Cash of the Titans

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When you first walk in the door, Citizen Schools feels like any other kid-friendly nonprofit. The Boston-based organization runs after-school programs in which local citizens teach 1,300 teenagers professional skills–from building robots to cooking to publishing a newspaper. The afternoon I visit, the kitchenette is filled with small gangs of young and animated staff plotting this spring’s programs, amid the stench of burned microwave popcorn.

The conference room belongs to a small troop of local teenagers, who plop an immense pile of puffy winter jackets on the lobby bench and then fight over who gets the good seats. They are here to tell a program director about improvements they’d like to see in Citizen Schools programs. “We need to know how we can make our after-school programs educational, but also fun,” the director tells me. “Because otherwise the kids are like, ‘Another two hours of school. Yay.”

The kids chortle. It’s obvious that Citizen Schools aims at that devoutly wished-for and amorphous goal of all youth services: making the kids feel good about themselves. But the staff here have another goal, and it’s considerably less touchy-feely. They’re working to turn this nonprofit into a thriving, entrepreneurial business.

Head over to the corner desk of Eric Schwarz, the group’s energetic president and cofounder, and you’ll find yourself talking to a guy who describes his success in classic marketplace terms–speaking a lingo not unlike that of the high-tech entrepreneurs of the recent giddy boom. For him, the teenagers are “customers” to be served, who’ll “vote with their feet” if they don’t like the “service.” He uses an elite corporate management tool from the Harvard School of Business to track Citizen Schools’ goals, which include launching a $25 million fundraising campaign, maintaining a budget surplus, and achieving an “aggregate quality rating of 4.1 on a 5-point scale…from stakeholders,” those being students, parents, and staff.

And like a growing number of nonprofits these days, Schwarz and his colleagues are working on new ways to create “earned revenue,” including selling Citizen Schools’ expertise in creating after-school programs, to keep its $4.8 million-a-year operation growing. I’ve met CEOs of Fortune 500 companies who aren’t this poised.

Schwarz motions around Citizen Schools’ big, funky office: “I think of this as a very successful start-up,” he enthuses. “We’ve built a bit of a better mousetrap. We’re delivering services in a new and creative way, and getting results.”

In the last two years, Schwarz and his Citizen Schools cofounder, Ned Rimer, have had a burst of support in this goal, from a young Boston-based organization called New Profit. Last year, New Profit gave them the first installment of a four-year, $1 million grant, as well as hours and hours of hands-on input from Monitor Group, a leading management consulting firm. Together they’ve helped craft Citizen Schools’ business plan, done extensive CEO-style consulting with Schwarz, and developed strict performance measures they review quarterly and annually to make sure the nonprofit accomplishes everything it’s promised to.

“We’re helping nonprofits figure out what the economic denominators are, being very rigid and making tough decisions and saying, ‘Should we do this new program, is it cost-effective, is it sustainable?'” explains Vanessa Kirsch, New Profit’s president and cofounder. “Our donors are looking for results. They want to see the nonprofits really thriving.”

The people giving the money, in this case, are known to Citizen Schools as “investors”–a group culled primarily from Boston’s technology-rich venture capital community that is convinced Citizen Schools and the four other Boston organizations New Profit is currently funding will get results for the $11 million they’ve put in so far. At Citizen Schools, results are teens who’ve improved their academic skills. For the organization Working Today, that money is supposed to result in cheaper health insurance for the self-employed. For the preschool education group Jumpstart, success equals the number of children who reach first grade with above-average learning skills.

Now New Profit is doing business in New York, and is on the hunt for local nonprofits that want to do business the venture capital way. Healthier kids, PCs in the homes of poor families trained to use them…when it comes down to it, Kirsch expects just two things from New Profit’s investments: that they result in social change, and do it in a big way. “I know there are a lot of hot, entrepreneurial nonprofits out there,” Kirsch says. “We’re going to help them really take off.”

