Yet many contemporary observers have commented on the blurring of these sectors. Nonprofits earn revenue, companies produce environmentally beneficial products, and the government invests in social innovation. We have commercial vendors of charitable giving products, nonprofit producers of some of the world’s most widely used software products, and networks of mobile phone crisis responders who don’t fit into any circle. The creation of new corporate forms for good and the impact investing movement have become standard parts of philanthropy conferences. And the Supreme Court’s 2010 decision in Citizens United v. Federal Election Commission has unleashed a new era of nonprofit activity in campaign politics.

Although all of these examples are contemporary, none of them is fully new. Olivier Zunz’s book, Philanthropy in America: A History, tells a 100-year story of how we got to where we are today, focusing on the political choices we’ve made to shape nonprofit organizations and philanthropic foundations. Zunz braids together the tales of small and large donors. This is not an institutional history of major foundations, though many appear in its pages. Nor is it the tale of workplace giving, federated campaigns, or direct fundraising appeals, although those also make appearances. What Zunz does is to set the story of the Easter Seals campaign alongside the founding of the Carnegie Corporation of New York and encircle them with the public policy decisions that make both possible.

In the years between 1913 and 1920 we fought World War I, amended the US Constitution to allow for a federal income tax, and incorporated several major foundations. The connection among these events is not the one you might expect. The foundations preceded the taxes. The income tax financed some of the costs of the war, but a large part was paid for by the voluntary purchase of bonds. And the sale of war bonds by community groups and the fervor with which neighbors engaged around this cause laid the groundwork for direct mail, workplace giving campaigns, viral fundraising, and many of the other mainstays of today’s charitable world.

Zunz begins his history in the late 19th century, with the ofttold story of Julius Rosenwald financing the construction of schools for blacks living in the South. He is careful to note that Rosenwald enabled the education of hundreds of thousands of blacks, but not by challenging segregationist state governments to change their ways. This relationship between private philanthropy and public policy is the story that really interests Zunz. Through each of his chapters, from the turn of one century to the next and with close looks at community philanthropy, civil rights, the war on poverty, and international giving, Zunz returns to the political questions that surround the use of private resources for public good.

Zunz tells of presidents from Hoover to Kennedy seeking to control, influence, or partner with large foundations to provide social services, health care, and education. Not until the late 1950s do we hear stories of foundations pushing back against government policy. Once again, the issue is the education of blacks in the South.

Zunz makes rich use of a limited resource—foundation archives. So few foundations make their records available that the history of American foundations is drawn from the history of a few dozen organizations. Zunz mixes the institutional sources with biographical material, congressional record, court documents, and media coverage to capture both the contributions and contested nature of American philanthropy.

Zunz ends his book in the late 1990s and doesn’t really look into the role of technology in changing philanthropy. This raises an interesting question about the historiography of organizations. Our current communication technologies will change not only how foundations work but also the public record they leave behind, which will be largely outside of their control.

The author’s interest in the political privileges and limits of philanthropic institutions takes him far beyond grantmaking record and internal memos. He begins with 19th-century probate court decisions and folds in the steadily diversifying cast of regulatory characters from state attorneys general to the halls of Congress to the IRS up to the 1969 Tax Reform Act. What unfolds is syncopated progress toward an ever-elusive definition of public good. The tension comes from a public desire to promote charitable assets, while limiting the use of such assets to influence public policy. This produces what Zunz calls the “arbitrary” divide between political and educational activities.

Zunz includes an illustrative anecdote about Lyndon Johnson. Shortly after championing the political independence of Jewish philanthropists to support Israel against the wishes of the Eisenhower administration, the senator faced a tough election challenge in the 1954 primary in Texas. His opponent, Dudley Dougherty, had the support of two nonprofits backed by an oil millionaire and a newspaper magnate. Upon his return to the Senate, Johnson abandoned his support for the political independence of nonprofits and inserted an amendment into the IRS code forbidding them to “participate in, or intervene in … any political campaign on behalf of any candidate for public office.”

This battle is, of course, ongoing. The political economy we’ve created over the last 100 years is a mixed system in which philanthropic resources, public agencies, and commercial enterprise all contribute to our shared social goods. Zunz shows us that the lines of our imagined Venn diagram were never as clear or static as we thought. With impact investing, social enterprise, and social business we’ve increased the tools we use to apply private resources to public good. If Zunz’s historical arc extends into the future, the battles over the rules for those tools will be a defining character in the philanthropic story of the 21st century.

Lucy Bernholz is a visiting scholar at Stanford University’s Center on Philanthropy and Civil Society and a managing director at Arabella Advisors.

Only about one in five donors consults nonprofit watchdogs online. Cnaan found that being rich, computer savvy, highly educated, or engaged in volunteer work doesn’t make people any more likely to use them. “The vast majority of social investors and charitable givers really make their decisions predominantly on personal connections and emotional ties and things of that nature,” says Ken Berger, president and CEO of the watchdog Charity Navigator. “The whole movement toward using independent data is still in its infancy.” Also, for most of the more than 1 million US nonprofits, very little information is available.

Cnaan and colleagues analyzed data from the Donor Pulse, an online survey conducted by Harris Interactive. The poll asked respondents who had donated within the past year to check off the resources they used from a list consisting of GuideStar, Network for Good,Charity Navigator, the Better Business Bureau, the American Institute of Philanthropy, the organization’s own website, and “other.” The Better Business Bureau was the most frequently consulted of the group, at 40 percent, followed by Charity Navigator at 12 percent.

Two kinds of donors did seek out independent evaluations more often: people who were giving more money and people who were engaged in advocacy. “If you donate $50, you know you don’t have much impact on the organization,” says Cnaan. “But if you donate $10,000, you want to see that your money is not wasted.” Cnaan was more surprised by the scrutiny of the activists, who he supposes are more suspicious and less accepting of authority than the average donor.

One reason people may neglect watchdogs is an implicit trust of nonprofits. Another is that it’s too much trouble: To use a watchdog to choose a nonprofit, you first have to choose a watchdog. There are competing methods of assessment and “some nonprofits are considered a safe bet by one organization and not by another,” says Cnaan. Also, donors are often just motivated by the warm glow of giving, not by assessment.

Watchdog organizations have control over at least one aspect—no one will consult a service they don’t know exists. “All of us who are concerned about providing third-party information have an obligation to continue to educate and encourage people as to the importance of doing so,” says Berger. Cnaan agrees: “Donors should know that they have an option.”

Ram A. Cnaan, Kathleen Jones, Allison Dickin, and Michele Salomon, “Nonprofit Watchdogs: Do They Serve the Average Donor?” Nonprofit Management & Leadership, 21, 2011.

Bonilla beat the odds when she enrolled in an antipoverty pilot program run by New York City’s Center for Economic Opportunity (CEO). In exchange for taking on a full course load, the program provided Bonilla with enough money for tuition, books, and MetroCards for the commute to campus. She received tutoring, academic advisement, and job placement services. The program staff also lent Bonilla a laptop, so that she could do her schoolwork and still be home with her children.

Today, more than 1,000 students from all six City University of New York community colleges are enrolled in the program, and 55 percent of students complete their associate degrees in three years. Bonilla has finished her associate degree and is on track to earn a bachelor’s degree in public administration this spring. After graduation, she plans to open a daycare center for children with special needs.

The community college graduation initiative is just one of more than 40 programs tested by CEO, which evaluates and implements innovative antipoverty initiatives, rigorously assesses their outcomes, and makes funding decisions based on program performance. With an annual budget of $100 million in public and private funding, CEO programs have helped New Yorkers find employment, graduate from college, open savings accounts, shop for healthy foods, and earn tax credits.

In 2006, New York City Mayor Michael Bloomberg established a commission to analyze the issues and scope of poverty in the city. At the recommendation of the commission, he formed the center within the mayor’s office to better inform the way New York City and the federal government spend dollars fighting poverty. “Usually, mayors are preoccupied with fire and safety and roads and trash pickup,” says Gordon Berlin, president of the education and social policy research firm MDRC. Bloomberg, however, faced an extraordinary situation that was difficult to ignore. “The state requires a dollar-for-dollar match on most programs serving the poor,” explains Berlin. Researchers at CEO calculated a 19.9 percent poverty rate for New York City in 2009.

“It’s daring to talk about poverty and to say: ‘We don’t have the answers. We’re going to build on the work of others, and we’re going to try new ideas,’” says Veronica White, executive director of CEO. “It gets you involved in a conversation that a lot of politicians would be afraid to get involved in, and Mayor Bloomberg wasn’t.”

