015

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The National Christian Foundation’s ability to turn unusual contributions to gold is creating a new trove of generosity

Sebastian Gray

By Liz Essley Whyte

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Sebastian Gray

very year the Chronicle of Philanthropy publishes a list of the largest 400 charities in America. Last year, the National Christian Foundation was No. 15. But what may be more interesting is the word the Chronicle used to describe what type of charity NCF is: “other.” That word turns out to be perfectly apt.

Even NCF president David Wills doesn’t know quite where to place his group. When asked what other organizations NCF compares itself to, Wills says ­matter-of-factly: “None.”

That’s because the foundation is an unusual mix of Christian mission body, donor-advised fund, national nonprofit, and tax pioneer. It’s large and efficient like Fidelity—but religious. It’s religious like the Jewish ­Federations—but more national in scope. Its accounts are customizable like those at community foundations—but it has a tight focus on specific philanthropic purposes.

The net result is that the National Christian ­Foundation is zooming in popularity, outpacing household names like the American Cancer Society, Harvard University, and H ­ abitat for Humanity in attracting funds (which it then sends back out the door in carefully targeted packages, as quickly as possible).

In 2014, NCF distributed over $870 million to a range of Christian and humanitarian causes. What was once a small niche fund for faithful givers now finds itself an innovative leader among donor-advised funds.

And as if these successes were not enough, NCF has developed an additional, unusual strength: It is now one of the planet’s most sophisticated organizations in converting non-liquid assets into valuable charitable gifts.

Giving trees, not just fruit In November 2014, NCF employee Troy A ­ ustin found himself in North Dakota, addressing about a hundred local churchgoers in the ­Bakken shale region. In little more than the blink of an eye, they had gone from earning middle-class incomes to owning several million dollars worth of royalty interests in the oil beneath their homesteads. And they didn’t know what to do with it.

“They were already giving to the church. But they’re not giving as wisely as they could, and they recognize that,” Austin says. “One of the things they said is: ‘There are so many people up here who have wealth overnight, and we just don’t talk about it. So therefore we are all in the dark, and we’re spending our time surfing the Internet to find answers.’”

Fortunately, Austin had ideas about how they could give to their churches and communities in a smart way.

He’d been working on a project to allow NCF to become a conduit for gifts of oil and gas interests. Though some universities and foundations have accepted petroleum royalty interests in the past, often outsourcing their management or selling them immediately, Austin found scant evidence of donor-advised funds accepting such gifts, let alone holding onto them long-term, or accepting donations of working interests—which come with more liability, as they bear the expense of getting the oil out of the ground, but also more potential for big payoff.

“We want to steward these resources just like a donor would choose to do. If it’s not an asset that the donor would choose to sell because they think it’s going to be more profitable to keep, then we want to be able to afford them that opportunity. Our goal is to try to maximize the asset.”

These are the kinds of puzzles the foundation has been solving for about two decades. NCF was co-founded in 1982 by attorney Terry Parker, who for a dozen years ran it with the help of just one assistant. But in the mid-’90s, Parker started accepting gifts beyond simple cash and stocks. As his expertise grew, so did his workload. Demand boomed, and the foundation has now given out nearly $5.3 billion in grants since its creation, growing to about 30 local affiliates with their own boards and staff.

Current president David Wills estimates that of the roughly $2.2 billion the foundation holds right now, $500 million of it is in the form of non-liquid assets.

In addition to receiving real estate and various kinds of stock, NCF is also a leader in helping donors give away part or all of entire businesses. (Philanthropy’s Spring 2014 issue described how Alan and Eric Barnhart gave their $250 million crane and rigging company to charity through the National Christian Foundation.)

NCF employs about 20 experts—tax lawyers and financial gurus—to help make non-cash gifts happen. It offers simple fact sheets on its website to help donors understand the basics of giving unusual gifts and why they might want to do so. “It used to be in the fundraising world that when it came to these types of assets we’re talking about, donors would never give the tree, but would just give the fruit,” Wills says. And Liz Essley Whyte is a contributing editor to Philanthropy.

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The NCF’s ability to capture complex assets for charity has helped transform it from a small fund to an innovative leader in philanthropy.

according to Jim Loscheider, the nonprofit’s vice president of donor ministries.

So Samaritan’s Purse called in NCF for help in assessing and, if necessary, avoiding any toxic liability.

A cleanup effort by the donor later revealed there were only surface oil spills. Meanwhile, NCF was able to evaluate the property and transfer its six-figure value to the nonprofit. “NCF’s expertise is strong in making the complex simple,” Loscheider says.

Foundation staff have also given Samaritan’s Purse employees training on how to talk about donating businesses and other complex giving. Loscheider has even had NCF give a presentation to some of his donors about estate planning. The partnership has paid off: Loscheider estimates that his organization received more than $11.5 million from NCF donor-advised funds from 2010 to 2014.

Unlike Samaritan’s Purse, many of the nearly 20,000 charities that receive gifts through NCF-administered funds each year are low-budget organizations. These small ministries and other nonprofits would be unable to accept complex assets unless NCF helped convert them into cash.

In addition to nonprofits, the foundation has nurtured relationships with financial advisers. It doles out advice on whether donors should give away businesses or buildings before they sell them, or give away the proceeds after. “Over the years we’ve worked with thousands of advisers,” Wills says, and the foundation has helped them to think carefully with donors about when it makes the most sense to give.

Wills underscores that NCF tries to be “relationally engaged” with everyone it works with. NCF employee John Putnam, president of the affiliate in Charlotte, first got to know NCF through his former job as a financial adviser. “The one thing that very much impressed me was not only their technical expertise but their—to use a non-technical term—bedside manner,” he says. “It was just very warm.”

Kingdom Energy has already become a go-to ­ roblem-solver. It recently stepped in to help out a donor p who had royalty interests to give and a major university that felt ill-equipped to take them in. Now NCF holds the interests, and the proceeds go into a donor-advised fund and thence to the university.

“There were a lot of donors in Texas who had ­energy-related assets who were giving cash,” Austin says.

“We just started asking questions like, ‘Should we not be doing more?’ And that’s what led us to really start trying to innovate around this area, really just trying to constantly push the envelope.”

The why, not just the what NCF is loaded with expertise on how and where A good pipeline donors can give. But in recent years it’s also become a NCF has become so well known for its expertise in pioneer in answering a more philosophical question: complex giving that it has become a valuable adviser to Why should donors give? Wills says he got into that donors who want to give a non-cash asset to a nonprofit. business almost by necessity. “Everybody’s asking and One prominent example involved Samaritan’s Purse, answering those three questions all the time…. You the evangelical international relief organization led by can’t avoid answering them.”

Franklin Graham. A donor wanted to give the group a To inspire reflection on those questions, the foundatrucking terminal in the southeast U.S. But Samaritan tion partners with Generous Giving, a nonprofit (funded staff worried the terminal could have “hidden ­toxicity”— by the Chattanooga-based Maclellan Foundation) that perhaps spilled oil or other c­ ontaminated waste in its helps donors think deeply on charity. Wills helped found soil, for which the new owner could become liable, Generous Giving and sits on its board. The two orga14

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Sebastian Gray

nonprofits would only accept fruit, not trees. “We’re saying, ‘No, that’s not what you would do if you were in business. So maybe that’s not what you should do if you’re a charitable organization.’”

The foundation is developing even more expertise in oil and gas interests. Austin’s project, dubbed Kingdom Energy, has accepted royalty interests from a handful of donors. And thanks to a risk-minimizing strategy that he created, NCF is now prepared to take working interests, though it has not yet received any. Since oil prices tanked in late 2014, more givers are deciding to hold on to their interests for now. Austin says several donors have told him they do intend to give away their interests, regardless of the market’s tosses and turns.

Austin says he has spoken with many devout members of the industry who believe that “the asset they generate is closely tied to God’s provision.” He’s met people who say: “We recognize that these minerals were in the ground, that our creator placed them there…. How could we not think of this from a stewardship perspective?”

Sebastian Gray

nizations co-sponsor 24-hour retreats for NCF donors called Journeys of Generosity.

During a JOG, as they’re affectionately called, a small group of givers gathers to hear stories of remarkable benevolence, discuss why giving is good, and explore their own motives for their philanthropy, all aided by a staff facilitator. ( JOGs are solicitation-free: G ­ enerous Giving offers no advice on where to donate your money.)

Though based on a Christian perspective, JOGs go beyond the typical Sunday sermon.

“We believe the most powerful influence is peer influence. Essentially all the stories are peers talking about their own generosity,” says Generous Giving president Todd Harper. “And then the experience is very interactive and engaging, rather than didactic. We’re not teaching; we’re telling stories and discussing.”

JOGs also spark conversations between the wealthy that don’t normally happen in an ecclesiastical setting, allowing donors to talk about topics (such as lifestyle choices) that could be awkward missteps elsewhere. “This permission to be free and talk with my peers about these issues about handling wealth in a God-honoring way is a different dynamic for many people,” Harper says.

He’s seen a transformative effect, as uncertain donors trade in an “ought-to” mindset about their giving for a “get-to” mindset. “The participants experience the joy, the freedom, the purpose that these families are experiencing in living this way, and it’s very attractive,” he says. “I’ve never met an unhappy generous person.”

Generous Giving led more than 150 JOGs in 2014, and at least 30 were held specifically for NCF donors. And Generous Giving is working to train local NCF affiliate presidents and boards to lead JOGs themselves.

NCF employee Putnam once helped organize a Journey of Generosity in his previous stint as a financial adviser. Now he’s excited to bring JOGs to NCF givers in Charlotte, where he’s based. “It was very enlightening,” he says. “One commenter said: ‘We’ve been doing this a long time and thought we understood everything.

After this 24 hours, we realize there is a lot more we could be doing.”

The factors attracting so many donors to the National Christian Foundation likely include its unusual efforts to spark generosity. They certainly include the foundation’s creative and expert handling of unique gifts.

Wills thinks there is even more, though, to the story of NCF’s remarkable rise.

“It probably won’t surprise you,” he says, that he credits his group’s success to a higher power. “Frankly our growth is kind of almost inexplicable. But for God I can’t imagine it would have happened.” P

Varieties of Faithful Giving Religious groups of all shapes and sizes help faithfilled donors plan big gifts—the Catholic Community Foundation, the Presbyterian Foundation, and the Hope Christian Community Foundation are examples. But perhaps the closest comparison to the National Christian Foundation is the Jewish Federations of North America, a network of 152 organizations sprinkled across the country. Taken together, the Jewish Federations (which are more independent and loosely tied than NCF affiliates) are a giant in philanthropy, raising and giving out $3 billion every year, according to Steven Woolf, senior tax policy counsel for the organization. The funds often go to support national and international Jewish causes, such as Birthright, but also to local services, such as kosher meals for the needy, and to Jewish education.

The national umbrella group coordinates the federations’ efforts and passes on best practices for fundraising. But each federation has its own giving campaigns and donoradvised funds (which are also sometimes managed by closely tied Jewish community foundations).

“It was and is very much a local movement.

Federations really started as the local address for Jewish philanthropy and Jewish social services, most often in eastern urban areas—Boston, New York, Cleveland, Detroit. And federations themselves are still very autonomous in both their fundraising and social service support,” Woolf says.

Another major player in the religious giving field is LDS Philanthropies. Housed within the Church of Jesus Christ of Latter-day Saints, the organization’s staff members are all paid by the church, so that any gifts that go through LDS Philanthropies do so with $0 in administrative costs deducted.

The gifts go toward LDS initiatives such as humanitarian services around the globe, Brigham Young University, and the Perpetual Education Fund, a church-run student loan program.

Though most Mormons give their customary tithes and fast offerings directly to the church, LDS Philanthropies serves donors who wish to give more to specific projects or take advantage of the church’s donor-advised funds or planned-giving services. The group raised more than $160 million in 2014, with gifts coming in all shapes and sizes. “We could deal with someone who gives ten cents or tens of millions of dollars,” says Tanise Chung-Hoon, managing director.

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tiero / istockphoto.com

Marries

By Howard Husock

The hopes and hazards of bringing market mechanisms to philanthropy

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tiero / istockphoto.com

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profitability with a desire to solve social and environmental problems.” In their book about “transforming how we make money while we make a difference,” Antony Bugg-Levine of the Nonprofit Finance Fund and Jed Emerson of ImpactAssets write of pioneers who “are maximizing the total value of their investments and organizations, creating a high-octane blend of economic performance and sustained environmental and social impact.”

The movement enjoys buzz from the highest levels of government, philanthropy, and venture capital. A private blue-ribbon group that includes representatives of the Omidyar ­Network, Case Foundation, Morgan Stanley, Soros ­Economic Development Fund, Bridgespan Group, and the Ford, Rockefeller, and F. B. Heron foundations recently suggested that “the power of markets can help to scale solutions to some of our most urgent problems.”

ocial-impact investing”—venture capitalism, more or less, that aims for a mix of human and economic returns—is becoming all the rage.

At first blush, the common shorthand term “impact investing” may seem redundant. All financial investments are made with the intention of having an impact. The twist here is a desire among some idealistic investors, philanthropists, foundations, and financial institutions to meld moneymaking with societal improvement. It’s a growing niche. According to a recent report by J. P. Morgan, some $8 billion in impact investments were made just in 2012, and interest has grown since then.

“Put simply, impact investments are intended to deliver both financial returns and social and environmental benefits,” writes ­ R ockefeller Foundation president Judith Rodin in a recent Howard Husock is vice president for policy research book, calling them “a new way of deploy- and director of the Social Entrepreneurship Initiative ing capital that can combine the demand for at the Manhattan Institute.

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Global capital The quintessential impact investments take place in developing countries and are designed to bring products or services to the poor in ways that are friendly to health, ecology, and prosperity. One impressive result of impact investment is the commercial venture that markets the Universal Anesthesia Machine in ­sub-Saharan Africa. The machine is a hospital-quality device that can operate without electric power to safely sedate patients during medical procedures. The distributor is a freestanding, limited liability c­ orporation

Should impact investors expect standard market returns, or are charitable aims an acceptable tradeoff for weakened performance?

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run by the Nick Simons Foundation, which has long focused on improving health in developing countries.

Experience has shown that impressive gadgets can end up being useless in poor countries if they aren’t owned and maintained by some entity that values them, so the UAM is not given away but sold to hospitals and governments at a price that encourages the buyer to protect the product and recovers its cost. Meanwhile, the revenue stream back to the firm from that commercial sale allows it to finance ongoing manufacturing and product improvement.

Another prominent example of an impact investment is the Nairobi-based company M-KOPA Solar. It sells a variety of solar-powered products to Africans who have no access to the electricity grid. Its lights provide an alternative to darkness or costly and polluting kerosene lamps. Its solar-powered radios and phone chargers not only allow communication, but link rural villagers to the mobile payment system that has become a backbone of East African commerce. Customers lease M-KOPA’s equipment toward purchase, typically in 18 months, after which the household can devote its income to other purposes. M-KOPA’s 100,000 customers often come out ahead economically because of the money they no longer spend on expensive kerosene. And the fume-free lighting improves indoor air quality and thus family health. A network of 1,000 retail agents and shops and a staff of 400 allow the company to sell to 2,500 new households a week, with recent expansions from Kenya into Uganda and Tanzania.

M-KOPA was started by an investment banker who had worked for the Johannesburg-based AfriCap Microfinance Fund and Bank of America. Its investors include the Bill & Melinda Gates Foundation and Gray Ghost Ventures, founded by Atlanta real-estate developer Bob Pattillo.­ ­Pattillo and his wife had run a traditional family foundation, directing most of their grants to support public education in Atlanta, where she served on the school board.

His father, also a real-estate developer, had advised him to “invest your philanthropy in the communities where you do business.”

But at a church gathering, the younger Pattillo was exposed to impact investing—in the form of microfinance as a means to put working capital in the hands of very poor people overseas. “Really energized by the idea,” he contributed to a fund overseen by Deutsche Bank, making his first ­“program-related investment”—that is, a grant of money that

AlenaKogotkova / shutterstock; DNY59 / istockphoto.com

Some advocates frame impact investing as not only a new way of allocating funds, but an improvement both to markets and to philanthropy. “Questions have been arising,” writes Rodin, “about the nature of capitalism itself and whether its current practice really serves our society and the planet.” Clara Miller of the F. B. Heron Foundation, both philanthropic executive and impact investing thought leader, argues that too many charitable resources are tied up in traditional forms of investment.

Foundations, she says, shouldn’t just make grants but actually invest all of their money in ways that will improve the overall economy, especially as it affects the poor.

Factoring in nontraditional returns like social effects leads to a range of expectations about profits. Amit Bouri, CEO of the Global Impact Investing Network, notes that some impact investors expect standard market returns, while others will accept below-market returns along with the social effect they desire. Sometimes this tradeoff is masked with the claim that the investor is simply seeking his or her economic return over “a longer time horizon.”