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Money in, hard results out; it’s an entirely new type of relationship between a nonprofit and its benefactor. Foundations have traditionally kept an arm’s-length relationship with the organizations they fund, granting money for good works, asking for reports, occasionally commissioning outside evaluations, but mostly keeping their distance–the assumption is that the nonprofit knows best how to run itself. The foundation’s money might have originated in the cutthroat corporate world, but once it’s in the hands of the nonprofits, a separate culture is presumed to take over: nonprofits are supposed to behave differently than corporations, because they’re seeking social change.

New Profit, in contrast, embraces corporate culture and thinks its nonprofit beneficiaries ought to, too. It picks organizations that already have lively, entrepreneurial leaders, puts them through an intense due-diligence process, then ushers them through boot camp in for-profit management techniques, all before handing them their first check. The goal is to help the nonprofits develop their own self-sustaining revenues and grow, grow, grow–citywide, even nationwide. Growth, Kirsch argues, is the only way nonprofits can thrive long enough to make a difference. In the nonprofit world, she likes to say, “We’ve planted a million wildflowers, but we’ve grown only a few oak trees”–mega-organizations like the Sierra Club or Girl Scouts, whose “brands” are so dominant they attract major corporate donors as well as hundreds of thousands of small contributors.

Kirsch’s way of doing business has come to be known as “venture philanthropy,” a mini-movement modeled on the aggressive practices of venture capitalism. Born out of the pro-market, can-do vibe of the high-tech boom, venture philanthropists don’t merely give money away; they invest it. And, like all venture capitalists, they keep close tabs on how their investments are performing–helping them with administrative planning, but also demanding that the nonprofit produce some serious results. “It’s an investment relationship,” Kirsch says. “We’re producing social capital.”

Venture philanthropy is still a small phenomenon. There are only 37 organizations like New Profit in existence, according to a study by the Morino Institute, a group that researches tech-industry efforts to promote social change. But the movement is growing rapidly; three-quarters of all venture philanthropy funds started up in just the last two years.

Venture philanthropy is suffused with talk of the new, but it’s also a barely disguised backlash against traditional charitable giving. They believe that the foundation world is broken–that traditional foundations are too stingy, and nonprofits too timid in their goals. Both, they say, need the excitement and rigor of the free market.

That suggestion has provoked heated, almost vicious criticism from traditional philanthropists and nonprofit leaders. The whole point of nonprofits, they argue, is to take care of people who aren’t getting served by the marketplace. Venture philanthropists, they contend, are intolerant of grim, entrenched social problems, and focus only on ones that respond to sunny entrepreneurial optimism–technology training, yes; tenant organizing, no.

“This is just a bunch of people who’ve gotten lucky in the boom thinking they now know how to save the world. But they’re probably more likely to screw up nonprofits than help them,” says Pablo Eisenberg, senior fellow at the Georgetown University Public Policy Institute and a frequent critic of the philanthropic establishment. A granting director at a major New York foundation shares Eisenberg’s dim opinion of for-profit prowess: “Half of these people ran businesses into the ground, and they think they’ve got it figured out? Give me a break.”

At the same time, some of the most enthusiastic adherents to the new management model are coming from the ranks of traditional philanthropy. Starting this year, the influential Edna McConnell Clark Foundation is focusing funding on the institutional growth and development of a handful of organizations, demanding greater accountability and business acumen in return. “The debate is explosive,” says Bruce Trachtenberg, director of communications for the Clark foundation. “The philanthropic community has not had a conversation like this for years.”

There is one thing everyone can agree on: The ways nonprofits currently get funded can be a draining dead end. Just 13 percent of all foundation grants are for general operational support–to pay for salaries, rent, paper clips, the basics. Much of the rest is designated for specific programs that often have more to do with a foundation’s priorities than those of the groups they fund. At most nonprofits, overworked development staff spend their days scrounging for those one-year grants, then twist their goals into pretzels trying to satisfy their narrow terms–inefficiencies that would be unthinkable in for-profit business. Says Neil Carlson, director of communications at the National Committee for Responsive Philanthropy, “That critique is shared by everyone in the nonprofit world.”

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“I hate the word ‘charity,'” Vanessa Kirsch tells me. “I don’t like the way it’s set up.” For 35-year-old Kirsch, that conclusion came from her own hard experience in the trenches. In 1991, she founded Public Allies, an organization that paid young people to do apprenticeships making a difference in their communities. It quickly grew to six cities nationwide, and Kirsch raised $9 million to make it happen.

