Funding Innovation: What Will It Take to Grow Impact?
The Journal of Jewish Communal Service has a long, distinguished history. Among their many goals is to be “the journal of record and authority for Jewish communal leaders” that “documents the development of new trends and methodologies…”. They do this extraordinarily well.
The current issue is titled, A Tradition of Innovation, and includes essays on the history, funders, values and more as relates to the field of innovation. Following is the first of several articles The Journal is sharing with the eJP community. The index for the issue can be found here.
by Adene Sacks
The Jewish philanthropic community is engaged in significant discussions about the health of the innovation ecosystem and funders’ ability to grow and support creative enterprise. These discussions are important in a time where resources are scarce and creative enterprise seems to be at an all-time high.
Looking over a longer period – say the last decade – the Jewish funder community seems to be more adept at identifying promising early-stage ventures. Few would debate the success of the first-generation Joshua Venture alumni in making their mark on the Jewish community, and local efforts to identify and incubate Jewish entrepreneurs have grown in both number and sophistication.1
Yet, as many entrepreneurs toiling in early-stage nonprofit ventures will tell you, funder interest in promising innovations rarely translates into predictable, long-term sources of capital support. Many of the organizations that have come into existence in the last 10 years are currently engaged in a fight for subsistence, not growth. Of the remaining 10 stand-alone Joshua Ventures (5 are now embedded elsewhere), all are struggling to identify funders that will help them grow into sustainable organizations.
Depending on your viewpoint, the experience of these entrepreneurs is either a Jewish form of natural selection or a collective failure of the Jewish philanthropic sector to create a rational capital structure that nurtures worthy, early-stage ventures into maturity. While failure is a necessary part of any innovation ecosystem, this struggle to advance appears to be systemic, afflicting a wide range of organizations.
It is time for funders to reflect on the impact that their specific contributions have on the uneasy state of the innovation ecosystem (Jumpstart et al., 2009). Largely, the broad community of funders has not developed a longitudinal view of organizational growth that can reliably foster entrepreneurs and organizations through the realities of the organizational life-cycle.
The Jim Joseph Foundation’s (JJF) mission is to foster compelling Jewish learning for youth and young adults. Only in its fifth year of existence, the foundation funds Jewish education, exclusively. JJF has grounded its grantmaking practices in the research and experience embedded in the philanthropic ecosystem, both secular and Jewish. In doing its work, it has also been instructive to consider the models offered by venture capital. Venture capital makes up a small portion of all equity funding (less than 25% of all U.S. private equity funding), yet it plays an outsized role in identifying and nurturing emerging businesses that define the future of the business world. Foundation giving is also small (12% of overall philanthropic giving), but it should and does play a similar role in defining new solutions and directions (Gair, n.d.). While analogies to the business sector are always imperfect, there are obvious similarities to the philanthropic world, especially in regard to the early life-cycle of organizations.
For-profit venture investors, unlike their philanthropic counterparts, are equally rigorous in considering how they fund as in considering what they fund. Adopting this discipline in the Jewish funder community would represent a significant step toward creating a more functional innovation ecosystem. But it requires funders to adopt a level of coordination that goes well beyond current practice.
A for-profit approach to the innovation system
In the world of venture capital, the path to investment for business entrepreneurs is better articulated and the rules of engagement are more explicit than in the philanthropic world. Moreover, coordination and co-funding among for-profit funders are a norm. Venture investors are transparent about their funding goals and strategies, yielding a clear roadmap for a given sector. This section describes the impact that articulation of the funding pipeline has on entrepreneurs.
A venture investment firm is typically defined by both market sector (bio-tech, greentech, software, etc.) and investment strategy (early stage, expansion, and mezzanine). This dual definition provides entrepreneurs and partners insight into the fund partner’s skill set, investment size, and focus. It also enables the sector as a whole to envision the entire pipeline of funding – making transparent the opportunity for partnerships and potential handoffs between funds.
As illustrated in Figure 1, three growth stages loosely characterize a start-up venture: early, expansion, and mezzanine. Each stage is defined by investment size, an investor’s contributions, and key benchmarks that signal readiness to advance to the next stage of growth. Certain traits are common across all the growth stages, most notably, a commitment to benchmarking, measuring success, and the active involvement of funders in fundraising and networking with other funders.