The center borrows and builds upon existing lessons from private, government, academic, and nonprofit organizations to create its own programs. These antipoverty interventions range from a re-entry program for young offenders that originated in Oregon, to a matched savings program that works closely with the city’s Volunteer Income Tax Assistance sites.

INVESTING WISELY

CEO runs pilot programs in collaboration with appropriate city agencies. Its 15-person staff monitors program performance, and each project’s success and failure is measured by outside research firms such as MDRC. If analysts find that the program makes a measurable impact and an agency can integrate the initiative into its activities with dedicated funding, CEO hands the program over to the agency. “It’s very unusual to see this combination of innovation and mainstream take-up in government,” Berlin says.

Many of the organization’s programs stem from others’ successes. “It’s essential to understand what’s come before you in thinking about programs,” says White, who often looks outside New York City for inspiration. “It is about making sure you do that scan of what’s in existence, what’s working, and what’s not working.”

Preceding her role at CEO, White was a nonprofit consultant and chief operating officer of Partnership for New York City and president and CEO of Housing Partnership. Staff members at CEO are equally versed in government and nonprofit work as well as in translating research into practice. All senior staff have advanced degrees in economics, sociology, public policy and administration, public health, and law.

White says some of her team’s best research comes from talking to providers and participants who are involved in poverty programs every day, asking them about the drawbacks of the existing programs and what they would add if they had more resources. Antipoverty programs dependent on federal funding are often restricted by what they can do with government funds. “There’s only so much room to innovate with federal dollars,” says Allegra Blackburn-Dwyer, chief of staff at CEO. “We start with other resources and test around the edges.”

One antipoverty initiative led Mayor Bloomberg and CEO staff to Mexico. The country’s conditional cash transfer program, called Oportunidades, provides 5.8 million poor families with regular payments if they meet certain requirements, such as going for regular health checkups and keeping children in school. Children enrolled in the program are healthier and stay in school longer.

In 2007, CEO refined the Mexican cash incentive program and adapted it for New York City families. Opportunity NYC: Family Rewards became the first conditional cash transfer program launched in a developed country. During its first two years, the program offered 22 incentives, ranging from $20 to $600, for activities including children’s school achievement, preventive health care, and parents’ work, education, and training. “MDRC worked with CEO and other experts to refine it and adapt it for New York City, and we have put it to a very serious test,” says Jim Riccio, the lead MDRC researcher on CEO projects replicated in New York City from elsewhere.

To appraise its programs, the center uses a range of performance management and evaluation techniques, including random assignment studies. The control group is invaluable in measuring changes in poverty levels, particularly today. “In the current economic climate, of course poverty is going up,” Berlin says. “If you have a reliable comparison group, you may find that the poverty rate would have gone up even more.”

Early results from MDRC’s five-year evaluation of the Family Rewards program are promising. Cash rewards reduced debt and hardship and improved health outcomes and, among some high school students, academic performance. The program also cut poverty among participants by 11 percent.

RIPPLE EFFECT

After benefiting from their predecessors, White and her team return the favor by sharing what they’ve learned. All of CEO’s research and evaluation reports are available to the public on the center’s website. “Other places have done great work, but they don’t necessarily have it available for other people to look at,” says White. “We are really interested in formal and informal learning communities.”

Now, she will be able to expand CEO’s reach even further. The organization was the only government body to win a Social Innovation Fund federal grant of $5.7 million annually for five years to reproduce one or two of its five most successful programs, including the conditional cash transfer initiative, in New York City and seven other cities.

With the federal grant, CEO is replicating its savings account program in Tulsa, Okla., San Antonio, and Newark, N.J. Participants of the SaveUSA initiative are eligible for a 50 percent match, up to $500, if they deposit at least $200 from their tax refund into a SaveUSA account and maintain the deposit for a year. In New York City, the 2,200 participants of the original banking program saved more than $1.7 million in three years.

But not all of CEO’s programs have been worth replicating. As planned, the center has discontinued several of its less effective initiatives. Most programs that the center has cut were inadequately put into practice, had flawed models, or offered too few services. When the center partnered with just a single provider and tested a program that proved unsuccessful, researchers couldn’t decipher whether the program failed as a result of its design, location, or recruitment.

The center’s ventures, successful or not, are not always viewed as positive learning experiences—especially by Bloomberg critics. Heather Mac Donald, a fellow at the Manhattan Institute, has been a vocal challenger of the conditional cash transfer program.

“CEO has to deal with the fact that they’re in a political world and can take heat directed by political opponents,” Riccio says. He says the scope of the city’s poverty problem also can set the center up for failure. “They risk setting expectations that are beyond what they can do. The cause of poverty is affected by macroeconomic forces that the city can’t control.”

Despite these challenges, White and her CEO colleagues continue to innovate and test models that they plan to replicate in and outside of New York City. “It’s important to build on the basis of what other people know,” says White. “We’re working with what they’ve done and we’re trying to retool it and make it better.”

The organization is using some of the Social Innovation Fund award to create how-to guides for five of its antipoverty programs, so that other governments and nonprofits can replicate CEO’s star achievements. Says White: “I think part of the long-term value of the center is that we can spread so much of our knowledge base across the country.”

Corey Binns is a journalist based in New York City. She writes about science, health, and social change for publications including Popular Science and msnbc.com.

The reason this classroom was so extraordinary is that it was participating in a program run by Reading Partners, an Oakland, Calif.-based nonprofit that provides one-on-one tutoring for K-6 students living in low-income communities. In twice-weekly sessions lasting 45 minutes, volunteer tutors (everyone from retirees and full-time parents to high school students and working professionals) help young children who often barely know their alphabet start to read books and answer questions about their content.

Reading Partners’ strategy is simple—use volunteers to deliver the type of teaching that underperforming children so badly need yet is unaffordable in the public education system. The results are dramatic—the average student advances an entire grade level in reading skills after just 30 hours of one-on-one tutoring (twice as fast as their peers who are not in the program).

So what was Fors, a man who’d spent his career building companies, doing in a classroom used to promote literacy? Fors was on a site visit organized by Silicon Valley Social Venture Fund (SV2), to learn more about Reading Partners.

SV2 is a type of giving circle—groups of donors who put anything from a few hundred to a few thousand dollars (and in some cases much more) into a pool of funds, teach themselves about effective forms of philanthropy and issue areas, and decide collectively how to allocate their money.

Fors first learned about SV2 while reading “When Givers Get Together,” a BusinessWeek article written by Jessi Hempel that described a form of philanthropy that allowed donors to pool their funds to make a bigger impact and have a say in how their money would be used. Fors was intrigued by the idea of collective giving. He’d recently stepped aside from certain parts of his business and had started thinking about how to make a greater difference in the world.

The problem was that Fors didn’t know much about philanthropy. “I wanted to get really good at how best to give money away in reasonable chunks,” he explains. He also wanted to do more than write checks to organizations with which he had no contact. Most important, he wanted to find a community of like-minded people who could support him as he learned how to become a more effective donor.

After learning more about SV2, he joined the organization in 2005. Rather than learning from a book or a class, SV2 members—called partners—learn from each other. Supported by his colleagues, Fors soon acquired the confidence and experience to assess nonprofits effectively, judge their needs, and recognize their potential to expand and make a bigger difference. “This was a fast track to learning how to make a good grant,” he says. What also struck Fors was the extraordinary camaraderie he found among a group of people working together on meaningful projects. “There’s so much energy created when people get together and get excited about impact,” he says.

Growing in Popularity

Giving circles are a significant and growing segment of US philanthropy. There were about 800 giving circles in 2007 (the latest formal survey).¹ A May 2009 study estimated that about 600 giving circles in the United States together gave more than $100 million and engaged more than 12,000 people.² From these statistics, I estimate that giving circles have granted hundreds of millions of dollars and engaged tens of thousands of people during the last decade.

Giving circles range widely in size, some with only a handful of members and others with several hundred. Although membership has tended to be largely female (about 53 percent were all-female in 2006), they’re increasingly mixed or all-male (according to the Giving Circles Network).³ Giving circles are formed by former classmates, members of the same place of worship, or simply friends, work colleagues, or neighbors who like spending time together but want to do that more productively. Participants span all ages, professions, religions, ethnicities, and income levels.

The structure of giving circles varies tremendously. Some are small, informal groups that share volunteer activities and decision making. Others are large and employ staff to manage finances and administration. Some are housed in philanthropic institutions. Others are membership organizations, independent nonprofits with membership fees and minimum donation amounts. Many offer volunteering opportunities, either in helping run the giving circle or working with the nonprofits the circle funds.

