How New Forms of Philanthropy Are Squeezing Traditional Charities

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Carolyn Esparza, executive director of Community Solutions of El Paso, fights for every penny of her budget, and has for many years. To pay for her group’s recent conference, which explored how to connect prison inmates with their families, she went so far as to hunt small donations from “people with a good heart who are willing to go to Target to give us a gift card.”

Her battle for dollars is only getting harder. Pigeonly, a for-profit start-up launched by a former inmate, sells phone and internet services to help prisoners stay in touch with their families and friends. Just six years old, it has received more than $1 million in early-stage investments.

Notably, one of Pigeonly’s biggest backers is a venture-capital firm funded by philanthropists Mitchell Kapor, creator of the Lotus spreadsheet, and his wife, Freada Kapor Klein. The Silicon Valley couple supports many nonprofits through their foundation, but they also put their faith in market solutions and companies that, like Pigeonly, often work on the same issues as charities.

Mr. Kapor and Ms. Kapor Klein aren’t the only ones conducting philanthropy through unconventional means. The Omidyar Network, the philanthropic arm of billionaire eBay founder Pierre Omidyar, features both a foundation and a limited-liability corporation. Since its 2004 founding, it has split its commitments almost evenly, with $563 million going to for-profits and $618 million to nonprofits.

The highest-profile philanthropists to embrace the LLC are Facebook co-founder Mark Zuckerberg and his wife, Priscilla Chan. Through the Chan Zuckerberg Initiative, they are expected to give money to nonprofits, socially minded businesses, and political entities. The subtext: Why would we constrain ourselves to a foundation, that relic born a century ago, when we can donate, invest, and influence policy through a single, smartly branded business venture?

Interestingly, foundations themselves are rewriting the definition of philanthropy. Old-guard grant makers such as Ford, Kresge, and MacArthur are starting or expanding impact-investment efforts in which they act like investment houses, buying stakes in businesses they believe will produce some social good.

Common to all these efforts is the belief that the traditional grant-driven style of philanthropy isn’t enough to tackle today’s problems. “I don’t think that grant-making strategies are going to disappear into history,” says Joshua Mintz, general counsel of the MacArthur Foundation. “But standing alone, they may be insufficient.”

Where does that leave nonprofits, the biggest beneficiaries of old-style philanthropy? Proponents of these novel giving strategies assure charities they won’t be left out. The new philanthropy, they say, isn’t a zero-sum game pitting nonprofits against for-profits and political campaigns.

Still, these approaches challenge the longstanding primacy of charities as the chief vehicle for doing good. As donors and grant makers seek new ways to bring about change, nonprofits will increasingly face pressure to prove their worth in an age when an organization’s results matter more than whether it’s a 501(c)(3).

“Who cares about the tax status?” says Linda Rottenberg, chief executive of Endeavor, a nonprofit backed by the Omidyar Network. “The for-profit-nonprofit binary is officially over.”

From Advocate to Investor

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Foundations have reigned for decades as the philanthropist’s preferred choice to drive change. There are 87,000 of them, according to the Foundation Center, and each anchors a multibillion-dollar system in which tax-deductible donations are converted to grants, which in turn go to charities on the front lines of doing good.

Benjamin Jealous, 44, worked in that system for most of his career, fighting social justice in largely traditional ways — first as a journalist and later as a community organizer and activist. In 2013, from his post as head of the NAACP, he led a victorious crusade to abolish the death penalty in Maryland.

Today, however, Mr. Jealous is a partner with Kapor Capital, the venture-capital firm backing Pigeonly. Conventional philanthropy simply doesn’t work, he says. The Tax Reform Act of 1969, which ushered in the modern private foundation, has failed. Grant makers can point to few victories. Social problems remain as vexing as ever.

Pigeonly, Mr. Jealous says, is an example of how things could be. It has offered an internet-based workaround for thousands of inmates and their families who have struggled to stay in touch — a problem that years of efforts to overhaul the criminal-justice system have failed to solve.

