Discontent runs deep in philanthropy today. Although the amount of money given away each year continues to rise, there are lingering doubts about what, if anything, billions of dollars already backed by good intentions have ultimately produced. Of course, almost all foundations, corporations, federated funders, and major individual donors can point to some grants that have led to impressive results. However, it remains very difficult to see how the many small and isolated success stories of donors around the country total anything resembling a meaningful response to any of the major social problems that private philanthropy has long targeted, like economic development in inner cities, access to health care, reduction in youth violence, or the reform of public schools.

Amid rising doubts about the impact of philanthropy's diverse and diluted efforts, many ideas have emerged about how the field might be strengthened. Some foundations have, for example, abandoned categorical grantmaking in favor of a limited geographical focus on one or a few specific communities. Other donors have fled from the limitations of providing services through grantmaking in favor of funding public information campaigns, advocacy work, and ballot initiatives, all with the hope of impacting public policy. Still other philanthropists have sought to create funding collaboratives in order to pool resources and act in a coordinated way. Many of these ideas have been developed for and applied to the field of public school reform, where the need for broad, system-wide change has forced donors to look for ways to intensify the impact of their giving.

While diverse efforts to increase effectiveness have proceeded apace, no idea for advancing the field of philanthropy has gotten more attention over the past five years than that of "venture philanthropy." But what exactly is it? What makes it different from traditional philanthropy? What innovations has it introduced into the field? Can it be used to reform public education? To begin to answer these questions, it is important to step back for a moment to consider the political and intellectual contexts within which the idea of venture philanthropy emerged.

The Investment Metaphor

Over the past decade, two broad developments-one in business, the other in politics-have quietly elevated the word "investment" to new heights. The 1990s saw the rise of Silicon Valley and vast fortunes made by the creators of new internet and computer companies. The technological revolution ushered in by these start-ups gave the old practice of venture-capital investing fresh exposure and currency. The capital flows that fueled the high tech boom came from a relatively small group of firms, many located in California, that brought to their work a set of practices designed to increase the odds of success for their young and often inexperienced investees. These practices included heavy amounts of due diligence during the screening process, long-term financial commitments designed to prevent the undercapitalization that cripples many start-up firms, and the provision of extensive advice and consulting to investees on how to develop and manage their new firms. The ultimate objective of this investment process was to build large companies from scratch, take them through initial public offerings as soon as possible, and, for all participants, make a lot of money.

The powerful pull of this appealing investment approach was impossible to confine to business and it soon entered the political arena. Starting with the 1992 presidential campaign, the Democrats shifted their party's policy language in a distinctive way. For instance, rather than call for higher taxes and more spending, the rhetoric of the Democratic campaign, repeated constantly and consistently, was about the necessity of greater "contributions" to make possible higher levels of "social investments." Of course, the contemplated investments in education and health care were nothing other than greater levels of tax-generated spending for longstanding health and education programs. But the change in language ushered in by the "New Democrats" was significant: It represented a repudiation of the idea of wasteful government, and the rise of a tougher fiscal policy that would take a more rigorous, business-like approach to public problems by making "critical infrastructure investments" capable of generating social returns.

The rhetoric of the New Democrats and the practices of Silicon Valley were ultimately joined in the field of philanthropy; the result is what is now generally termed "venture philanthropy." It was a marriage made in heaven, in that sophisticated donors have long sought to turn their gifts and grants into something more concrete and scientific. Rather than simply channeling charitable dollars into deserving organizations of many sorts, venture philanthropy promised to turn donors into hard-nosed social investors by bringing the discipline of the investment world to a field that had for over a century relied on good faith and trust. Two major differences still separated the new philanthropic investors from their government and business counterparts, however: (1) While government was able to make social investments that affected millions of people through entitlement programs, philanthropy searched for enough resources to have a major impact; (2) While business firms had a clear way of determining whether their investments paid off-namely return on investment-philanthropy struggled to develop performance measurement tools to assess the impact of its grants. The search for solutions to the problems of impact and measurement have been at the center of the conversation about venture philanthropy as the approach has begun to spread, especially among younger donors who have made their money through entrepreneurship. The attempt to transfer wisdom across sectors galvanized a small group of individual and foundations donors who have now declared themselves to be "venture philanthropists."

Venture philanthropy's approach and language has penetrated the private and community foundation world, the small giving circles and clubs that help guide new donors, and the territory of corporate philanthropy. The idea of turning philanthropy into social investing has been tried in a host of fields including early childhood health, environmental protection, and community development, to name just a few. But one of the most popular venues for venture philanthropy efforts has been K-12 education. Many business people see the failure of large parts of the public school system as a crisis that could erode America's long-term economic growth potential. The challenge of getting public schools to perform better has been taken on by many of the high-tech entrepreneurs who have shown an affinity for the venture philanthropy model.

