Is it crazy for promising venture-backed start-ups to commit time and stock to nonprofits even before making money themselves? Former VC Gib Myers doesn't think so
Making the rounds on Sand Hill Road in 1997, Gib Myers sounded more like a supercharged entrepreneur than the soft-spoken venture capitalist most people knew him to be. For 27 years, as a partner at Silicon Valley's Mayfield Fund, Myers had championed investments in early-stage companies. Now, for the first time in his life, he was rallying support for a start-up of his own. And unlike the companies in Mayfield's portfolio, Myers's new business had no designs on profitability.
Practically overnight, Myers had become consumed with the idea of transferring his venture-financing know-how to the nonprofit sector. He had hit on an audacious -- albeit noble -- idea: he would ask entrepreneurs at early-stage companies to buy into a "venture philanthropy" foundation. The foundation would be funded with donations of pre-initial-public-offering stock and fueled by entrepreneurs' hands-on involvement with nonprofits.
It wasn't just that nonprofits had long struggled to survive from one funding infusion to the next -- or that they typically lacked the resources to strengthen their own management and grow their operations to better meet their missions. As Myers surveyed the 36-city Bay Area -- where nonprofits were wrestling with everything from sheltering the homeless to improving school test scores -- those problems were obvious and compelling enough. But what really moved Myers was the potential to mitigate those problems by redirecting some of the enormous wealth and talent he saw all around him.
"We've got this huge entrepreneurial sector that's been so successful, but by and large they're not participating in the community," says Myers, 59. "My goal, the real ultimate vision, is to change the culture, change how the entrepreneurial sector thinks about the community. They're all heads down, thinking about their companies, which is kind of what they should do. But what we're trying to say is that even when you're in the trenches, you can integrate a community culture and begin to demonstrate that as a value early on."
Thus inspired, Myers christened his fledgling venture the Entrepreneurs' Foundation (EF) and began peddling his influence in Silicon Valley to open up some doors to the idea. "You could feel that he was genuinely charged up and excited about this," remembers Jeff Brody, a partner at Redpoint Ventures who met with Myers. "He was feeling the entrepreneurial fervor."
From his fellow VCs Myers sought not money but rather a line into the entrepreneurs whose companies they financed. Who else, after all, was better positioned to suggest that a start-up donate $100,000 worth of equity and companywide volunteer time to Myers's new foundation? "The VCs were the leverage," says Myers, who also made a point of personally courting entrepreneurs.
Some, like Emil Wang, the 49-year-old CEO of Latitude Communications Inc., had already made community involvement a priority at their start-ups. Myers convinced them that joining EF would be an important additional step. "As he laid out his vision I could see a whole different approach to venture philanthropy," recalls Wang. "One of the secrets to Silicon Valley is the infrastructure -- the network of VCs, lawyers, and bankers who all get it and who know how to help entrepreneurs. For young companies EF is the equivalent to that infrastructure for community service. It provides an analogous network for philanthropic activity."
The 73 start-ups that have so far joined EF not only have begun to make community involvement a core value in their businesses but also have forged a tie with Silicon Valley's top-tier elite. Thanks to Myers's recruiting abilities, EF's board reads like a veritable Who's Who of the valley. It includes Kleiner Perkins Caufield & Byers partner Brook Byers and Silicon Valley Bank chairman John Dean. That one-two punch of power and influence gives EF a running start at becoming a model for giving among early-stage companies.
In an interview in EF's spanking new offices, in Cupertino, Calif., Myers candidly admits that for most of his working life he embodied all the traits he now seeks to change in Bay Area entrepreneurs. "I'm typical," he says. "I spent all my time at Mayfield, head down, doing Mayfield work and taking care of my family." His limited outside involvement was with his grad-school alma mater, Stanford University. As chair of the Venture Investment Group there, Myers led seven other area VCs in investing small amounts of the school's money -- $10,000 to $25,000 a shot -- in venture deals.
