Edward Skloot*
| Brief
Biography |
Introduction
If your nonprofit organization were a dot.com startup, what multiple of earnings would it be trading at today? What would the stock price be? Well, that's a foolish question. Nonprofits don't have returns on investment. They don't measure their success that way. Or do they?
What if we flip the question? A great number of for-profit internet and communication companies have below-zero price-to-earnings ratios. From Amazon to Priceline, they are losing money by the carload. It's they who look like America's new family of nonprofits - and they may remain so for a long time. Talk about the erosion of boundaries between the sectors!
The great shock is this: Bleeding money on the way to market dominance is now seen as a successful commercial strategy. It's a strategy of choice! Young entrepreneurs are winners if they drop tens of millions of dollars, only to launch their next, next venture. Losing money has become fashionable in this explosively rich country.
More remarkable still is the fact that people who have succeeded at this strategic gambit are now viewed as possible partners, even mentors, to the nonprofit leaders, whose entire training has been a struggle to conserve their funds.
On its face, the marriage of digital entrepreneurs to nonprofit organizations may seem ill-advised - even disastrous. We have all heard of isolated examples of bright, young, wealthy entrepreneurs who wade into the operations of nonprofit groups, arrogantly telling people how to do their work. That's one story, though.
The other story is that there are examples of new efforts to channel the brainpower and financial resources of these people into philanthropic efforts. Many are doing good. Many others are seeking to learn what "doing good" actually means. So, we should be wary of shotgun marriages between new money and old institutions. But we can also imagine that successful relationships are, indeed, possible. In fact, this is happening right now. I'll detail some of them later.
Blending Money and Technology with Philanthropy
I don’t need to tell anyone here that now is a time of great ferment. Seattle is "ground zero" in the digital revolution and the money it has produced. The two are reshaping economic assumptions, civic institutions, and social relations. Witness the battle over creating a major downtown park; the gentrification of once-modest communities, the public concern over whether Seattle has "lost its soul."
We seem to be at a point where we know the city is changing before our eyes. Yet the drum beat of change is hard to grasp. In Seattle, and in Silicon Valley and Silicon Alley and many other places, technology and money are bursting forth without boundaries. Our challenge is to channel the efforts of these two forces to improve our civic and social institutions. Our problem is how to tame these two lions with only a small whip hand.
This challenge is particularly urgent today. Nonprofits are operating under new and increasing pressure. Major policy and funding changes at the state and federal levels are transforming the sector. In a post-welfare-reform society, the forces of privatization, commercialization, and competition are altering the relationships among the nonprofit, for-profit, and public sectors.
A case in point is human service nonprofits. They have to have high level information technology capacity to bid on and manage large service contracts in welfare-to-work. The growing intrusion and influence of large firms, like Lockheed-Martin IMS and Maximus, are pushing them to the max. For-profits can outbid and out-manage nonprofits for welfare-reform contracts. Nonprofts must be fully computerized or they will fail to win contracts in our welfare devolution.
The boundaries between the sectors are eroding. Governments increasingly off-load their work to contractors. Productivity and accountability become the new watchwords of faith. Nonprofits simply have to do everything in their power just to maintain their historic place. That means absorbing and integrating best practices in technology and management - today's rules of commerce - like it or not.
What's more, this is not, as some nonprofit leaders argue, a battleground of value systems. You know, "My sector is better than your sector." Anyone who wants to claim the high road fails to see the multiple sides of our polity. In fact, the founders of our country chose to make it a commercial republic, not a civic, social, or equitable one. Money has always driven our nation. Charity and, later, philanthropy, have always tempered its excesses. In my view, we have to understand, absorb, and adapt to the world of commerce and, in doing so, we will promulgate the values of the sector.
The Gilded Age
A bit of history is instructive. Today’s developments harken back to an earlier era of wealth at the dawn of last century. It was a time of unparalleled invention, innovation, and wealth creation, when the worst excesses of capitalism were increasingly apparent and when, if only briefly, America's social conscience flowered. It all has a familiar ring today.
