We’ve come across many cases where a funder took a leading role in creating a now-major nonprofit. This has been surprising to us: it intuitively seems that the people best suited to initiate new organizations are the people who can work full-time on conceiving an organization, fundraising for it, and doing the legwork to create it. Most successful companies seem to have been created by entrepreneurs rather than investors, and the idea that a philanthropist can “create” a successful organization (largely through concept development, recruiting and funding, without full-time operational involvement) seems strange. Yet we’ve seen many strong examples:
- The Center for Global Development (which we are generally impressed by) got its original start due to the philanthropist Ed Scott.
- Ed Scott also played a leading role in creating several other organizations: “Besides co-founding CGD, he founded the advocacy organization DATA (Debt, AIDS, Trade, Africa) together with Bill Gates and George Soros (DATA has since joined forces with the ONE Campaign). He founded Friends of the Global Fight, which provides support in the U.S. for the Global Fund to Fight AIDS, Tuberculosis and Malaria, and has served as a model for similar organizations around the world. And he founded the Center for Interfaith Action on Global Poverty, a global center of excellence on interfaith action.”
- The Bill and Melinda Gates Foundation has been integral in the creation of many of the organizations it has made major grants to, such as GAVI (which has received several of its largest grants), Alliance for a Green Revolution in Africa, Innovative Vector Control Consortium, Foundation for Innovative New Diagnostics, and PATH Malaria Vaccine Initiative.
- We previously wrote about the Sandler Foundation and its role in founding ProPublica, Center for American Progress, Center for Responsible Lending and Washington Center for Equitable Growth.
- We believe that the Center on Budget and Policy Priorities (whose track record generally impresses us in terms of political influence) is another case where a funder took the lead in conceiving, and recruiting for, a new organization. Our source is not public at the moment, but we hope to write more in the future as part of our History of Philanthropy project.
- I skimmed the Wikipedia pages of 10 major think tanks that I’ve come across in the context of U.S. policy, I note that five of the ten seem to have had a funder play a major role in initiating them – either because they started as a foundation, were conceived by a foundation, or had a philanthropist as one of the co-founders. (The five that seem to fit this description are Brookings, Cato, Demos, Heritage and Roosevelt. The other five I looked at were AEI, Manhattan, Hudson, Urban and EPI.)
This is not anything approaching a comprehensive list. It’s a set of organizations we’ve come across in our work, many of which we perceive as prominent and important. I would struggle to think of many analogous cases of for-profit companies for which the original concept, recruitment, etc. came from investors rather than full-time founding employees.
Assuming this difference is real, what might explain it? While I’m not sure, I’ll list a few speculative possibilities:
- A nonprofit startup must raise funds from a relatively thin and fragmented market. Investors ultimately all want the same thing (returns); philanthropists want very different things, and a nonprofit won’t be able to get off the ground if it can’t find a match. One symptom of “philanthropists want different things” is that nonprofit proposals are generally highly tailored to the values of funders. Thus, people with ideas may choose not to write up and shop proposals until they’ve identified a highly interested funder.
- A nonprofit startup also doesn’t have an analogous option to bootstrapping to prove its value and raise its negotiating power. It can hope eventually to reach the point where its donor base is highly diversified, but early on nonprofits will very often live or die by major funders’ preferences.
- Starting a new company is generally associated with high (financial) risk and high potential reward. But without a solid source of funding, starting a nonprofit means taking high financial risk without high potential reward. Furthermore, some nonprofits (like some for-profits) are best suited to be started by people relatively late in their careers; the difference is that late-career people in the for-profit sector seem more likely to have built up significant savings that they can use as a cushion. This is another reason that funder interest can be the key factor in what nonprofits get started.
- The dynamics of competition may be different. If someone sees a for-profit with a good concept and poor execution, s/he might start a competitor. Someone who sees a nonprofit with a good concept and poor execution (and a solid funding situation) might be more likely to try to improve the nonprofit, e.g. by working for it. If true, this might make funder-initiated organizations – which, it seems, would be hard to find the right leadership match for – more viable on the nonprofit side than the for-profit side.
Our tentative view is that funders should think of “creating an organization” as a viable possibility, though as something of a last resort, since it is likely to be a much more intensive project than supporting an existing organization.
Comments
Rich people frequently start nonprofits. But they frequently start companies too (serial entrepreneurs are a thing). It could be that in some cases rich people will start companies without being heavily involved in them but call themselves founders anyway. For example, Peter Thiel is referred to as a “founder” of Palantir, but it seems plausible to me that he’s never spent more than 10 hours a week on it. (Note that he’s apparently never been the CEO.) It looks like Elon Musk has a similar relationship with SolarCity: it was his idea, he funded it, and he owns most of the stock, but he hasn’t done that much work on it. These are probably what “funder-initiated” startups look like in practice: a rich person finds a team to cofound the startup with and pays the team to do most of the work.