But her success was won bitterly: By Kirsch’s estimates, she spent over 90 percent of her time fundraising. Foundations preferred to give one-year grants; worse, they were usually designated for special projects instead of what she really needed, which was money for the everyday costs of keeping Public Allies going. Kirsch wanted to “scale” the organization–to keep growing it across the country–but foundations were mostly useless in that objective. On the contrary, they figured that since Public Allies was now well established, it didn’t need help; they wanted to focus on fostering new and struggling nonprofits, not making big ones bigger. “Foundations began telling us that we were too successful,” Kirsch says, incredulous. It was crazy, she thought; why punish success?

Kirsch decided the culture had to change, so that nonprofits could get longer-term funding and support to help them grow. She started researching venture philanthropy–a concept popularized in a 1997 Harvard Business Review article called “Virtuous Capital,” which argued that charitable giving ought to function more like for-profit venture capitalism. In venture capitalism, Kirsch notes, investors don’t just hand over a check to a worthy company; they vet their investments closely, and offer their expertise in business-building.

The outcome, established later that year, was New Profit. And Citizen Schools was an easy pick for its first round of support. Kirsch needed four surefire winners. Not only did Schwarz have the entrepreneurial fire Kirsch craved, but he had spent five years working for her husband, Alan Khazei, at City Year, a Boston organization that pays youth to work in their communities. (Khazei also serves on Citizen Schools’ board; in the world of venture philanthropy, with its emphasis on partnerships, his affiliation is considered not a conflict of interest but an asset.)

Investors may be willing to pitch in time and money, but they also need to see results. The problem, as foundations know, is that tracking success in social change is an inexact science. “How do you measure how much you’ve prevented poverty? Or how do you measure a decrease in unhappiness?” wonders Dorothy Ridings, president of the Council on Foundations.

To try and track this amorphous stuff to the satisfaction of her venture-capitalist donors, Kirsch turned to a business tool called the “Balanced Scorecard.” It was originally developed in 1992 by Harvard business professor Robert Kaplan, to help companies measure their performance in similarly nebulous areas–like “innovation” or “customer satisfaction.” Companies, he realized, frequently ignore these areas because they’re not easy to measure, but they’re crucial to running a profitable business.

With Kaplan’s blessings and input, New Profit and Monitor Group spent long hours working with Schwarz and his staff to develop measurements and goals. “Customer satisfaction” would be gauged with a survey to see how happy students, parents and even employees were. Another was financials: They wanted to have a 5 percent operating surplus, and embark on an aggressive fundraising campaign to secure $25 million through 2003. Yet another was improving their students’ “hard” skills: Kids had to perform better on written tests at the end of the school year.

At the end of each year, Citizen Schools and the Monitor Group would collect data to see whether each measurable goal was met. If so, New Profit would agree to cut the $250,000 check for the next year. And if not? The bottom line is that if an organization misses its goals “in any serious way,” says New Profit Investor Relations Manager Victoria Jette, they could be cut loose. “We’re prepared to have some of our portfolio organizations fail.” The expectation, though, is that investors will have plenty of warning if a nonprofit is in trouble, and can intervene to help fix it.

New Profit also tries hard to weed out potential failures. Groups have to work out their Balanced Scorecard ahead of time, spending months working with Monitor Group to identify goals that make both them and New Profit happy. One of New Profit’s Boston organizations is still going through this mating dance. Dorchester’s Codman Square Health Center is a neighborhood nexus for medical care, social services and community revitalization. In its 23-year history, it has taken on everything from AIDS to urban planning to launching a charter school.

Now, it’s facing the prospect of tough decisions. “That process itself is enormously valuable,” says Executive Director Bill Walczak. “We’re already thinking much more clearly about goals now. It used to be that if somebody came up with an idea for a community service, we’d be like, ‘Great, do it! It can’t hurt!’ But now we think about whether we’re using our resources wisely. We’ll say, ‘Sure, it can’t hurt–but will it help?’”