In spite of these variations, giving circles all share the same philosophy—that by working collectively, donors can do more with less and find new ways to give more strategically and accountably, and with measurable impact. Giving circles expose members to best practices and learning through doing. They help individual givers to become proactive rather than reactive, and to practice structured rather than informal giving. And because donors base their giving on research, education, collective decisions, and—when housed at philanthropic institutions or run by professional staff—the experience of professional grantmakers, giving circles help turn intent into impact.

For donors with no philanthropic staff or access to professional giving advice (the vast majority of givers), this kind of support is critical. Between the signing of a check and the delivery of vaccinations to an impoverished family in Liberia or a better education for low-income sixth-graders in Detroit lie a complex set of decisions, strategies, and infrastructure, all of which contribute to the impact of the money itself. As more people recognize the challenges involved in making thoughtful and effective giving decisions, they are turning to giving circles and other forms of collective giving. (See “Benefits and Drawbacks of Giving Circles” below.)

A Gap in the Market

My interest in collective giving was born in the 1990s. It was a thrilling time. The Internet was opening up new opportunities for connecting, communicating, and making transactions. I was studying for my MBA, and most of my classmates at the Stanford Graduate School of Business were writing business plans for dot-com startups. Like them, I had a burning desire to create my own enterprise. But I wanted to do something different. Instead of establishing an organization designed to make money, I wanted to create one that would give it away.

At the time, many technology companies in Silicon Valley were going public, creating thousands of instant millionaires. I figured that these young, energetic, and highly entrepreneurial people would be attracted to a form of philanthropy that treated social investments with the same seriousness, accountability, and efficiency as for-profit investments. I felt sure that, as it was for me, these people wanted to do more than write checks. They wanted to learn from their peers and work in partnership with nonprofits. I had spotted a gap in the market—and I knew how I could help fill it.

In 1998 I founded SV2. It turns out that I was not the only one with this idea. Although I didn’t know it at the time, a similar model had just been created in Seattle (where Microsoft had spawned its own technology-driven community) when Paul Brainerd founded Social Venture Partners Seattle. Cultural shifts were sweeping through the philanthropic sector—driven partly by these young, self-made wealthy individuals—and entrepreneurial vehicles were emerging to support the higher level of accountability demanded by the new economy’s social investment dollars. “Giving while living” became the new norm.

Among these new types of organizations was SV2. Our pooled funds provide multiyear, organizational capacity-building grants to nonprofits, helping these organizations build up their business infrastructure to operate more effectively and efficiently. SV2 partners (who come from a wide range of professions, age groups, social passions, and backgrounds) are the decision makers when it comes to allocating funds to nonprofits. Every partner—regardless of the size of his or her gift—has an equal vote, and new partners can participate immediately in grantmaking.

Nonprofits—by invitation or by responding to an open request for proposals—present their case to the partners, who assess their needs, their potential to grow, and the impact they might be able to have through additional funding, management support, and access to partners’ expertise and networks. Together with the grantee, SV2 partners develop grant contracts that include the strategy, implementation plans, and quarterly performance benchmarks needed for the nonprofit to achieve its goals. Although grantees are accountable to SV2 to meet and report on these goals, SV2 is responsible for helping achieve them by investing partners’ time and expertise in addition to money.

Partners help grantees not only to build the capacity needed to achieve current goals but also to come up with new, more ambitious goals and strategic growth plans. Several partners have joined grantees’ boards, and in a few cases even chaired them. Many partners make individual gifts to nonprofits in addition to their SV2 grant. In the past year alone, SV2 partners have collectively given an additional $744,800 and 1,245 hours of volunteer time to past and present grantees.

Getting Together to Give

Collective giving organizations are part of a dynamic new era for philanthropy—one in which donors are becoming far more involved in their giving. Many donors no longer want to give in isolation—they want to get together to share their ideas and excitement. They want to talk to others about philanthropy, to compare experiences and problems, and to ask basic questions among communities of people they trust. And although there is a great deal of variation among giving circles, they share important characteristics that distinguish them from other types of philanthropy.

It starts with the bringing together of money and talent. “Everyone puts in a certain amount of money and when we pool that, we end up with the ability to invest in a whole range of nonprofits and with a lot more funding than the partners could give individually,” says Paul Shoemaker, executive director of Social Venture Partners Seattle. “It’s the same reason anyone invests in a mutual fund.”

By pooling money, donors can have a bigger impact on a nonprofit. And giving circles do more than gather financial assets. They also draw on members’ skills and knowledge. Those who’ve worked with startup companies, for example, might become more involved with an organization at the early stage of its development. The skills of a human resources or management professional could be valuable at a later stage in the organization’s evolution. Members also provide tremendous support to grantees as coaches, advocates, and network builders—not to mention the stamp of credibility that a giving circle investment can provide the organizations it funds.

Shoemaker believes the hands-on nature of this type of giving is part of its power—particularly since it helps partners to expand their own capabilities. “There’s nothing like experiential learning,” he says. “When you do a strategic plan or a marketing strategy for a nonprofit you learn a huge amount—you can’t put a price tag on that.”

Moreover, when people donate collectively they end up giving more, and more effectively, than they do alone. In 2011, more than 71 percent of the SV2 partners surveyed said they were giving larger amounts of money now than before joining the organization, with nearly 90 percent reporting that their giving had become more strategic.

Finally, as Fors experienced, partners are often pleasantly surprised to find the extraordinary camaraderie generated by a giving partnership. Joining forces on shared goals and meaningful projects is a way of bonding with a group of people who are happy and enthusiastic about their work. Half the fun of being part of a philanthropic partnership is being around an energetic, intelligent, and engaged group of people. In the process, people often develop what turn out to be deep and lasting friendships.

Giving Circles Vary

There are three basic types of giving circles: grassroots giving circles, sponsored giving circles, and institutional giving circles. (For a comparison of the characteristics of these three types of giving circles, see “The Giving Circle Spectrum” below.)

At one end of the spectrum are grassroots giving circles—informal, self-directed giving circles in which small groups of people (who often already know one another) come together for the purpose of giving. ChAngels, a group based in Northern California that was started by a 9-year-old girl named Kate, is an example of a grassroots giving circle. It has nine members, mothers and daughters from the same school who come together to research ideas for projects, which they present at monthly meetings, and collect and earn spare change (hence the name ChAngels). They volunteer at nonprofits, join walkathons, and run small-scale fundraising activities for causes such as relief for Japanese tsunami victims, books for Fijian libraries, and a small farm where sick children can play with animals. On its blog, members share information about their activities, such as a Popsicles and Pillowcases Party during which girls get together to transform pillowcases into dresses delivered to girls in need through the Dress a Girl Around the World program. The simplicity of the ChAngels model makes it easily replicable by any mother-daughter group in any community.

At the other end of the spectrum are institutional giving circles, independent nonprofits that have formalized the giving circle model into a structure similar to a grantmaking intermediary. These circles have professional staff, formalized membership and grantmaking processes, and a significant donor base (whose contributions fund both the circle’s grantmaking and its infrastructure). An example of this type of circle is Impact Austin, which was founded in Austin, Texas, by Rebecca Powers in 2003 and has spread to Indianapolis, San Antonio, Pensacola, Fla., and other cities. More than 4,000 women each give $1,000 a year through Impact Austin, and each has an equal voice in selecting recipients for grants. By 2010, the organization had made more than $2.6 million in grants to nonprofits supporting a range of causes, such as job training and community ballet instruction, as well as after-school programs and health care for uninsured and underinsured people. Members of Impact Austin also help run the grantmaking organization. The group uses volunteer management software to fit the right member with the right volunteer task. Sometimes, members work directly with the nonprofits they fund or participate in their advocacy initiatives. Believing in the importance of empowering women to realize their philanthropic potential, Impact Austin also has a program called Girls Giving Grants in which young women in grades eight through 12 each contribute $100 and participate in collective grantmaking.

In the middle of the spectrum are sponsored giving circles—groups that have formalized their collaboration and housed it within an existing philanthropic institution, such as a community foundation. These giving circles use the infrastructure and expertise of an existing philanthropic organization, but remain donor led (though they may have part-time professional staff). An example of this type of circle is the Queer Consciousness Fund (QCF), a donor-advised fund of the North Star Fund. Founded by Craig Harwood, Terrence Meck, and Reid Williams—and tapping into the expertise of their mutual friend, Weston Milliken, co-founder of the Queer Youth Fund—this giving circle was established to give money to the GLBTQQI community (gay, lesbian, bisexual, and transgender individuals, as well as those who identify themselves as queer and those questioning their sexuality and intersex individuals). Members of QCF each contribute $25,000. QCF supports organizations in New York, New Jersey, Connecticut, and Pennsylvania. Past grants have included funding organizations such as Spring Clearance (which runs an annual weekend retreat to promote well-being, healing, service, and community engagement among GLBTQQI people recovering from crystal meth addiction) and Trans in Action (which supports runaway and homeless transgender and gender-nonconforming young people).