At the early stage, investments are typically smaller in size, and investor portfolios include numerous early-stage investments. This is driven by the high failure rate typical in the start-up space. Early-stage investors tend to focus on internal activities: working with the founding team on a core product and defining what will be achieved if successful. As that company matures, investor activities shift from inside the company to more external roles. The focus of this “expansion” funder becomes soliciting the first round of customers and networking on behalf of the company with other funders. If a company successfully completes this growth phase, the final phase of the company’s maturity requires yet another set of skills. The “mezzanine” investor typically has a systems focus that will enable the company to both scale its impact and begin to think about a financial exit.
A needed shift in the philanthropic approach to the innovation ecosystem
The focus on investment strategy and life-cycle is largely missing in the innovation discourse in the foundation world. Across the Jewish philanthropic sector, it is fairly common for a foundation to identify itself by what it funds – be it Israel, Jewish education, or peoplehood. But private foundations do not typically offer potential grantees or partners a clear map of how they fund: their investment strategy. Funders tend not to be explicit about the path into or out of a grant. The result is that grantees struggle to identify their investor base, remain in the dark about the basis by which they will be considered for funding support, and are unclear about the parameters around “exit.” This occurs across the organizational spectrum, but is especially critical to early-stage organizations that do not have the resources (capital and human) to absorb the ebbs and flows of inconsistent support.
If funders were more explicit about their roadmap to funding, tailored the funding timeline to growth, and from the outset defined their role in both achieving deliverables and designing a mutually beneficial exit strategy, the innovation ecosystem would be healthier. As funders work with entrepreneurs, a clear focus on investment strategy and life-cycle offers the field the following benefits:
- It signals to the field what a funder is best at and what skills the funder brings to the table.
- It allows entrepreneurs to set realistic funding targets, potentially throughout the start-up life-cycle.
- It provides funders in overlapping market segments an ability to identify the status of different organizations in the pipeline and to find opportunities for collaboration and handoff.
Yet, despite these benefits, adding investment strategy to a funder’s self-definition is not a simple proposition. There are significant barriers to collaboration that stem from the limits of applying the venture model to the nonprofit sector, in addition to the barriers inherent to the field of philanthropy. In a recent paper published by the Monitor Institute, Barbara Kibbe, Gabriel Kasper, and Katherine Fulton (2010) articulated those barriers to collaboration:
- Funders are used to acting independently and having control.
- Philanthropy is too often an expression of values rather than effectiveness. This results in an insularity and inward focus that resist feedback and cooperation.
- Philanthropy is often risk-averse and short-sighted. Small grants, short-term grants, and a focus on small measurable outcomes limit the potential of any enterprise.
- Funders like to lead, not to follow. This “thins” the pipeline of later stage investment, which can impede the cause or organization that may have the most impact.
Despite these obstacles, several promising practices can create greater clarity in the funding pipeline.
Early lessons at the Jim Joseph Foundation
In its early years, the Jim Joseph Foundation (JJF) has attempted to adapt some of the practices observed in the venture model into its grantmaking and to incorporate learning from the likes of Lucy Bernholz of Blueprint R&D, the Monitor Group, the NonProfit Finance Fund, LaPiana Associates, and Cynthia Gair of REDF. JJF takes seriously the need to increase transparency about process and priorities because of its commitment to its own effectiveness as well as its understanding that, despite the resources at our disposal, JJF needs funding partners to effect real change.
JJF is very much in a learning mode regarding these ideas and, like many foundations in the nonprofit funding sphere, does not fit neatly into any of the venture models. Still, we have begun to integrate grantmaking practices that center on organizational life-cycle and investment strategy. Our early lessons include the following.
View Organizations Holistically and With a Field Perspective
Before making an investment, a venture capitalist will conduct rigorous due diligence on the company under consideration. A venture investor looks carefully at the abilities of the lead entrepreneur, the depth of the overall management team, and the viability of the anticipated outcome, given the current state of the target market. Once the determination to invest has been made, a venture capitalist commits to the development of the entire enterprise and its entrepreneur through a stage of growth.2
In philanthropy, while the social entrepreneur has celebrated status, philanthropic investors rarely undertake the degree of field mapping or capacity assessment to determine the likelihood of that entrepreneur’s ultimate success. In the for profit sector, funders do not invest in the entrepreneur until after due diligence is done. In the philanthropic sector, funders often skip the due diligence and just bet on the entrepreneur. Ideally, the path to investment in any new enterprise should include a map of the field coupled with an internal assessment of an entrepreneur’s leadership and organizational growth potential – and the investment should be tied to the life-cycle stage of investment rather than the grantmaking calendar.