AlenaKogotkova / shutterstock; DNY59 / istockphoto.com

is intended to be paid back, or to accrue equity in a venture, with the recipient being an entity whose work matches the foundation’s philanthropic goals. Federal regulatory changes that made it easier for program-related investments to count toward a foundation’s required 5 percent annual payout were important in making this possible for Pattillo.

Not only did Pattillo invest, he went to Bangladesh and India to meet microfinance borrowers directly. He is still touched to recall how one of them invited him back to her hut. The owner of a sundries stall in the local market, she engaged him in deep conversation about her dreams—to educate her children, to contribute to the cost of modernizing wastewater treatment in her village, even to get involved in the political life of Bangladesh.

Then she surprised Pattillo by asking about his dreams.

“It came to me that instead of writing a philanthropic check, I could buy shares,” he says.

Pattillo liked to follow the progress of his investments and came to believe that microfinance made for a changed and healthier relationship between him, as a wealthy investor, and the poor he hoped to help.

“A light bulb went off in my head,” he says. “She was going to make choices about what to do with her loan. She could choose how to use the money, choose among microfinance banks, push the loan officer to get a better rate. That was altogether different from, say, technical assistance offered by a charity—which might not be right for her and might lead her to drop out without the charity even knowing it.”

At first Pattillo assumed that “microfinance would be philanthropy in which you lose your money slowly,” as he puts it memorably. But he found that loan repayment rates were robust—so solid that he’s put 70 percent of his personal net worth into impact investments today, the largest portion of that in microfinance banks. “I’ve seen how much further the capital goes in a developing economy. I completely switched my philosophy,” he says. “I’ve learned that the poor may be poor in finance but not in imagination, resilience, or work ethic. They deserve credit just like you or me.” (For more information about microfinance, see “Micro Lending, Major Impact” on page 48.)

These limited-profit impact investments in developing countries might be described as a new form of capitalism.

Alternatively, you could think of them as a new form of development assistance—one that calls on recipients to cover a portion of the costs, or pay back a loan, while tracking results so the practice can be refined in the future. These are great advances compared to traditional government-provided foreign aid—so much of which was wasted or redirected into counterproductive purposes.

But as winning as these new mechanisms are, do they really represent a fundamentally new form of investing?

As a new means of development assistance, impact investments are an improvement over wasted foreign aid, but do they truly represent a novel form of investing?

Balancing many bottom lines At least superficially, the answer can seem to be yes, both in terms of the means and goals of impact investors. Like Bob Pattillo, many impact investors pursue their aims through a combination of for-profit venture capital and philanthropic program-related investments. Steve and Jean Case are prominent advocates of this hybrid strategy. Steve, who built AOL in the early days of the Internet, is now chairman of a ­Washington-based impact-investment firm that provides capital for firms like Revolution Foods, a supplier of healthy foods to schools, Sweetgreen, a supplier of organic foods derived from local produce, and Everyday Health, a “suite of apps” designed to help users monitor their health. Jean, who chairs the Case Foundation, has been encouraging other signatories to the Giving Pledge to take up impact investment. The Case Foundation has plans to make at least $1.5 billion in impact investments.

The Bill & Melinda Gates Foundation has also dedicated $1.5 billion to program-related investments, more than tripling its corpus since 2009. “We are trying to solve some pretty hard problems, and we need to bring everything to bear,” foundation CEO Susan ­Desmond-Hellmann told the New York Times. “If we don’t involve private industry, we’re leaving out a powerful tool.” The Gates Foundation most recently staked $52 million on the pharmaceutical company CureVac, with hopes of producing more and cheaper vaccines for the developing world.

The Heron Foundation is another proponent. Its goal, says Clara Miller, is “to put not just some but all of our dollars toward mission.” Making program-related investments out of a charitable endowment was first popularized by the Ford Foundation, but Heron goes much further—aiming “to deploy all Heron capital for good.”

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Not just grantmaking but also the investment of the foundation’s $300 million in assets should be aimed at making measurable social gains and “lifting people out of poverty,” she believes.

Heron targets its investments to “growth-stage businesses whose product or service will employ the poor and/or formerly unemployed, at relatively high wages.”

Miller says that “if there’s an employed person in the house, children will approach school with a different attitude.” Prior to Miller’s tenure, Heron estimates that only 40 percent of its endowment investments were directly aimed at “mission.”

Heron’s investments include “triple-bottom-line” enterprises that aim to earn a profit while helping the poor and improving the environment. Among them is ­EcoLogic, a business in California’s Central Valley that manufactures “green, convenient, and effective packaging” for various beverages and is dedicated to hiring those of low income. That investment, like most of H ­ eron’s, is not made directly but through third-party organizations that offer ­impact-investing services to a range of clients, including foundations. Pacific Community Ventures is one of the groups Heron invests through. It describes itself as a venture fund “providing capital to growing companies either located in or hiring a large percentage of their workforce from low-income communities in California.” Miller explains that Heron prefers to invest through such partners “because we don’t have the capacity to be a bank” which researches and manages financial details.

The risks that such investments pose do not faze Miller.

If losing money on an individual investment is not a sin in the for-profit world, her staff likes to remind her, it should not be a sin for nonprofit investors either. To help reduce risks industrywide, Heron provided $2 million to the Sustainable Accounting Standards Board, a nonprofit developing industry standards for impact investors.

Another initiative called IRIS (Impact R ­ eporting and Investing Standards) offers regular reporting for impact 20

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Public-private-profit Does impact investing pose a comparable challenge to traditional philanthropy? Impact investors do not reject ordinary grantmaking—that is, funds disbursed without expectation of a financial return. Pattillo, for instance, continues with his private donations, like paying some of the costs of constructing primary schools in India (which, once open, support themselves via tuition).

Bugg-Levine and Emerson predict that “the traditional model of separating financially focused investment and charitable giving will no doubt continue.”

Miller believes that traditional philanthropy is the most appropriate way to support basic research, the arts, and education (particularly as it affects the disadvantaged).

Heron’s own grantmaking is not markedly different from its impact investing—its focus is on increasing employment among lower-paid workers. In both spheres it insists on a revenue-oriented and results-based approach.

Not long ago Heron made a $1.5 million grant to support Cooperative Home Care Associates. The South Bronx nonprofit provides home health care to low-income households.

The agency is owned jointly by its 1,920 employees, and Miller believes the morale boost provided by cooperative ownership, plus its high-quality operations, yield higher wages for the employees. Just like when making an investment in a forprofit company, Heron didn’t just consider the solidity of the firm, and the goodness of the cause, it also factored in market conditions—the aging of baby boomers will result in health needs that make CHCA a good bet for a substantial grant.

Many times, an impact investment will meld not just the charitable and for-profit sectors, but also some government

AlenaKogotkova / shutterstock; DNY59 / istockphoto.com

Are standards boards that evaluate social and environmental as well as fiscal performance the building blocks of a whole new financial system?

investors on the “social, environmental, and financial performance of their investments.”

In addition to using these intermediary firms and audit groups, many impact investors seek out “benefit corporations” as partners. These are companies with explicit social and environmental goals they rank equal to or above profit­ making. They are certified by the nonprofit B Lab, which looks for four goals in addition to financial success: “offering quality jobs, building strong communities, championing healthy environments, and alleviating poverty.” Shareholders in B-corporations don’t have an inherent expectation of earning market returns—a fundamental alteration of the normal shareholder-management relationship.

Taken together, these various entities begin to look like the building blocks of a new financial system. It is clearly inspired by the power of the market to find efficiencies, be honed by competition, and generate new ideas. Yet at the same time, this brave new world of impact investing also represents an implicit challenge to the market, claiming what amounts to higher moral ground.

AlenaKogotkova / shutterstock; DNY59 / istockphoto.com

money and purposes as well. So-called social-impact bonds are one example. When a social-impact bond is set up, a private investor provides operating capital for a public service provided by a nonprofit grantee. If the charitable work results in savings to the government (for instance, lower costs for disability payments because of a charity’s work in rehabbing injured persons), then the SIB provides for a sharing of these savings with the original investor. That yields a “return” on the money put into the SIB. For instance, Goldman Sachs, with additional support from Bloomberg Philanthropies, has entered into a social-impact bond with New York City. The investment bank is providing operating funds for a rehabilitation program for older teens at the city’s notorious Riker’s Island jail. By some estimates, it costs the city nearly $100,000 annually to house a single inmate at Riker’s. At present, a teen released from the jail has a 50 percent chance of being back behind bars within a year (and 70 percent within three years). Just a 10 percent reduction in that recidivism rate will allow the program to pay for itself, and Goldman will break even; if the improvement goes beyond that, Goldman will receive a profit. The outcomes are being tracked by a premier research firm, and the $9.6 million investment will be compensated according to its findings.

Meanwhile, Goldman recently bet another $9 million on a Boston program to curb gang activity. Former Treasury Secretary Lawrence Summers, who has himself put money into a social-impact bond, describes the investment as “a big deal.” If it works, it is a win-win-win situation: for investors, for taxpayers, and for the teens and the communities they come from.

Will government commandeer impact investing?

Despite their obvious attractions, these public-private experiments deserve a word of caution. Rockefeller’s Judith Rodin has suggested the reach of impact investing might be increased should public-employee pension funds begin to take up the approach. Such a suggestion implies either a belief that impact investments can consistently generate the 7-percent-plus returns that such funds desperately need to remain solvent today, or that she thinks the softer, less tangible benefits of impact investing justify cutting the monthly checks of retired teachers and cops. One wonders how pensioners themselves might view the matter. (As it happens, Bob Pattillo counts as his worst impact-investing mistake the day he convinced a major pension fund to invest in a microfinance funds pool, only to see a regulatory crackdown on the practices of the South Asian microfinance industry, plunging the pension fund into losses and an abrupt pullout.)

by the federal Small Business Administration. Loans from such funds are meant “to support small business investment strategies that maximize financial return while also yielding enhanced social, environmental, or economic impact.” Other government attempts to accelerate impact investing are being peddled by the National Impact Investing Advisory Board, a new entity peopled mostly with left-leaning foundation executives.

One worries here about government, in effect, implicitly asserting that small business generally should seek these “triple-bottom-line” goals—when most startups have a hard enough time just showing a profit. Moreover, efforts to pull impact investing under the wing of government could destroy its potential to bring market strengths and disciplines into philanthropy. Instead, impact investing could become part of a new regulatory regime in which a variety of pressures and incentives are used to manipulate private investing, pushing money into causes defined as pro-social while denigrating investments that serve economic need and efficiency (and therefore make money). This risks becoming a back route to a suffocating sort of economic planning and slowed economic growth.

If impact investments do not generate the returns needed to keep pension funds solvent, do the social benefits justify cutting the checks of retirees?

Another public push for impact investing is a new $200 million Small Business Impact Fund, administered

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More broadly, to believe that impact investments are the only or best path to combining social, ­environmental, and economic benefits, one must put aside the ­observation— demonstrated time and again—that the commonest way the world is transformed for the better is via traditional for-profit investments that produce powerful, ­self-sustaining new products like cell phones, ultrasound scanners, low-cost building materials, and safe, abundant foods. Providing a new good or service that is so appealing it is profitable remains the best way to improve society. Impact investing may have great value in filling gaps. But when it is prescribed as a large-scale substitute for commercial innovation, it will almost surely cause a degradation of living standards, less wealth for maintaining a clean environment and succoring the less fortunate, and a reduced pace of technological quickening.

As an example of how purely commercial innovations can lead to a range of unexpected and unplanned social benefits, consider the introduction of cell phones into the fishing industry of the southern Indian state of Kerala.

Do social investments targeted to the poor offer anything that efficient business relations don’t?

The region’s many small fishermen typically wasted a significant portion of their sardine catch because they had no way to know which of many ports might offer them the best price, or even which ports were not even buying any more sardines at all. A 2007 analysis by economist Robert Jensen found that the arrival of paid cell phone service in the area produced not only increased income among Kerala’s fishermen, but “the complete elimination of waste,” and therefore “both consumer and producer welfare increased.” That seems very much like the ­“triple-bottom-line” investments that proponents of impact investing seek. Profits were made. The poor were helped. The natural environment was stressed less. Though no one particularly set out to achieve that result, the power of market forces in producing optimally efficient outcomes caused it to happen. It’s a story that repeats itself over and over.

In its own way, the recent years’ emphasis on marketing to the so-called bottom-of-the-pyramid (the poor in 22

PHILANTHROPY

the developing world) has brought consumer goods from shampoo to laundry detergent to populations which had not previously had access to them—access created through marketing insight based in the traditional profit motive.

One could even go so far as to say that relatively low-cost prescription drugs have reached many of the world’s poor thanks to the same sort of differential pricing schemes which are used by airlines and even M ­ cDonald’s—which, as the Economist has long noted, charges different prices for Big Macs in different economies.

No doubt solar-charged flashlights are an improvement over kerosene lamps. But if conditions in poor countries could be made favorable to traditional capitalist investment, one nuclear power facility, or pharmaceutical factory, or road-building plant might do much more for the poor of the developing world than all the boutique impact investments of the last decade. Contemporary philanthropy that seeks to help the poor should not forget that including the poor in the very core of our free-market economic system is the very kindest and most reliable way to lift them up.

Historically, the best philanthropists were reluctant to create a sort of parallel economy (least of all, a wholly new economy) to serve the poor. Rather, they used their giving to offer the poor the tools they need to succeed in the mainstream. Carnegie’s libraries encouraged literacy and a love for knowledge. Settlement houses taught practical skills. The Boy and Girl Scouts bolstered virtues that underlie successful careers and families, ranging from thrift to delayed gratification to personal responsibility.

Commerce, government, and philanthropy all have distinct roles in society. And occasionally partnerships may be advantageous. But it is a mistake to remove the guardrails and combine these distinct spheres too closely—or to think that doing so is the path to a new and better general economic model.

From a startup firm in rural Africa, to an elaborate new financial instrument for improving government social services in the largest U.S. city, there is no doubt that impact investing is drawing capital today to original ideas and enterprising leaders. That is clearly a force for good. But impact investing must be a complement, not a replacement. It is no substitute for our experience-forged system of allocating economic resources on a decentralized commercial basis—which saves and improves millions of lives the world over in each passing year. P

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Madison Avenue MERCIES

The virtues of advertising, overhead, and other wicked ways of doing good

4x6 / istockphoto.com

By Nicholas Kristof and Sheryl WuDunn

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D

4x6 / istockphoto.com

an Pallotta was an ambitious twentysomething living in Los Angeles when, in 1994, he organized a long-distance bicycle ride to raise money for AIDS, involving 478 people cycling from San Francisco to Los Angeles.

Soon Pallotta TeamWorks, a fundraising con- attorney general fined Pallotta TeamWorks sulting company he started to sponsor such $110,000 for generating a small percentage events, was producing AIDS rides all over the return and failing to register as a professional country, netting millions of dollars for medical solicitor. The attorney general’s action did not services at AIDS charities. In 1998, Pallotta suggest any deception on the part of Pallotta, TeamWorks added three-day fundraising but critics nevertheless pointed to the fine to walks for breast cancer, which proved even raise doubts.

Pallotta TeamWorks continued to grow, more successful. The first walk, a 60-mile hike from Santa Barbara to Malibu, brought in more attracting 182,000 people as walkers or riders than $4 million. Soon Pallotta TeamWorks was and 3 million donors. By 2002, its events had holding events all across the United States and raised $582 million. Harvard Business School even abroad, moving into other causes including chose Pallotta TeamWorks for one of its forsuicide prevention. Pallotta poured money into mal case studies, and the company moved marketing, advertising, and logistics to ensure into a new 50,000-square-foot headquarters.

In 2002 Pallotta netted—after expenses—$82 that the events ran smoothly.

“People don’t imagine the scope and the million for medical services and research, a scale of it,” he says. “People at the time would sum equivalent to half the annual giving of the say, ‘Is that a full-time job?’” In fact, Pallotta Rockefeller Foundation at the time.

Meanwhile, activists accused Pallotta of had more than 350 full-time employees in 16 U.S. offices. The team included a 60-member profiteering. Some resented the way his name traveling crew that erected a mobile city at each seemed to be at the center of everything. Some event—tents, toilets, kitchens, showers, medi- critics would say: It’s about him, not AIDS or cal units, and dining halls. Pallotta TeamWorks cancer. Others were aghast at the high salaries had 15 people in its internal advertising agency, for people running charity events: Why should including media buyers, graphic designers, ordinary workers contribute to charitable events run a photographer, and a poet. For capital, it set by people earning hundreds of thousands of dollars up a multimillion-dollar line of credit. Pallotta a year? Logistics, marketing, and administrative recruited the best people and paid generously— expenses swallowed up about half of each dollar including a salary of $394,500 to himself in donated, and this drew additional fire. In 2002, 2001. “We did what we believed would work,” he Pallotta tried to expand too quickly, holding recalls. “We advertised our events the way Apple more AIDS bike rides than the market could advertises iPads.” bear, so the amount going to charity dipped For one AIDS ride in the east, Pallotta to 17 percent. One rider sued, and outrage at TeamWorks chose three AIDS groups in ­Pallotta spread. ­P hiladelphia as beneficiaries. But there were 91 AIDS organizations in Philadelphia, and Adapted from the new book A Path Appears: 88 of them felt aggrieved. Some threatened Transforming Lives, Creating Opportunity to hold a “die-in” at the beginning of the bike by Nicholas Kristof and Sheryl WuDunn. ride, depressing participation by cyclists and © 2014 by Nicholas Kristof and Sheryl WuDunn. Published by reducing the event’s income. The Pennsylvania arrangement with Alfred A. Knopf.