Over time, the structure of any particular giving circle may evolve, from grassroots to sponsored, or from sponsored to institutional. When SV2 was created it was essentially a sponsored giving circle, with a donor-advised fund at the Community Foundation of Silicon Valley (now Silicon Valley Community Foundation). After expanding our partner base, grantmaking portfolio, and organizational vision, we decided that becoming an institutional giving circle, with our own nonprofit grantmaking organization, would be a more effective structure through which to maintain our entrepreneurial culture and ability to innovate.

Some institutional giving circles have even gone global. Social Venture Partners Seattle, for example, has inspired a global network of affiliated organizations called Social Venture Partnership International, which has 25 affiliates in the United States, Canada, and Japan with members all contributing passion, knowledge, time, and experience, as well as money.

Starting Your Own Circle

One of the great things about giving circles is that it takes only a few people, a shared passion, and a philanthropic purpose to create one. You can even use an existing group—such as a book club, investment club, or religious group—as the foundation for a giving circle. Although giving circles are easy to start, without careful planning one can easily lose its focus. (For more information on how to start and evolve a giving circle, see www.giving2.com).

Once the members of the giving circle have been selected, the first thing to do is to decide on the group’s mission and what its funding focus will be. How are you going to give away the funds the group collects? Should your giving circle, for example, decide what to fund on the basis of discussions among the members and members’ research? Will you allow nonprofits to submit applications for funding? How will you conduct due diligence on the nonprofits you’re considering investing in and verify that gifts will be used as intended? (This is particularly important for larger-sized gifts.) Will the group require a unanimous decision on whom to fund? Will members conduct site visits of the nonprofits it funds? And what kind of feedback will beneficiaries be required to submit on how the group’s money has been spent and what difference it’s made?

Members also need to establish the size or range of each member’s financial contribution. In groups where every member has an equal say in how the money is distributed, it often makes sense for everyone to give the same amount. Some groups have tiered donation levels. To manage the money, you can set up a joint bank account, establish a donor-advised fund at a community foundation or an investment company, or even create a public charity.

Giving circle members also need to decide whether or not the group can expand and how big it’s going to become. Are you going to request that members make a yearlong commitment? Can donors join at any time, or should they be allowed to sign up only at certain times of the year? Some giving circles prefer to keep the group intimate, restricting membership to the small group of people that first came together. In other cases, organizations grow rapidly and become significant forces for change.

A giving circle also needs to be prepared to learn and grow. What happens when members disagree on a voting decision, when a grantee fails to meet expectations, or when members’ interests shift over time? Setting up parameters for dealing with such challenges in advance can promote group cohesion and effectiveness. Through successes and challenges, giving circles should be forums for shared social objectives and be safe spaces in which people can engage in group learning, idea generation, and grantmaking. It is important to remember that even unsuccessful grants can be successful learning experiences and provide an opportunity to do things better in the future.

The Power of Collective Giving

Since becoming a grantee of SV2, Reading Partners has expanded rapidly. It now operates in 36 schools and serves more than 17,000 students. The ability to scale up a philanthropic enterprise like Reading Partners is critical. “In California about one in three fourth-graders can read at their grade level and nationwide it’s only slightly higher, so we’re talking about the vast majority of children throughout the country being unable to read at their grade level,” says Michael Lombardo, CEO of Reading Partners.

Lombardo believes that the support of an organization like SV2—which brings skilled, knowledgeable, and highly engaged donors along with funds—has been important in helping Reading Partners grow. “It gives an organization like ours a disposition to be bold,” he says. “It’s about taking risks and trying to do what seems to be impossible.”

Reading Partners isn’t the only one that has benefited from the relationship. Involvement in the program gave Fors a huge philanthropic learning opportunity. Working with grantees has taken him from high-energy classrooms to chaotic startups where social entrepreneurs compensate for their lack of organizational capacity with their excitement and enthusiasm. After months of volunteering his time and expertise, Fors created a strategic plan for Reading Partners based on a visionary growth plan. After presenting the strategic plan to the Reading Partners board, Fors joined the board, and he is now its chairman. Since retiring from his last company, Fors has become a full-time, high-engagement philanthropist, chairing the boards of Reading Partners, New Teacher Center, Social Venture Partners International, and SV2.

“For me, getting involved in this way was the beginning of seeing the potential leverage you can get from this kind of work,” says Fors. He also loves collaborating with nonprofit leaders and spending time with his venture philanthropy partners. “You’re developing a much deeper network of friends because you share this profound common value,” says Fors.

Philanthropy begins with the heart. It’s an expression of our love for humankind. Yet love is not always enough. To tackle the huge, complicated problems affecting the lives of those around us, we need the support of others. We need to do more with less, channeling precious philanthropic resources into innovative ways of giving—learning constantly, partnering with others, pooling funds, and generating new ideas by sharing our knowledge and experience. Getting together to give—whatever the membership size, collective giving level, structure, or purpose of the organization—is a powerful way to transform the world while also transforming your giving.

This article is based in part on the book Giving 2.0: Transform Your Giving and Our World, by Laura Arrillaga-Andreessen (Jossey-Bass, 2011).

Laura Arrillaga-Andreessen is a lecturer in philanthropy at the Stanford Graduate School of Business and founder and advisory board chairman of Stanford University’s Center on Philanthropy and Civil Society (PACS). She is the founder and chairman emerita of Silicon Valley Social Venture Fund (SV2), president of the Marc and Laura Andreessen Foundation, and a director of the Arrillaga and Sand Hill foundations. She is the author of Giving 2.0: Transform Your Giving and Our World (Jossey-Bass).

Founding SV2 marked the end of Arrillaga-Andreessen’s apprenticeship in philanthropy and launched her on the quest that inspired and informed Giving 2.0. Over the succeeding 15-plus years, the author immersed herself in the field: creating and teaching graduate business and undergraduate courses at Stanford University, commissioning case studies, serving on nonprofit boards, helping design Stanford’s Center on Philanthropy and Civil Society, interviewing hundreds of fellow travelers, and learning by giving herself. She has consistently upped the ante for her own philanthropy with every new lesson learned.

From her parents, especially her beloved mother, she absorbed what it meant to leverage personal gifts of heart, mind, and time to make truly meaningful contributions. Creating an organization, however, signaled a whole new level of commitment and propelled Arrillaga-Andreessen on to the next phase of her journey in philanthropy, one that confirmed she’d found her career and her calling.

Giving 2.0 is the result of Arrillaga-Andreessen’s intellectual and experiential odyssey. From ancient practices like tithing to today’s peer-to-peer giving platforms, she shows how philanthropy has evolved. With each chapter, we are introduced to a particular form of giving. The book begins with volunteering. We meet Hector Chau, a good-humored and accomplished Mexican American, now retired from his accounting career and volunteering for Tax-Aide in Los Angeles, which provides older low- and middle-income Americans with free, professional tax return service. Arrillaga-Andreessen celebrates him as an exemplar of effective philanthropy, as she does a diverse, engaging cast of characters from all walks of life and backgrounds. Like Chau, they’ve all discovered personal assets to off er their communities, a cause, the world—and set about “transforming their giving,” as Arrillaga-Andreessen writes, to great benefit.

Throughout, the author cites research that informs and validates philanthropic practice. For the chapter on volunteering, she references Stephen Post, a bioethicist at Brown University’s Alpert Medical School, whose work proves the value of the “prosocial” engagement expressed through voluntarism. Arrillaga-Andreessen displays knowledge of the field that is Wikipedia-like in its comprehensiveness and currency. She weaves together reams of facts and statistics, references to historical influences, descriptions of organizations and their approaches with an easy, graceful narrative style. In the opening chapter, she grounds us in French philosopher Alexis de Tocqueville’s 19th-century travels through the young American republic, citing his observation of the natives’ collective go at improving their communities. She then brings us current, noting that some 63 million of Americans volunteer today, and goes on to describe the roles played by a wide range of organizations operating in the space: stalwarts like the Rotary Club and Junior League, government-backed entities like Senior Corps, established innovators like Civic Ventures and the web-based VolunteerMatch, and recent startups like Crowdrise and Catchafire.