“In a few short years, Pigeonly has achieved more in the marketplace than the movement has been able to achieve in Washington on this particular issue in the past three decades,” he says.

Such sweeping change — complete with tangible results — is the goal of many donors establishing LLCs or social-venture funds. They are obsessed with getting the best social return on their charitable giving. Not content to simply write checks to nonprofits whose work touches their emotions, they pore over annual reports and the results of randomized, controlled trials for proof that programs are bettering the world.

Not surprisingly, many of these donors are business entrepreneurs. “They don’t separate how they make money and how they want to change the world,” Mr. Jealous says.

No-Limits Philanthropy

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Kat Taylor is a prime example of this new breed of donor. While she and her husband, hedge-fund billionaire Tom Steyer, have joined the many traditional donors who’ve taken the Giving Pledge, their philanthropy is hardly traditional. Their TomKat Foundation, founded in 2006, serves as a wellspring for the multitude of philanthropic efforts they run. Among its beneficiaries: a nonprofit grant maker that supports sustainable agriculture and a for-profit commercial bank that provides loans to nonprofits and companies serving poor and minority populations traditionally underserved by the banking system. TomKat also supports two venture funds for start-ups that work in agriculture, energy, and other areas supported by the bank.

Ms. Taylor says she and her husband have built this hodgepodge of charitable tools because foundations are too limiting. Most are tied to the convention that they should only make grants that equal 5 percent of their endowments. That, Ms. Taylor says, means they are “fighting an uphill battle,” especially if their investments don’t contribute to their mission.

So Ms. Taylor and Mr. Steyer work as grant makers, bankers, and investors. They believe that range affords them deeper involvement — and a much greater chance of bringing about change.

“It’s a very different commitment and hope for outcome than entrenching your endowment wholeheartedly in the conventional economy and hoping that 5 percent of the earnings off of that endowment are somehow going to transform that conventional economy,” she says.

New Philanthropy’s New Order

Chris Michael

A small number of philanthropists are using LLCs and social-investing funds as vehicles for doing good. But how they think about philanthropy is leading some charities and grant makers to change.

IDENTIFY WHAT WORKS

For more than 80 years, the International Rescue Committee has operated in fairly conventional ways as it responded to refugee crises. But three years ago, it committed to improving its evaluation practices and began developing technology to better gather and measure data. It also hired evaluation experts to help identify which interventions work and which should be discarded.

The group aims to better serve refugees and offer donors evidence of its efficacy. “We have certainly found with some organizations, particularly corporate partners, this aspiration marks us out as different, and it’s one of the reasons they love working with us,” says Amanda Seller, senior vice president for global revenue.

Ms. Seller says her fundraising approach doesn’t assume data and evidence are the sole drivers of giving; many people are attracted to organizations that share their values, tug at heartstrings, or offer recognition.

Still, she says, the rise of market-oriented donors makes it critical that traditional nonprofits do more to demonstrate success: “If you care about refugees, is a gift to International Rescue substantially transforming the outcomes?”

INVEST IN INNOVATION

The role of competitive markets in innovation inspired JDRF to create its own LLC that invests donated money in diabetes research conducted by for-profit companies. The organization realized that some donors feel that “philanthropy on its own will not cure diabetes,” says Sean Doherty, chair of the Board of Directors of the group’s T1D Fund. They are intrigued by the chance to spark private investment in a specific area of research.

“There’s a real interest among high-net-worth individuals, in particular, in making their philanthropy as highly impactful as possible,” Mr. Doherty says.

So far, the fund has raised $60 million from private gifts and announced seven investments totaling more than $10 million.

MAKE A DIFFERENCE

The Philanthropic Ventures Foundation, a charity in Oakland, Calif., has long operated like a traditional community foundation, supporting local social-service charities. This year, sensing that donors want something different, the foundation looks to raise between $250,000 and $500,000 for an investment fund to provide start-up cash for entrepreneurs with a social bent.