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“We advertised our events the way Apple advertises iPads.” jobs. More than 48,000 people participated in the last year of Pallotta TeamWorks walks for breast cancer; the next year, 8,000 people joined the Avon walks. The net amount raised for breast cancer grantmaking fell from nearly $77 million under Pallotta in 2002 to $11 million under Avon in 2003.

One of Pallotta’s most fervent critics back in 2002 was Craig Miller of AIDS Community Donor Action.

“I stand by those criticisms,” he said. “A tremendous amount of money was being raised” in the name of AIDS charities, but “the vast majority of it was being consumed by very high event production costs.” As it turns out, Miller has been doing some of his own AIDS fundraisers. Overhead for his 2012 walk in San Francisco ate up 58 percent of revenue—worse than Pallotta’s average performance—and the event netted $1.2 million for AIDS charities, a paltry sum compared to the amounts raised by Pallotta.

Pallotta is now lecturing and writing widely about how “our system of charity undermines the causes we love.” He particularly resents criticism of salaries of leaders in the nonprofit industry. “We don’t want people making money in charity,” he says in a recent book, ­Charity Case. “Want to make $50 million selling violent video games to kids? Go for it. But if you want to pay the 26

PHILANTHROPY

right leader half a million dollars to cure kids of malaria, you and the leader are parasites yourselves.”

From advertising to advocacy When the public considers whether to support a nonprofit, one of the basic bits of information people look for is its Charity Navigator ratings and the proportion of its revenues consumed by administration, particularly salaries. They also see overhead and marketing as a drain that should be absolutely minimized. Administrative expenses can indeed be relevant, but what truly matters is not overhead but impact. There’s no point in funding an AIDS vaccine effort that saves on overhead by using unreliable third-rate laboratory equipment.

Would it have been better in the 1950s to finance a polio charity that used 99 percent of its funds to push survivors around a park in wheelchairs, or one that swallowed up half its money in salaries for talented scientists and lab equipment and ended up financing Jonas Salk’s invention of the polio vaccine? One shortcoming of Charity Navigator ratings has been that charities often respond by systematically underinvesting in anything overhead-related. Charity Navigator is trying to figure out ways to measure impact, but its focus on overhead metrics has encouraged charities to skimp on computers, personnel training, evaluation, marketing, and talented people.

We asked Charlie MacCormack, who formerly ran Save the Children, about overhead at nonprofits, and he was blunt: “Our uncompetitive salaries make it almost impossible for people to develop real careers; our underinvestment in staff development hampers performance; and our creaky knowledge management and information systems undermine potential results.… Nevertheless, donors are more than resistant to funding these kinds of activities and consider pie-chart ratios to be proxies for organizational quality.”

Forced to squeeze their overhead, aid groups cut corners in ways that undermine the mission. Without the funds or expertise to do rigorous evaluations, they’re often groping in the dark to determine what works best.

They sometimes even fiddle with their bookkeeping. A fundraising appeal will include a paragraph about the challenges so that a chunk of the mailing cost can be allocated to advocacy rather than fundraising.

Charities also hugely underinvest in marketing, hobbling themselves in getting the word out. The experience of one former ad executive shows how much they’re missing out. Brian Mullaney had made it big on M ­ adison Avenue. After rising to the top of an advertising agency, he quit and formed his own firm.

He lived in a Manhattan penthouse, drove a Porsche, wore Armani suits, and had a gold Rolex watch on his wrist. He had everything in life—except a purpose.

Jayesh / istockphoto.com

AIDS Community Donor Action ran an advertisement with the headline “Ask Pallotta TeamWorks: Will Their Upcoming AIDS Vaccine Events Save Anyone’s Future, EXCEPT THEIR OWN?” One critic denounced Pallotta’s “greed and unabashed profiteering off the good intentions of others.”

Avon, which was Pallotta’s partner in the cancer walks, announced it would cut its ties with him and hold its own fundraising walks for breast cancer. Without a partner, Pallotta TeamWorks collapsed. It owed money to the bank and now had no way to make payroll or pay the rent. Pallotta describes that day as the worst in his life.

The critics believed that without the glitz more money would be available for AIDS and cancer research.

Indeed, the California AIDS bicycle rides continued under new management in a more understated way.

But without the promotional spending, the amounts raised for charity plunged. Net returns to AIDS charities dropped more than 70 percent in one year, from $6 million in 2001 to $1.6 million in 2002. The San Francisco AIDS Foundation laid off 28 employees, and the Los Angeles Gay and Lesbian Center eliminated 55

Jayesh / istockphoto.com

That’s when he became involved in reconstructive surgery for children with cleft lips and palates.

In the developed world, clefts are surgically repaired in the first year of life, but in poor countries children often remain disfigured. They may also have difficulty eating and speaking. Inspired by how fixing a cleft, which is so simple, can change a life path, Mullaney became involved with a charity called Operation Smile.

He traveled with American surgeons to Vietnam and China and saw the transformation in children who had clefts repaired, and began to dream of change on a grander scale.

Meanwhile Operation Smile was running into its own problems, and Mullaney realized that it made little sense to fly American surgeons and equipment halfway around the world for a week; paying local surgeons for the same work would save money, improve efficiency, and build an important skill base.

He approached entrepreneur Charles Wang, who generously invested $27 million to back a new initiative called Smile Train. When the first two presidents of Smile Train lacked business sensibility, Mullaney agreed to take the helm himself on an interim basis.

He has never returned to the corporate world.

Mullaney focused on fundraising by advertising and direct mail appeals, sending out mass mailings and carefully measuring which kinds of messages and photos worked best to generate donations. He studied which zip codes responded most generously. He compiled responses by name, learning that someone named Alyson will on average give more than someone named Suzie.

He learned to emphasize storytelling about individuals. While continuing to expand into new countries and mastering the science of direct-mail appeals, Mullaney began to think that a movie about Smile Train’s work would surely help. “Let’s do a documentary and try to win an Oscar,” he resolved.

Smile Train hired two first-rate filmmakers and sent them into the field to document cleft repairs. One of the directors went to India and focused on telling the story of Pinki, an eight-year-old girl from Varanasi with a gap in her upper lip. Villagers mocked and teased the girl for her deformity. Other children sometimes threw stones at Pinki, and she was reluctant to leave her hut. But her parents didn’t have the money for an operation. That’s when Smile Train stepped in.

Countless aid groups have made promotional films and videos, usually watched by no one other than aid workers and their mothers. But this 39-minute film, named Smile Pinki: A Real-World Fairy Tale, was different. Smile Pinki cost around $300,000 to make and was watched by millions of people, mostly in India, where it generated huge a­ ttention and sympathy for children with clefts. Broadcast by HBO in the

United States, it raised millions of dollars for Smile Train. And it did win an Academy Award.

Mullaney used the success of Smile Pinki to take his operations to new heights. His aggressive marketing techniques helped Smile Train raise about $700 million on his watch, reaching the major leagues of American charities. He recruited top-notch, business-minded executives, whom he paid very well by charity standards.

Over time, Mullaney began to believe that the challenge of cleft lips and cleft palates was diminishing. Smile Train and improved health care in China, India, and around the world were making a difference.

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in8finity / istockphoto.com

We flinch at advertising blindness and clubfoot, but we’re even more troubled by the thought of children who are blind or crippled and aren’t getting treated because organizations aren’t efficient at raising the money to treat them. You see children with clubfoot dragging themselves through the traffic at intersections in cities around the developing world, begging for money from passing cars. That’s a thousand times more undignified than using their photos in mailings.

Mullaney may be paid a hefty salary. He has helped more than a million children all over the world, though.

And by using local doctors in developing countries, he figured out how to lower costs, serve more people, and build local capacity.

People working on urgent causes such as poverty or disease too often fail to make their case effectively. When we were both at the New York Times, charitable groups working on life-and-death issues would send us unprintably dry press releases at the wrong address. Altruists may flinch at the idea of marketing, but it’s more important to “sell” vaccines or girls’ education than it is to sell a hamburger.

When we received a charitable mailing with a stamped return envelope, we used to grumble about how we didn’t want our donations squandered on stamps or other giveaways to people in a database. Then we got a mailing from the United States Fund for UNICEF containing a tote bag. That made us gnash our teeth at the waste, so we called Caryl Stern, the president of the United States Fund for UNICEF, to grouse.

She explained that the tote bag goes only to their best prospects for donations, and that it doubles the response rate. The upshot is that more money is raised for vaccinations, school feedings, and all the other work UNICEF does. Stern noted that the United States Fund for UNICEF has been in the vanguard of experimenting with direct mail for many years, and in 2002 it put a nickel in mailings, visible through a glassine window on the envelope. The response rate in the mailings rose from 0.78 percent without the coin to 1.47 percent with it.

“While we did get criticized, it was one of the most successful direct mail campaigns we did,” Stern told us. “We’re here to raise money to save kids’ lives.”

As counterintuitive as it may often seem, this kind of The nickel effect Mullaney is brash, and his marketing sensibility can rub pragmatic thinking should perhaps have a bigger role traditional nonprofit leaders and donors the wrong way. in charity. P Within aid groups there has been a backlash against grim photos of suffering children—sometimes called “poverty porn”—but Mullaney is unapologetic. Cheerfully exaggerating, he mimics a UNICEF official: “We don’t want to show any unhappy kids. No kids with flies.” He shakes his head: “It’s so antiseptic and artificial. It’s like they’re dancing around a little village.” Mullaney pauses and says emphatically. “If you want to raise money, you have to show a problem and suffering.”

in8finity / istockphoto.com

The global cleft problem could be solved, he says, and local hospitals were developing better tools to manage needs. But while the Smile Train board wanted to focus on bringing down the average age at which clefts were fixed, Mullaney wanted to branch out. He left to start a new organization where he would use the same direct mail techniques to tackle an array of other surgical health problems such as burns, clubfoot, and blindness.

Mullaney called his new venture WonderWork, a conglomerate that is the umbrella and back office for a set of focused charities operating with the same marketing and fundraising machine, sharing overhead to keep costs down. If you respond to one blindness mailing, you may get a letter asking you to help kids in India with clubfoot.

When we asked Mullaney about the economics of a mailing that we received, he surprised us with a revelation: he expected it to lose money. A first mailing, he says, always loses money, because for every 75,000 direct mail letters sent out to potential new donors on average 323 new contributors are found.

Overall, Smile Train says it cost $1.79 to raise a single dollar from a new donor in 2012. Mullaney is finding the figures are a little better at WonderWork, but it still costs him $1.45 to raise a dollar from a new donor for clubfoot. Mullaney is willing to lose money the first year with a new donor because he feels he can raise money cheaply in subsequent years. For second and future mailings, the response rate is about 6 percent. After about five years, each $1 invested in direct mail has raised a total of $5 or so.

Mullaney is regularly invited to make presentations to boards of other nonprofits. The conversation usually goes downhill when he explains that the millions he raised were from direct mail. “People come in and go, ‘Direct mail? No, I’m going to grow my charity on the Internet because it’s free,’” he says. “They reject everything.” Mullaney says that charities get by with weak productivity records that would lead G ­ eneral Motors or Ford to go bankrupt and shut down, but with a charity, the refrain is: “They’re doing God’s work. Aren’t they great?”

Groups under pressure to cut their “overhead” eliminate spending for rigorous evaluation and end up groping in the dark to determine what works best.

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your timetable

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GIVING

MADE EASY Donor-advised funds are bringing new convenience to philanthropy

By Joanne Florino

studiogstock/istockphoto.com

W

hen Dan Smith lost his wife, Joellyn, to breast cancer, he and his children wanted to honor her legacy. Turning to the ­Communities Foundation of Texas for help, the Smiths received needed advice and direction, resulting in the Joellyn Smith Fund for Breast Cancer Support. With further guidance from the foundation, the Smiths eventually discovered and supported the Bridge Breast Network, whose mission, assisting low-income uninsured women with cancer, was a fitting tribute to their beloved wife and mother.

When Communities Foundation of Texas CEO Brent Christopher explains ­donor-advised funds, he often cites this story. People create funds for various reasons: to share good fortune with others, to remember a happy or tragic life event, to encourage multigenerational giving—all without incurring the administrative burdens of setting up a charity or a foundation. A ­donor-advised fund offers efficiency and flexibility, allows money the chance to grow while it is invested in the market, and gives even small donors access to a large foundation’s accumulated knowledge of community needs and the best nonprofits that address them.

Donor-advised funds now make it easy for families to transmit values and teach younger

members how to engage in creative giving.

“Donor-advised funds are attractive to generous people and actually encourage them to set aside more for charity,” states Christopher. Today over one thousand organizations offer donor-advised funds in the U.S., housing over $50 billion in charitable assets.

Making it simple In 1931, the New York Community Trust established the first donor-advised fund for William ­Barstow and his wife, Francoise. William worked with Thomas Edison in his Menlo Park laboratory and served as general manager of the Edison ­Electric Illuminating Company in Brooklyn, in addition to his own entrepreneurial ventures. The couple didn’t want the paperwork and rules of their own foundation, so they used a new charitable mechanism to give to several organizations offering technical training and other support to poor children.

Many givers followed in their footsteps, and today donor-advised funds span the globe, housed in local community foundations, m ­ ission-focused funds, ethnic or religious federations, and Joanne Florino is senior vice president for public policy at The Philanthropy Roundtable.

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22%

of a typical DAF is paid out to charities each year By comparison, the payout rate for an average foundation is around

5%

c­ haritable funds sponsored by companies like Fidelity, Schwab, and Vanguard. The funds run by the latter custodians have recently grown so rapidly, because of their ease of use, that they now rank among America’s largest charitable conduits, accounting for three of the ­Chronicle of Philanthropy’s top ten public charities in 2014. (A fourth, the Silicon Valley Community Foundation, also sponsors DAFs.) Donor-advised funds now outnumber private foundations by more than two to one in the U.S., and in 2013 they funneled nearly $10 billion to charities favored by their donors.

What’s the most important factor driving philanthropists to donor-advised funds? In a single word, “simplicity,” says David Wills, president of the National Christian Foundation. Contributions of complex assets that donors would be unable to give to smaller charities and hesitant to give to any one large charity can be monetized to give donors flexibility. (For more on NCF and the way it helps people convert complex assets like real estate, private stock, and even oil interests into gifts to others, see “Alms Alchemy” on page 12.) In San Francisco, Tides Foundation CEO Kriss Deiglmeier also cites the ability of DAFs to take complexity and messiness out of gift-giving as one of their main advantages.

She reports that Tides—located in the city that is now home to Salesforce, Twitter, Pinterest, and other tech companies—is now using DAFs to help people give away full and partial business interests to­­progressive causes.

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Brent Christopher says the Communities ­Foundation of Texas has even translated donated art into charitable purposes via a donor-advised fund, capturing more value for the end recipients.

One of the ways DAFs expedite giving is by allowing people to turn the act of donating and the act of giving away—both of which can be complicated—into separate transactions, conducted without time pressure or competing interests. First a donor creates a fund at a sponsoring organization, receiving the charitable tax deduction for the gift. Once dollars are in the fund, donors can ask the sponsoring organization to disburse a grant at any time. At some national funds, online account access enables donors to monitor and disburse their gifts at opportune moments. At Fidelity Charitable, 86 percent of 2013 grants were initiated online.

The ease of these funds invites family involvement. Parents are establishing funds for their children as ­Christmas presents or to celebrate a bar or bat mitzvah, or setting up funds that a geographically-dispersed family can share. In Dallas, Christopher works with a family that has its own private foundation, yet added a donor-advised fund so it could fold additional family members into its philanthropy.

As an aid to those who find philanthropy daunting or time-consuming, DAF sponsors offer advice as desired—from basic summary information to personalized guidance. Several community foundations offer special programs on particular issue areas, and some conduct site visits to nonprofits. The Communities Foundation of Texas curates knowledge about needs in North Texas, for instance, and produces a giving guide focused on that area.

For the first ten years of his work at Vanguard ­Charitable, president Ben Pierce saw the role of the organization as “making gifts happen for those who know what they want to do.” But as more and more givers saw the potential of donor-advised funds to help them carry out high-impact philanthropy without hassles, Vanguard began to field more questions about strategy, about the pros and cons of specific grants, about conditional or matching gifts, or the wisdom of multiyear grants, or offering general operating support. Today when donors seek “deep-dive” knowledge about specific subject areas, Vanguard provides more philanthropic consultation.