Hewing to this structure, chapters cover myriad ways of giving, and each one is followed by a “Making It Happen” section designed to help readers probe their personal motivations and apply insights to themselves, their families, and their lives. The book’s appendices provide a wealth of resources, including a guide to keeping a giving journal and a bibliography.

Giving 2.0 speaks directly to the influence of millions of ordinary people whose contributions form the backbone of American philanthropy, adding up to more than $200 billion and 8.1 billion hours of volunteering each year. A compelling, meticulously researched work, Giving 2.0 pays its readers the ultimate tribute by assuming that they have what it takes to become powerful givers themselves. Its influence will be felt in untold acts of more informed and thoughtful giving. And its—and Arrillaga-Andreessen’s—impact will be registered in the societal transformation those vastly better gifts make possible.

If you want to understand the history and future of giving, this is the one book you should read. Make a gift of it.

Lifewave was facing an inflection point in late 2010. The early-stage company had a technology promising more accurate fetal monitoring in obese and overweight women, whose deliveries now account for 60 percent of all births in the United States. These women have pregnancies with high rates of complications and C-sections.

Early Lifewave clinical trials had produced promising results. Technology experts, investors, and clinicians also viewed the product favorably. But the company was having difficulty raising the necessary funds to get through the regulatory-approval process.

The California HealthCare Foundation (CHCF) was contemplating an investment through its Health Innovation Fund. If a CHCF investment were to be successful in moving the company to the commercialization stage, the Medicaid program in California, which pays for half of the pregnancies in the state, could reap significant savings.

Lifewave was the Innovation Fund’s first for-profit investment proposal. The foundation team began with a review of the company and its “mission fit” with CHCF’s charitable goals. The CHCF staff engaged in a spirited discussion about whether and how this investment could drive lower-cost care and improve access for underserved populations, its criteria for investment. Once the proposal passed the mission-fit screen, the team would finalize the terms of the investment, in consultation with legal and investment advisors experienced in both technology investment and foundation impact investing.

In order to secure an investment from CHCF that could help get it through regulatory approval, particularly given the challenges the company had faced seeking capital from traditional investors, Lifewave was prepared to adhere to the foundation’s investment goals—to improve outcomes for obese and overweight pregnant women, the providers who care for them, and the publicly financed system that pays for much of the care they receive. After approximately four months of due diligence, CHCF invested just under $1 million in April 2010.

The foundation is among many organizations looking for ways to enhance traditional approaches to funding social innovation. What drives their entry into “impact” or “mission” investing varies, but it generally includes a desire to scale up and spread successful programs, align an investor’s assets with its mission and goals, and work with innovative efforts across the spectrum of nonprofit and for-profit organizations. Several US health care foundations are following in the footsteps of their philanthropic counterparts in housing, economic development, and education. They are developing ways to find, make, and manage financial investments in private sector companies that can help fulfill their charitable missions.

This article focuses on foundation investments as a representative sample of the wider realm of social investments with a market orientation.

THE BASICS OF MISSION INVESTING

Mission investing, often referred to as impact investing, refers to investments in revenue-generating nonprofit and for-profit organizations whose work is consistent with an investor’s charitable purpose and goals.¹ The emphasis is on investments, as opposed to grants. Unlike traditional grantmaking, mission investors expect that the funds will be paid back—recycled for their charitable purposes, so to speak. These investments offer investors a way to advance their philanthropic missions while supporting enterprises that may be more likely to achieve sustainability and scale than the typical grant-funded initiative.

Mission investments can include cash deposits, bonds, loans, or venture capital and private equity investments in companies, and they can be made directly, through funds, or via specialized intermediaries. Some mission-investing programs are market-oriented, generating financial returns that are comparable with typical investments in an organization’s portfolio. Within the foundation world, these are typically referred to as mission-related investments (MRI). Other programs take more risk or accept lower returns than commercial investors would take, but they also have the potential to generate significant impacts and deep alignment with an organization’s mission. These investments are a subset of mission investing referred to as program-related investments (PRIs). With all forms of mission investments, foundation social investors follow specific standards and regulations.

Social investors are exploring mission investing because they have experienced “successful” pilot projects that never made it beyond the initial site and often didn’t continue once the grant period was over. Although grants are the right tool for much of the work of social investors, fundamental limitations and challenges exist to scaling and sustaining organizations whose primary “fuel” consists of grants.

Moreover, many of the innovations that social investors care about are in the for-profit sector. This dynamic is particularly true in health. Whereas government pays for about 47 percent of health care delivered in the United States, private sector institutions deliver the vast majority of health care using technologies, devices, and tools that for-profit companies develop. In part because of health care cost escalation, health reform, and other forces, experienced innovators and investors are increasingly focusing their energy, capital, and creativity on developing solutions that ensure high-quality, lower-cost health care, as the articles in this supplement have demonstrated.

This growing pool of innovation and capital creates an exciting opportunity for social investors to reach out to new partners who can help tackle important health care challenges. These investors now have the opportunity to align their own knowledge and assets with this emerging breed of entrepreneurs and investors. In addition, the long history of health foundation work with the Medicaid and Medicare programs and public hospitals offers a window into what it will take for innovative technologies and services to be successful as these public programs expand and evolve under health reform.

IMPACT INVESTING IN HEALTH CARE

What follows is a map of the emerging impact investment landscape among US health care foundations. The goals and approaches vary significantly, but the diversity among programs provides a sense of how those seeking to use investments to improve health have approached mission investing.

Interest areas extend beyond health care delivery to include the social factors that affect health (referred to as social determinants of health), such as poverty, education, air quality, and wellness issues like food and fitness. Opportunities for investment in both for-profit and revenue-generating nonprofit organizations exist in each of these areas, and each can offer social investors interesting opportunities to extend their traditional approaches to grantmaking and endowment management. (See “Areas of Mission Investment” below.)

Although health care foundations are working across a wide range of topic areas, impact investment projects are beginning to emerge under several common themes.

Lowering Investment Risk. Foundations can play an important role in lowering the risk for traditional financial investors, as the authors argued in the article that opened this supplement. (See “Funding the Safety Net” on page 4.) Their work can encourage investors—whose capital, expertise, and networks offer significant benefits—to support initiatives that might not otherwise meet the criteria for investment.

For example, The California Endowment (TCE), in collaboration with financial intermediary NCB Capital Impact and a diverse range of partners, established the California FreshWorks Fund, a public-private partnership loan fund created to increase access to healthy food in underserved communities, spur economic development that supports healthy communities, and inspire innovation in healthy food retailing.

In California, adults in neighborhoods with low access to healthy food options are 20 percent more likely to be obese than those with high access to healthy foods. The goal of the fund is to support supermarkets and other fresh food outlets in the “food deserts” of low-income communities. Through the fund, TCE and other social investors provide forms of debt and credit that remove some of the risk to commercial lenders and encourage them to provide major financing to projects.

Funding Specialized Financial Products. Several intermediaries, including some that operate largely in traditional markets, have worked in conjunction with foundations to create specialized financial instruments with significant health impact goals.

The W.K. Kellogg Foundation partnered with Community Capital Management, an experienced fixed-income manager, to find and purchase market-rate “community food bonds” that finance community facilities, schools, and community groceries. Inadequate access to healthy food in low-income communities and schools creates a critical impediment to good health, so the goal was to increase the supply of healthier, affordable food for vulnerable kids and their families.

Specific bonds supported a community garden where residents in an affordable eldercare center in Michigan could grow their own food; upgraded school lunch facilities to enable from-scratch meal preparation in a low-income school district in New Mexico; and an expanded facility for the Greater Boston Food Bank.

Establishing the Business Case. Recent advances in computing power, mobile technology, and networking have made possible an explosion of innovation that helps people track and manage chronic diseases more effectively. Although there is general agreement that these innovations can improve health, the business models necessary for them to reach sufficient scale have not been established. Social investors have an important role to play in developing the return on investment (ROI) cases—through studies, pilots, and business model development—that are necessary for new, cost-saving technologies to gain traction.

As one example, CHCF made a recoverable grant for a pilot with Asthmapolis, a company with a global positioning system that tracks where asthma episodes occur. The service allows asthma sufferers to manage their treatment more effectively, and public health workers to better understand the environmental triggers that exacerbate symptoms and contribute to health care costs. As part of this effort, CHCF and Catholic Healthcare West will be working with the company and its pilot partners to demonstrate cost reductions due to the technology and to explore business models with a range of payers and providers in the commercial, safety net, and government sectors.