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Archie Nagraj, now Citizen Schools’ associate program director, remembers the organization in its “old days”–back in 1997. She’d just finished her MSW, and she was, she laughs, a “classic social-work softie–my whole goal was to improve kids’ self-esteem.”

Nagraj enjoyed the scrappy, hard-driving environment at Citizen Schools, which was located in a basement office that sometimes flooded. She and her coworkers would often work until 2 a.m. “We were all into the excitement of being a start-up, just going like crazy,” she says. It wasn’t always a positive energy: As at many nonprofits, administration was lax, budgets were sometimes nonexistent and people would often duplicate each other’s work. “Things were not well run all the time,” she says.

But the rewards were “incredible,” particularly when Nagraj could watch a student make a breakthrough. She says she’ll never forget one boy, emotionally distressed and with a hard life at home, who stuggled to pass a test in a karate class taught by a cop. “I thought he was going to be crushed,” she recalls. “But then he worked at it and worked at it and when he finally passed, he was running around the hallways screaming ‘I did it, I did it!’ You could tell he’d broken through a barrier, and he had a better sense of himself.”

Such stories of success and inspiration are common currency in the nonprofit world–the way they often show their funders they’ve achieved the ever elusive goal of “impact.” When New Profit got involved, the tone shifted discernibly. Its measurements wouldn’t even try to capture elements like self-esteem. Citizen Schools was no longer a social work-style organization–it was aiming squarely at being an educational company.

“The danger,” Rimer admits, “is that you can be seduced by things that are easy to measure, like attendance and grades on tests.” Another longtime staffer, Stephanie Davolos Harden, says she welcomed the shift to hard numbers. “But it wasn’t easy. You’re taking all this stuff that used to be qualitative, and making it quantitative.”

The political value of statistical goals is easier to see. “You can go to people and say, ‘4.2 out of 5 parents like what we do.’ That’s powerful!” Nagraj says. School boards, Rimer adds, are deeply impressed by the measures. “Even if there was no funding from New Profit, I’d still want to do a Balanced Scorecard. Because at the end of the year, you can go to employees and say, ‘We had a good year.'” Indeed, when they met their goals for 2000, Citizen Schools staff got bonuses of up to $2,500.

There is also more serious money to be made with the numbers. New Profit is showing Citizen Schools’ Balanced Scorecard to other venture philanthropists, as a way to help Schwarz hit his fundraising goal. The day after I met him, Schwarz headed to San Francisco, where New Profit had brokered a meeting with the Pisces Foundation. “It’s something you always see in the for-profit world,” notes Michelle Boyers, who heads New Profit’s New York office. “It’s syndicate funding. A venture capitalist takes a company, does its due diligence, checks out all the fundamentals and then invests in it. Then it takes it around to all its friends and says, ‘Hey, this company’s great, you should get in on it.'” This sort of networking relies on everyone trusting the first investor to have done the hard work and number-crunching that “proves” the company is a good bet–something the Balanced Scorecard accomplishes handily.

Helping a nonprofit raise even more money, Boyers stresses, is one of the biggest ways venture philanthropy differs from traditional charitable giving. “You’ll never see this with regular foundations,” she complains. “They almost never cooperate in this way. Once a nonprofit gets a grant from one foundation, they say, ‘Okay, you’re taken care of. You don’t need our help.’ It’s awful. How can a nonprofit grow with that lack of support?” When a nonprofit does try to secure multiple sources of funding, it has to fill out mountains of different paperwork for each one.

“Foundations don’t trust one another. Venture capitalists do,” Boyers declares. “If a company looking for investment had to fill out different forms for every single VC it went to, it’d be nuts. Nothing would ever get done! But that’s how foundations are, and it just makes more work for nonprofits.”

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These blistering critiques tend to drive foundations and nonprofit executives bonkers. Venture philanthropy, they argue, exhibits a dangerous arrogance toward nonprofits, regarding them as know-nothings in need of the free market’s saving graces. By pushing measurement and accountability so fervently, they suggest that most nonprofits are slackers in need of babysitting-soft-headed liberals wasting money on dubious feel-good projects.