At Fidelity Charitable, the story is similar. Fidelity’s website offers information on a variety of common giving areas—including extensive guidance on disaster relief, for instance. Most of Fidelity’s givers are self-directed, says president Amy Danforth; three quarters do not ask for assistance. To aid the other quarter, Fidelity partners with philanthropy advisers around the country to offer answers to questions. Danforth believes that when millennials enter their philanthropic years, “donor-advised

funds will be their strategic giving vehicles.” To aid their decision-making, Fidelity Charitable is now exploring ways to build communities of donors around specific issues such as K–12 education.

giver, “only the original donor can name successor advisers, and accounts should be closed 20 years after a donor’s death,” explains CEO Whitney Ball. Since inception, DonorsTrust has received over $700 million in funds for granting to charities and has disbursed over $600 million.

Some critics, such as Boston College law professor Ray Madoff, have complained that since there is no rule on how quickly money must be distributed after being placed in a donor-advised fund, philanthropic dollars can end up “warehoused” while charities are in immediate need. In 2014, members of Congress considered limiting the “shelf life” of contributions to donor-advised funds to five years as part of a tax-reform overhaul.

This criticism has been a moot point for D onorsTrust, where the aggregate annual payout ­ rate is 85 percent or more. “Our experience is that ­donor-advised-fund donors give more, and give faster, because they’ve already parted with the money and resolved tax issues,” says Ball. With a payout rate of 35 to 40 percent, the National Christian Foundation turns over its assets every three years. “Our folks are moved to give their money out quickly,” agrees Wills.

At Tides, the aggregate payout rate is about 50 percent.

“Our mission is to accelerate the impact of partners in social change, so our culture is about ‘right now,’” Deiglmeier explains. The National Philanthropic Trust reports that the overall payout rate for donor-advised funds in 2013 was 21.5 percent—considerably higher than the 5 percent mandatory distribution rate for private foundations.

Funds with a purpose Donor-advised funds also enable birds of a philanthropic feather to flock together. In 1976, Drummond Pike started the Tides Foundation after he recognized the potential of donor-advised funds to help liberal philanthropists join together in collaborative giving for policy change. Today hundreds of Americans support progressive causes through Tides; the foundation distributed over $94 million in 2013. In 1996 the foundation set up the Tides Center to incubate new organizations and projects that advance the goals of “social justice and shared prosperity.” In addition to attracting funds to these groups, the center provides donors with technical assistance on management, fundraising, and public relations. About 160 left-leaning organizations now operate through the Tides Center.

On the other side of the political spectrum, ­DonorsTrust offers DAFs for givers who wish to support “the ideals of limited government, personal responsibility, and free enterprise.” Founded in 1999, DonorsTrust both administers funds and launches new projects and charities under its ­tax-exempt umbrella. DonorsTrust encourages its givers to “sunset” their DAFs in order to preserve donor intent. As a “failsafe” to insure there will be no perpetual accounts that drift into causes not favored by the ­original

WHAT RECESSION?

2013:

Donor-advised funds continued to surge in number right through the Great Recession, and their growth remains at record levels.

217,370

2007:

161,940

2007

2008

2009

2010

2011

2012

2013

Source: National Philanthropic Trust SPRING 2015

33

An encouragement to give It’s common knowledge that during the recent Great Recession, individual donations to charities decreased significantly. What’s less well known is that even during this time of economic stress, donors continued to give money from DAFs. Though contributions to DonorsTrust dropped to $38 million in 2010, $61 million was nonetheless distributed in grants that year. Donor-advised funds thus act as shock absorbers, smoothing the peaks and valleys of giving over different economic phases.

Because these funds encourage givers to consistently share more over time, they can also provide ongoing operating support for charities. The Jewish Federations of North America collectively hold $4.7 billion in donor-advised funds, recommending grants to a variety of Jewish and other causes. These DAFs also provide over 10 percent of the contributions to

the federations’ own annual fundraising campaigns.

What this indicates, says JFNA’s senior tax policy counsel, Steve Woolf, is “the increasing significance of planned giving and donor-advised-fund accumulation and spending on the current operating budgets of our federations and affiliated agencies.” (For more on the Jewish Federations, see page 15.)

Donor-advised funds aren’t just for fat cats. To the contrary, they have brought the convenience of professionalized giving to middle-class givers. At Fidelity Charitable, it takes a contribution of only $5,000 to set up a fund, and 60 percent of accounts hold under $25,000.

“Donor-advised funds are democratizing strategic giving for folks who would never have a private foundation,” summarizes Danforth.

MaryAnn Rich, a retired schoolteacher and mother of two sons, cherishes her family’s funds at Vanguard ­Charitable, created after her husband, Gordon, died in

THE BRIGHT SIDE OF DARK MONEY “The shadow of ‘dark money’ haunts the midterms,” warned the Washington Post in September. Two days later, a Huffington Post headline chimed in: “It’s Time to Name the 2014 Midterms the Dark Money Election.”

The notion of dark money was first introduced in a 2010 report from the Sunlight Foundation, a nonprofit group that calls for greater transparency in government. Originally, the term referred to funds of undisclosed origin being used to influence elections. It has since morphed into a term of art mostly employed by the left to describe any undisclosed gifts to right-leaning nonprofits. While donors are within their legal rights to remain anonymous, the implication is that something nefarious is afoot.

Philanthropic privacy has long been a cherished part of American civic life, and philanthropists, whatever their political stripe, should be allowed to remain anonymous. No one appreciates this more than Whitney Ball, president and CEO of DonorsTrust, a group dubbed by Mother Jones “the dark money ATM of the conservative ­movement.” Founded by a small group

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of donors and nonprofit executives with the common agenda of “promoting our free society as understood in ­America’s founding documents,” the organization helps philanthropists manage the logistics of their giving and be sure that their gifts are directed to advance the cause of liberty.

Donors run the full spectrum of the right, from libertarians to conservative traditionalists. Ball estimates that 70 to 75 percent of gifts go to public-policy organizations. The balance goes to more conventional charities such as hospitals, religious institutions, art museums, schools, and homeless shelters.

While foundations are required by law to disclose where they spread their largesse, individual donors need not disclose their gifts to any charity. In other words, the philanthropists who use DonorsTrust could remain private simply by giving directly to their favored organizations. D ­ onorsTrust does not invest them with any legal privileges they wouldn’t otherwise have.

“I like to think of it as sort of a charitable bank account,” Ball says.

Donors do have the right to make

PHILANTHROPY

recommendations as to where the money should go, which Ball says are honored in most cases. (Gifts to ­violence-promoting groups, organizations that receive a large portion of their funding from the government, or relatives of the donor are all examples of requests DonorsTrust would deny.)

DonorsTrust also protects donor intent, a hot-button issue for givers who have learned that if they establish a foundation of their own, their heirs could easily put it to alternative purposes upon their demise.

Ball thinks that transparency advocates often conflate donor-advised funds with organizations affected by Citizens United v. Federal Election Commission, a landmark 2010 Supreme Court ruling that broadened the rights of 501(c)(4) organizations to spend money in political races. Unlike their (c)(3) cousins, (c)(4)s are allowed to directly fund political-campaign activities, but their donors are not given tax breaks. “Every community foundation operates how we do,” she says.

Casual observers might be left with the impression that “dark money” is unique to the right. However,

2000. His life insurance and other payments that arrived upon his death stocked the fund, and MaryAnn continues to make contributions 15 years later. “I keep making gifts,” she remarks, and “through this fund, Gordon is still with us.”

Rich also opened funds for her sons so they could learn to give as a family, with everyone participating in research and decision-making. This process led to a significant grant to their local food bank, where one of the sons volunteered. Using their individual funds, the young men have the freedom to recommend grants to any number of nonprofits pursuing whatever causes they feel strongly about.

For this family, the payout flexibility of ­donor-advised funds enabled them to make smarter gifts. At the time of her husband’s death, MaryAnn was teaching full-time and raising two young children.

She knew she wanted to earmark financial resources for charity, but needed time to get her bearings and learn

there are plenty of other donor-­ advised funds ranging ideologically from ­progressive—like the Tides ­Foundation—to politically neutral— like funds run by financial-services giants Vanguard and Fidelity. It is far more prevalent on the left than the right to criticize “dark money.” TV host Glenn Beck decried the Tides Foundation’s anonymous donations, but his argument never gained traction; most conservatives believe Tides should be allowed to give as it sees fit.

This is really a dispute over the value of donor privacy, no matter what the politics involved. As Adam Meyerson wrote in the Fall 2013 issue of Philanthropy, “the right to privacy enjoyed by contributors to ­donor-advised funds is no different than the right to privacy that governs the overwhelming majority of charitable giving.” Philanthropic privacy, he argued, is justified by the same reasoning as the 1958 Supreme Court case of NAACP v. Alabama, in which the court unanimously ruled that if the civil-rights organization were forced to disclose its membership, supporters might be subjected to “economic

DAFs aren’t just for fat cats— 60 percent of the accounts at Fidelity hold less than

$25,000 how to be a good donor. “That takes hard work,” she says. In addition, a time limit would have prevented her sons from participating as young adults. “It would have changed the way we did things, and not for the better,” she concludes.

“When you’re talking about philanthropy,” Rich asks, “why make it difficult?” P

r­ eprisal, loss of employment, threat of physical coercion, and other manifestations of public hostility,” thereby restraining “their right to freedom of association.” Some of the reasons donors might wish to remain anonymous include “to protect themselves from unwanted solicitations, to protect their children from knowledge of their family’s wealth,” and most resoundingly to protect their “freedom to support controversial organizations without fear of reprisal or ostracism” like NAACP donors of old.

DonorsTrust’s benefactors describe a variety of reasons for wishing to remain private. One tells me that his first large anonymous donation was a six-figure gift to his synagogue.

“I didn’t want everyone to think that I was a big shot entitled to special treatment,” he says. Later, he established a family foundation. “The whole point of this was to get my kids involved and encourage charitable impulses in the next generation,” he says. “To my horror, people could Google and see my kids, the amount of money in the foundation, and when I saw that on the Internet it totally

SPRING 2015

scared me for my kids’ safety.” He also cites the medieval Jewish philosopher Moses Maimonides, who posited that the more anonymity there is between donor and beneficiary, the more righteous the act.

Another anonymous donor, the head of a foundation with an interest in education reform, says he does not want his friendships clouded. If his giving were in the open, he would be frequently hit up for money by pals whose favorite charities put them up to it. And in any case, he stresses, privacy is among the rights that should be afforded to everyone. “Any discussion around ‘dark money’ is somehow secondary and irrelevant to fundamental freedom of speech,” he says. “The founding fathers believed that, generally speaking, we were to be left alone…. I don’t think we came over here with the mindset that we would have some sort of benevolent dictator looking over our shoulders to see what we are doing.”

—Excerpted from “Dark Money” by Bill Zeiser at National Review Online Reprinted by permission; © 2014 by National Review Inc.

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Taryn Wolf

36

PHILANTHROPY

Stronger

Together Donors are increasingly using expert intermediaries to bundle and target their giving

By Evan Sparks

Taryn Wolf

B

. J. Cassin is no stranger to the idea that small investments can generate outsized results. That is the foundation of the venture capital industry—the business in which Cassin has earned his fortune over the last 35 years. So it is no surprise that Cassin’s next big move in K-12 education philanthropy will invest in carefully selected schools, educational entrepreneurs, and school networks with the intention of “transforming” faith-based and private schooling.

Cassin was one of the most important funders behind the growth of Chicago’s acclaimed Cristo Rey Jesuit High School from a single site in 2000 to a network of 28 high schools in 18 states and D.C. today (with more on the way). These Catholic schools now serve 9,000 students per year, the vast majority of them racial or ethnic minorities from ­low-income homes. With its innovative work-study model of four students sharing a job at a company, the network is affordable for families and fiscally

sustainable. In 2014, all of its graduates were accepted to college. (For more information on Cristo Rey, see “More Than Just Academics” on page 58.)

Now Cassin is seeking to amplify this success. For years, he has been part of a group of Catholics seeking new models for financing private schools—whose enrollments as a proportion of the entire U.S. student body have declined by a third over the past half century.

He connected two friends—Rob Birdsell, at the time head of the Cristo Rey Network, and John Eriksen, then the reform-minded superintendent of Catholic schools in Paterson, New Jersey—and together the three men are launching a philanthropic venture called the Drexel Fund, named for Katharine Drexel, the C ­ atholic heiress-become-nun who founded schools for the underprivileged across America around the Evan Sparks is a contributing editor to Philanthropy.

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­ hilanthropists like Cassin have made pooled investing p a key part of their philanthropic strategy because the collaboration with other donors allows them to have big effects relatively quickly. For other donors, aggregators are a solution to the problem of not having enough time to deeply research a field; the intermediary organization takes responsibility for finding the best practitioners, and the donor provides the resources.

Thanks to the multiple benefits they offer philanthropists, aggregators have become extremely popular of late. The Charter School Growth Fund and the ­NewSchools Venture Fund have together invested some $435 million in charter schools. Community foundations and other donor-advised-fund sponsors frequently offer pooled giving funds for donors interested in specific projects. (For more on donor-advised funds, see “Giving Made Easy” on page 30.)

P hilanthropic consulting and advising firms like the Bridgespan Group, Arabella Advisors, ­Rockefeller Philanthropy Advisors, and FSG have also leapt into prominence over the last decade or so by helping connect donors with compatriots who share the same philanthropic goals. Venture Philanthropy Partners has adapted venture capital and private equity practices to allow groups of wealthy individuals to join together in very effective and efficient philanthropic giving.

By now it’s a truism that donors are increasingly oriented toward measurable results. “As more and more donors have that commitment, they are looking to philanthropic aggregators,” says William Foster, a partner at the Bridgespan Group. “A desire to achieve major results” on a large scale is tightly linked to decisions to Banding together for outsized results join forces with others.

Groups like Drexel are known as aggregators, and The Edna McConnell Clark Foundation was an they help givers in a variety of ways. Many serious early pioneer in this area. Founded in 1969 by an Avon Products heiress, the $950 million foundation dramatically reinvented itself in the 1990s to focus on achieving results at scale for at-risk young people. In addition to using its own funds, EMCF solicits donations from other foundations and individuals interested in giving high-performing nonprofits a growth spurt.

The foundation’s current leader, Nancy Roob, spearheaded its transformation to an investor-like approach of “money committed up front, against performance, that nonprofits can count on over a long period of time to execute their strategies.” Noting that charities

“If you’re a private K-12 donor and you don’t have the time or resources to go find the best entrepreneurial educators, that’s what we’re here for.”

38

PHILANTHROPY

Taryn Wolf

turn of the twentieth century. The fund will raise an initial $30 million from a variety of wealthy individuals (and $85 million over a longer term) and then invest it as venture capital to create 50,000 new seats in excellent, sustainable faith-based or private schools (most but not all of them Catholic).

“There are a lot of interesting new models in faithbased and especially Catholic schools, but we don’t have a platform to replicate the most successful ones,” Cassin says. “That’s where the idea of Drexel came from.” It seeks to do for private schools what the NewSchools Venture Fund and the Charter School Growth Fund have done for charters: provide capital to start promising new school networks and scale up successful existing schools. Cassin gave $1 million in seed money and recruited several other donors to launch the effort.

The schools that Drexel underwrites—representing Catholic, evangelical, Lutheran, Jewish, nonsectarian, and other traditions—will be intended to serve low-tomiddle-income families who are seeking to give their kids better academics, better values, or both. “We want to ensure access for all kids to high-quality private schools,” says Eriksen—adding, with a chuckle, that Drexel won’t be scaling up “Our Lady of the Chichi.”

To start, the fund will focus its efforts in six states—Arizona, Florida, Indiana, Louisiana, Ohio, and Wisconsin—where tax credits or vouchers help parents afford private schools. Across these states, the average public support per pupil is $6,000. “You can run a good elementary school on that,” Birdsell observes. With modest tuitions, “that’s a good business model that requires very little private philanthropy.”

By 2024, Drexel’s funders aim to create 125 new private schools, grow six to eight school networks, and cultivate 40 new private-school entrepreneurs. And if all goes according to plan, no more than 15 percent of a Drexel-supported network’s budget will come from philanthropy once it is fully up and running.

Taryn Wolf

often have a very difficult time raising money for steady expansion, Roob wanted her foundation to provide and raise growth capital for nonprofits with the biggest potential to scale up.

One of those nonprofits was Memphis-based Youth Villages, which provides intensive in-home and residential treatment for troubled young people, as well as foster care and adoption services. In 2004, the organization was in only a few states, mainly Tennessee, serving 8,000 kids. An EMCF program officer found out about Youth Villages and cold-called its CEO, Patrick ­Lawler, inviting his organization to be part of the foundation’s initial aggregation portfolio.

Lawler was intrigued. He worked with EMCF and Bridgespan to develop a business plan for expansion.