Moving Innovation into New Markets. Traditional financial investors and their portfolio companies first seek to gain a foothold in the most profitable markets. This often leaves large but less lucrative markets, such as Medicaid patients or rural areas, without sufficient access to innovations. Social investors can create the financial cushion to test innovations and take them into traditionally underserved markets. Foundations in particular can play a crucial role in investment syndicates as strategic investors and intermediaries to help safety net providers and commercial companies work together more effectively.

Small and rural hospitals often cannot attract or afford qualified staff to supervise their pharmacies 24 hours a day. Avoidable medication errors are the result. Pipeline Healthcare (PHC) offers “tele-pharmacy” services that provide expert, remote supervision for these hospitals. The company is able to share a single pharmacist among several hospitals, increasing efficiency and improving compliance.

CHCF is contemplating an investment in PHC as part of a syndicate that includes the foundation, an investment firm, and a technology company. Through the venture, CHCF would help hospitals that care for underserved Californians to lower costs and improve clinical outcomes, and PHC hopes to prove its cost-reduction case and value to safety net providers.

Facilitating Lending. One of social investors’ simplest tools is below-market-rate loans to help health care organizations fulfill their charitable missions. Foundations across the country have provided working capital and construction loans to clinics that serve low-income people, at rates below what they would have been eligible for from traditional lenders. The loans allow community health centers to devote more of their resources to serving people in need.

For example, the California Primary Care Association (CPCA), in partnership with financial intermediary NCB Capital Impact, created the Emergency Working Capital Loan Fund in 2008. CPCA launched the program when a state budget crisis resulted in payment delays to community health centers that serve people on the state’s Medicaid program, Medi-Cal, which is the primary source of revenue for these clinics. California clinics were eligible to apply for up to $250,000 to cover working capital needs as they waited for payment. Clinics return the funds as soon as Medi-Cal pays, typically within two to three months.

Participants in the fund have included CPCA, Sutter Health Systems, Catholic Healthcare West, the Nonprofit Finance Fund, the Mercy Partnership Fund, and the California HealthCare Foundation. All the organizations have made funds available at rates ranging from 1 percent to 5 percent. When loans are blended together according to the proportion the funders have lent, the interest rate to the borrower becomes 3.25 percent, well below market rates. The fund has been renewed most years since 2008, and its total capital has ranged from $20 million to $30 million. The funding partnership will be expanded this year to include several new participants, including two foundations. NCB Capital Impact continues to do all the loan underwriting and servicing, and together with CPCA has created a loan guarantee fund to mitigate the risk of late repayment or default.

Another example is Playworks, a national nonprofit that has developed a program to bring recess back to public schools. As public school budgets are cut and recess is removed from the school day, safe and engaging play is disappearing from the lives of many children. With significant grant funding from the Robert Wood Johnson Foundation (RWJF), Playworks expanded from its original base in Oakland, Calif., to more than 250 schools in 15 cities. Even with the grant funding, Playworks still faced a significant working capital deficit, because its payments often came well after the organization had incurred expenses. RWJF partnered with OneCalifornia Bank to meet this working capital need through a deposit that the bank used as collateral against which to administer a loan to Playworks so that it could “keep recess going” while waiting for school funds to come in.

LOOKING FORWARD

These are just a few of the ways that the tools of impact investing can improve health care. They represent creative thinking and a willingness to cross long-established boundaries between sectors in the pursuit of common goals. As the United States seeks to reform its health care system to both lower costs and improve access, such collaboration is vital. Foundations and other social investors have an important opportunity to serve as strategic partners in supporting the brightest and most creative entrepreneurs in creating lower-cost and more accessible models of care.

John Goldstein is co-founder of Imprint Capital Advisors, which catalyzes capital for social impact by supporting foundations, individuals, and family offices and their trusted advisors.

Margaret Laws is director of the California HealthCare Foundation’s Innovations for the Underserved program, which focuses on reducing barriers to efficient, affordable health care for the underserved by encouraging, testing, and promoting lower-cost models of care. She also directs the foundation’s mission-investing efforts.

In 2010, BeWell Mobile faced a dilemma all too common among startups in the health care field: how to fund the growth of breakthrough innovations that both lower costs and improve the standard of care when the patients and providers who often benefit the most have the least ability to pay.

The San Francisco company develops customized disease management software that operates on devices like cell phones. In an eight-month pilot study with the San Mateo Medical Center, funded by the California HealthCare Foundation, 50 bilingual, uninsured teens with severe asthma recorded their symptoms by phone at least once a day using BeWell’s technology. The real-time feedback, reminders, and other interventions they received in response caused the patients’ drug compliance to more than double, their need for rescue medications to be cut in half, and their visits to the emergency room and their days of missed school to fall dramatically.¹

In most fields, results like these would have had investors beating down the doors. But despite the promise of its technology, BeWell hasn’t been able to demonstrate a business model that resonates with venture capitalists. In the current health care system, clinicians aren’t reimbursed when poor patients on Medicaid avoid going to the hospital—only when they receive care. In effect, Medicaid accrued the benefits of keeping the pilot program’s patients healthier and reducing the overall cost of their care, while the physicians at San Mateo Medical Center who did the work received little financial reward. In this scenario, it’s no wonder that the hospital decided it couldn’t justify a longer-term investment in BeWell’s technology.

BeWell’s story illustrates the challenges facing companies that try to enter underserved markets, defined as low-income people and the health care providers who serve them. In particular, this segment of the health care field has a significant need for new medical technologies that expand access to important diagnostics, treatments, and specialty services while reducing costs—all without sacrificing the quality of care. Think of remote monitoring technologies that check on the vital signs of the elderly, people with chronic health conditions, or those recovering from a serious illness so as to enable providers to intervene before a crisis occurs.

Many of these technologies have the potential to help underserved populations that receive care from so-called safety net providers. Such providers serve disproportionate numbers of the uninsured and those on Medicaid by offering free or discounted care. They include public hospitals, community health centers and clinics, and for-profit and nonprofit health care organizations.² Because of their mission and the socioeconomic status of the majority of patients they serve, safety net providers face severe resource constraints.

The problem is that traditional funders of health care innovations, such as venture capitalists and corporate investors, are seeking significant rewards to compensate for any risk they take. “Investors are looking for unbounded upside with the least amount of risk possible,” said Josh Makower, founder and CEO of device incubator ExploraMed. But, he explains, “Most investors don’t expect to find big, unbounded opportunities in low-resource environments.”

Medical technologies with high social value—those with the potential to reduce costs, improve outcomes, and increase access for underserved populations—can play an important role in helping safety net providers use their resources more efficiently to better serve millions of patients. But these products and services may not necessarily generate the high financial returns that investors expect, particularly when the benefits are misaligned, as in the BeWell example. For this reason, many companies have struggled to secure capital to fund the development and commercialization of important innovations.

This misalignment between the risks and rewards associated with innovative new technologies must be overcome if the United States is to improve its health care system significantly over the coming decade.

HOW TECHNOLOGIES GET FUNDED

Medtech innovators typically have two choices when seeking the cash they need to achieve scale: venture capital and corporate investment. Venture capital is by far the largest source of funding in the medtech field. In 2010, for instance, US venture capitalists invested $2.3 billion in 324 medical device startups, according to PricewaterhouseCoopers.

Venture capital, also referred to as venture financing, typically helps startups establish or sustain a business with high growth potential. A venture capitalist (VC) makes an investment, and in exchange, the VC’s firm receives equity in the company. The expectation is that the investors will be able to realize a substantial return on their money through an “exit event,” such as selling the company to another firm, at some point in the future. This type of funding is especially helpful to startup companies that do not yet have an operating history, revenue, or significant collateral, and therefore lack access to other sources of capital, such as bank loans.

In the medical devices sector, VCs select their investment opportunities using specific criteria that help them balance the risk-reward equation. Although every VC takes a slightly different approach to evaluating new technologies, there are some common criteria that they all use, such as the strength of the management team, the technical feasibility of the product, and the size of the potential market. (See “What Venture Capitalists Look for in Medtech Investments" below.)

In combination, these criteria assist VCs in placing their bets. The more risk they see as they evaluate the opportunity, the greater the market size and potential return on investment must be to get them interested. Because a large portion of venture capital deals fail to earn any return on investment, those that succeed must compensate for the losses. “If roughly 20 percent to 40 percent of companies succeed, you need these companies to make up for the capital invested across the portfolio and generate a return for investors,” says Mudit Jain, a partner with venture capital firm Synergy Life Science Partners. Returns for VC-funded companies considered to have achieved a successful exit range from 300 percent to 1,000 percent, or three times to 10 times the total investment.