That strategy generated returns to Stanford of more than $100 million and informed Myers's thinking about how to structure EF. Instead of tapping into start-up growth potential by buying into the venture deals, however, EF would get in on the action through gifts -- warrants for $100,000 worth of early-stage stock -- from each participating company. Liquidity events, such as an IPO or a sale of the company, would enable the foundation to sell shares and invest the proceeds in growth- oriented nonprofit organizations. "Stock is kind of our currency out here, so I thought, 'Why can't we take this magic of stock and make it work for the community?" says Myers.
His decision to fund EF through start-up equity distinguishes Myers's brand of venture philanthropy from other, more established efforts. (See "A Venture-Philanthropy Sampler," page 88.) It also makes the EF model especially vulnerable to market gyrations. For example, the value of the foundation's portfolio dipped from a high of $10 million in early November to $6 million in January. Myers acknowledges that the recent dramatic market drops signal a slowdown in EF's philanthropic investments, which means that the foundation must be especially vigilant in its efforts to kindle a community-minded culture in its member companies.
Like other venture-philanthropy efforts, EF invests in the infrastructure and internal management of the nonprofits rather than in specific projects. Despite mounting needs for social services and bigger public expectations that nonprofits should play a role once performed primarily by the government, the nonprofit sector has not scaled up to keep pace with increased demand. Nor has the traditional funding structure provided nonprofits with any incentive to do so. As a result, "capacity building is the number one issue for most nonprofits today," observes Jim Thalhuber, president and CEO of the National Center for Social Entrepreneurs, in Minneapolis, a nonprofit management consultancy for nonprofits.
It's fitting, then, that bolstering nonprofits' capacity to serve bigger markets is one of EF's priorities. "Our approach is to provide long-term, substantial blocks of funding and expertise to support the management team, the mission of the organization, and everything that's required to fulfill that mission," explains F. Robert Miller, whom Myers hired from the for-profit sector as EF's first CEO last spring.
"Why can't we take this magic of stock and make it work for the community?" Myers asked himself.
The foundation has specifically targeted nonprofits whose missions serve children and education, and it seeks out leaders who show a desire and an ability to grow their operations. Julien Phillips, the executive director at San Francisco-based Partners in School Innovation, clearly fit that profile. A management consultant with McKinsey & Co. for 20 years before founding his nonprofit education venture in 1993, Phillips had long sought to run his outfit as a business, not a charity. By 1999 he'd deployed his method of monitoring and improving teacher and student performance in 8 Bay Area elementary and middle schools, and though expansion had leveled off, he'd mapped out a plan for increasing the number of schools to 17 by 2004. "That seemed like the maximum we could expect to achieve with the funding we believed to be feasible," Phillips says.
Then, midway through 1999, EF approached Phillips. Only 40 companies had so far signed on with EF, and just 5 had gone public, but Myers was none- theless eager to try out his model. Having heard about improved test scores at the schools Phillips had worked with, Myers conducted a bout of VC-style due diligence on Partners in School Innovation. His conclusion: if money weren't a constraint, the nonprofit program could easily be expanded to many more schools. For the 1999-2000 school year EF cashed in some of its stock donated from start-ups and put $325,000 to work for the nonprofit.
With support from EF, Phillips spent that first round of financing recruiting a new senior-management team (paid at competitive Bay Area rates), expanding the rest of his professional staff, and refining his business plan. Phillips also relied on two EF-supplied start-up consultants to hammer out what he says are "more concrete and tangible" goals. Now, he says, Partners in School Innovation is on track to more than triple the number of schools it works with, from 8 to 27, by the 2003-2004 school year.
It's much too soon to assess whether the increased capabilities that EF has afforded Partners in School Innovation will in fact improve the nonprofit's influence on education. Nonetheless, flush from a second round of EF funding for the 2000-2001 school year -- $750,000 -- Phillips bets the venture- philanthropy model will yield results.
Although Partners in School Innovation marks EF's first significant foray into venture philanthropy, Myers intends to hold it up as an example in encouraging traditional foundations to shift their focus to nonprofits' long-term management and infrastructure needs. And some leaders in the nonprofit sector wager that Myers has a shot at shaking things up. "This could really change the way the nonprofit sector works," says Bill Shore, founder and executive director of Share Our Strength, an antihunger and antipoverty organization in Washington, D.C. "It's an opportunity to create a responsive philanthropic marketplace...to provide incentives and enable high-performing nonprofits to scale up."