The philanthropic sector certainly offers examples of foundations that follow this ideal (Edna McConnel Clark Foundation is a primary example), and there are examples of this clarity on the Jewish landscape as well,3 but it is far from the norm. Due diligence is nonstandard across foundations, and funding decisions are often based on anecdotal evidence or the persuasiveness of a charismatic entrepreneur. Such decisions are problematic for entrepreneurs and funders because they do not translate into a realistic view of what it will take for early-stage ventures to succeed.
At JJF, we make an effort to assess the impact of any potential grant on the organization itself and its contribution to the field of Jewish education. As a part of our due diligence process, JJF professionals take into account the life stage of the organization. We also assess a potential grantee’s role in the Jewish educational landscape. While JJF does make restricted grants, we consider seriously whether what is proposed for funding is “core to mission” for the grantee; that is, whether it is fundamental to the primary growth strategies of the organization in question and not just a specific program, and to JJF’s mission as well. These metrics play a part in our ultimate determination of whether an investment will achieve impact in our “market” of Jewish education.
During the process of consideration, JJF professionals attempt to identify and articulate to both members of our board and grantee stakeholders the areas of shared values and the role that JJF will play in the life-cycle of that organization. In a grant to Reboot, for example, JJF played a role akin to a mezzanine funder by enabling Reboot to build the systems it needs to successfully embed its activities in a structure that better supports its constituency and target market. This grant was built on the early-stage support of both the Andrea and Charles Bronfman Philanthropies and the Righteous Persons Foundation. This role can be contrasted to that JJF plays with grantees Moishe House or Mechon Hadar, both of which are at an earlier point in their life-cycle. In those cases, JJF is more actively involved with the expansion strategy of those organizations.
Coordinate and Co-Fund
Venture investors tend to be explicit about the terms of engagement in managing a start-up through a specific stage of growth and actively working with prior and replacement investors to ensure the move to the next growth phase. Achieving these milestones reflects positively on both the start-up and the investor.
In the foundation world, the drive for independence and creative control can inhibit this level of collaboration and transparency. But, this pattern may be changing. In a recent speech, Bill Gates (2010) said that one of the key lessons learned by the Gates Foundation is the need to partner to leverage learning and dollars; this lesson applies all the more to smaller foundations. To achieve this level of coordination, funders need to be better networked and more actively engaged with one another.
For the JJF, coordination of effort and aggregation of funds are often viewed as an incentive for investment. Most of our grants include some form of funder partnership – especially for early-stage efforts. In many grants, JJF has elected to “follow” another investor, especially when the grantee organization has demonstrated early results and the potential for wide-scale impact. This was true of our grant to Pardes, which followed a long-time investment of the Avi Chai Foundation. It was also a major factor in our decision to invest in Moishe House following both seed funder Morris B. Squire and the “expansion” investment of the Charles and Lynn Schusterman Family Foundation. JJF’s investment also enabled Moishe House to leverage and solidify the longer term commitment of the Schusterman Family Foundation.
It is also common practice for venture investors to aggregate different funding sources at the same growth stage, especially when the project is too big to tackle alone or the problem needs a more systemic focus. Cynthia Gair of REDF uses the term “strategic co-funding” to describe how foundations can mimic the coordination evident in venture investing. She points to the need for shared goals, agreement on the scale of the intervention, and aligned measures of success as key to deploying more capital more efficiently (Gair, n.d., pp. 2, 5).
