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Re: Venture Philantrophy



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Any comments as to whether Venture Philantrophy can work in India?
See article below:
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THE STUDENT NEWSPAPER OF THE HARVARD BUSINESS SCHOOL SINCE 1937
Monday, September 4, 2000

Pushing the Envelope: Venture Philanthropy
By MONISHA SALDANHA, OD

Venture Philanthropy is the best buzzword Iíve heard all year. But what is 
it? This Harbus reporter cornered New Profit, Inc.ís Founding Partner, Kelly 
Fitzsimmons, to get the scoop.
Harbus: Kelly, I think you know what Iím going to ask. What is Venture 
Philanthropy?

Kelly: Fundamentally, venture philanthropy is venture capital for the 
non-profit sector which ties philanthropic investments to social outcomes 
and performance measurement. Like venture capital, venture philanthropy uses 
incentives to focus non-profits on outcomes by making longer term 
investments to support the growth of an organization.

This approach supports the idea that philanthropy must operate more like and 
within a context of a social capital market by finding opportunities to 
support organizations at different stages of growth. It also invites 
different philanthropists to work together, like groups of investors to 
support non-profit organizations in a more competitive and sustainable way.

Harbus: How does Venture Philanthropy differ from Foundation grants?

Kelly: Traditionally, foundations and individuals have funded the non-profit 
sector. While America has benefited from significant generosity in this 
area, our means of giving have not always created significant impact. While 
philanthropic giving amounted to $185 billion compared to $46 billion of 
VC/private equity investments in 1999, the nation still suffers serious 
social problems.

Typical foundations make 500 grants at an average size of $40,000. 95% of 
grants are for just one year, barely 10% of grants support general 
operations or technical assistance, and 70% of the 60,000 US non-profits 
have annual budgets less than $500,000. Typical foundations tend to focus 
resources on program-specific instead of organizational specific 
opportunities. In the for profit world, this would be the equivalent of 
investing in a single product (Diet Pepsi) or a department (Marketing) 
instead of the whole organization (Pepsico). Organizations canít get to 
scale with fragmented support and so it makes since to adopt an investment 
approach for social change so that we can grow the best organizations 
capable of solving critical social problems.

Venture philanthropy aims to make larger grants which meet more of the 
non-profitís capital needs, make longer and deeper engagements with the 
grantees, and institute accountability and performance measurement to ensure 
a efficacious use of funds.

Thatís not to say anything negative about traditional foundations; they play 
an important role of seeding ideas and fueling a highly innovative social 
sector. Their approach has not diversified sufficiently to support 
organizations at various stages or to help the ideas that they have often 
seeded grow to deliver higher impact. There is a gap in the social capital 
markets in that there is very little mezzanine or second stage capital 
available. Our version of venture philanthropy at New Profit Inc. works with 
traditional philanthropy to fill that market gap by providing the next tier 
of mezzanine funding to help proven models and proven organizations grow. We 
are here to help winning social entrepreneurs take their organization to the 
next level.

Harbus: Can you explain more about the social capital market. What do you 
mean?

Kelly: In the for-profit world, we know where to go to obtain investing- 
there is an established capital markets. There are instruments like bonds, 
warrants, stocks, securities and institutions like banks and funds to go to 
for certain needs. If you are a for-profit entrepreneur or business you know 
where to go to for your working capital needs. Itís transparent. In the 
social capital market, we are just beginning to develop the spectrum of 
alternatives for social entrepreneurs to obtain funding. Foundations and 
individuals constitute the backbone of philanthropic giving in the US but 
itís not transparent to the social entrepreneur.

Harbus: Who are your investors?

Kelly: NPI investors and supporters of venture philanthropy in general 
represent a new breed. This generationís philanthropists are what we call 
the "investor-donor" segment because they see their philanthropy as an 
investment and they expect a social return. Frequently, these individuals 
have created their own wealth; they are successful in the business world. 
They want to drive social change through growth in a performance-based 
model. In some ways they are true idealists, because as a result of the 
incredible wealth and organizations they have created in their own life, 
they believe they can achieve incredible results in the social sector. They 
keep their business hats on as they do their philanthropy.