John D. Rockefeller, J.P. Morgan, and Andrew Carnegie were titans of what came to be called America's "Gilded Age." They ushered in an era from which there was no turning back; the country, and then the world, was unified and then conquered by industry. Their model was the machine. Their machines operated at unprecedented speed. It all has a familiar ring today.
They also did great social and environmental damage. Their extreme wealth was the mirror image of extreme poverty. And so, in today's language, they too decided to "give something back." They did so on a grand scale. They founded libraries, built museums, opened art galleries to the public and sought to eradicate the worst aspects of poverty, illiteracy, and disease. They founded philanthropies! Most observers would rank their legacy as unique and remarkably powerful.
By noting the similarities with today I don't want to compare the two eras. I am suggesting that we might well be, once again, at a time where money can do great good, can think large thoughts, and can partner with nonprofit institutions of unique skill and human capital. But it won't be easy.
Today, the relationships among business, foundations, and nonprofits are edgy and in transition. One very important reason for this is America's staggering, unprecedented wealth and the opportunities this money creates. We may, in fact, be stumbling into our "Second Gilded Age." But this time there is far less agreement on what to do with all the money and how it should be spent.
The Surge of Money
Not only are we rich beyond our wildest dreams, this wealth is not going away. Our inventions and innovations have produced a very large new group - the Mega-Wealthy individuals and foundations. They are a target of opportunity for nonprofits - and they should be.
This is the scale of the opportunity:
Last year, the Forbes 400, the ones the magazine knows about, listed 267 Americans with a net worth of more than $1 billion. Professor Edward Wolff of New York University, a student of such things, figures the number of households with a net worth of more than $10 million stands at more than 350,000, probably more than the number of households in Seattle! This is a 400% jump in the last decade alone. (NYT 3/3/00) Today there are 4.8 million millionaires! ("Philanthropy in America," The Economist, 5/30/99 p.19.)
Foundations are part of this wealth explosion. Last year (1999) they gave away $22.8 billion. This was 17% more than the year before. It's the fourth straight year of double digit growth. (Foundation Center press release, 3/29/00; and New York Times 3/29/00 pA18.) And, if the percentage of foundation payout rises, to 6% or 7% or more, even more dollars will gush into the nonprofit sector.
What about the future? Will the good times continue to roll? The good times will make the old times look like very modest times. The starting gate has opened. The heralded "trillion dollar transfer" of money between generations has begun.
Two respected researchers from Boston College (Paul Schervish and John Havens, in Millionaires and the Millennium: New Estimates of the Forthcoming Wealth Transfer and the Prospects for a Golden Age of Philanthropy) recently produced really eye-popping projections. They estimate the transfer of wealth, in the next 50 years, could range from $41 trillion to $136 trillion. Charities could gain $6 trillion - $25 trillion in that time. Think about that number and then reflect on our mantra of just a few years ago. It was: "Nonprofits and philanthropy can't take on the role of the government. We can't begin to do it all." That may still be true. But we certainly can do - and have already begun to do - much, much more.
The public sector is also a beneficiary of all this wealth. Today surpluses abound. The Congressional Budget Office recently estimated the federal surplus to exceed $1 trillion over 15 years. State coffers are overflowing. The economy is as robust as it has ever been. Welfare rolls have been slashed in half; in my state, New York, the number is 43% (New York Times 3/21/00). The financial condition of Social Security and Medicare is increasingly sound. For example, the Medicare Hospital Trust Fund's life has been extended by eight years, to 2023.
And, finally, no matter who gets elected President, both candidates are proposing major spending programs in health care, child care, earned income tax credits, education and the like.
So we need to change our cognitive categories, our mental maps. We need to stop "knocking wood" every time we talk about the length of America's nine-year economic boom. At no time have we ever been so close to solving the great issues of class, race, and economic security. Nonprofits need to stop their embattled complaining about being left out of this era of great wealth. It is a time of unparalleled opportunity.