James Higa, the foundation’s leader, is applying some lessons from his stint at Apple reporting directly to Steve Jobs. Grant making, for instance, happens quickly. After a 45-minute pitch, potential grantees are informed within two days whether they won support. The tax status of grantees or equity partners isn’t important, says Mr. Higa, as long as they are making a difference.

“Nonprofit, for profit — it really doesn’t matter,” he says. “Let’s help these great entrepreneurs get off the ground with as little friction as possible.”

Separate from TomKat, the couple has spent tens of millions on political advocacy. Recently, Mr. Steyer’s SuperPAC, NextGen America, gave $1 million to help mobilize immigrant voters in Virginia for the state’s election in November. He’s also funding an internet and broadcast campaign calling for the impeachment of President Trump.

Some donors find foundations’ influence on public policy wanting. Since 1969, federal law has prohibited grant makers from contributing to political campaigns. The LLC, by contrast, offers philanthropists absolute freedom to bankroll political groups. That was made clear in the Supreme Court’s much-debated 2010 decision in Citizens United v. Federal Election Commission, when the justices ruled that the government could not restrict corporate giving to political causes.

Experts say the court’s decision may inspire wealthy donors to reallocate some of their philanthropic dollars to LLCs and then on to political action committees, which promote issues that can help individual candidates for office. In September, the Emerson Collective, the philanthropic LLC created by Laurene Powell Jobs, purchased political ads that attacked President Trump’s goal of ending protections for undocumented immigrants who came to the United States as children.

The Omidyar Network says it has not given money to political campaigns, in part because it includes a foundation and wants to stay on the right side of the law. But Mr. Zuckerberg and Dr. Chan, who don’t have a foundation, appear to be interested in the political arena. They have brought on to the Chan Zuckerman Initiative several veteran political operatives — including David Plouffe, from Barack Obama’s presidential campaign, and Ken Mehlman, a strategist for George W. Bush — in policy roles. Announcing the moves, the couple wrote on Facebook that “part of creating sustainable social change is also helping to build movements.”

‘A Black Box’

Many nonprofit veterans sound alarms about how philanthropy is being redefined by the likes of Mr. Zuckerberg and Ms. Taylor. Ms. Esparza, of Community Solutions of El Paso, can see how the new strategies are prompting hefty investments related to her cause; she can only imagine what she might do with the $1 million in investments that Pigeonly has won. Last fall, she was scrambling to raise just $5,000 to produce a documentary on mass incarceration.

But for-profit ventures make her uneasy, particularly when vulnerable people are involved, like those in prison and their families. “To grow their business, they need more inventory,” she says of Pigeonly. “You’ve got to have more prisoners to use their services.”

The use of LLCs to influence politics also increases longstanding concerns that philanthropists are using money to purchase clout in a democracy. “I think there is a growing question of the role wealthy individuals play as philanthropists and political actors,” says Don Howard, president of the James Irvine Foundation. “If you conflate the two, it gets messy fast.”

Fears also abound about the lack of transparency with LLCs. As private corporations, they have few legal obligations to make information public. The Emerson Collective declined to discuss its activities with The Chronicle. The Omidyar Network has adopted the International Aid Transparency Initiative’s data-sharing standard and reports quarterly on its nonprofit portfolio. It doesn’t, however, produce regular reports about its for-profit investments.

“You truly have a black box” with an LLC, says Alicia Plerhoples, director of the Social Enterprise & Nonprofit Law Clinic at Georgetown University Law School. “You don’t have to report anything.”

Mr. Howard worries that this opacity makes monitoring the work of LLCs nearly impossible. “What’s the future of accountability look like for investors in social change?”

