New Economy New Philanthropy

Not long ago, at an estate-planning seminar, a Boston money manager told this story: He paid a call on an older couple who lived on Cape Cod. They had a modest home and kept the heat too low for his taste. But in their bank account, the money manager discovered, they were sitting on several million dollars.

Case Studies

To illustrate how the New Economy is transforming both giving and good works, CommonWealth profiles five local organizations, each still in its infancy. The Hestia Fund is a giving circle—a hands-on social investment group—made possible, in part, by New Economy wealth. New Profit aims to funnel the money and talent of donor-investors into results-oriented social change. TechFoundation is bringing philanthropic and intellectual resources to bear on erasing the technological gap between nonprofit organizations and for-profit corporations. Villa Tech, a spin-off of an established inner-city agency, is bringing high-speed Internet access to all 900 units of a low-income housing project in Boston’s South End so that residents can participate fully in a digital America. And, finally, CitySkills, a nonprofit outgrowth of a for-profit Web-development company, seeks to improve urban job-training programs so that minorities can gain marketable information-technology skills.

You can read these profiles at right.

Welcome to Massachusetts, famous for its penny-pinching Yankees. It’s not just a stereotype: The Bay State ranks fourth among the 50 states for household income, but the state’s level of charitable giving, according to most measures, leaves it near the bottom. NewTithing Group, a philanthropic research organization in San Francisco, finds that Massachusetts taxpayers with adjusted gross incomes up to $100,000 are giving about what they can afford, but those with higher incomes could more than double–or, for the wealthiest, more than quadruple–their donations to charity without feeling a pinch. Last year, through legislation and a ballot initiative, Massachusetts approved a new income-tax deduction for charitable giving, bringing the state into line with others as well as the federal tax code, but whether that will open wallets any wider remains to be seen.

Nor is the rest of the country digging that deep. In the United States as a whole, giving as a percentage of personal income has remained essentially the same over the past 30 years, hovering around 2 percent. NewTithing Group says personal giving could climb to 3.7 percent without making a dent in personal wealth; collectively, Americans could comfortably give 70 percent more than the estimated $143 billion donated to charity by individuals in 1999.

The time may be ripe for a turnaround. Giving from individuals, foundations, bequests, and companies together increased nine percent between 1998 and 1999. There are also more “mega-wealthy” Americans than ever–more people who are capable of giving away very large amounts. In 1994, 528 individuals made gifts in excess of $1 million. Four years later, three times as many people, or 1,500 individuals, made grants that size.

Some of that money can be traced to the growth of the high-technology sector and boom times on Wall Street, which have combined into a potent economic and cultural phenomenon. The so-called New Economy, including the stunning wealth it has created virtually overnight, is reshaping the country from Seattle to New York’s Silicon Alley. And the state that Gov. Paul Cellucci likes to call “the dot-commonwealth” is in the thick of it: High-tech firms dot Boston, have virtually commandeered Cambridge, and have brought new wealth to towns along Route 128. Even conservative Boston law firms have had to follow the New Economy drumbeat, making their dress codes more casual and their starting salaries more generous, to grab onto talent. Why should the world of charity be immune to the cultural contagion of business innovation?

In the Bay State, the New Economy is rewriting the rules for doing good: New donors are making donations in new ways; new kinds of service projects are being created by a new class of do-gooders sometimes referred to as “social entrepreneurs”; and old-style nonprofit organizations and foundations are finding they need to operate more like for-profit businesses if they’re going to survive–and thrive–in this new philanthropic world.

It’s too early to say whether any of this will change Massachusetts’s reputation for stinginess. But great wealth can be turned into great good–if the wealthy can be turned into donors. “The perceptions are right that there’s greater potential than has been tapped into,” says Vanessa Kirsch, founder and president of Cambridge-based New Profit, a venture philanthropy fund that aids nonprofits. “There are organizations we are really eager to invest in and don’t have enough investors.” As it is, Kirsch says, only slightly more than half of the donors to New Profit are from Massachusetts.

So far, the dot-commonwealth doesn’t have its own high-tech titans on the scale of Microsoft’s Bill Gates or Jim Barksdale, the former CEO of Netscape, who give away many millions at a time. But there are certainly New Economy execs and their families who are giving out lesser, yet still significant, sums–and doing so more quietly.

New Economy donors are often young, sometimes under 40, and suddenly find themselves, on paper at least, with more money than they know how to spend. They have created their own wealth (not inherited it), they’re new to giving, and they’re turned off by “checkbook” philanthropy–the arms-length shelling out of cash to worthy but largely unchanging entities. They want to make a mark with their money, but haven’t the time or the patience for the traditional courtship rituals of philanthropy.

As a result, charities are starting to put their pleas in terms these prospects can understand. Nonprofits are learning to make a 10-minute “pitch” to donor-investors, as they’re sometimes called, rather than write a lengthy grant proposal–the philanthropic equivalent of fast-forwarding from the pony express to instant messaging.