EMCF kicked in $15 million and raised an additional $15 million from other funders, including the Bill & Melinda Gates Foundation, the Duke Endowment, and the Kresge Foundation. An additional $10 million was raised by Youth Villages itself, and the organization is now in 12 states and ­Washington, D.C., serving 22,000 children and their families.

Since 2004, EMCF has given more than $36 million to Youth Villages and passed on an additional $25 million from its partners. “Without their idea and vision for the future of Youth Villages, we could never, ever have imagined this happening,” Lawler says.

The foundation’s grants to Youth Villages are part of its Growth Capital Aggregation Pilot, which raised a combined $120 million from 19 co-funders for Youth Villages, Nurse-Family Partnership, and Citizen Schools. EMCF counts the pilot a success, noting that it helped grantees nearly double the number of youth they served over five years. Building on this experience, in 2011 the foundation launched the True North Fund. Raising $63 million from 14 co-funders within its first two years, True North is helping 12 grantees execute their own strategic plans. In this case, however, c­ o-investors can use what the foundation calls a “portfolio-based approach” by giving to a general fund, region-specific funds, or to particular grantees.

The Milwaukee-based Bradley Impact Fund, linked to the Lynde and Harry Bradley Foundation, likewise offers its donors opportunities to give toward specific portfolios—such as economic vitality, security, or “American ideas and institutions”—in addition to giving through its general fund or a donor-advised fund.

Donors benefit from Bradley’s programmatic strength in finding and vetting effective nonprofits aligned with Bradley’s principles.

Although the Pew Charitable Trusts were a family of private foundations until the early 2000s, they combined

to form a public charity, which now raises funds from philanthropic partners—ranging from Gerry Lenfest to the Robert Wood Johnson Foundation to the Peter G. Peterson Foundation—to complement Pew’s own sizable endowment resources. New fundraising gives Pew an opportunity to tackle bigger projects than it could alone, but its original resources help protect the trusts’ independence of action.

A premium on expertise and efficiency In an increasingly complex charitable landscape, donors are looking not just for the leverage that comes with larger resources, but also for trusted judgment they can access by banding together. “There’s a build-versus-buy question,” explains Foster. “The for-profit world has long decided that there is value in specialized expertise, and the nonprofit world is following that path.”

That feature is what attracts donors to the Drexel Fund, says Rob Birdsell. “If you’re a donor and you don’t SPRING 2015

39

centralized the reporting expected from the nonprofit.

“Reporting into one organization versus having to maintain all the different conditions was extremely helpful,” have the time, network, or resources to go find the best says Lawler. entrepreneurial educators in the private market, that’s our job. That’s what we will be doing.” He encourages A two-edged sword donors to think of it like a private equity fund—an The use of outside experts in philanthropy is a two-edged opportunity to work with experts to achieve results not sword, requiring—as William Foster notes—a relentless focus on goals and results. Without this focus, giving possible without both the experts and the capital.

Many who give through aggregators are attracted through aggregators and hiring consultants can become a by the opportunity to learn from fellow donors. Take, way of appearing to do good without having to confront for example, the Silicon Valley-based Legacy ­Venture. actual outcomes. “Donors who give through intermeA venture capital fund of funds started in 1999, L ­ egacy diaries should understand their motivations—whether aggregates over a billion dollars from nearly 500 inves- they’re looking for results or merely validation,” says Tom tors, who dedicate their original investments and all Riley, vice president for strategy at the ­Philadelphia-area returns to their individually chosen philanthropic pur- Connelly Foundation. “It can become the philanthropic poses. (See “Venture (Capital) Philanthropy” in the version of the old business saying: ‘No one ever got fired Fall 2009 issue.) The aggregation is in the process of by hiring IBM.’” One test for whether experts will serve your philangrowing the capital; investors make their own charitable decisions, says Russ Hall, a Legacy co-founder and thropy’s ultimate goal, Riley offers, is “how much jargon you are getting back” from them. “The unwary donor managing director.

But Legacy doesn’t just collect a pool of capital—it is impressed by jargon.” He also cautions givers to pay seeks to expand its investors’ horizons by giving them attention to how respectful the intermediary is of your opportunities to interact with each other and with personal goals and intent as a donor.

For donors concerned about the hazards of aggregation, Foster urges them to think of it as “an exercise in minimizing risks.” Donors should be more concerned about missing opportunities for more effective giving by not participating in these kinds of philanthropic vehicles, he explains. In this sense, philanthropic aggregation is like diversifying a financial portfolio—it spreads the risk around and increases the chance of a bigger payoff over time. Depending on your philanthropic strategy, giving through a community foundation might be like investing in an index fund that tracks the charitable market, so to ­philanthropic experts. For example, investors have joined speak; meanwhile, giving through a venture philanthropy forces to learn how to be effective nonprofit board organization resembles the higher-risk, higher-reward ­members—a skill that doesn’t always translate easily models of hedge funds.

When aggregators invest their own capital alongside from the for-profit sector. “Open to learning techniques from others” such as how to set philanthropic strategies or that of their philanthropic partners, that commitment evaluate grantees, Hall says, Legacy investors are tapping generally boosts donor confidence. Nancy Roob estiinto wisdom for “a thoughtful lifetime of philanthropy.” mates that EMCF chips in at least 30 percent of the Another driver of aggregation is efficiency. “It’s all pot, on average, when doing a deal. By doing so, “we’re about minimizing transaction costs,” says one foundation really able to minimize the financial risk for the other officer who has also worked as a philanthropic adviser. investors,” she says.

Given the experience of the Drexel Fund team and Philanthropic aggregators can “get the grant reporting done, check on how they’re doing, cut the check,” she the talented educational entrepreneurs they will work with, B. J. Cassin sees very little risk of failure. He is adds. “They’re better set up to run smaller grants.”

Aggregation helps grant recipients, too—grant optimistic about what donors can accomplish in urban compliance costs can be significant and can distract education by pooling their capital. “We’ve learned a lot the attention of staff away from operational excellence. about the action needed to replicate schools,” he says.

When EMCF aggregated support for Youth Villages, “Drexel allows donors to efficiently get into where the it secured identical grant terms for all the funders and action is.” P

If giving through a community foundation is like investing in an index fund, giving through venture philanthropy comes with the higher risks and higher rewards of a hedge fund.

40

PHILANTHROPY

Choosing Among Intermediaries It is a saying as old as Aristotle that giving away money wisely is harder than m ­ aking it.

“I resolved to stop accumulating and begin the infinitely more serious and difficult task of wise distribution,” said Andrew Carnegie.

Or in the blunter words of a contemporary rapper: “Mo money, mo problems.”

Turning to organizations that aggregate funds for further distribution is a longstanding tool for American donors. “Community chest” organizations—the forerunners of today’s United Way—date back to the 1870s. Jewish federations have steered their faithful to worthy projects since 1895. Community foundations sprang up in 1914 as intermediaries between nonprofits and masses of givers.

Today, intermediaries take a variety of forms but are generally divided into four categories: administrators, advisers, aggregators, and allies. Each correlates with different levels of donor involvement and control: Administrators are entities that are under the donor’s firm control. The donor is actively engaged in setting strategy, choosing tactics, identifying grantees, and making grants. Typical administrators include private foundations, family offices, and trusted lawyers and bankers.

Advisers allow donors to retain full control over funds while giving up a level of involvement in details. These are consultants that provide fee-based services, from research to grant management.

Aggregators maximize results by pooling funds. Donor involvement can be reasonably high, but donors relinquish ultimate control of their gifts. Venture philanthropies, community foundations, United Ways, and scholarship funds are all examples of aggregators.

More Donor Involvement

Aggregators Venture philanthropy firms Community foundations Foundations that accept contributions

Donor-advised Funds Nonprofit groups

Commercial accounts

Allies are networking organizations centered on particular interests. They can offer donors articulate principles, broad strategies, and lists of top-performing charities. Allies can include affinity groups, ­information-sharing networks, and associations of grantmakers.

Donor-advised funds are a kind of hybrid, and they offer many of the same conveniences as intermediaries. See “Giving Made Easy” on page 30.

Some intermediaries fall into multiple categories. For example, Arabella A ­ dvisors offers services as an administrator, an adviser, and an aggregator. Many donors give through a mixture of intermediaries as their needs and giving priorities warrant.

Administrators Private foundations Family offices Lawyers and bankers

Scholarship funds United Ways

Allies

Advisers

Information-sharing networks

Consulting firms

Affinity groups

Foundation management contractors

More Donor Control SPRING 2015

41

Venture for America

Some of the Venture for America class of 2014, with their ever-energetic ringmaster Andrew Yang.

42

PHILANTHROPY

A NEW WAY TO SERVE

Venture for America is bringing entrepreneurial vim and vigor to unexpected corners of our country

Venture for America

By Ashley May

is commencement day at Brown ­University. Graduates, family, alumni, bagpipers, and the odd dog parade down College Hill and through the iconic iron gates. The class of 1996 is led by student-selected orators Andrea Anderson and Michael Palmer. Anderson, already accepted into Brown’s eight-year liberal arts medical program, will become a doctor in ­Washington, D.C. Palmer will end up working for a dot-com ­company in Seattle, get his MFA in screenwriting in Los Angeles, and pen some scripts for the fourth season of the “West Wing.”

Also in the throng is Andrew Yang, an economics major on a partial scholarship provided by his father’s employer, IBM. He had been a snack-bar worker on campus and a busboy at a Chinese restaurant. He trained in tae kwon do,

played video games, and enjoyed working out, naming his pectorals Lex and Rex. But when it came to life after Brown, Yang didn’t know what to do. His senior year was primarily focused on moping about his e­ x-girlfriend.

He recalls feeling that he had “really achieved nothing at this point; no distinction.”

He had, however, achieved a 178 on the LSAT and acceptance into Columbia Law School. He took out $40,000 a year in student loans and enrolled. This led, as night follows day, to a tony job at Davis Polk & Wardwell in New York City, doing the paperwork for mergers and acquisitions. He started at $125,000 a year with an annual bonus of $15,000.

“If you’re a very strong student you can become a banker, consultant, doctor, or a lawyer, Ashley May is managing editor of Philanthropy.

SPRING 2015

43

Current entrepreneurs are building future entrepreneurs.

and LinkedIn president Jeff Weiner are all VFA donors.

and get paid quite well for doing nothing other than being good at school, passing from one level to the next,” he tells me. “I was 24 years old and had done nothing of substance.” Despite the high pay and prestige, Yang kept thinking, “Shouldn’t I be the person building the company, and hire someone else to do the paperwork?”

So he quit the law firm and founded Stargiving.com, a website to help celebrities raise money for charity. It went the way of most startups; it failed. His investors lost all their money and Yang started seeking out the free bread samples at Cosi.

He learned a painful but simple lesson: “Entrepreneurship is super hard.” Resolving to apprentice himself to an experienced business builder he could learn from, 44

PHILANTHROPY

Yang found his way to a health-care software c­ ompany.

On the side he began a weekend party business to rebuild his commercial confidence, make a little money, and better his chances with the ladies.

Then a friend asked Yang to run his small test-prep company, Manhattan GMAT. With an initial salary of $65,000, Yang took the offer and built the company into one of the leading GMAT preparers in the United States. Four years later the venture was acquired by Kaplan, making Yang a 34-year-old millionaire.

Though he was suddenly doing great, “I found myself really despairing about the path the country seemed to be on.” This was 2010, two years after the fall of Salomon Brothers. Detroit was well on its way to municipal bankruptcy, and unemployment passed

Venture for America; Bloomberg, contributor/gettyimages; Marvin Shaouni; LinkedIn

Clockwise from top left, financier Sy Jacobs, LinkedIn co-founder Reid Hoffman, Quicken Loans founder Dan Gilbert,

Venture for America; Bloomberg, contributor/gettyimages; Marvin Shaouni; LinkedIn

9 percent. Meanwhile he saw hordes of bright college graduates spinning their wheels as he had: pursuing careers in professional services they had no passion for, just because it was an easy and expected course, and they didn’t see any obvious path for putting their talents to work in a more creative way.

Though America’s economy desperately wanted fresh talent and new growth, the cities with the greatest need and lowest startup costs—New Orleans, Baltimore, Detroit, Cleveland—weren’t attracting college graduates.

“Our talent is not allocated in a way that is actually going to solve our biggest problems,” he realized. So Yang made a pact with himself: “You should get off your butt and try to do something about it.”

Reversing the brain drain The idea was deceptively simple. Place top college graduates at worthy startups in low-cost cities where they will gain the skills and instincts necessary to be valued workers and then progenitors of new enterprises themselves someday. The companies where these smart young kids were placed would benefit from the influx of energy and talent. The receiving cities would have a chance to grow.

And the participating men and women would be solving problems and creating new entities, not just dispensing professional services.

This would require sophisticated recruiting, instant creation of a measure of prestige, a powerful training boot camp, and rituals and rites capable of building camaraderie and esprit de corps. What Teach For America had done for education, Andrew Yang wanted to do for entrepreneurship. He even mirrored the name, calling his new nonprofit Venture for America. An initial goal was to help participating startups create 100,000 new jobs in their struggling areas by 2025.

With his plan in hand and $120,000 of his own savings invested as seed capital, Yang started to court donors. He tapped old colleagues and friends from Brown. He pitched fellow entrepreneurs. Venture capitalists and other financiers liked the focus on building new companies and cultivating business savvy in a new generation of bright kids.

Private equity fund manager Sy Jacobs was at a Detroit Tigers baseball game when he first heard about VFA. His buddy and fellow University of Michigan alumnus Bernie Sucher had moved to Moscow years ago and become very successful in Russian capital markets, but kept ties with business interests back home. He and Jacobs shared a particular interest in initiatives that might bring some commercial spark to the Motor City that they each had links to.

“Bernie was telling me about the increased time he was spending in Detroit, and I kept asking him why,

what’s going on that’s exciting,” remembers Jacobs.

When he described how VFA was bringing in Ivy League kids to help boost small local ventures, Jacobs wanted to learn more. “I was captivated by the mission of promoting entrepreneurism as a nonprofit,” he says.

“I got involved right away.”

Of particular interest was the concept of “reversing the brain drain”—sending top students back to midsize American cities, from which many of them would otherwise flow to the obvious locales like New York, San Francisco, Atlanta. “Kids are almost systematically directed into three white-collar industries in five wealthy cities,” Jacobs says. It was “crystal clear to me that this was not a good thing.” Jacobs (who has just agreed to chair VFA’s board) is a walking advertisement for a reversed brain drain. “I’m a New Yorker but somehow all of my charitable dollars end up in the State of Michigan.”

Along with his new supporters like Jacobs, Yang began to think through where to send fellows. After launching in Detroit, Providence, and ­­New ­Orleans, VFA added nine more “target cities”—and still more are coming. From a starting budget of $200,000 in 2011, the program is projecting a nearly $5 million budget in 2015, which will allow it to send out about 150 fellows.

This growing reach is thanks to a growing donor base. The largest supporters of VFA are now corporate foundations—Barclays, PricewaterhouseCoopers Foundation, and UBS. Individuals like LinkedIn co-founder Reid Hoffman, Zappos CEO Tony Hsieh, and LinkedIn CEO Jeff Weiner are also making large yearly gifts. Foundations known to invest in ­e ntrepreneurship—the Ewing Marion Kauffman Foundation, the Burton D. Morgan Foundation, and the Abell ­Foundation in Baltimore—are on board. For some donors, the allure is to support their own region.

Tony Hsieh and the Zappos Downtown Project, for instance, pledged $1 million to set up a pipeline of fellows to Las Vegas, where the firm is headquartered and the local economy is very mixed.

Motor City mojo “Living in Detroit is certainly different than other cities.

But it’s absolutely perfect for trying to start a business.”

Meet Brian Rudolph, co-founder of Banza, a company that aims to do to pasta what Chobani did to yogurt: redefine the category. “Banza is made from

“Kids from top colleges are systematically directed into three white-collar industries in five wealthy cities. It’s crystal clear this is not a good thing.”

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energize his ambitious Downtown Project in Las Vegas.

chickpeas. Chickpeas are delicious. Also the same color as pasta,” he explains. But Banza has nearly twice the protein of regular pasta, roughly half the carbs, and four times the fiber. Oh, and it’s also gluten-free.

“I thought I was going to go into finance and consulting. That’s what my family encouraged me to do,” says Rudolph. But “I just like to sell things,” and in the process of co-founding a music blog with friends at Emory University “I fell in love with this concept of creating value.”

He heard about VFA from someone in the Kairos Society, an entrepreneurship group on campus, and what he learned “really resonated with me. It made sense that I could go work in a startup environment and have an impact from day one.” He went through three rounds of

“If you really want to start a company I don’t think there’s a better path.

You learn by working in a startup.”

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An engine of character formation Leaning into my recorder, Andrew Yang is eager to make his point. “We’re taking very smart technical people

Zappos.com

Zappos.com CEO Tony Hsieh is counting on a steady stream of fellows to

interviews, culminating in a day in New York City with other candidates. Seeing the caliber of his peers sealed the deal. “It was appealing, being around people who are like-minded and want to create value, potentially create a business. I don’t think I’d ever really been in an atmosphere like that before.”