It is difficult to pinpoint the exact size of the venture philanthropy movement today, though one recent survey estimated that there are some forty institutional funders committed to the approach, investing a total of about $60 million a year. Although venture philanthropy remains small today, particularly when compared to the total $200 billion dollars given away each year by donors, its influence is considerable. It has been the subject of growing media attention even as the profile of early practitioners has risen within the field. Most significantly, several of the largest private foundations have recently begun to experiment with the language and practices of venture philanthropy. Because of the powerful appeal of the metaphor on which is rests, it is critical to understand what the approach has to offer.

Getting to Scale

When one considers the roster of America's largest nonprofit organizations, one fact imposes itself immediately. Most of the organizations on the list have been on the scene for decades or more: the American Red Cross, the Salvation Army, and the largest private universities and hospitals all have long and distinguished histories that are testament to the significance of their missions and the strength of their reputations. The list does raise at least one troubling question, however. Why have so few nonprofit organizations of more recent vintage achieved scale? In asking this question, venture philanthropy starts with the tenets that size matters in the nonprofit sector, that achieving scale is a sign of success and relevance, and that creating organizations that accomplish this is a legitimate and worthy philanthropic goal. These basic commitments are grounded in the belief that philanthropic dollars should be applied to important social problems and that donors must strive to maximize the public benefits of their giving. Faced with the threat of irrelevance or invisibility, venture philanthropy has consciously declared that getting tangible results-and getting them on a broad scale-is central to the mission of philanthropy.

To achieve scale, venture philanthropy has sought to move beyond the tired idea of program expansion though government replication. For many years, philanthropy had relied on the rather optimistic assumption that government would replicate successful nonprofit programs. In fact, the hope that government would extend many philanthropically-initiated efforts gave rise to a cottage industry in "pilot programs" and "demonstration efforts" aimed at attracting the attention of government, which was in a position, in principle at least, to place large amounts of money behind fledgling ideas. Unfortunately, the list of nonprofit projects that were ever brought to scale by government is short and growing shorter as discretionary funds available for new initiatives shrink at all levels of government.

In place of wishful thinking about government replication, venture philanthropy has sought a surer way to achieve scale. The nonprofits chosen for support by venture philanthropists are assisted in their efforts to construct and execute strategic plans that will lead to substantial growth and broad social impact. These plans are often anchored in a franchise model in which a programmatic idea is packaged and made available to other social entrepreneurs through either autonomous units or affiliated entities. In seeking to take control of the diffusion and expansion process rather than simply pass it off to government, venture philanthropy draws on many of the ideas and practices of corporate strategy focused on growing companies. A critical element of any effort aimed at scale is refining the underlying service model until it is fully developed, tested, and debugged. Only after this process is complete should the model be extended to multiple new sites.

A different idea for getting to scale has also emerged. It focuses not on building a model that is ripe for replication, but instead on creating a powerful organization that has a steady revenue stream behind it to drive internal growth. Some venture philanthropists have focused on building the capacity within nonprofit organizations to design and deliver services that have paying clients waiting to consume. However, the problem with any nonprofit model that is built on a base of earned income is simple: even when the fee schedule is a sliding one, commercialism limits the ability of the organization to reach disadvantaged populations that may not be in a position to pay. Thus, in its place some funders have looked at ways of helping nonprofits operate independent, non-mission related ventures that generate revenue capable of giving sponsors the funds they need to grow. No matter whether the earned revenue is generated by the programs themselves or by unrelated business activity, this approach to getting to scale is fraught with at least a little danger since it requires that nonprofits do more than simply charitable work: it requires that a nonprofit have the business acumen to succeed in breaking even or turning a profit to subsidize its own mission.

Getting to scale either through franchising or commercialism requires a different kind of financial support than that customarily provided by donors. Venture philanthropy has therefore developed tools to boost the likelihood of success. At its core, venture philanthropy can best be seen as a three-legged stool, each leg of which is seen as a solution to a problem in traditional philanthropy that has impeded nonprofit organizations. First, venture philanthropists believe that large blocks of capital delivered over an extended period of time are needed to build the capacity of nonprofit organizations. Second, these new donors believe that improving nonprofit strategy through management consulting is critical to lasting success. Third, venture philanthropists are committed to developing new metrics to measure organizational performance or, in their words, the "social return on investment." It is useful to examine each of these three legs-capitalization, engagement, and performance measurement-separately to see just how strong they are and whether they truly support more effective giving.