Another common funding source for medtech innovators is corporate investment. Large corporations, such as Johnson & Johnson and Medtronic, can help fund startups by underwriting a specific research and development effort through a development partnership or by investing in the company as a traditional VC would. Corporations have criteria similar to those that VCs use when evaluating opportunities. Unlike venture investors, however, corporate investors are looking for investments that will also create synergies with other products in their portfolios or new opportunities aligned with their growth strategy. If a new technology is strategically attractive, a company may be slightly more flexible than VCs when making an investment.

THE TWO SIDES OF THE SAFETY NET MARKET

Unfortunately for innovators who want to develop technologies that aid underserved populations, VCs and corporate investors use the same demanding criteria to evaluate these technologies as they use to assess mainstream commercial opportunities. What’s more, VCs today face even greater pressure to produce results, and they may have less money to invest than in the past. In combination, these factors can make it difficult to get funding for technologies that could benefit the safety net but pose greater investment risk.

“The investors we represent don’t look to us to do their humanitarian work,” says Michael Goldberg, a partner with venture capital firm Mohr Davidow Ventures. “They look to our firm to generate a return on their investments in a way that’s hopefully compatible with their humanitarian values. If we told them we were going to sacrifice investment returns in any material way in an effort to better serve the general welfare of the US or world population, I think they would move their money as soon as they had the opportunity.”

When asked what advice he would give to innovators seeking funding to meet clinical needs in low-resource settings, William Starling, managing director of Synergy Life Science Partners, says bluntly: “Avoid venture capitalists. Venture capitalists are trying to survive. There’s just no way they’re going to put money into efforts that don’t meet the minimum bar for return on investment in the current climate.”

Despite the perception that low-resource environments can’t generate big returns, the safety net shows some promise as a market opportunity for commercial investors—specifically, it can be used as a launchpad for cost-reducing technologies. As the entire health care system becomes more cost constrained, technologies that can reduce spending should become more broadly appealing. Proving the value associated with these products under the challenging conditions of the safety net could potentially help them cross over into mainstream commercial settings. In the process, it would help establish the safety net as a preliminary market from which companies could expand.

Innovators can also consider expanding from the safety net into low-resource environments abroad. “If you can actually find a solution that makes sense in [US-based] resource-constrained environments, you may be able to enter the true growth markets of tomorrow,” says Ed Manicka, CEO of medical device maker Corventis. “Specifically, India and China are demanding low-cost solutions that are technologically on par with what is available in the United States. Now, clearly, the margins are going to be lower, but the pure scale is mind-boggling.”

Finally, the size of the underserved population, although small compared with the total US market, is still substantial. Medicaid covers roughly 48 million low-income families and another 14 million elderly and people with disabilities. Total Medicaid spending for fiscal 2010 was approximately $365 billion, almost a 9 percent increase over the previous year, and the budget is expected to continue growing for the foreseeable future. Although there are significant challenges associated with reaching and serving these patients and their providers, the population represents a sizable opportunity for innovators who can figure out how to serve it profitably with high-value, lower-cost solutions.

THE CASE OF REMOTE MONITORING

A specific class of products known as remote-monitoring and intervention technologies illustrates the challenges and opportunities that innovators face when they seek venture funding for innovations that have high social value. Although remote monitoring can potentially reduce costs, improve care, and increase underserved patients’ access to specialty care, venture investment in this area has been slow and somewhat inconsistent.

Devices like blood pressure cuffs and glucose monitors enable physicians and other care providers to check and treat patients’ conditions without being physically present. Costs can be lowered when care shifts to a less expensive setting, such as a clinic or a patient’s home. By keeping people out of the hospital, these solutions can also significantly help improve people’s quality of life.

When VCs and corporate investors evaluate remote-monitoring technologies using their standard investment criteria, many innovations receive high marks for technical feasibility. “Remote-monitoring technologies are relatively low-tech in some ways—I mean, it’s not like we’re putting devices inside the body that are going to shock a patient’s heart,” says Suneel Ratan, a marketing, reimbursement, and government relations executive at Robert Bosch Healthcare, a leading corporation in the telehealth field. Most of these products are based on fundamental technologies that have proved themselves in sensors, data communications, or other fields.

Moreover, because the devices are for external use, they pose few safety risks for patients. As a result, they often receive regulatory clearance through the FDA ’s faster 510(k) review process. Most investors favor 510(k) products over those that require pre-market approval, and thus they may be more attracted to remote-monitoring innovations.

Although the technical and regulatory risks are relatively low, several other investment criteria have proved to be problematic for many remote-monitoring solutions. Investors frequently decide not to fund the technologies because of a combination of market and adoption risks, as well as issues regarding business models and reimbursement. Investors are also hesitant to commit resources because they perceive a low potential return on investment. Each is a significant barrier that must be overcome in order for new technologies to move forward. (See “Remote-Monitoring Risk Factors” below.)

The story of Health Hero Network illustrates each of these barriers to funding, as well as the challenges traditional investment criteria create. At the time Health Hero Network was established in 1998, the Palo Alto, Calif.-based company’s primary product was the Health Buddy System for monitoring and improving the health of high-risk, high-cost elderly and disabled patients with one or more chronic conditions.

Patients used a simple, four-button device that each day led them through interactive sessions of six to 10 questions customized for the person’s condition. Primary care physicians and specialists prescribed Health Buddy to teach patients how to understand their conditions better, help them change their behavior, enable the early detection of health risks before they escalated to an acute stage, and provide reassurance to patients that their health was being monitored. Health Hero Network supplied the technology and training for users; the health care provider set up the basic infrastructure for receiving, interpreting, and acting upon data transmitted from patients’ homes.

After Health Hero Network developed the technology, it conducted a series of demonstration studies to prove the system’s value. A small early study with the health plan PacifiCare showed a 50 percent reduction in hospital readmissions for heart failure patients who used Health Buddy, according to Ratan. Despite these encouraging results, PacifiCare eventually decided to outsource its disease management services rather than adopt the technology.

In 2000, Health Hero Network launched a pilot with the Veterans Administration (VA) in Florida. The study of 900 patients using Health Buddy found a 63 percent reduction in hospital readmissions and an 88 percent decline in nursing home days.³ Approximately four years later, Health Hero received its first national contract with the VA. The agency agreed to directly fund the purchase and use of Health Buddy technology and related services.

Health Hero Network then approached the Centers for Medicare & Medicaid Services (CMS) about securing reimbursement for its product. “The largest and most expensive group of patients you can go after globally is the folks on Medicare,” Ratan says. “[Health Hero Network] had a desire to prove that health care management interventions with the Health Buddy would generate a similar result in a fee-for-service system.” The company submitted a proposal to CMS and got approval to launch a three-year demonstration study in 2006. The results have not been officially released, although Ratan described them as “jawdropping.” CMS extended the demonstration project in 2009, but as of this writing has not yet decided whether to grant reimbursement for the product.

Robert Bosch Healthcare acquired Health Hero Network in late 2007, when more than 20,000 people with chronic conditions were using Health Buddy. After receiving about $72 million in total known funding, the company was sold for $116 million, a return of roughly 1.6 times the investment.

In deciding to sell the company, Health Hero’s board presumably determined that an exit at that point was financially more attractive for its investors than the alternative of raising more capital in order to drive reimbursement changes and increase market adoption. The funding environment in 2007, along with the company’s progress to date, most likely made it difficult for Health Hero’s investors to envision a compelling return on investment from putting in more money and extending the investment time horizon.

Other risk factors also played a role in preventing Health Hero from raising additional capital to commercialize the Health Buddy product on its own. The high burden of proof required to change physician behavior and drive widespread market adoption turned out to be time-consuming and costly to the company, causing it to burn through the funds it had already raised. Adoption was also limited primarily to integrated health care providers like the VA, which could benefit from the longer-term, system-level savings associated with such improvements as reduced hospital admissions. Fee-for-service providers remained unconvinced of its value, especially without reimbursement for activities or technologies that keep people out of the hospital. That reduced the size of the market in the near term. As Ratan explains: “The premise of the Health Buddy system is chronic care. It’s continuous, supportive, and designed to build an individual’s capability to take better care of himself. But the health care system is engineered for acute care—the incentives are structured largely to wait until someone’s in crisis.”