Rudolph’s placement was at promotional company Quikly in downtown Detroit, a city he had avoided at all costs before. But after only two years, he has changed his tune. In New York, “I’m easily distracted.” Being in Detroit “allows me to spend more time and focus on work.” And the local startup culture is opening one door after another.

Days after he finished his VFA placement, he got a call from CNBC asking about his interest in a reality TV show, “Restaurant Startup,” where teams compete for investors to back their food business. A few weeks later they filmed. “We managed to pull together a product in a very short period of time,” he said. Rudolph also pitched the chickpea pasta idea at a competition, and met Brian May, who would later introduce the company to the Meijer grocery chain.

He also connected with Dave Zilko, president of Garden Fresh Salsa, who became Rudolph’s mentor. “There’s nothing quite like being able to learn from a seasoned entrepreneur who can guide you,” says Rudolph. “I’ve sent him e-mails where I’ve been absolutely stressed out of my mind because something went terribly wrong, and he’s sent me back responses that have really helped me make the right decisions in those moments of crisis.”

Looking back over his experience with VFA and his preparation for Banza, “there are a ton of skills that I have now that I didn’t have then,” he says. “If you really want to start a company I don’t think there’s a better path. I really don’t. You learn by working in a startup.”

Rudolph is not the only VFA alum who has gone on to lead in Detroit. Five former fellows have started companies. Sean Jackson, a key member of the city’s Blight Removal Task Force today, began in the city as a VFA fellow at Dan Gilbert’s Rock Ventures.

The decision to support VFA was a “no-brainer,” says Gilbert, the founder of Quicken Loans and now a major philanthropist and business-builder. “From the day the VFA fellows arrive, they are fueled by the electrifying environment and energy that a hustling and bustling urban core offers. They seem to always be looking for innovative solutions to business problems, and are driven to create new opportunities for themselves and others, which is exactly what cities like Detroit and Cleveland need to continue to thrive.”

Zappos.com

today and having them design esoteric paper assets as opposed to building things. When you say entrepreneurship to many parents, they think unemployment, they think youthful dalliance, naïveté, they think this person is going to wind up on my sofa. Some people think entrepreneurship is a well-supported path. I haven’t seen that on any significant level.”

But even though they have to step off the expected, gilded paths to enter the world of s­ tartups, when the option is made available, often thanks to philanthropic support, many young people will jump for the chance. Blackstone LaunchPad, a group of business accelerators on college campuses, reports an unprecedented amount of interest from u­ ndergraduates—80 percent of whom are not business students. They’re “music students, English majors, all thinking about how they can make a living out of what they’re interested in,” says Amy S ­ tursberg, executive director of the ­Blackstone ­Charitable Trust. “That’s the direction America needs to go into. Two thirds of all the jobs that are going to be created in our economy are going to have to be from startups.”

When they have a shot at some of each generation’s best talent, early-stage companies have a better chance of flourishing. Baltimore-based cybersecurity company ZeroFox hired three VFA fellows in 2013. It now employs 12. “Our fellows are absolutely assets to our organization,” says ZeroFox “chief people officer” Hillary Herlehy. “They are high achievers who exhibit entrepreneurial spirit, intellect, tenacity, initiative, integrity, and an unwavering pursuit of excellence.”

And it isn’t just companies and cities and the country that benefit. Adding an easier path into entrepreneurship to challenge the standard lawschool-Wall-Street-become-a-doctor options allows today’s high achievers to rethink “success” and open up fresh horizons.

“I want to throw something out there,” Yang tells me. He notes that a human brain doesn’t finish growing and rewiring itself until the late 20s. “When you come out of college you’re quite raw and incomplete. So we have to look very closely at what people do between the ages of 21 and 28, because that’s going to end up literally determining a lot of who they are.” He pauses to collect his thoughts.

“If you work at a startup company in Detroit or Baltimore for a couple years, you’re going to become a different sort of person than if you work in a large consulting firm running reports for bureaucratic companies,” he says. “I have seen the transformation among our fellows. You can change quickly from well-behaved recent college graduate to gritty builder.”

VFA is an effort by philanthropists to create “a path for some of our young people to become the

kind of individuals and leaders and potential business builders and job creators that we need,” he continues.

“I originally thought of this as a plumbing problem,” and VFA was going to hook up some new lines. “What I realize now is that we’re also potentially an engine of new character formation.”

The next generation It is commencement again at Brown University. This time it’s 2013. Same mortar boards. Same iron gates.

Same odd dogs.

But a different group of students is processing 17 years later. Among them is Zoe Chaves, a finalist to be the class’s student orator. Her speech, about a doctor’s care to her uninsured family when she was five, culminates in her expressed desire to help others in an equally concrete way. When her text is printed in the Brown Daily Herald it carries this byline: “Zoe Chaves is graduating with an AB in Architectural Studies and will be staying in Providence for the next two years through a fellowship with Venture for America.”

Chaves’s background in urban design might not suggest a career in business, but she would argue otherwise. She had experience earlier doing social work at a hospital. “I was helping people apply for things, calling social services agencies and advocating on behalf of my clients,” she explains. “But I was starting to worry that wasn’t sustainable. I knew that what most of them needed was job training and a job.… And I would just wonder, when are they going to get in crisis again because mom doesn’t have work, and can’t find it.”

Chaves found nonprofits that offered training classes and clothes for interview days, but the general absence of private employment in Providence was “really frustrating.” “I just saw this huge need for jobs, and I was starting to be a little skeptical that the nonprofit sector, at least in the way I was experiencing it, could really tackle that.” So when she found out about VFA from a professor, she was intrigued. “I heard about VFA’s mission of creating jobs by scaling companies, and I thought about all the other effects that might have.”

She admits that most of the software engineering jobs her current VFA employer is creating won’t be available to those she served when she was working at the hospital. But the community will thrive from the growth.

“When a company scales from 5 to 100, it doesn’t just have an effect on the 95 extra people that get hired. It has an effect on their families, their communities they pay taxes into, and the people they employ.”

“I was ready to try a new approach,” she says.

Venture for America is counting on our country being ready for the same fresh departure. P SPRING 2015

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After serving as a missionary in the Philippines, candy tycoon Menlo Smith felt called to help developing-world entrepreneurs build up their businesses.

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PHILANTHROPY

MICRO LENDING

MAJOR IMPACT

By Marques Chavez

How the maker of SweeTARTS is combining friendship and capital in one tangy dose

L

ilia Pascual is a small business owner in the city of Taguig in the Philippines. Not long ago, she and her family of six lived in a small, crudely-made shanty, which they had to reinforce every time a typhoon passed through to keep it from crumbling. At the time, Pascual was the owner of a “sari-sari store,” a Filipino corner mart. “It was a very small business,” ­Pascual says, and while it was able to stay afloat, it did little to generate income, leaving the family in perpetual poverty.

Like many other developing-world business owners, Pascual did not have access to the capital she needed to expand her operations.

Without any possessions of real value or other form of collateral, these entrepreneurs cannot obtain credit through traditional means. Driven from legitimate lending institutions, some seek out dicier options like street sharks. The interest charged by street sharks is high, and if the loan is not repaid the borrower may face real danger.

But in 2000, Pascual saw an announcement describing loans for business owners and entrepreneurs from an organization called Mentors International. At a meeting, she learned that she could borrow a small amount of money safely, while also getting support and advice that could help her enterprise grow. She immediately signed up.

Mentors International was created to help people like Lilia by linking microfinance, supportive social networks, and wholesome character education. The group’s average first loan is just $172. When combined with some business training and social support, though, this small influx of capital is enough to help many marginal enterprises grow to the point where the owners are lifted out of poverty.

The candy man Mentors International is the sweet invention of Sunmark Companies founder Menlo Smith.

His father, John Fish Smith, moved the family to Salt Lake City during the Depression to join in a cousin’s business venture. Their company, Marques Chavez is director of communications at The Philanthropy Roundtable.

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DIRECT DONATIONS If you visit the website of Mentors ­International you will meet the entrepreneurs aided by gifts to the program—a strawberry farmer, a ropemaker, a blind restaurateur. However, your donation will go into a common fund, and the actual lending decision will be made at a local level.

But in this special issue of Philanthropy exploring new mechanisms and forms of giving, it’s worth noting that there are other versions of microfinance that connect lenders and borrowers directly. Kiva is an example. Its loans start at $25 and go toward basic investments like a dairy cow or rickshaw. Repayment schedules are clear and provided online as well, and users can post ratings of risk and repayment reliability. Virtually all Kiva loans are repaid in full, and lenders have the option to invest their repayment in another loan. Like Mentors International, its recipients are not grantees, but business partners.

When Matt Flannery and his wife, Jessica, first imagined Kiva in 2004, there wasn’t a precedent for individual sponsorship of a business overseas, and certainly not over the Web. Their concept for allowing Internet users to make microloans to particular entrepreneurs in developing countries flustered regulators at the U.S. ­Securities and Exchange Commission.

Some funders also fussed over distinctions between charity and for-profit.

The Flannerys explored taking Kiva commercial, but the board felt strongly about remaining nonprofit.

Today, Kiva is a proven operation.

Since its founding it has connected over one million lenders and borrowers worldwide, making $680 million in microfinance loans. In 2013, the group launched a domestic branch, partnering with microfinance institutions in Little Rock, Arkansas, and Washington, D.C., to support American small businesses.

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Another organization encouraging direct person-to-person giving in the U.S. is DonorsChoose. Its mission is to make it easy for individuals to support projects in K-12 education. In 2000, Bronx teacher Charles Best created a website where he and his colleagues could post requests for classroom aids, taking contributions as small as $5. If a particular project reaches its goal, the teacher receives his or her request. If the project doesn’t reach full funding, donors can choose to send their teacher a gift card or invest in another project on the site. Since its inception DonorsChoose has connected over 1.5 million donors with over 200,000 teachers, giving away $308 million.

A similar platform, Kickstarter, has a foot in both the philanthropic and for-profit worlds. Unlike Donors­ Choose, Kickstarter funding can go to any p ­ urpose—educational, artistic, technology invention, new business formation, you name it. The purpose can be commercial, charitable, or personal. Individuals can give (without a tax deduction) to any effort they deem worthwhile. Similar to DonorsChoose, funds do not change hands if a project fails to receive enough pledges to meet its goal. K ­ ickstarter collects a 5 percent fee on any fully funded project.

While Kickstarter is not a charity, in some areas, especially the arts, it has encouraged much creativity and innovation. By 2013, Kickstarter was distributing several times as much annual funding to artists as the National Endowment for the Arts. Since 2009, over $2 billion has been pledged by 7.8 million people, funding more than 77,000 projects.

What this means for traditional philanthropy is yet to be seen. Meanwhile, donors like Catholic-school supporter John Hazeltine are trying to see if direct donating can be taken to an even more intimate level. Some years ago, he was moved to pay the Catholic-school tuition

PHILANTHROPY

of one of his children’s schoolmates after that boy lost his father to a heart attack.

The experience taught Hazeltine that having a direct connection to a recipient can be powerfully satisfying. Upon prodding from a pastor, he sought out other children in his community for scholarships based on specific knowledge of their needs.

Today Hazeltine is working on a platform where donors can read personal narratives and contribute to individual students’ schooling. While he admires traditional tuition-aid programs like the Children’s Scholarship Fund that pool funds and deliver them corporately, he believes that many givers will dig deeper if they know the reallife stories of children they’re helping.

Hazeltine acknowledges that this approach has its share of ethical and practical issues to navigate, including privacy and fairness concerns, but he thinks those can be solved.

One organization with 60 years of experience in trying to balance the pros and cons of direct giving is World Vision.

Its child sponsorship program connects donors to specific kids with whom they exchange photos and letters. While those relationships are direct and one-to-one, financial contributions go into a pool that World Vision distributes across that child’s whole community. This method helps avoid turning charity into a popularity contest and allows for larger, longer-term projects, while keeping a personal element and direct human connection alive.

With the help of technology, it is possible today for a single modest donor to send a child to school, grow a business, or help a jazz trio perform at a festival.

Little gifts can have big consequences.

And new levels of generosity, respect, and mutual satisfaction can sometimes erupt when givers and recipients connect directly. —Ashley May

Everbest, specialized in selling household goods and groceries, including a powdered soft-drink mix they called Frutola. The cousins eventually had a difference in approach to the business and decided to split; John Smith kept the Frutola product while his partner took everything else.

John started selling his powdered mix in small envelope packets for one cent, reasoning that people would rather pay a penny for the smaller product than a nickel for a larger package. Sugar rationing during World War II hindered his ability to maintain his product at a prewar level, but it also created a new market opportunity.

The largest confectioners in the country had stopped selling penny candies, designating their allotments of sugar to their higher-margin products. Smith’s packet became the lone sugary product children could purchase for a single cent.

Then Smith noticed that kids sometimes slurped up the powder directly rather than mixing it into a drink.

The product grew in popularity after the war, and Smith realized there was potential to take it national, but at his age that was not a venture he wanted to tackle. His son Menlo stepped in.

After some initial research, Menlo determined that St. Louis, Missouri—which used to be the center of the American confectionery industry—was the best location to manufacture and sell the product on a continental scale. He first created Pixy Stix to make his tangy powder less messy to consume. Then, gaining access to an underused machine for making antacid tablets, he discovered that his fruity flavorings could be compressed into little colored disks. SweeTARTS became part of ­Americana, and Smith soon added other products like David’s Sunflower Seeds and the Willy Wonka Candy Company to his booming enterprise.

Menlo Smith is a member of the Church of Jesus Christ of Latter-day Saints, which puts serious leadership and missions expectations on its congregants, no matter how busy their lives might be. In the 1980s he was called to serve a stint as president of the Mormons’ Baguio Mission in the Philippines. There he saw firsthand true hunger, homelessness, and hopelessness.

“I had been in developing countries before my mission, and I had seen poverty before,” says Smith, “but I had never seen this depth of poverty. I wasn’t a visitor; I was living in the country.” Upon completion of his mission term, Smith was determined to help break the cycle of poverty in countries like the Philippines. But he wanted to help in a way that empowered people to direct their own lives and not become dependent. “It’s very important that you don’t let the people you try to help become tragedies of your compassion, which is very easy to do,” he says.

On the advice of leaders in the LDS Church, Smith reached out to the Marriott School of Management at Brigham Young University to find help for his cause. He eventually connected with professor Warner Woodworth and Utah businessman Steven Mann. They organized a team of graduate students to visit Manila to gather input and develop ideas. Smith and Mann each put up $5,000 to finance the launch.

After the initial research, a meeting of interested parties took place in Manila in 1989. Before deciding to undertake any long-term operation, the group agreed that a three-year, $400,000 pilot project would be necessary to either prove or disprove their model. The LDS Church, with its growing membership around the world, particularly in developing nations, showed strong interest in the effort. Smith’s group approached the church with an offer to raise the first $200,000 if the church could match it.

“We told the church that we would not come back to them for more money after their $200,000 contribution,” Smith recalls. “If this was going to be successful, we would have to be able to make it on our own.”

Peer-pressure payments Today, microfinance is a household term, thanks to the work of Nobel Prize winner Mohammed Yunus and popular organizations like Kiva. Mentors International was an early adopter of the microfinance model—and while many of the goals and logistics are the same, it came to have its own distinctive flair.

People seeking loans from Mentors International must meet certain qualifications. First, the applicant must obtain a personal recommendation from a respected member of the community, often a minister or other religious leader. Then a borrower must form a solidarity group—five or six individuals who are each interested in securing a business loan and willing to work together, supporting each other to make sure everyone succeeds. Lastly, the applicant agrees to attend training classes to learn practical skills like budgeting.

The program is very decentralized. Both the classes and loans are administered by Mentors International’s subsidiaries, which are directed by local business people and leaders. The whole emphasis is on running the program through people who share connections, physical locations, and friendships. Financial accountability is built on the level of intimacy among the people doing business.

The program particularly seeks borrowers with what it calls the three M’s: mentality, morality, and motivation. Loan recipients must demonstrate the mentality to learn and understand the principles of running a business. They must also have the morality to make and keep promises, to honor business relationships, to SPRING 2015

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to this Guatemalan weaver.

avoid cheating customers. Finally, they must have the motivation to dedicate themselves to the success and growth of their enterprises.

While the whole group is taking business and life skills classes, the borrower who organized the solidarity group will usually be the first person to receive a loan. She (90 percent of Mentors International’s clients are women) will make weekly repayments with interest. If the first recipient is able to make payments and keep her business operational, then another person in the group gets a loan. If the second person meets the same standards, a third person gets a loan, and the process is repeated until everyone has received funding.

Every member makes a commitment that if anybody’s business starts to have difficulties, or if someone gets behind on the loan payments, the others will either try to help solve the business problem or make good on the person’s loan.