A New Form of Funding

From the vantage point of nonprofit service providers, private foundations and corporate donors have long engaged in any number of practices that seem counterproductive and frustrating. High on the nonprofit list of grievances is the move to ever-narrower forms of project support, often delivered for short periods of time, and almost never for general operating support designed to build operational capacity. In a search for greater levels of accountability, many institutional funders have in fact developed a strong preference for project grantmaking, in large part because they believe these grants can be monitored more actively than unrestricted support. One problem with general operating support is that it has come to be associated with "non-essential" items like staff and rent. Providing funds to cover these overhead expenses is less attractive to many funders because these costs seem extraneous to the core mission and public purposes of nonprofit organizations.

As a consequence, many institutional funders have come to insist on funding projects and activities, not organizations. In recent years, general operating support has constituted only about 15 percent of all grants. Much of the rest is disbursed as project-specific grants. To make matters worse, it is not uncommon for funders to limit their project support of particular nonprofit organizations to two or three consecutive years. Fearing that they will create a dependence that cannot be sustained, traditional institutional funders have settled on a short-term approach to grantmaking that allows them flexibility to change direction quickly should community conditions or board interests change. The consequences for nonprofit organizations have been predictable: financial instability, programmatic uncertainty, and wasted effort, all of which makes the achievement of real scale and impact very difficult.

Venture philanthropy has keyed on this pattern and come forward with a different approach to funding, one that builds on the venture capital model and offers longer term support and larger amounts of unrestricted financial support. Instead of pulling the plug quickly and moving on to fund other projects and organizations, the venture philanthropy model emphasizes long-term commitments designed to help organizations develop and grow. Unlike grantmakers that trickle out support in small installments, the venture philanthropist seeks to get into projects with a large initial investment that signals real commitment. In New York, for example, the Robin Hood Foundation, an early venture philanthropy entrant, has long focused on building lasting relationships with the organizations it supports, with some engagements lasting as long as a decade. In a few cases, this has translated into very large financial commitments, while in other instances the amounts have been more modest. By providing large blocks of capacity-building support to nonprofits over longer periods of time, venture philanthropy believes it will be possible to overcome one of the biggest drawbacks in the nonprofit sector, namely the inability of nonprofit organizations to achieve real scale and impact.

Before delivering large blocks of support and committing to an organization over the long haul, venture philanthropists engage in a heavy dose of what they term "due diligence." While it is not entirely clear how this review differs from what donors have always done (examining financial disclosure documents, requiring the presentation of a strategic plan, and conducting a site visit), the language change is designed to draw attention to the fact that great care needs to be devoted to the decision-making process leading to a commitment. In making the choice of which organizations to support, venture philanthropy groups, like New Profit Inc., view the ability of a nonprofit organization to achieve scale as a critical consideration. New Profit's long term investments have focused on organizations like Jumpstart, a pre-kindergarten program designed to help disadvantaged children get ready for school, which has plans to open sites in fifteen cities around the country.

One of the most visible efforts to apply business acumen to the reform of public schools is being undertaken by John Doerr, the Palo Alto venture capitalist. In 1998, Doerr founded the New Schools Venture Fund (NSVF) with the intention of providing seed capital for promising new for-profit and nonprofit organizations that had the potential to bring movement in the public education field. In choosing organizations to fund, Doerr applies a clear set of criteria. He seeks to support groups that have strong leadership and could have a direct impact on school achievement. What made his approach different was that he also insisted that the organizations that would receive support had to have a concept that could be brought to scale. Like any business investor, Doerr assembled a team of partners. In all, some $20 million will be used to fund both nonprofit and for-profit initiatives. NSVF's early nonprofit investments included a comprehensive online guide to California public schools, both nonprofit and for-profit charter school management organizations, a school leadership training program, and a math curriculum development effort. On the for-profit side, NSVF invested in a network of charter schools operated by a business firm in Florida. NSVF's approach to school reform continues to reflect a distinctive application of the venture philanthropy model. Drawing on the talents of a group of exceptionally successful entrepreneurs and CEOs, the Fund has developed its own ideas about getting to scale: beyond funding organizations with potential for growth and impact, NSVF also works to build a network of school reformers through which innovations and ideas can spread. Thus, NSVF both invests and convenes with the aim of maximizing the impact of its investees and moving them to scale quickly.