There is one overarching issue, however. This vast new wealth - like the first Gilded Age - is truly stratified. So much is concentrated in so few hands: 1% of Americans now own 40% of the assets of this country - and the divide is growing, not shrinking. Forty-five million Americans, including 12 million children, have no health insurance. One in five children is poor. Twenty five percent are hungry or at risk of being hungry. Housing is hard to find and harder to afford. You know the litany of deep problems yet to be solved.
So here we have it: An unprecedented and expanding level of wealth at the top. A growing divide between the top and those poor-and-middle class Americans who are being left out. One hundred years ago, the Titans of Industry created a voluntary sector to deal with just this problem. It still exists today.
Bringing the Sectors Together
A major ingredient is Mega-Wealthy individuals, and they have a unique chance. They can energize philanthropy to lead the way to new solutions. They can use these old institutions to reinvigorate society and its civic and social fabric. They can do this if they improve their skills of listening, learning, and collaboration - and put their money down.
Nonprofits have to build up the same skills. In my view, if they want the new money, they need to better understand and use the market and its mechanisms. The resistance is strong. Just look at our language. Not 20 years ago the term entrepreneur had a slightly oily, negative connotation. If you wanted to dis' someone you didn't like, you called him an entrepreneur. Inc. Magazine, the mouthpiece of entrepreneurship, didn't get launched until 1979. Today, entrepreneurship and venture capital-speak ripples through all conversation in the voluntary sector.
Nonprofit (and foundation) leaders are just now getting comfortable with financial statements, public-private partnerships, and real returns on investment. Now they have to learn about value propositions, first-mover advantage, and exit strategies. Last week, in a talk I had with a very wealthy technology entrepreneur, he practically pleaded for a conversation he could understand. He said, "We are very rational people. We think strategically. We hate generalities and we like data. Our decisions are data-driven.
And lest we forget, the staffs of the nonprofit sector really do come from scarcity. As I suggested at the start, they have had to struggle to make ends meet. They didn't enter their professions to make a killing, certainly not by the time they were 30. They never heard of price-to-earnings ratios. Their definition of equity is not the capitalist's definition of equity. They truly believe that the accumulation of knowledge and valuable experience, through service, is real investing.
So the strategic issue is how to bridge this cultural, experiential, and linguistic divide; how to get our sectors to work together. The money is there.
Can nonprofits and the mega-wealthy now build the techniques of the marketplace into civic and social institutions? Can they overcome a natural reluctance and lack of vocabulary? Can they take the time to learn? It seems to me we don't have to answer these questions. They are being answered for us at this moment. A thousand philanthropic flowers are blooming.
Examples of New Philanthropy
Bill Gates, his companions at Microsoft, and their competitors, have created our "Second Gilded Age." They have revolutionized how information is aggregated and used. They have re-shaped our lives in ways inconceivable a decade ago, and unimaginable a decade from now. But in some ways these information entrepreneurs call to mind an information revolution of over 500 years ago. It too has resonance for us.
My reference point is the revolution created by Johannes Gutenberg's printing press and moveable type process. As management historian Peter Drucker has written, in 1450 Europe was a monastery-based information culture. Skilled monks labored six days a week to copy about 1,200-1,300 pages per year. Five decades later a small number of lay craftsmen, called printers, worked in teams, to produce 25 million printed pages or 125,000 books per year. Prices fell dramatically. They were no longer luxury goods for the wealthy, but utilitarian tools within the reach of the poorest family. Printing also revolutionized education, since the availability of cheap books propelled literacy and led to the founding of Europe's modern university system. And printing's biggest impact was on the church, since it made the Protestant Reformation possible. ("The Next Information Revolution," Forbes ASAP, 8/24/98 p. 57-58.)