With this reframe, you could see funders who initiate the creation of nonprofits as “philanthropic entrepreneurs”. So the upshot is that it’s hard to be a philanthropic entrepreneur unless you’re already rich. This suggests a market failure in the form of non-rich philanthropic entrepreneurs not having a good way to get connected with, or demonstrate competence to, funders. Ideally, EA Ventures will be the Y Combinator of nonprofits and give promising teams the funds they need to create a proof of concept of their idea and then take that proof of concept to larger funders.
(I realize Y Combinator is already funding nonprofits, but they are doing the same thing everyone else in the nonprofit world is doing and funding nonprofits that already have a proven model. I think the Y Combinator of nonprofits needs to invest at an earlier stage because people are less willing to take personal financial risks in order to get their nonprofit off the ground. Quitting your job in order to start a nonprofit and hoping that it gets funded is way riskier, probably partially due to the donor interest thing you mention in the first bullet point.)
It seems that a philanthropist plays the role of both investor and paying customer. I think the issue is not so much that there are few investors in philanthropy, but that there are few customers. This makes it more attractive to start a project in response to demand from one of those customers.
I would expect industries with a small number of big customers to be closer to the customer-initiated model, and for charities with a large number of small customers/donors to be closer to the founder-initiated model.
I’m surprised that you’re surprised, Holden. Philanthropies constitute a business sector that can concentrate on finding problems that a) need attention, and b) can be impacted by investments of money. The “intersection of importance and opportunity,” as we used to say at the JM Kaplan Fund. In many cases ? by no means all ? no potential grantee organization is working at the intersection. The philanthropy can either entice an already-exisiting NGO to go there (that was the Kaplan m.o.) or it can set up a new NGO (as described in your note). Your list of successes is helpful, but I can assure you that the list of disappointments is as long or longer.
Anyway, thank you very much for helping us all think more critically about this funny business of ours. Cheers.
FYI, looks like the Ed Scott bullet should be a quote (from the CGD Reflections post).
Great post — this is something I’ve seen and wondered about but hadn’t seen articulated.
One possible reason there do not seem to be as many private-sector examples of funder-initiated startups is that companies find it more convenient to start new lines of business within an existing corporate structure. These can then be spun out into separate companies if they are successful.
Examples of recent spinoffs that fit into this paradigm include:
– Windstream, a major cable TV provider, spun off its fiber and real estate business into a new company, CS&L.
– Inland American, a real estate investment trust, started and then spun off a hotel management business, Xenia Hotels and Resorts.
– Kimball International establishing Kimball Electronics to build electronic organs, then spun it off after the business had grown.
Sometimes it’s hard to tell if a line of business was started with an eye toward a spinoff or not, but in at least some cases this approach was the clear intent from the beginning — Juno is one example that comes to mind.
Thanks for the comments, all!
John: Palantir and SolarCity are good examples of “funder-initiated startups” that might be analogous to the nonprofits I’ve listed. There are probably others as well (here’s one set of possibilities). Still, my impression is that the phenomenon is much more common in the nonprofit world.
I’m somewhat skeptical that the main issue here comes down to a shortage of very early-stage funding. Ashoka, Echoing Green and Draper Richards Kaplan all provide very early-stage funding at some scale, and the initial funding to “get off the ground” is often a realistic amount to raise from an entrepreneur’s personal connections. In my view, the bigger issue is that even if someone can “demonstrate their competence,” this still doesn’t guarantee finding a funder who shares their values/goals, and some nonprofits (particularly those that need senior people to get started) need quite a bit of funding in order to provide an attractive career option. For most of the nonprofit startups I listed in this post, I think the initial funder provided a great deal of funding, rather than a small grant to facilitate a proof of concept. One could say that what we really need is more funders willing to provide a great deal of funding (millions of dollars) up front to unproven entrepreneurs, but I’m not sure there’s enough to go around for that model. To be clear, I think that small, early-stage “proof of concept” grants can make a huge difference and I would see a lot of potential in a good funder focused on these sorts of grants; I just don’t expect such grants to have much impact on the dynamic described in this post.
Paul: that’s possible; I don’t know whether this is the case.
Conn: Your analysis of why funder-initiated startups make sense is logical, but would seem to apply equally to for-profits, so I think more explanation is called for.
Good point re: the list of disappointments. That’s probably true. I didn’t mean to imply that funder-initiated startups usually succeed, only that they seem to account for a pretty significant portion of major nonprofits.
Ian: I think spinoffs are a different category, and one that I know much less about. For a given spinoff, it’s going to be hard to distinguish (from the outside) between cases where someone provided money/ideas/recruiting without being involved full-time, and cases where the initiator of the new project was more intensely involved in the early day-to-day.
Holden: I think your response to John basically expresses the sentiment I had in mind.
On that story, it seems like it might be nearly as good to provide a small amount of early funding + a commitment to substantial funding conditioned on demonstrated success, rather than providing a lot of up front funding. That sounds much more attractive to me as a philanthropist, but it doesn’t sound that much worse from the perspective of founding a non-profit.
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