Because it draws on the business methods of venture capital, NSVF is willing to make a small number of large bets. After making these bets, the Fund stays with the organizations that are funded for an extended period of time, assuming the organization can demonstrate progress and results. Investments made by NSVF range between $200,000 and $1 million. Sometimes the efforts that are funded succeed, such as a California ballot initiative that pushed the California legislature to allocate millions of dollars for charters schools. Other times, big investments have not paid off so well: Advantage Schools, one of NSVF's for-profit portfolio organizations, has struggled to hold on to its public school contracts and was recently taken over by another firm. Nevertheless, NSVF's investments represent calculated gambles to achieve real impact and scale in a field like school reform where small projects hold little promise of changing the performance of large numbers of public schools.

Of venture philanthropy's three legs, the idea that nonprofits need larger and longer forms of support is certainly the strongest. Whether venture philanthropy has truly made good on its commitment to building strong organizations with the capacity to grow is another matter entirely. To date, many of the grants made by venture philanthropy funds have been relatively small owing to the fact that resources in these funds remain limited. In fact, all of the biggest gifts in recent years, including several hundred-million dollar gifts to universities, were made independently of the venture philanthropy mantra. Thus, while providing major blocks of capital aimed at taking nonprofits to scale is a good idea, it is not an original one.

Consultative Engagement

In its effort to re-engineer the mainstream model of philanthropy and reorient it toward achieving impact on a broad scale, venture philanthropy has also focused on changing the relationship between the funder and the recipient. Looking at the way many institutional and individual donors carry out their giving, the proponents of venture philanthropy observed that a tremendous amount of effort was being sunk into the process of selecting grant recipients and scant effort was being devoted to helping nonprofit organizations succeed once the check was sent. Indeed, in many foundations, there is today very little follow up or consultation between the two sides from the time the grant check is mailed to the time the final report on activities is due. One reason that most of the effort of philanthropy is directed at decision making about grants, not effective implementation, is that there is real pressure on funders to be transparent, fair, and accountable for their actions. Given these demands, it is hardly surprising that many institutional funders have little time for anything other than careful review of applications, site visits and the preparation of recommendations for the board. As grant cycles roll around and around, it can in fact be very hard for funders to break this cycle and engage with recipient organizations in a sustained relationship.

Venture philanthropy takes a different approach to donor/recipient or investor/investee relations, one that extends the time horizon and deepens the contact between all parties. Rather than cut a check and run, venture philanthropy believes that the work only begins once a financial commitment has been made. Given that the commitment is intended to be long-term, the new funders have set out to connect directly with the organizations in their portfolios. There are two perceived benefits to a high engagement strategy. First, nonprofits may learn something that they do not know already, especially if the consulting involves specialized skills not usually found in nonprofits. At New Profit Inc., grant recipients receive hands-on assistance from the management consulting giant Monitor Group. Working with organizations that have received money from New Profit, Monitor's consultants assist with planning growth and tracking progress. For organizations like Citizen Schools, an after-school program that uses adult volunteers to teach real-world skills to teenagers, this added service is intended to increase the likelihood that the organization will continue to flourish and grow. In lending the expertise of a management consulting firm to their investees, funders are attempting both to protect their investments and to increase the social benefits that are achieved. Beyond consulting advice, the investor can also provide nonprofits with useful connections: The New Schools Venture Fund explains that "Our hands-on approach goes far beyond providing capital. It includes matching board members, recruiting management team members, consulting, and linking education entrepreneurs to a powerful network of peers and new economy resources."

The second perceived benefit of a consultative and engaged relationship has little to do with nonprofit performance and much to do with the satisfaction of the donor. High engagement philanthropy is a social activity that satisfies the desire of many wealthy people to find meaning in their lives outside of business. Young entrepreneurs who are active in venture philanthropy enjoy taking a hands-on approach and view the process as one of learning and personal growth. At Social Venture Partners (SVP), one of the earliest venture philanthropy efforts, donors commit a minimum of $5,000 to the fund and in exchange they gain first-hand exposure to the nonprofits that SVP funds. Many of the investors in other venture funds become even more involved in the organizations they fund either by either helping with fund raising or by serving on the board.

Several assumptions are built into the engagement part of the venture philanthropy model: first, that nonprofit organizations want outside help in strategizing and carrying out their work; second, that those offering the consulting possess skills that are missing in the nonprofit world and that nonprofits will run better once they have been exposed to these tools; third, that engagement is ethical and appropriate in philanthropy. All three assumptions can reasonably be questioned.