Today, literacy for all now is within reach. Computer prices are dropping like a stone while access to information is bursting. Every home with a computer now has a dictionary and an encyclopedia. New forms of knowledge sharing are now possible. On-line learning is easy and distance-learning is imminent. Gutenberg and Gates, in today's terms, leveled the playing field. And, to top it off, Gates has created the largest foundation in the world to further level the playing field.
There are numerous others who are giving back. Also here in Seattle is Paul Brainerd, founder of Aldus and creator of Pagemaker. He made desktop publishing available to all. Now everyone can be a Gutenberg! He has decided to use his considerable personal wealth to "give back" too. His Social Venture Partners has created "giving circles" as an instrument of teaching philanthropy and engaging the wealthy in it. Giving circles demand money, time and involvement from their members. The experiment has spread to Austin, Phoenix, Boston and other cities. Just as Brainerd democraticized publishing, he is doing so with philanthropy. Here is a great case where money has decided to learn what the nonprofit sector does before jumping in impulsively.
Rob Glaser of RealNetworks took the revolution a step further by moving from desktop publishing to broadcast. By making streaming media available to everyone around the globe, everyone can now push their ideas and visions - in audio and video - into cyberspace. Glaser has also been a pathbreaker in corporate philanthropy, committing to give away five percent of profits when the company achieves profitability. And, what is rare for an internet company, RealNetworks is now in the black and money should start to flow.
Beyond Seattle, the world is full of action. Mario Marino, another highly successful internet entrepreneur, will soon start a multi-million dollar "social venture capital" fund in Washington, DC. It will use for-profit investment principles to select and support youth-serving organizations. It will reward the high performers with even more money.
South of here, in Silicon Valley, the Entrepreneurs Foundation, a two year old philanthropy, is aggregating money and personal commitment. It receives shares of start-up companies from their owners. When the shares go public, the Foundation sells them and invests the proceeds in entrepreneurial nonprofits. To date, 63 companies have joined the Entrepreneurs Foundation. Their member employees volunteer constantly in community projects. Last fall, the Foundation made its first investment ($325,000) in Partners in School Innovation, a San Francisco nonprofit working for school reform.
Also in San Francisco, the Roberts Economic Development Foundation has spent ten years experimenting with strategies of "engaged" grantmaking, both funding and providing management assistance to nonprofits operating social enterprises.
Across the country, is another variation on the investment model. New Profit, Inc. has just raised its first $5 million pool, on its way to $20 million. Based in Boston, it has selected four nonprofits with the purpose of strengthening them and taking them to scale. It provides money for its nonprofit partners. It offers continuing expertise from high level consultants from Monitor, an international consulting firm. It helps them build strategies, focus on outputs and measure performance.
Like Monitor, other consulting firms are really getting involved! Bain & Co., a global management consulting operation, has just set up a nonprofit arm called The Bridge Group. It will consult with, and systematically "give back," the knowledge it acquires from its for-profit and nonprofit clients. Bridge will charge concessionary fees too (supported partially by philanthropic dollars). It plans to capture knowledge from its assignments and to package it for use by other nonprofits. Other large firms, like McKinsey & Co., are now considering jumping in too.
I should mention a few established foundations that are "venturing forth" too. The James Irvine Foundation in California is about to launch a proactive $5 million Innovation Fund. It will support commercial and nonprofit partners to help solve social problems by using new or emerging technologies.
In New York City, the Edna McConnell Clark Foundation is actively retooling itself to become a long-term field-builder. It will pick a small group of accomplished, promising grantees and make major, long-term investments to take them to scale. It will be actively engaged in their operations.
The Packard Foundation, this year, will develop a $35 million program area to improve nonprofit capabilities and expand philanthropic effectiveness. The Hewlett Foundation is thinking in a similar way. Surdna is expanding its already substantial commitment to capacity-building and information technology. It is working closely with the private sector to build portals and content for nonprofits.
The focus of all these initiatives is the application of technology to improve management and deliver on mission. To me, this is a very positive step; an effort to connect with nonprofits from a very useful platform. Nonprofits are really seen as places to invest, not places to make grants.