“It’s sort of like having a built-in board of directors on a very small scale,” Smith explains. “While these loans never involve collateral, collateral is naturally developed

Solidarity groups both train borrowers in new skills and develop the “social collateral” needed to insure loans.

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PHILANTHROPY

Mentors International

A loan of just a few hundred dollars made all the difference

in the form of social pressure and self-interest to not get behind on your loan.” If any person in the group fails to make his or her payments, lending for all members in the group stops. The social collateral, as Smith puts it, is the ultimate motivator for success.

Mentors International ensures that its local administrative partners operate by the same principles required of borrowers. Each local chapter must pay its own overhead via the interest collected on its loans. “If we were going to teach the people to be self-reliant and self-sufficient, then our partners should also be self-reliant and self-sufficient,” reasons Smith.

For its part, the headquarters organization has honored its original arrangement with the LDS Church: all subsequent funding has been raised from private donors.

Meanwhile, the church has initiated some microfinance projects of its own through “self-reliance centers” around the world.

At Mentors International, a website with client histories gives donors large and small a glimpse into the lives of the entrepreneurs their gifts support. In 2014, the organization expanded its pool of rotating capital with more than $1 million in contributions. It distributed over $5 million in loans during the year. When a loan is repaid, that money is recycled to another borrower.

So each dollar contributed touches multiple low-income strivers, and the program is always growing.

The repayment rate across all Mentors International loans is 96 percent. Over 98 percent of the women in Peru who received one of its loans, notes one of the n ­ onprofit’s reports, have overcome the country’s poverty index. In Honduras, the average borrower who makes it to a third loan cycle has been able to at least double her income. In just the Philippines, Mentors International has helped 11,000 families shift to three meals a day since 1999.

“The loans helped my business get very big. They have helped my family,” says Lilia Pascual. Fifteen years into the program, she is the owner of a thriving lumber, hardware, and general merchandise business. She has sent all four of her kids to college, and those who have graduated are now working professionals. Her family no longer has to worry about typhoons destroying their shanty—they own a spacious concrete home on a lot that includes several rental units which Pascual also owns.

Thanks to mentoring and training, successful clients like Lilia also have much richer social networks and better skills for navigating all aspects of daily existence.

“Our real focus,” says Smith, “has always been on helping develop the character necessary to be successful in business and successful in life.” P

Changing Hearts, Minds, and Laws

ideas

History shows that donors can have big, healthy effects on public policy—if they are prepared

BY JOHN J. MILLER AND KARL ZINSMEISTER

The traditional categories of philanthropy are familiar and broadly accepted: religious works, medicine, scientific research, education, almsgiving and economic uplift, disaster relief, environmental conservation, the arts, and so on.

It may not be self-evident that trying to reshape public policy by promoting particular ideas and organizations is an equally worthy cause. Yet donating money to change public thinking and government policy has now taken its place next to service-centered giving as a constructive branch of philanthropy.

Today, many donors view reform of public policy as a necessary adjunct to their efforts to improve lives directly.

From charter schooling to creation of think tanks of all stripes, from tort reform to gay advocacy, philanthropists have become involved in many efforts to shape opinion and law.

This is harder than it sounds.

Public-policy reform requires philosophical perspective, understanding of governmental practice, and administrative care. Public-policy philanthropists may encounter opponents operating from different principles who view them as outright enemies. Moreover, public-policy struggles never seem to end: victories one year become defeats the next, followed by comebacks, then setbacks, and on and on.

Where can philanthropists turn for the expertise they need to become effective at this increasingly important branch of giving? To history. American donors have been active in reforming public policy for generations. Modern givers can learn much from prior examples.

Abolitionists go to court The most consequential change of all in American public policy was the abolition of slavery. Private donors were right at the heart of that effort. The abolition

movement showed there is no cause too moral arguments around slavery onto the nation’s front pages for many months, big for philanthropy.

Central New Yorker Gerrit Smith and highlighted the horrors of the slave donated the equivalent of about a billion trade. It became a public-relations coup dollars in present funds to help banish for abolitionists, and built emotional suphuman bondage. His spending ranged port for their claims of justice.

Arthur and Lewis Tappan gave from buying enslaved families and giving them their freedom, to underwriting deeply of both their talents and their Frederick Douglass’s newspapers, to money in the effort to change slave polorganizing civil disobedience and rescues icies. For their troubles they endured in response to the Fugitive Slave Law. He savage attacks from opponents, includeven funded John Brown’s gunrunning to ing burnings of their homes and abolitionist forces in Kansas, and Brown’s personal possessions, murder attempts, raid on the Harper’s Ferry arsenal, which and regular vilification. Both brothers sparked the Civil War. As an act of rec- lived to see the end of the Civil War, onciliation after the war, Smith paid the though, and enjoyed the satisfaction of knowing that slavery, at long last, had bail to free Jefferson Davis.

Wealthy businessmen and evangelical been banished from American society, Christians Arthur and Lewis Tappan were in no small part because a handful of among the most devoted and successful major donors, backed by thousands of philanthropic campaigners for abolition. small givers and volunteers, had refused One of Lewis’s great successes came in to be silent.

1839, when the human cargo aboard a slave transport called the A ­ mistad rose up Reimagining welfare against their captors. They gained control The Lynde and Harry Bradley Foundation of the ship and intended to sail for Africa, has had great success in influencing public but their navigators—hostages from the policy in recent decades. It was in welfare crew—tricked them into making for the reform that the foundation arguably made United States, where they were impris- its greatest achievement. It did so by startoned for piracy and murder. The decision ing on the local level, creating a smashing to treat the Africans as criminals for trying triumph in its home state of Wisconsin, to free themselves outraged Lewis Tappan, and then using potent ideas, savvy strategy, and patient funding to lead the way to who formed a committee to aid them.

He found a man capable of trans- a national transformation of the way our lating the obscure Mendi dialect spoken governments aid poor people. by the defendants. He paid Yale students to tutor the jailed Africans in English Contributing editor John and American social practice. Lewis Miller is director of the hired top-flight legal counsel, and even Dow Journalism Program recruited former President John Quincy at Hillsdale College. Karl Adams to represent the Africans before Zinsmeister is vice president the Supreme Court—which ultimately of publications at The ordered their release in 1841.

Philanthropy Roundtable.

The Amistad trial, as Lewis had This is adapted from the Roundtable’s new anticipated, was a vivid teachable moment guidebook, Agenda Setting: A Wise Giver’s for the American public. It brought the Guide to Influencing Public Policy.

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ideas By the mid-1980s, Wisconsin was more than ready for a fresh approach to welfare. Its benefits were generous, abuses were common, and the public was becoming fed up with the social dysfunction encouraged by having whole neighborhoods dependent upon the “mailbox economy” of government checks. So the Bradley Foundation began a multiyear effort to uncover a better way.

Bradley both practiced its own ­public-policy philanthropy and built on successes by other foundations. In 1982, social scientist Charles Murray published a long article in the Public Interest, an influential quarterly journal co-edited by Irving Kristol that was itself an important product of private philanthropy. With special grants from the John M. Olin Foundation and the Smith Richardson Foundation, Murray expanded his article into a pathbreaking book about the problem of dependency.

Losing Ground changed the national conversation about welfare.

The Brad ley Foundation next generated some political consensus around what Murray, Olin, and Smith ­R ichardson started. One of its initial grants, for $300,000 in 1986, supported a yearlong seminar that brought together some of the country’s top scholars on welfare, including both conservatives like Murray, Lawrence Mead, and Michael Novak, and liberals such as Franklin Raines, Robert Reischauer, and Alice Rivlin. Called the Working Seminar on Family and American Welfare Policy, it produced months of cooperative investigation, a series of research papers, and a highly readable book-length final report.

The seminar report, which Michael Novak drafted and shepherded to unanimous approval, sketched a remarkable new consensus. The conservatives in

the group allowed that “a good society is judged by how well it cares for its most vulnerable members.” The liberals acknowledged that “no able adult should be allowed voluntarily to take from the common good without also contributing to it.”

By the time Tommy Thompson was elected governor of Wisconsin in 1987, Bradley had blazed a whole network of paths toward reform. With additional practical, intellectual, and financial assistance from Bradley, Wisconsin’s new chief executive committed his state to put a bold transformation into effect. The welfare establishment resisted vehemently, insisting starvation and social disorder would result.

Thompson began to implement a series of piecemeal reforms. People weren’t simply kicked off welfare, they were required (and helped) to find jobs as a condition of receiving any public benefits.

Welfare enrollments began to plummet.

Many Democrats in the legislature had supported Thompson’s initial agenda. By 1993, though, they thought the reforms had gone far enough. To press the brakes without getting blamed by the public for obstruction, they tried a risky political maneuver: They voted to abolish Wisconsin’s welfare system entirely. They expected that Thompson would veto such a dramatic move, blurring perceptions about which party backed real change.

Thompson decided to call their bluff, and signed the bill.

This gave the governor a blank slate and chance to build an entirely new system. His state could apply insights discovered by the various investigators backed by Bradley and other public-policy philanthropists. But he would have to do this under strict deadline, risking chaos if

Private donors were at the heart of the abolition movement, funding literature, protests, fugitive rescues, legal challenges, and more.

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a substitute program couldn’t be designed quickly to replace the old regime.

So Thompson, relying heavily on the Bradley Foundation for rapid funding, turned to the Hudson Institute, a conservative think tank then based in Indianapolis. Hudson agreed to do much of the detailed research and design work needed to transform Wisconsin’s system from its old focus on income maintenance to a new emphasis on supporting work by poor individuals. Bradley ponied up around $2 million, starting in 1994, to fuel this urgent work.

The ultimate results were striking.

When Thompson took office in 1987, Wisconsin had 98,000 people on its welfare rolls. The numbers dropped every year after the workfare reform—to just 11,000 by 1998, an astonishing 89 percent reduction. And recipients, families, and children ended up with a better quality of life. Family and child poverty dropped, and indicators of well-being turned upward.

The new Republican Congress elected in 1994 created a landmark federal welfare-reform statute modeled on Wisconsin’s example, and President Clinton signed the measure into law in 1996. The new system offered extensive child, medical, and job help, but ended any long-term entitlement to an annual income. Recipients had to work, and families were limited to five years of assistance. Wisconsin was the lodestar, and the Bradley Foundation had ordered the universe from which it emerged.

Shifting a state from red to blue In 2004, Colorado was a solidly Republican state, with the governor, both U.S. senators, and five of its seven members of the House belonging to the GOP. That same year, Colorado gave its electoral votes in the Presidential election to George W. Bush.

By the time of the 2008 elections, however, the politics of the state had been turned upside-down. After all the ballots had been counted, the governor, both U.S. senators, and five of seven House members were Democrats, plus Barack Obama carried the state. It was a full-fledged flip.

A key part of this dramatic shift could be ascribed to a group of liberal philanthropists who set out to remake Colorado politics through a mix of public-policy giving and campaign donations. The so-called Gang of Four consisted of Rutt Bridges, a venture capitalist; Tim Gill, founder of the software firm Quark; Jared Polis, an Internet businessman who would win election to Congress as a Democrat in 2008; and Pat Stryker, the heiress of a ­medical-equipment company.

All were motivated to some degree by gay rights. “Nothing can compare to the psychological trauma of realizing that more than half the people in your state believe that you don’t deserve equal rights,” Gill told the Chronicle of ­P hilanthropy after Colorado voters amended the state constitution to prohibit the government from granting protected status on the basis of sexual orientation.

By the late 1990s, Gill and his allies were determined to elect Democrats to office at all levels of government.

In 1999, Bridges gave $1 million to found the Bighorn Center for Public Policy. The short-lived think tank pushed successfully for new rules on campaign finance, setting the stage for the Gang of Four to fund an infrastructure of nonprofit organizations that issued reports, investigated politicians (usually Republicans), and generated controversy. They gave Colorado Media Matters, a leftwing pressure group, enough money to keep a dozen people on staff. With their support, Citizens for R ­ esponsibility and Ethics in ­Washington, a liberal group that works to publicize scandals involving conservative political leaders, opened a Colorado field office, as did other advocacy nonprofits.

Through their combination of ­p ublic-policy philanthropy and traditional campaign contributions, the Gang of Four built a well-oiled machine. In an investigative story for the Denver Post, reporter Karen Crummy explained how the various pieces fit together: “A liberal group with a nonpartisan name

like C ­ olorado First puts out a list of polluters and demands official action. A ­Republican running for Colorado office is on the list. Paid liberal bloggers chatter. An online liberal publication with a newspaper-like name writes an article about the candidate and his company polluting Colorado’s streams. A liberal advocacy group puts out a news release, citing the group and the pollution, which sound reputable to an ordinary voter.

They mass e-mail the release and attach a catchy phrase to it like ‘Dirty Doug.’

At some point, the mainstream media checks out the allegations.”

The overall spending by the Gang of Four and their allies dwarfed that of their conservative rivals. It was an impressive effort, made even more impressive by the result—a wholesale transfer of ­Colorado’s political allegiance from one party to the other. Nothing is permanent in politics, and in the deep-red 2014 election, Republicans reclaimed one of the two U.S. Senate seats in Colorado.

But the incumbent Democrat governor won re-election, and the other Senate seat and three of the seven House seats remain with Democrats. Colorado is now a purple state.

And the Gill/Bridges/Polis/Stryker donor structure remains in place. Through investments in skillful policy entrepreneurs, they took ideas that were out of favor and made them seem inevitable. In a remarkably short period of time, these donors sparked a large swing in governance.

Serendipity and strategy Pressing the government or fellow citizens for new policies isn’t the only way to change public life. Over the years, some American philanthropists have chosen to have their effect by transforming

important institutions of intellectual life.

National change may be less immediate or direct when it is pursued in this way, but planting seeds of revised thinking can eventually have long-lasting influence on law and culture.

The donors who created think tanks like the Brookings Institution or the Heritage Foundation have tasted these long-term effects. And the fresh ideas produced by such institutions have indisputably improved the health of American governance and public life.

By hiring top scholars, working on a broad range of topics, and pumping out research closely timed to the cresting of issues in ­Washington or state capitals, donor-funded think tanks have become a major part of American problem-solving.

Of course there is another branch making public policy in America, and that is the courts. Liberal philanthropists pioneered the concept of p ­ ublic-interest law firms, starting in the 1960s and ’70s. Suing at every opportunity, often on novel grounds, these litigators have exerted enormous influence on public policy, especially in areas of civil rights.

Legal activism has become a powerful change strategy, offering funders the possibility of sparking enduring reform.

Public-policy breakthroughs often cannot be predicted. So one of the secrets to successful policy-oriented philanthropy is to position oneself so as to be ready when an opportunity for action opens up. Serendipity is not a strategy, but the reality is that some of the greatest achievements in p ­ ublic-policy philanthropy were unexpected. And when the stars do align, if some sage giver is standing prepared and in position, a comparatively modest investment can sometimes have powerful effects. P

Wisconsin’s experiment in welfare reform, built from research sponsored by the Bradley Foundation, became a model for the nation.

SPRING 2015

55

ideas Rebounding From Philanthropic Failure Our plan flopped. We didn’t give up. We changed course.

BY KAREN MINKEL AND MARC HOLLEY

the Walton Family Foundation tried to address poverty in this broad way, rather than through discrete projects.

We spent $52 million on the effort between 2003 and 2013. We provided our operational support through an intermediary charged with coordinating the area’s development. Southern B ­ ancorp ­Community Partners was already a presence in the community and agreed to convene and steer new efforts, help grantees request funds, and coordinate reporting of results.

The first task was to build a plan based on wide community involvement.

Hundreds of residents contributed to a blueprint that would guide grantmaking. Our giving included KIPP charter schools, promotion of the King ­Biscuit Blues Festival, a civil leadership program, construction of Civil War monuments and forts, and investments in downtown revitalization. The collective impact of these grants, we hoped, would be a whole greater than the sum of its parts.

To measure progress, we tracked everything from the number of residents leaving the Delta to poverty rates to tourism dollars. We tracked student outcomes in academic performance, college readiness, and college acceptance.

It wasn’t long before we began to see shortfalls. A year after launching the project, we asked an outside evaluator to track macroeconomic indicators, assess our intermediary’s performance, interview community stakeholders, and conduct a quality-of-life survey, among other tasks.

The more closely we observed our project, the clearer it became that we

In a quality-of-life poll, nine out of ten residents ranked public safety as their top priority, an area of concern our “comprehensive change” initiative hadn’t even touched.

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weren’t making progress on our goal. The poverty rate and unemployment ticked up. The population continued to decline.

Even comparing our counties to similar areas in the Delta to account for national economic trends, we saw no improvement at scale.

Our internal evaluation staff arrived at a somber insight: Our aims were too ambitious. Spreading $5 million per year across a diverse set of projects, however ­well-intended, was nowhere near enough to dig the region out of entrenched poverty. To add insult to injury, our intermediary began to struggle, making only three grants in one year. Because of leadership turnover, some local action committees met only once or twice.

What did we miss?