First, several foundations that have surveyed their recipients have discovered that nonprofit managers complain that the process of working closely with a funder is draining and does not always add value to their work. As one might expect, the generally tense relationship between benefactor and supplicant is hard to transform into a balanced working relationship. Faced with the prospect of a "relationship" with the donor, many nonprofits would opt for a no-strings check.

Second, when it comes to the skills of high engagement grantmakers, there is no clear evidence that the people who control capital in the business sector or who posses expertise in business management have any special claim on knowledge about how to create a successful nonprofit organization. Nonprofit mission fulfillment does not always equate to satisfying the demands of clients or responding quickly to market trends. Sometimes, nonprofits need to lead by offering services for which there is little immediate support, but that nevertheless speak to important social needs.

Finally, many religious teachings related to charity appear to run counter to the precepts of venture philanthropy. A recurring theme across many faiths is that donor and recipient need to be separated, preferably through anonymous giving, so that the recipient is not shamed by having to take money directly from someone else. Anonymous giving also promises to ensure that the donor's intent is pure and the gift is aimed to helping others rather than gratifying oneself. By shielding recipient from donor, it is possible to create a transfer that is both practical and moral. Venture philanthropy's response to such objections is predictable: Venture philanthropy is making investments that are different from charity. Because they are given under different initial terms, the moral problems associated with charity do not apply. This is an argument that ultimately rests on semantic hair splitting, however, and it skirts the reality of the asymmetric relationship that characterizes all forms of philanthropy. Still, venture philanthropy's secular, entrepreneurial turn is ultimately designed to satisfy the current generation of new entrepreneurial donors eager to express themselves through action in the social sphere.

Performance Measurement

Beyond a theory of achieving scale through new forms of financial and consulting support, venture philanthropists distinguish their work by the way they assess results. While all donors want to know whether their grants have an impact and lead to real changes in the world, venture philanthropists have elevated the importance of performance measurement and made it a centerpiece of their approach to giving. At the core of this desire to measure results is a dual commitment to learn how to improve the programs of investees and how to make better investment decisions in the future. By focusing on assessment, venture philanthropy has hit a nerve. Many donors, particularly those who have made money in business, find the lack of standards and benchmarks in the world of philanthropy particularly troubling. Without good evaluation, giving seemed doomed to remain an emotive exercise that never asked tough questions about the social benefits produced through philanthropic intervention.

One of the earliest and most visible efforts to construct a performance measurement system for the new venture philanthropy was developed by the Roberts Enterprise Development Fund (REDF), a venture philanthropy fund founded by investor George Roberts of Kohlberg, Kravis, and Roberts fame. For years, REDF has experimented with the use of philanthropy to create social purpose enterprises within nonprofit organizations. These enterprises, ranging from a bakery to a janitorial service to a cafe, employ disadvantaged and untrained workers. The enterprises generate both financial flow for the nonprofits operating them and social benefits in the form of income for the employees who do the work. For REDF, there is an added benefit: this kind of philanthropy affords a unique opportunity to measure impact. Thus these enterprises have both a business and social bottom line. REDF describes its effort at quantification as follows:

REDF's efforts to calculate the social return on investment (SROI) of its portfolio of social purpose enterprises is one attempt to analyze and describe the impact of these enterprises on the lives of individuals and on the communities in which they live. REDF's approach to calculating SROI includes measuring the tax dollars saved by helping the people who work for REDF portfolio social purpose enterprises reduce their dependency on public assistance, homeless shelters, and other government-supported services.

REDF's elaborate reports provide an illuminating perspective on the problem of performance measurement in philanthropy. The "SROI Reports" purport to measure the creation of blended value, consisting of enterprise value ("the financial return from the business") and social purpose value ("the monetized public cost savings and taxes generated by the enterprise employees"). Upon closer inspection of the actual data collected and analyzed by REDF, however, the calculation of SROI turns out to be nothing but a straightforward application of cost-benefit analysis, a tool for measuring program impact that has long been used by business managers and government policy makers. By christening cost-benefit analysis "the calculation of Social Return on Investment," REDF has succeeded in giving the venture philanthropy a new language that can appeal to younger donors, no matter that the underlying practices are techniques popularized in the 1960s.

One of the real problems now vexing venture philanthropy is that the rhetoric of performance measurement has grossly outpaced the practice of performance measurement. While REDF's work on measuring the net benefits of employing disadvantaged persons in enterprises run by nonprofits is often held forth as the venture philanthropy model for quantifying results, it has little relevance for the vast universe of measurement challenges facing the field of philanthropy. For while the income streams of nonprofit business ventures and the employment and income gains of disadvantaged workers can be estimated, there are large parts of the nonp