The hands-on involvement required of all EF participating companies -- an overlay that Myers added at the suggestion of Kirk Hanson of the Stanford Graduate School of Business -- could also take hold as participating companies mature and become role models for others. "We have a tremendous potential to create a new mind-set among start-ups," observes Mayfield managing partner Kevin Fong, who has personally referred half a dozen companies to the foundation. "We want them to make community involvement a habit."
As of this writing, however, EF's phones aren't ringing wildly with calls from companies eager for nonprofit involvement. For all EF's high-level support among area VCs, only Mayfield has made it a policy to encourage entrepreneurs to sign up for the program. And as the market turmoil that began in April 2000 dragged on toward year's end, many entrepreneurs politely stalled when asked to donate the stock and time that EF requires. Redpoint's Jeff Brody estimates that one in four entrepreneurs he's recommended to the foundation has joined.
Even among some of the companies that have signed up, the dramatic downturn in tech stocks has drained some energy from volunteer work. "So," says Neela Benjamin Gentile, a former nonprofit executive director who now builds the outreach programs and coordinates nonprofit assignments among EF companies, "we have to start small and be really creative."
To assess volunteers' interests and try to spark their participation, Gentile visits each EF participating company and personally surveys its workforce. Although EF invites participating companies to come up with their own choice of causes, Gentile more typically brokers a relationship between a company and nonprofits that she believes can offer assignments that will be consistent with the company's corporate image and will appeal to its employees' interests.
After meeting with the human resources director at EF member Nuance Communications, for example, Gentile introduced that company to the nonprofit village banking institution FINCA, which is launching an international microlending program for poor women. Nuance is developing plans to donate its wireless-communications technology and services to the bank and its customers.
Usually, Gentile steers her start-up companies to volunteer projects that yield concrete results: painting a wall with Habitat for Humanity, for example, or sorting through barrels of donated canned goods. Such basic assignments are typical of what EF describes as the first phase of community involvement, the phase at which two-thirds of its participating companies stand right now.
The EF model calls for companies to progress through four phases within a two- to four-year time frame, making community involvement an integral part of the corporate culture and strengthening ties with particular nonprofit organizations at each step. Along the way, EF hopes to teach member companies to pursue nonprofit projects on their own. EF's contracts also allow each member company to set aside up to 50% of its equity contributions for its own philanthropic investments.
In the long run, that aspect of EF may shape management strategies on both sides of the profit line. "It's small entrepreneurial organizations dealing with small nonprofit organizations," observes Dave Anderson, a managing director at Sutter Hill Ventures and an EF board member. "There's an awful lot of knowledge transfer going on there."
Although no company has yet to move beyond EF's second phase, some have begun bonding with nonprofits. What began in mid-2000 as a single food drive by software developer Keynote Systems, for example, is now a weekly routine. Every Thursday morning, six Keynote staffers volunteer for three hours, manning the kitchen and serving meals at the Samaritan House soup kitchen in San Mateo, Calif. Similarly, Latitude Communications has built on its sponsorship of a triathlon that raised $19,000 for a nonprofit called VIA, which provides rehabilitative services for disabled children and adults. Five months after the triathlon (in which 30 employees competed, including CEO Wang) Latitude employees joined in harvesting Christmas trees to sell, also to benefit VIA.
As Wang sees it, his work with VIA and other nonprofit institutions is a responsibility, not an obligation. He also views Latitude's community role as crucial to making his company a place where people will want to build long-term careers. "Young companies are often very happy to spend unbelievable amounts of time and money on team-building events that have no cost benefit whatsoever," Wang says. "I view community service as team building that always produces rewards that exceed the investment."