Our outside evaluator was fully immersed in the project, attending committee ­meetings, conducting interviews with residents, scanning local news and economic measures for pertinent information. The verdict was clear: we had catalyzed more positive interactions among community members, but the project was “achieving little in the way of substantive community and economic development.”

We wondered if initiatives like ours had run into similar obstacles and started combing through analyses of other efforts around the country. We saw that the Aspen Institute had reviewed 48 c­ ommunity-change initiatives implemented between 1990 and 2010 and had found that “place-based efforts have had difficulty stimulating broader economic development, as too many of the forces that drive economic activity are outside of Karen Minkel and Marc Holley both work for the Walton Family Foundation, where she is a senior research officer and he directs the evaluation unit.

Walton Family Foundation

At the Walton Family Foundation, we have worked to strengthen our evaluation and learning processes over the past five years. It has helped us when other philanthropic leaders have shared their challenges and failures. That’s inspired us to do the same.

So in the spirit of improving together, this is a story about how our foundation evaluated a failed strategy and used the findings and input from community leaders to alter our investments in the Arkansas and Mississippi Delta. Board and staff remained committed to the communities and people in this region.

But as a result of an intensive, sometimes difficult assessment process, we have decided to try helping in a different way.

The Delta was once a flourishing nursery of agriculture. But in the latter half of the twentieth century, the bloom withered and the area began to struggle.

The Walton Family Foundation has been involved for three decades in trying to help it revive.

Two counties in particular captured our attention: Phillips and Coahoma.

Their poverty rates were among the most severe in the country. We felt strongly we had to do something, so in 2003 we adopted a strategy similar to the Hewlett ­Foundation’s Neighborhood Improvement ­Initiative, the Annie E. Casey Foundation’s ­Rebuilding ­Communities Initiative, and other examples of “comprehensive community change.” The idea was that transformative efforts are best achieved by pulling many social and economic levers at once. It was the first time

Walton Family Foundation

the control of neighborhood actors.” This rang true with our experience.

Urban Ventures also added perspective in a similar review: “Too many change efforts have been ‘sold’ based on a ­well-articulated but utterly unrealistic set of results that bear no possible relationship to the actual program interventions made or the scale of resources invested.”

With dreary data in hand, we figured the best next step would be to ask our community what we could have done differently. So in January 2013 we began interviews and conducted a q ­ uality-of-life poll. Elected officials, public safety officers, business leaders, clergy, and teachers confirmed our evaluation that there had been some successful individual projects in our initiative but no wholesale transformation.

The poll responses also pointed out several items we had missed. One was the region’s staggeringly high crime rates. A concern for safety and private property drained productivity and inhibited growth and investment. Nine in ten residents ranked organized youth activities as an important community need and improved law enforcement as a top priority. Other than supporting the Boys and Girls Club of Phillips County, our $52 million initiative had not made any grants in teen activities or public safety.

On the bright side, KIPP was recognized as an academic success story. A once blighted area now featured a good playground. We found anecdotal evidence of increases in positive interracial communication and increased civic participation.

Issues of common interest were making it to the public conversation.

But the economic trends and the public feedback raised difficult questions about the efficacy of our investments. The time to rethink was at hand.

How we told our board and moved forward Admitting failure is vastly more difficult than claiming success. Our foundation had been investing in the Delta for decades, and staff and board members enjoyed long-term relationships with nonprofit and community members. Now we had to break the news

The Jackie Payne Steve Edmonson band performs at the King Biscuit Blues Festival in Helena, Arkansas, which the Walton Family Foundation supported along with other tourism-boosting programs. The Arkansas Delta’s vivid local character is important to the foundation, which has been investing in the region for three decades. But when it became clear that cultural grants weren’t helping the community in the ways it needed most, a hard rethinking was at hand.

that our involvement hadn’t moved the needle on our overarching goals of ­community-wide improvement.

O ur evaluation staff began to present findings in formal and informal settings.

We brought academic and community experts to the table. We found that if we gave our board multiple sources of information in varying forms, painting a thorough picture of the project’s impact—or lack thereof—our message was better received.

We came out of this season with a confirmed commitment to the region but eyes open to our own shortcomings. The idea that one organization and one plan could succeed where both the private and public sectors have failed was perhaps too audacious. At the very least, our theory of change was wrong. We know how to fund meaningful particular projects in the Delta. But, like others who’ve embarked on comprehensive community change efforts, we haven’t discovered the way to help transform an entire community.

So we ended this strategy. We committed, however, to maintain a high SPRING 2015

level of investment—about $50 million from now to 2020. We’re focusing on ­shorter-term goals like improving public safety and offering afterschool programs.

We stopped our exclusive reliance on using an intermediar y organization and instead are partnering closely with a consultant raised and currently living in our target counties. We’re doubling down on the pieces of our project that did yield results, like our investment in KIPP charter schools and the Teach For America Delta corps. We are also adding resources to improve public safety and to help junior and senior high-school students pursue higher education.

Evaluation is never easy, nor is it a walk in the park to ask hard questions about heart-tugging interventions. But when we see failure, we need to recognize it for what it is and be willing to change course. That was the tough decision we made while staying committed to our partners. That was the best thing for the people we aim to serve, and the only responsible course for our board and staff. P 57

More Than Just Academics Catholic schools have power and potential beyond book learning

BY AN DY SM A R I C K

Over the past hundred years, urban K-12 Catholic schools have educated millions of underserved boys and girls, from European immigrants fighting poverty and nativist bigotry to working-class children of the baby boom to the primarily African-American and Latino families who are today’s urban poor.

Despite their service to the nation and to individual children, these schools have suffered a long, steep decline, with approximately half as many ­Catholic schools in existence today (serving about half as many students) as at their mid-1960s peak.

Changing city demographics, shrinking numbers of nuns and priests, upward pressure on salaries, competition from high-performing charter schools, aging facilities, and church scandals have rendered many urban Catholic schools financially unsustainable.

Some might view this as a Catholic problem. In reality it is an urban education problem that should concern everyone. Catholic schools have a strong track record of helping disadvantaged populations learn skills, develop character, graduate from high school at better rates than neighborhood peers, and persist in higher education. While urban charter schools are accomplishing outstanding results in many locations, long and expanding charter waitlists underscore their inability to grow fast enough to meet demand. The loss of C ­ atholic schools diminishes the availability of educational options at a time when families are demonstrating their desire for more of them.

It turns out that this collapse affects not only educational outcomes, but civil society more broadly.

As Notre Dame professors Margaret Brinig and Nicole Stelle Garnett write in Lost Classroom, Lost Community, “Catholic school closures precede elevated levels of crime and disorder and suppressed levels of social cohesion.”

That is, the urban Catholic schools that are now disappearing had social benefits beyond the classroom, extending to the whole neighborhood.

As other observers have noted, Catholic schools have an unusual ability to build a community around a shared vision, helping reduce achievement gaps between students of different backgrounds.

Lost Classroom, Lost Community buttresses this claim with rigorous research.

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Lost Classroom, Lost Community: Catholic Schools’ Importance in Urban America

By Margaret Brinig and Nicole Stelle Garnett

Putting Education to Work: How Cristo Rey High Schools Are Transforming Urban Education

By Megan Sweas

PHILANTHROPY

One reason for Catholic schools’ central importance to their communities is their longstanding presence. Ironically, the longevity of urban Catholic schools is also to blame for some of their problems.

Put bluntly, the world—especially the urban education world—has changed dramatically in the last few decades, yet Catholic schools have grown sclerotic, failing to adapt to their new environment.

Typically, each school continues to be controlled by its local parish, with a priest overburdened by other responsibilities and possessing little to no K-12 training overseeing the institution and its countless components.

The diocesan central office is not able to help. Too little has been done to build new pipelines of future teachers and principals. Too many important public-education advancements associated with standards, assessments, transparency, accountability, and technology have failed to permeate the walls of urban Catholic schooling.

These challenges are not limited to Catholic schools. Urban public school districts have also been stuck over the last generation. Despite staggering investments of time, money, effort, and talent, these behemoth organizations have barely improved. It appears that the slow accretion of a century’s worth of policies, practices, contracts, beliefs, habits, and more have fossilized them as well.

Civil society’s response to this impasse, charter schooling, has opened new public schools under fresh, often radically different, rules. Operating outside the old system, charter advocates have developed new school models, staffing plans, school calendars, human-capital pipelines, expectations, and much more.

In city after city, charter-school students are learning considerably more than their district-school peers.

The movement at large is allowing entrepreneurial individuals and organizations to replicate and expand successful ideas, develop new schools, and build the diversity of options from which families can choose.

One sobering finding of Lost Classroom, Lost Community, though, is that new charter schools do not compensate for the loss of social cohesion. Even if charter schools are academically ­high-performing, filling “both the physical and educational void” caused by Catholic school closures, they do not “appear to generate the same positive community benefits.” Though Brinig and Garnett are careful to note that charters may, over time, grow into this role, for now the trade of Catholic schools for charters isn’t an even swap for neighborhoods.

In the last several years, urban Catholic schooling has slowly begun learning chartering’s overarching lesson—that “new” may be necessary.

Cristo Rey Jesuit High School

books

Cristo Rey Jesuit High School

In a growing number of cities, new Catholic schools are emerging, and existing Catholic schools are being reorganized into charter-like networks, such as ACE Academies, Phaedrus, Faith in the Future, and the Partnership for Inner-city Education. The Manhattan Institute’s Charles Sahm and Sol Stern call this the “quiet revolution in Catholic education.”

One outpost of this revolution is the subject of another new book: Putting Education to Work by Megan Sweas. Cristo Rey, the largest network of new-style independent Catholic high schools, opened its first school in Chicago nearly 20 years ago; the replication effort started a few years later. Today, the network has more than two dozen schools in 27 cities. Nearly all of its 9,000 students are children of color, and more than three quarters are from low-income families.

Cristo Rey is explicit about its focus on poor boys and girls; in the words of the network’s founder John Foley, “If you can afford to come here, then you can’t come.” The network’s “Mission Effectiveness Standards” require member schools to serve the poor exclusively. Cristo Rey denied the application of one potential campus because it planned to have a student body that was only 80 percent economically disadvantaged. Another school left the network because the local bishop didn’t want to deny a Catholic education to diocesan Catholics who weren’t low-income.

And though children of all faiths are welcome, the schools themselves must be Catholic. As Sweas writes, Catholicism forms the network’s belief system. A central conviction is that “all people have equal dignity as children of God” and that “every student is extraordinary and capable of extraordinary things.”

The most celebrated aspect of the Cristo Rey model is its innovative work-study program.

Students work one day per week for an outside employer. They gain valuable practical experience and life lessons, and their earnings are used to offset school costs, keeping tuition affordable. About 2,000 companies have participated in the network’s program, and students earn more than $40 million annually. To further shore up its finances, the network has also prioritized school growth in states with ­private-school tax credits or public scholarships.

Cristo Rey embraces the new. Nearly all of its schools were freshly created; only a few were existing high schools that joined the network, and it now has a policy against any more such conversions. Its schools are operated outside of the traditional diocesan and parish structures. Local churches are involved—many Cristo Rey schools

A Cristo Rey intern gets hands-on experience at Mercy Medical Center in Baltimore.

are sponsored by a religious congregation—but they don’t own the school, they support it.

Cristo Rey’s determination to start from scratch has enabled an array of innovations. Before a new school is launched, the network requires a full feasibility study, including proof that the local community can raise private funds and assemble a strong board. A nonprofit is brought in to recruit employers and place students. Students learn basic workplace skills like using M ­ icrosoft Excel, making professional small talk, and dressing appropriately. Schools keep detailed track of demographic, operations, financial, and ­student-performance metrics. Some Cristo Rey schools have lay leaders. One school even created a residential program.

In other words: These are not the Catholic schools of 1965.

In combination, Lost Classroom, Lost Community and Putting Education to Work compel supporters of Catholic education to grapple with the fundamental challenge that continuously tests the larger church: how to balance old and new.

The social capital that Catholic schools offer takes time to accrue, so it is often found in longstanding institutions. But the most promising development in urban Catholic education is the emergence of new urban Catholic schools that function outside of old systems.

There are several reasons to have faith that this tension can be resolved. First, new Catholic networks give every indication that they appreciate the importance of social capital. Second, though the schools and some of their practices may be new, their faith traditions are time-tested. Sweas quotes the president of Cristo Rey’s Houston campus: “It has been 473 years since the founding of the Jesuits, and 465 years since they opened their first school.”

Most importantly, these new schools, like the old ones, are centered on care for others. They have been built primarily to serve the disadvantaged. Sweas notes that numerous Cristo Rey employees interviewed for the book believed that “providence—or the Holy Spirit—brought them to the school” so they can help their fellow man.

It is the service ethic that might be the bridge between old and new in the world of Catholic education. Upon ascending to the papacy, Pope Francis said, “How I would love a church which is poor and for the poor.” In this regard, Catholic K-12 schools are leading the way.

Andy Smarick is a partner at Bellwether Education and author of the Roundtable guidebook Closing America's High-achievement Gap.

SPRING 2015

59

president’s note An Entrepreneurial Explosion of Philanthropic Services

I have seen three dramatic changes in the landscape of charitable giving in my 14 years as president of The ­Philanthropy Roundtable.

The first is a growing commitment to giving by wealth creators during their lifetimes—both to apply their enterprising mindset to the philanthropic causes they most care about and to avoid the undermining of donor intent that frequently occurs in foundations after the founder’s death.

The second is the repeated assault on philanthropic freedom by interest groups, regulators, and political leaders of both parties who seek to direct how and where individuals and foundations make their charitable contributions.

And the third, the theme of this issue of Philanthropy, is the entrepreneurial explosion of services for donors and foundations. Donors today have more choices, more information, and more analytical tools for making philanthropic decisions.

Consider just some of the new services that are transforming charitable giving: • The rapid growth of donor-advised funds, which made grants of approximately $10 billion in 2013. Donors have a robust array of sponsors to choose from, including the charitable funds associated with Fidelity, Vanguard, Schwab, and other financial services firms; specialized cause-oriented funds such as the Jewish Federations of North America, the National Christian Foundation, the Tides Foundation for progressives, and DonorsTrust for free-market funders; and local community foundations, which have recently become much more responsive to serving the needs of individual donors. Much as 60

mutual funds transformed investing, donor-advised funds have simplified and democratized philanthropy, making it much easier for smaller donors to enjoy the benefits of organized giving.

There are now over 200,000 donor-­ advised-fund accounts, more than twice the number of foundations.

• The application of high-powered business consulting principles and knowledge to philanthropy. Among the leaders here are Bridgespan, the nonprofit established in 2000 by the consulting giant Bain to apply its insights to philanthropic and nonprofit strategy; FSG and the M ­ onitor Institute (now part of Deloitte), both co-founded by legendary Harvard Business School professor Michael Porter; and consulting giant McKinsey, which has expanded its services for philanthropists and published seminal reports on subjects such as prize philanthropy.

• E ntry of for-prof it companies into philanthropic services. Rapidly growing firms such as Arabella Advisors, Sterling Foundation Management, and ­Foundation Source enable foundations and other giving entities to take advantage of business efficiencies by outsourcing functions like back-office management, strategy development, due diligence, grant execution, and evaluation.

• Competition among foundations seeking outside investment. For many years foundations have sought co-funders for their favorite grantees. Over the last decade, they also have actively solicited funding from other foundations and donors. The Edna McConnell Clark Foundation has raised over $280 million from other funders through its Growth Capital Aggregation Pilot and the True North Fund. The Lynde and Harry Bradley Foundation has established the Bradley Impact Fund to encourage other donors to fund ­Bradley grantees.

The Pew Charitable Trusts converted PHILANTHROPY

from a foundation into a grantmaking public charity. In fiscal year 2013, Pew raised $54 million from other funders.

Similarly, a number of wealthy families are making their philanthropic staff available to other funders. Rockefeller Philanthropy Advisors, for instance, now advises on and manages $280 million in annual giving by 160 donors. The competition for investment has introduced some market-like accountability into foundations that previously did not have to attract outside support.

• Growth of specialized intermediaries. In the twenty-first century, you do not have to be wealthy to become a sophisticated, high-level philanthropist. You can set up an intermediary that will raise funds from others and offer specialized expertise. Examples include Acumen and the Global Fund for Children, which offer investors opportunities to address poverty in developing countries; Hope International, which offers microfinance funding with an evangelical Christian spirit in some of the world’s poorest countries; and the Silicon Schools Fund, which is supporting ­charter-school experiments with different models of blended (digital and classroom) learning.

Other innovations include crowdfunding, impact investing, networks of public-policy donors such as the Koch seminars and the Democracy Alliance, and growth philanthropy marketplaces such as the Social Impact Exchange. As long as freedom to make philanthropic decisions is protected, charitable giving is likely to become a more entrepreneurial and more competitive industry in the years ahead. And this in turn has the potential to stimulate substantial increases in charitable giving.

Adam Meyerson, President

The Philanthropy Roundtable

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