Venture philanthropists work very closely with grantees or, as they often call them, partners. They will stay with their bets for a long time and reward success with more money. They will move quickly and with a minimum of bureaucracy. The new approach may stimulate a shakeout, and perhaps consolidation, among nonprofits. It may well create stronger networks to share information. The hallmarks are greater focus, competitiveness, and effectiveness.
Real Opportunity
If all these initiatives are the opening wedge of serious, deep commitment to a new kind of activist philanthropy, then I think we are on the right path and should be truly excited. For all the hype and arrogance, there is much good coming on-line. This is the promise of "venture philanthropy," which is the flip side of "nonprofit entrepreneurial-ism." If I ran a nonprofit, and I did for nine years, I'd jump at the chance to be a partner. To be someone's social investment.
Everywhere I look I see information technology and improved management as the key to empowerment. Nonprofits that fail to master the tools and skill will increasingly lose control of their fate and independence. From rebuilding cities to creating employment, we cannot anymore resist the marketplace and how it operates, and technology is one part of the solution. Indeed, better use of technology can lead to greater success, which can then build and spread the values of the sector.
What Gates, Brainerd, Glaser and others are doing could well serve as a model for the thousand of dot.com millionaires looking to use their knowledge and money. First, they are building on their strengths in technology and information systems.
Second, they act with strategic focus, not throwing their money or their talk around loosely. Third, they take a long view, not expecting a quick hit victory and a near-term exit strategy. They'll be around for a while. Taken all together, this is the outline of a new, high-engagement enterprise. At its best, it provides both money and technology and creates powerful new networks to solve social and civic problems.
That said, we simply can't expect the Mega-Wealthy to do it all. There is the public sector, you know. There's a false American tradition which ascribes knowledge to the wealthy, as well as power. It's a big mistake to endow those of wealth - foundations and individuals - with knowledge and skills they don't have. Nonprofits must actively seek them out, help educate them, link technology with their content, and be willing to be an active partner.
In fact, I can identify a few trouble spots already.
First, as noted at the start, there is the combination of arrogance and impatience being foisted on a nonprofit partner. Those with narrow life-skills and considerable wealth are prone to making severe demands based on limited experience. It's hard to engage as equals under the best of circumstances. But the nonprofits job is to show it like it is and back up the situation with data. Learn how they learn. Sometimes the arrogance is unbridgeable. Best, then, to walk away.
Second, some wealthy partners do not have their values worked out and often have only a rudimentary knowledge of content - in education, in child care, in the environment. Well, that's a process of listening and teaching. There's no reason it can't be worked out.
Third is the matter of speed, of net-time. Unrealistic expectations can hurt everyone; sometimes time is not the only variable.
I personally believe we will see both successful and failed partnerships in the next few years. We will see hype. We will experience the seductive lure of money. We will see people without a clue willing to drop tens of millions of dollars on impulse. It comes with the territory.
But we have a tremendous upside potential too. All this wealth can be put to very good use.
The two things the nonprofit sector needs most are capital and technology - and a culture of sharing knowledge. Capital and technology have always been scarce; the voluntary sector has always been the impoverished sector, and institutional philanthropy doling out its money, has been part of the reason. Now, the Mega-Wealthy can provide the money and the technological capability to help answer some of our most pressing social questions - and nudge older philanthropy too. They have already begun to do so.
There is a big bargain here waiting to be struck. The good is that we can see it clearly now. The bad is that we might miss the opportunity. The inescapable is that the choice is ours to make.
*Executive Director, Surdna Foundation, Inc., New York, NY. Keynote address at the Sixth Annual Nonprofit Executive Series: Building the Entrepreneurial Nonprofit, Town Hall, Seattle, WA, April 10, 2000. In its original form this talk was entitled, "Nonprofit Entrepreneurialism: The Good, the Bad, and the Inescapable." © Edward Skloot