In addition to realizing the efficiency of shared risk, co-funding also has the potential to mitigate funder fatigue. One of the key misperceptions in both the private and for-profit sectors is underestimating the time it takes for a good idea to become a great company or, in the philanthropic world, an effective nonprofit (Chabot, 2009). Organizational growth, especially in the nonprofit sector, is a long process. Co-funding and collaborative funding distribute the weight among many responsible parties rather than just one.4
In its early years, JJF has participated in several co-funded ventures from their inception, including Birthright NEXT, the iCenter, and Repair the World. In the case of Repair the World, three funding partners (the Nathan Cummings, Schusterman Family, and Jim Joseph Foundations) spent more than a year studying the realities, possibilities, and challenges facing the growth of Jewish service as both a learning strategy for young adults and an enabler for social impact on communities (Blair & Irie, 2008). This early work aligned the three foundations despite different motivations – and ultimately added a fourth trustee, the Einhorn Family Charitable Trust. Eventually, aggregation of funds and an alignment of goals led to the establishment of Repair the World, an organization whose scale has positioned it to make a significant shift in how Jewish service is experi- enced across the Jewish landscape and beyond.
View Impact Broadly but Measure the Specifics
Venture investors have a single universal goal: return on investment. That said, investors are often in uncharted waters when they try to determine success measures for industries in their infancy. They often use a diversity of indicators (quality of the leadership team, visibility, sales volume, etc.) to chart early-stage progress (Gair, n.d., p. 17). Early on, multiple investors may debate the choice of metrics as much as the measurements themselves.
“Return on investment” in the philanthropic sector is a concept that is subject to relativistic concerns – success to one foundation board may not be viewed as such by another. The Jim Joseph Foundation’s executive director, Dr Chip Edelsberg, recently stated that performance should be the end-game for any in- novative enterprise rather than, as he describes, “innovators who actually possess the rare blend of personal charisma, insider interpersonal relationships and serendipity that can lead to prosperity” (Edelsberg, 2010). A performance orientation to innovation can only be achieved if the sector, as a whole, defines success measures that have relevance beyond any foundation’s individual concerns. To date, there has not been a collective effort to accomplish this important goal.
At JJF, evaluation is a cornerstone of grantmaking. The majority of grants include funding for an independently contracted evaluation (this currently constitutes 4% of total grant dollars awarded). The process of evaluation includes the establishment of explicitly stated goals and objectives to which the grantee and JJF will be held accountable. In addition to grant monitoring, the evaluation consultant works with both the JJF professionals and the grantee’s professionals to ensure that early lessons are integrated into grant implementation. On more than one occasion, an early report has allowed important course corrections to occur.
Our assessment of organizational impact is gradually moving beyond program evaluation. There is a growing interest in a “network” approach to evaluating impact. JJF professionals recognize that the work of our grantees and JJF itself happens within a highly interdependent system that includes nonprofits, government, business, culture, and, increasingly, any individual with a cause and an internet connection.
The pervasiveness of technology has made apparent the interdependence of all the players at the table and forces social actors (be they nonprofits or foundations) into new methods of delivering on their mission (Scearce, Kasper, & Grant, 2009). JJF has begun to view the ability of grantees to be active networkers – cognizant of their role in various networks and field of thought – as key to their success.
Further, JJF professionals believe that JJF has the potential to play an important role in “weaving”5 grantees together with the intent that knowledge will be shared and collaboration will lead to greater strides toward field-wide outcomes. JJF has begun to actively engage a networked approach with its grantees. Recently, it funded Hillel to convene a conference focused on Jewish education and emerging adulthood. For the first time, this conference brought together educators across the growing number of organizations focused on young adults to talk about what Jewish education has to offer those in their “odyssey years.” In this case, although JJF made a grant to a single organization, the grant was intended to lead to a larger sector-wide conversation that has relevance across organizations and promotes a collective pedagogy.
Conclusion: toward greater clarity of the funding pipeline
Innovation is core to the Jewish enterprise. It is not a new phenomenon but it is essential to our ability to reflect and encourage the vibrancy of our community.
Given today’s economic realities, coupled with the immense richness of ideas embedded in current innovative Jewish enterprise, it feels particularly important that funders collaborate and foster the growth of innovative enterprise – and ultimately the growth of impact.
The articulation of the Jewish funding pipeline will not be neat. The diversity and disagreement of desired outcomes coupled with the barriers to collaboration will always hinder our sector’s efficiency and impact. Venture capital offers a powerful model but it needs amending and customization. Given the potential impact on the innovative ecosystem as well as the sector as a whole, the struggle to find areas of coordination and clarity feels worthwhile. The reward for greater transparency and role articulation will be more effective philanthropy.