Anne Pasmanick, who heads the “Changing Charities” research project at the Washington-based Union Institute, Center for Public Policy, has seen this derision up close. “When they’re in venues where there aren’t any nonprofit people around, where it’s only dot-com millionaires, [venture philanthropists] will say ‘Look, these people don’t have their acts together.'”

It isn’t always in private, either. Harvard’s Kaplan, a big supporter of venture philanthropy, tells me he’s leery of nonprofits’ complacency. “Nonprofits are always sending me these letters like one I got last week, saying, ‘We’ve been doing our work for 10 years, we have these 20 programs, and the need has never been greater,'” he says. “And I’m thinking, if you’re doing this for 10 years, what difference has it made? What can you show me?”

Plenty, say critics. It’s not as if traditional foundations simply hand over checks, points out Rick Cohen, head of the National Committee for Responsive Philanthropy; they also ask for results. While he agrees with some of Kirsch and company’s criticisms, he thinks venture philanthropists overstate how hapless most nonprofits are. “They have to run very tight ships. They have to be accountable, or they won’t get funding,” he notes. “They’re more careful than most businesses, actually.” If they don’t seem to be quickly and dynamically “solving” poverty or inequality, he says, it’s because those problems are deeply ingrained; if the attention spans of high-tech donors can’t handle that, that’s their fault, not the nonprofits’.

Nonprofit experts also point out that while foundations invest most of their assets, giving out about 5 percent a year, venture philanthropists spend their money as aggressively as they raise it–a practice that could very quickly prove to be a fatal liability. Organizations like New Profit rely heavily on money from new-economy donors, the recently wealthy high-tech elite. (About 94 percent of donations come from individuals, and the rest from traditional foundations.) But the dot-com boom, from which so much venture philanthropy flows, consists mostly of companies that never had the slightest clue how to break even. As their fortunes plummet with the Nasdaq, “those donors could start scaling back on their giving very quickly,” observes Pasmanick. “I’ll be interested to see how they deal with that.” Kirsch agrees it’s a serious concern. She says that venture philanthropy needs to take root quickly among traditional foundations and old-school, inherited money: “It will just die if it is dependent on the new donors whose bubble just burst.”

But even outside the technology sector, the for-profit world is hardly a paragon of success. Quite the contrary; it relies on a constant slew of dismal failures to produce a few occasional winners. It’s a business axiom that eight out of 10 entrepreneurial enterprises collapse in barely a year or two. “If business, with its enormous capital, can’t produce a success, then how the hell can you expect a nonprofit to do so, following the same model?” asks an angry Pablo Eisenberg. “It’s just such crap,” he moans. “It’s awful.”

At the very least, New Profit is asking nonprofits to take a leap of faith. The organization firmly believes that skillful entrepreneurship can help nonprofits mint their own money; one goal of their four-year investments is to help their nonprofits develop as many revenue streams as they can. “Being self-sustaining, if possible, is ideal,” Boyers says.

Schwarz doesn’t think it’s out of the ballpark for Citizen Schools. He has created a “Citizen Schools University” to train other organizations running after-school programs, including school districts and educational nonprofits. They’ve already secured contracts from a federal program that preps low-income middle school students for college. Boyers thinks Citizen Schools has the potential to follow the trail of Head Start, which started as a nonprofit endeavor. “The government is a viable exit strategy for some of our investments,” she notes.

Some of New Profit’s other nonprofit investments have even more aggressive revenue-generating plans. Working Today, an organization that brokers affordable, health insurance for self-employed “free agents,” is expanding its insurance program into New York’s well-off new-media scene, hoping to make enough money to eventually subsidize new services for lower-income workers. Or there’s Jumpstart, a program to prepare preschoolers for the rest of their education. It’s created a for-profit spin-off–www.schoolsuccess. net–that helps teachers and parents track children’s progress, and Jumpstart plans to retail the service nationwide.

But critics wonder about the bias in venture philanthropy towards revenue-generating models. What about social problems with less obvious–or nonexistent–sources of revenue, from poverty to violence against women? “The whole point of foundations is that they serve people who’ve been abandoned by the marketplace. How can you suggest the marketplace can come in and help them out?” asks Cohen.