Indeed, a kind of philanthropic cottage industry is growing up around the New Economy donor., based in Newton, allows donors to make charitable contributions instantly on its Web site. The Hauser Center for Nonprofit Organizations at Harvard’s Kennedy School of Government last spring held its first workshop for wealthy individuals interested in strategic philanthropy. And craigslist, an online community Web site in the San Francisco Bay area, held its first Boston-area nonprofit venture forum last October in Cambridge. The forums, a twist on a Silicon Valley venture-capital ritual, give local nonprofits the chance to make their pitch for funding to a roomful of potential benefactors.

Service, with attitude

The advent of the dot-com business culture has coincided with the rise of a new generation of social activists, now in their 20s to early 40s, who take a businesslike, results-oriented approach to starting and running nonprofit organizations. They are, as J. Gregory Dees, a Stanford business school professor, has written, “change agents in the social sector” who are constantly innovating, adapting, learning, and charging ahead without regard for the limited resources currently at hand. In sharp contrast to traditional nonprofit leaders, who may see their mission of service as never-ending, many in this new generation hope to put themselves out of business as soon as possible.

Culturally–and politically–these activists are children of the ’90s rather than the ’60s. They neither fawn on government nor plot to overthrow it. More strikingly, they neither worship profit nor see it as the root of all evil. To them, there is no contradiction between private enterprise and social action, and they have consciously blurred the lines among the public, private, and nonprofit (or “third”) sectors. Instead, they draw on aspects of all three. With a nod to the start-up business climate all around them, they call themselves–at least those who are not put off by the ostentatiousness of the title–“social entrepreneurs.”

As a media-certified trend, social entrepreneurship has its skeptics. Some argue it is far from a new phenomenon–Goodwill Industries, founded in Boston in 1902, is one local example of long standing. But today, the entrepreneurial approach to social action is “gaining critical mass,” says Tom Reis, venture philanthropy director at the Kellogg Foundation in Battle Creek, Mich. And by at least one measure, Massachusetts has a disproportionate share of social start-ups. The Echoing Green Foundation in New York hands out seed money and technical support to individuals who are creating what it calls “innovative public service projects.” To date, there have been more than 300 Echoing Green fellows in the US and abroad. Massachusetts claims 25 of them, the third-largest number of fellows, behind California with 50 and New York with 32.

The outcomes-driven social entrepreneurs have found natural allies in the New Economy donors who want to have a social impact, and one way they’ve joined forces is through so-called venture philanthropy. The increasingly popular practice–conceived apart from, but finding resonance in, the New Economy–applies the principles of venture capital to the nonprofit sector. It’s essentially a Darwinian exercise that feeds cash to the fittest young organizations. But it is a small slice of the philanthropic pie. Of the estimated $90 billion put into non-religious philanthropy nationwide, says Allen Grossman, a professor at the Harvard Business School, there are only eight or 10 venture philanthropy funds, which gave away something like $10 million last year. “It’s getting a lot more press than money so far,” Grossman says.

Gaining a head for business

As those seeking funding for nonprofit start-ups increasingly think like the operators of for-profit businesses, established nonprofits are also staring harder at the bottom line. Agencies that previously focused only on providing services are now thinking about “market share” and “unit revenue,” according to Jim Thalhuber, president and CEO of the National Center for Social Entrepreneurs, a nonprofit consulting company in Minneapolis. Some are even starting for-profit divisions as a way of generating commercial revenue and tapping financial markets for growth.

They’re shifting their thinking because funding has gotten tighter. Corporate giving as a percentage of pre-tax income is down since 1985. And there are more nonprofits fighting for those dollars. The decade between 1988 and 1998 saw a 64 percent increase in the number of nonprofits registered with the Internal Revenue Service, according to Giving USA, a yearbook of philanthropy.

Perhaps it’s not surprising, then, that business schools, once merely factories for budding capitalists, have realized that you can be an entrepreneur even if you’re not fixated on the almighty dollar. Harvard Business School launched an Initiative on Social Enterprise in 1993, and Stanford’s Graduate School of Business established its own Social Entrepreneurship Initiative four years later.

Business-school-type thinking is also playing a role in how foundations are viewing themselves in the New Economy. Many players in the fund-raising world–from college development officers to foundation officials–know that the philanthropic ground is shifting. They, too, have to get on the same page with the “new” donors or fail to reap that wealth.

Meet the Author
Unfortunately, too few foundations think strategically about how to do the most good with the resources they have. That’s what Harvard Business School professor Michael E. Porter and Mark R. Kramer, a founder of Boston¹s Center for Effective Philanthropy, charged in a 1999 Harvard Business Review article. “Scattered funding, arm’s-length relationships with grantees, and a lack of awareness of outcomes necessarily create a divide between the foundation and the ultimate results of its work,” wrote Porter and Kramer. “The more foundations are able to improve the performance of social enterprises, create new knowledge, and influence larger public and private sector efforts, the greater will be their impact.” In short, foundations, too, need to think more like businesses.

They are taking note. Last year, a group of large, established US foundations commissioned a report, prepared by the Philanthropic Initiative in Boston, to help them get inside the heads of the new class of donors. For these foundations, as well as the social entrepreneurs who depend on them, much is at stake. “Established foundations,” the report said, “have a critically important role to play if the enormous potential for more and better philanthropy is to come to fruition in the coming decades.”