There’s a biting irony in this for charities. Donors who use LLCs often seek detailed information from nonprofits to demonstrate the return on their investments. Yet LLCs don’t have to provide much in return. Consequently, working with an LLC could be even more challenging than the grantor-grantee relationship; foundations by law are required to make at least some information publicly available, including grant awards.

Evidence First

How should charities navigate this changing landscape? Which types of nonprofits will thrive? There are no absolute answers, as philanthropists vary. But observers say the use of LLCs is accelerating trends already evident in charitable giving as baby boomers begin to give way to millennials and Generation Xers as the dominant donor class. Donors in the next generations, whatever their wealth, are focused on market solutions and innovation. Most of all, they want evidence of impact.

Pincho Factory

For these donors, “the first principle is: How do you solve the problem?” says Paula Goldman, vice president and global lead for impact investing at Omidyar Network. “They think a lot about scale. They think a lot about revenue models.”

The Omidyar Network’s list of “investees” offers at least some indication of what attracts this new breed of donor. It includes many young, tech-driven nonprofits seen as innovators, including Change.org (founded in 2007), the Khan Academy (2006), and DonorsChoose.org (2000). Traditional mainstream charities are largely absent.

Endeavor has received $22 million from the network since 2008. While a nonprofit, it aims not to amend social ills but to help capitalism do the job. Its work is infused with a Silicon Valley-inspired faith in the entrepreneur. In places where it believes increased entrepreneurship could fuel economic growth, it gives budding businesses cash, support, and mentoring. In 2012, the organization launched a for-profit investment vehicle whose profits boost its nonprofit work. Ms. Rottenberg, the group’s CEO, says millennials with money are hungry for new models of doing good like Endeavor’s. Previous generations held charities in high regard, but young people today embrace alternatives, like investing in for-profit companies.

They believe in capital markets, they like metrics, and they like seeing impact, she says. “Being able to recycle their capital has so much more power to it than every year getting the call” to donate to a nonprofit. Young donors demand “a sense of progress,” she adds, and to get it, they’re willing to disregard the distinctions between charities and businesses. “They have really good intentions at heart, but they’re also pragmatic.”

Foundations Still Strong

It will take years to determine whether Mr. Zuckerberg, Ms. Taylor, and the like are changing the fundamentals of giving. Foundations remain popular, even in Silicon Valley. The number in San Mateo and Santa Clara — the counties at the heart of the tech capital — increased 47 percent from 2005 to 2015.

In theory, the future could look bleak for nonprofits that don’t espouse market solutions or can easily measure results. The Omidyar Network and Chan Zuckerberg Initiative have shown little inclination to back, say, food pantries or operas, though CZI recently announced it will support more Bay Area groups, including some that work on homelessness.

But Omidyar Network’s Ms. Goldman argues that LLCs and other new giving vehicles won’t “cannibalize” traditional philanthropy. Community foundations and locally focused grant makers will continue to support organizations addressing needs in traditional ways. “For-profit investments are not a substitute for grant making; they’re a complement to grant making,” she says. “The two are not meant to compete; they’re different tools.”

Janet Camarena, director of transparency initiatives at the Foundation Center, adds a similar cautionary note. The creation of new philanthropic forms shouldn’t trigger a full-blown “existential crisis,” she says. But it should wake nonprofit leaders up to the fact that newly wealthy donors are eager to experiment and won’t reflexively support nonprofits if other methods seem more promising.

From an optimist’s perspective, the competition that LLCs inject into the nonprofit world could improve it. Foundations, for instance, must recognize that grantees ideally suited to carry out their missions now have alternative sources of funding, says the Irvine Foundation’s Mr. Howard. “It ups the ante for foundations in terms of our performance. New entities require us to be even better grant makers. It increases the pressure on us to be effective.”

Nonprofits themselves may be similarly forced to double down on efforts to show impact, regardless of how many philanthropists turns to LLCs.

Says Endeavor’s Ms. Rottenberg: “No one wants to just throw money out the door anymore.”