Judgment about what is or isn’t viable in the marketplace can also become highly political. Another philanthropic worker recalls sitting in on a meeting of venture philanthropists who shied away from funding any group with radical views on social justice–they felt the groups were not looking at “solutions,” and that they didn’t have sufficiently entrepreneurial leaders. “The idea of social entrepreneur is, to be frank, very much about race and class,” he contends. “Because when you look at who’s getting all this money, it’s very much the upper-middle-class people, the college grads who have a great social conscience. And that’s great. But you have to be able to talk MBA talk, about scaling and all that–and in, say, the South Bronx, there are few people with a social commitment who talk that way.”

Mind you, the venture philanthropists themselves don’t refute these charges. Quite the contrary: They go out of their way to note that their approach isn’t always suitable. They are not, they say, presuming to solve every social problem, or shoving the free market at everyone. “We are not in the business of injecting entrepreneurship into organizations,” Boyer says. “We pick ones that already have it. It has to be a ‘fit’.” Indeed, a recent study of venture philanthropy by the Morino Institute, otherwise supportive, warned that one serious problem is this very “fit”: finding nonprofits that won’t crumple under the weight of striving for aggressive growth. Growing too quickly has killed many for-profit companies, and the danger is similar for nonprofits.

Venture philanthropists are becoming keenly aware of this hazard. Joe Shoemaker, executive director of Social Venture Partners in Seattle, says they have to be careful when working to help a nonprofit develop business plans. “We can screw things up if we don’t listen to what they need,” he admits candidly; an organization needs not only to have a growth plan, but staff and leaders who fully support it. Schwarz agrees: “This only works for people who already dream big and airy.”

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Big and airy; that’s what Michelle Boyers likes. She wants me to meet New Profit’s newest prospective investment–Elizabeth Stock, founder of New York’s Computers for Youth, an organization that takes bulk gifts of computers from corporations, reconditions them, and gives them to low-income families on a school-by-school basis. “You just have to meet this woman,” she gushes. “She’s amazing. Just incredible, dynamic, a great leader with a great idea–exactly what we’re looking for!”

On a cold Saturday morning, I head out to a Harlem school, where the school’s computer lab is crammed full of kids with their parents and guardians, all clicking away. Today, they’ll get six hours of Computers for Youth training on using software, sending email and surfing the Web. Then they’ll take the computers home, for free.

Stock is a 32-year-old engineer and former White House fellow who figured out a while ago that computers in schools weren’t enough; they had to be in kids’ homes too, and parents had to be involved. “That way it’s good for the parents, too. It’s something they do with their kids. It breaks down the barriers to technology, and it breaks down the barriers between them, too,” she says, leaning against a bench in the school’s lab.

I can see why Boyers likes her. Stock has been running this for only two years, but she’s already figured out innovative ways to measure her success with hard numbers. Last year, she surveyed the families that got computers and discovered several intriguing statistics, including that 75 percent used them for homework and that kids with non-English speaking parents used the computers slightly more than those with English-speaking parents.

She’s running on a tight budget now–barely $350,000 for six staff in 2000, including the value of the donated computers. Stock hopes to triple that figure this year. The outfit’s energy is incredible; they’re so hard-driving that her head of technology jokes that he falls asleep upright in the shower when he goes home after these daylong training sessions. A strong investment could really give a boost. In a few weeks, Boyers is hoping to convene a meeting with Stock and some of New Profit’s dot-com donors, to suss out whether it’s a good “fit”–if Stock is willing, for example, to work with the Balanced Scorecard.

I ask Stock whether nonprofits should really emulate for-profits. She wonders, in return, whether that’s the right question. “Most nonprofits already have to be pretty entrepreneurial just to start up!” she points out. And, as she notes, running a nonprofit is always a chancy endeavor. “You risk going out of business that way too. I’ve known people who just burn out. You take chances either way.”

I wander into one of the training rooms, where an impossibly peppy instructor is giving the families a pop quiz on what they’ve learned. “What’s a ‘link’? Does anyone know what a ‘link’ is?” she calls out. A teenager in a hooded sweatshirt looks up from his keyboard, puts up his hand: “Yeah. That’s something that holds the web together.”

Clive Thompson is the technology columnist for Newsday.