Adene Sacks, Program Director at the Jim Joseph Foundation, has been at JJF since 2007. Her portfolio includes foundation grants to Hillel, Repair the World, BBYO, Reboot, Mechon Hadar and the Foundation for Jewish Camp.
A word of thanks to a number of people who advised and coached me in the process of writing this article. First, my sincere thanks to Eric Benhamou, whose work in both the worlds of philanthropy and business has long informed my professional viewpoint. I want to also thank my boss Chip Edelsberg whose edit- ing skills are the least of his contributions here. Finally, I want to thank readers Aaron Bisman, Shifra Bronziak, Brent Copen, Sandy Edwards, Lisa Eisen, Alan Feld, Aliza Mazor, Josh Miller, Dawne Bear Novicoff, Diana Scearce, Nachman Shelef, and Vincent Worms.
1. Examples of programs that are engaged in supporting early-stage entrepreneurs include UpStart, Bikkurim, Joshua Venture, PresenTense, Jumpstart, Six Points Fellowship, and programs of the Center for Leadership Initiatives (ROI and others).
2. This figure is adapted from a “back of the napkin” drawing done by Eric Benhamou in early 2007 shortly after I began working for the Jim Joseph Foundation. It is his idea that venture investors have a skill set that should be mimicked by philanthropic investors; I worked for Eric in establishing the Israel Venture Network in Silicon Valley from 2000 to 2006. Eric’s years leading large-scale companies (3COM and Palm) and seeding companies at all stages gave him a different perspective on the role of the philanthropic funder that he put this into practice with the Israel Venture Network and a number of other nonprofit ventures.
3. Natan invests in innovative organizations defined by budget size (http://www.natan.org/html/about.html), and the Covenant Foundation has a fund dedicated to “ignition” of new Jewish ideas that need seed support (http:// www.covenantfn.org/grants/apply-for-a-grant/apply-for-a-grant-1).The Lippman Kanfer Family Foundation has recently begun to research how to support organizations approaching the ‘mezzanine’ stage of growth (Lippman Kanfer Family Foundation RFP for Research Solutions, Delivery Models and Business Modesl for Increasing Effectiveness for Early Stage NonProfit Organizations. April 2010.).
4. An observation made to me by Alan Feld of Vintage Investment Partners based in Israel.
Fulton, Katharine, Kasper, Gabriel, & Kibbe, Barbara. (2010, March). Cultivating change through philanthropy. Available at http://www.futureofphilanthropy.org/files/workingpaper.pdf
Blair, Jill, & Irie, Ellen. (2008, May). Jewish service learning: What is and what could be. Available at http://btw.informingchange.com/uploads/2009/11/Jewish-Service-Learning-What-Is-and-What-Could-Be.pdf
Chabot, Christian. (2009, August 20). How long does it take to build a technology empire? Available at http://www.ipo-dashboards.com/wordpress/2009/08/how-long-does-it-take-to-build-a- technology-empire/
Edelsberg, Charles. (2010, January 28). Innovation is great, but it means nothing without results. Available at http://www.jta.org/news/article/2010/01/28/1010390/innovation-is-great-but-it-means-nothing-without-results
Gair, Cynthia. (n.d.). Out of philanthropy’s funding maze: Roadmap #1: strategic co-funding. San Francisco: REDF.
Gates, Bill. (2010). Press conference at the World Economic Forum, Davos. Available at http://www. livestream.com/worldeconomicforum03/video?clipId=pla_0a5ad43d-be31-42e8-b924-79b5fd46885e Jumpstart, the Natan Fund, and the Samuel Bronfman Foundation. (2009). The innovation ecosystem: Emergence of a new Jewish landscape. New York: Author.
Scearce, Diana, Kasper, Gabriel, & Grant, Heather McLeod. (2009). Working Wikily 2.0. Monitor Institute. Available at http://www.workingwikily.net/Working _Wikily_2.0.pdf
This article appears in The Journal of Jewish Communal Service, Vol. 86, No.1/2, A Tradition of Innovation. Reprinted with permission. To receive the complete issue, you can subscribe here.