They like the fund model, there is not a lot of vanity about putting their 
name on a building or a foundation. Instead, the fund allows them to amplify 
the effect of their dollar contributions and diversify over a portfolio of 
activities which New Profit, Inc. supervises. Right now 27 investors have 
contributed to our $11 million dollar fund. They donít expect a financial 
return on their money, they expect a social return when the non-profit 
delivers results.

Harbus: How does New Profit, Inc. measure performance?

Kelly: We worked with Robert and Ellen Kaplan to apply the balanced 
scorecard to NPI and our portfolio companies. We have contracts with our 
investors; if NPI or our portfolio companies fail to meet our targets, as 
defined on the balanced scorecard, our investors are released from their 
donation obligations. If a non profit fails to meet its performance goals, 
it may be released from the fund.

Harbus: What commitment do you make to your companies?

Kelly: Both NPI and our investors operate on a four-year basis. We start 
with a four year commitment to an organization, but we may cut it if the 
organization fails to meet their goals. Right now we have five investments - 
four companies, and one seed investment in an organization I think will go 
to scale quickly. We will add two more between now and December.

Harbus: Is there something you would like to say to the future MBAs in the 
audience?

Kelly: We need talented management expertise; the non-profit sector is no 
longer second class. Venture Philanthropy allows MBAs to keep their business 
hats on to address strategic challenges and explore new opportunities with a 
mix of talented individuals. While the incentives and pay structure still 
lag when compared to the for profit sector, they are getting ever more 
attractive. Iíve got to say, social enterprise owes a lot to Harvardóthere 
is an incredible cluster effect that has resulted from thought leaders like 
Allen Grossman, Jim Austin, and Chris Letts, and the number of non-profits 
in the Boston area. If there is a VCO team or field study students who would 
like to work with us, we would love to talk with them. You should talk to 
Michelle Boyers, HBS 2000, who joined us from the venture capital world.

Harbus: Michelle, what was the reaction from your HBS classmates when you 
accepted a job with a non-profit?

Michelle: When HBS people found out about my job at New Profit Inc., they 
were really intrigued and interested. A lot of HBSers want to have an impact 
beyond building their personal wealth. Venture philanthropy uses language 
and methodologies that they can relate to - and they really recognize the 
need for it. Many classmates, and future entrepreneurs, see social 
philanthropy as an integral part of what they want to accomplish. 90% of the 
people I talked to said, "Letís stay in touch, because 10 years down the 
line, after Iíve made my money, venture philanthropy is exactly what I want 
to do with it".

Harbus: Why did you leave Venture Capital in the first place?

Michelle: I did investment banking for two years, then VC for a couple of 
years. I liked what I did functionally, but I wasnít particularly inspired 
by the organizations we were funding. In my spare time, I volunteered with 
an AIDS services organization in NY. It was a great organization that was 
doing really interesting work, but it was run by a social worker who had no 
real knowledge about growing or running an organization from a managerial 
perspective.

I thought my business skills and experience could really bring a lot of 
value to the non-profit sector. I came to HBS to build on those skills 
before transitioning from finance into the social sector. I have to admit, I 
was concerned that working at a non-profit wouldnít be analytical or 
innovative or provide me with great mentors, but venture philanthropy is 
challenging and cutting-edge. A perfect blend.

At New Profit, I work with amazing people and organizations, and my work is 
completely fulfilling and satisfying on a personal side.

We have two HBS interns this summer and we are growing fast. The whole 
sector is growing fast. New Profit Inc. now has offices in both Boston and 
NY. Venture philanthropy is really hot right now. Entrepreneurs and VCís 
whoíve made a lot of money are now looking for a better way to put that 
money towards creating social impact. Venture philanthropy really makes 
sense to them. There are a lot of different funds using the term "venture 
philanthropy" - each with a slightly different model. I predict by the time 
the next class graduates, there will be a lot more venture philanthropy 
funds out there, affording MBAs to choose a model that makes the most sense 
to them.

Interested in learning more about Venture Philanthropy, organizing a field 
study, or investing in the fund? Contact Kelly at kelly_fitzsimmons@monitor. 
com or Michelle at michelle_boyers@monitor.com.

_________________________________________________________________
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