Five years from now EF hopes to have recruited 500 companies with CEOs who adopt the EF mission. Yet for all its aggressive-growth goals and its promises of providing a "high touch" outsourcing service for fulfilling start-ups' special volunteer interests, EF can't escape the economic constraints now facing early-stage entrepreneurs as well as nonprofit directors. Because of the flattening IPO market, many start-ups are under more pressure than ever before to keep their heads down -- just as Myers did throughout his career at Mayfield. And even the slightest "downtick" in the economy inevitably increases the demand for nonprofit services.
"The model is good, but they have to execute," emphasizes Mario Morino, who has worked in the nonprofit sector for eight years and has raised $30 million for his own venture-philanthropy fund, in Washington, D.C. "The real question is not, How do we raise money and increase involvement in the community? but, How do we make all of that produce greater results?"
EF also must be mindful of the enormous cultural divide that separates venture-backed companies from the nonprofit sector. "Certainly among management, but even more so among board members of nonprofits, venture philanthropy causes a lot of fear and trepidation," says Thalhuber of the National Center for Social Entrepreneurs. Among other things, Thalhuber says, nonprofits fret that VC types will push for a high-tech, bottom-line approach that's implausible when battling enormous social problems. "The venture philanthropists have to understand that they can't just barge in the front door and start fixing things," he says.
"For us to be effective, we have to introduce ideas, resources, and other things in a way that can be assimilated and digested by the nonprofits," agrees EF CEO Miller. "We have to respect both of these cultures and figure out a way to bring them together."
Indeed, aligning the expectations of resource-starved nonprofits with the radically different expectations of Silicon Valley start-ups, some of whom think they can change the world overnight, promises to be an extremely difficult balancing act.
Even as EF strives to gain a foothold in northern California, Myers has taken his venture-philanthropy model on a road show of sorts, seeking to prove that his plan is sustainable and replicable in other venture-capital- intensive economies. And so far, entrepreneurs have responded enthusiastically. By the end of this month, Myers says, EF plans to have agreements with affiliates in Austin, Dallas, Atlanta, and New England.
"I think we're going to be more successful in other areas than we have been here," Myers says. "People here are so busy and so intense about what they're doing that just making a couple of calls for EF is sometimes too much to fit in." His voice is tinged with regret, but Myers is not abandoning his dream of reforming Silicon Valley. "We still have to find a way," he says, "to make the Bay Area catch on fire."
D.M. Osborne is a senior writer at Inc.
A Venture-Philanthropy Sampler
Founded in 1980 by Yale Law School graduate Bill Drayton, the granddaddy of nonprofit venture philanthropists identifies and invests in social entrepreneurs in 40 countries worldwide. It had $9 million invested in 2000.
Founded in 1998 by Mayfield former general partner Gib Myers, EF invests in growth and infrastructure needs of local nonprofits, relying on donations of pre-IPO equity from venture-backed companies in Silicon Valley and the Bay Area. Its portfolio is valued at $6 million.
New Profit Inc.
Founded in 1997 by nonprofit veteran Vanessa Kirsch, New Profit invests in social-minded entrepreneurs and nonprofits. The $7-million fund has $5.3 million invested in four-year commitments to seven organizations.
New Schools Venture Fund
Redwood City, Calif.
Founded in 1998 by Kleiner Perkins Caufield & Byers VCs John Doerr and Brook Byers, this fund invests in both for-profits and nonprofits benefiting public schools. It's a $20-million fund.
The Roberts Enterprise Development Fund
Founded in 1997 by Kohlberg Kravis Roberts & Co. founding partner George R. Roberts and his wife, Leanne, REDF offers management assistance, technical support, and funding to Bay Area nonprofits that provide services to low-income and homeless populations. Since its founding, REDF has invested more than $16 million.
Robin Hood Foundation
New York City
Founded in 1988 by investment banker Paul Tudor Jones II, this fund invests in New York City nonprofits involved with job training, homelessness, and education. Since its founding, the Robin Hood Foundation has invested nearly $100 million directly into organizations.
Social Venture Partners
Founded in 1997 by Aldus Corp. former president Paul Brainerd, SVP leverages money and expertise donated by area venture capitalists and business and technology professionals to build capacity in nonprofits in Washington's Puget Sound region. It has invested $2 million to date.
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