STRATEGIES TO ADVANCE THE FIELD

New technologies, such as the Health Buddy and dozens of others like it, have the potential to reduce costs, improve health outcomes, and increase access to the services patients most need. But the social benefits these innovations create are undervalued in the way traditional VC and corporate investors make funding decisions. Foundations, social venture funds, individual philanthropists, and other socially minded investors can play an important role in correcting this market failure by altering investor perceptions of the risk-reward equation associated with these technologies. They can do this in three primary ways.

Fund Meaningful Pilot Studies to Reduce Safety Net-Specific Risks. After identifying the most promising technologies with high social value, social investors can help them succeed by underwriting and facilitating compelling pilot studies and clinical trials. This would directly reduce one of the most daunting costs of bringing promising innovations to market and could significantly reduce the time it takes to develop the clinical proof needed to catalyze provider adoption.

Such studies can also be designed to improve the attractiveness of the safety net as a market. There’s a common perception that safety net patients are less likely than other populations to comply with their prescribed treatments—including the use of technology. Rigorous studies with results that stand up to peer review may be able to demonstrate that underserved populations are no less compliant than other market segments. If particular patient groups continue to show difficulties with compliance, social investors might support the piloting of innovations to minimize these issues—for example, by shifting the burden of treatment or testing from the patient to the provider or by making patient requirements more fail-safe.

To get good value from the studies they fund, social investors must think more strategically than they have in the past about what to test, how to test it, and what data should be generated. The majority of pilot studies should include controls, produce publishable results, and include a rigorous economic evaluation of the technology, so that decision makers who can influence adoption perceive the data as credible.

To accomplish these objectives, social investors can collaborate directly with payers to determine the kind of value proposition data—cost savings, improved care metrics, and so on—they would want to see before they would be willing to pay. Then they could design and fund a pilot to gather those data. In the BeWell example at the beginning of this article, the company might have generated greater interest from investors and health care providers if its pilot study had been specifically designed with the goal of demonstrating significant value for customers and determining the return on investment required for adoption. That, in turn, might have eliminated some of the risks for traditional venture investors and health care organizations. Translational work of this kind would help innovations get uptake in the market and attract investment.

Change Policy. In parallel, social investors can help address business model and reimbursement-related risks, such as the ones Health Hero Network faced, by urging CMS and federal lawmakers to realign incentives in the current reimbursement system to support the use of technologies that reduce costs, improve care, and increase access, even if this means shifting the venue or disrupting the traditional model of care.

Existing incentives for “closed” health care providers, such as the VA, Kaiser Permanente, and other managed care organizations receiving fixed payments for services, may be adequate as long as sizable, long-term capital investments are not necessary. But direct reimbursement for innovative new technologies would certainly strengthen their motivation. It would also make the technologies more appealing to providers that still serve fee-for-service Medicaid and Medicare patients.

In 2011, a unique opportunity exists for social investors to interact with the new Center for Medicare and Medicaid Innovation, which Congress created under the Affordable Care Act. This division of CMS has a mandate to test innovative payment and service delivery models to reduce program expenditures while preserving or enhancing the quality of care for Medicare and Medicaid recipients. It has been given $10 billion in funding to explore new payment models between 2011 and 2019, which means that social investors are perhaps better positioned than ever before to collaborate with the center and influence its policy recommendations.

Another aspect of the Affordable Care Act that may present opportunities for social investors to effect change is the introduction of accountable care organizations (ACOs). ACOs are virtual networks of doctors and hospitals that share responsibility for providing care to a defined population of patients over a specific period of time. The ACO concept is intended to make groups of previously disconnected providers jointly accountable for the health of their patients, giving them stronger incentives to cooperate and save money—for example, by avoiding unnecessary tests and procedures. With these new incentives, technologies that keep patients out of the hospital may become appealing to traditional fee-for-service providers that previously wouldn’t have considered them.

The details of the ACO model still remain to be proven, but social investors can lend valuable insights as policymakers and providers figure out how to make the approach work. For instance, investors who are considering ACOs as potential buyers of medical technologies may be concerned that they will face long sales cycles that require approvals by the network’s board of directors before new products can be adopted. Social investors can potentially anticipate such risks and, through the pilot studies they support, gather data aimed at shortening sales cycles for ACOs.

Establish Dual-Market Potential. Because subsidized business models are rarely sustainable over the long run, social investors have a vested interest in increasing the crossover potential of cost-saving technologies that have been shown to serve safety net populations effectively. Reimbursement reform and the advent of ACOs will potentially increase the opportunity for technologies optimized for the safety net to penetrate commercial markets in the United States. Specifically, reimbursement reform will create incentives to encourage the adoption of new technologies among Medicare fee-for-service providers beyond the safety net (with private payers following Medicare’s lead in granting reimbursement). Similarly, ACOs will involve not just Medicare and Medicaid beneficiaries, but patients with private insurance as well, thereby giving private payers another reason to think differently about preventive care. By supporting these policy changes, social investors will help establish dual US markets for safety net innovations.

Social investors can further support technology crossovers by coordinating networks of VCs with an interest in investing in overseas markets and introducing them to technologies that reduce costs while improving health outcomes. Outside the United States, large emerging markets in countries like India and China are attracting significant attention. Some of the technologies that have been shown to deliver value to safety net providers may be strong candidates for improving health care in the developing world for tens or hundreds of millions of customers.

FUNDING SOCIAL INNOVATIONS

When it comes to funding innovations with high social value, social investors can use several models. Targeted grantmaking is perhaps the most common form of support that foundations, philanthropists, and government agencies offer. Innovators receive financial support from these entities with no expectation that they will repay the money. With effective targeted grantmaking programs, such as the US Small Business Innovation Research (SBIR ) program, funding is awarded for a specific purpose (for example, conducting a defined pilot study) and must be linked to a specific commercialization plan for moving the technology to market.

Program-related investment is another common form of funding. It has been around since 1969, but it has become increasingly popular over the last 10 years. Recognizing some of the inherent limitations of grantmaking, such as the dependence these subsidies can create, social investors like the Acumen Fund developed processes for providing “social capital” to bridge the gap between the efficiency and scale of commercial venture capital and the social impact of pure philanthropy.⁴ With these models, capital is raised from donors (typically large foundations) and then invested in fledgling companies with products and services that have the potential to generate high social impact, achieve scale rapidly, and become self-sustaining within five to seven years.

The companies benefiting from program-related investments might be given loans, guarantees that allow them to access capital through other channels, or investments in exchange for equity. The social investor expects to earn a return on its money, but the rates, investment horizon, and other terms are less stringent than traditional venture requirements. Acumen Fund, for example, expects that approximately half of its investments will succeed and half will fail. For this reason, it hopes to realize a two-times return on its successful investments, so that 100 percent of all capital raised from Acumen donors can be reinvested multiple times.⁵ Other entities recycling donor capital in this way within the health care field include the Bill & Melinda Gates Foundation, the Robert Wood Johnson Foundation, and the California HealthCare Foundation with its Innovations for the Underserved fund. (For more information about this strategy, see the “Foundations as Investors” article.)

Social venture funds are yet another source of capital. With this type of financing, no donors are involved; foundations, corporations, and high-net-worth individuals make debt or equity investments into a fund and become limited partners, as they would with any private equity or venture fund. The fund pursues a social mission, however, in addition to seeking to generate a financial return for its investors. “Investors take an outsized risk for the ability to have a social impact,” explains Raj Kundra, director of capital markets at Acumen Fund. The Acumen Capital Market fund has attracted investments from such high-profile foundations as Rockefeller and Skoll. By offering returns, even though they might be below market rates, fund managers are able to raise and deploy significantly larger amounts of capital than they could by raising donations for grants or program-related investments.

Foundations, in turn, contribute to these funds to help technologies with high social value reach a point at which they are attractive to traditional investors. As Kundra says, the goal of impact investing is to provide a proof of concept for interesting technologies and then bring in new sources of capital once these innovations are far enough along to meet more traditional investment criteria.

A fourth funding option focuses on commercializing innovations developed in academic settings. From 2006 to 2011 the Wallace H. Coulter Foundation awarded grants of $5 million to nine universities. The schools used the money to provide seed funding to projects that had the potential to generate treatments and devices that improve human health. At Stanford University, one of the grant recipients, 25 such projects were funded during the five-year period. A panel of academics, entrepreneurs, and investors selected the projects, and each one followed a rigorous development process that included a detailed commercialization analysis. Almost half of these projects moved toward the marketplace as a result of the funding, and they have secured $43 million in follow-on funding, with 49 percent from nongovernment sources.

Following on the success of the program, the Coulter Foundation established a $20 million endowment at Stanford to support funding of such translational projects in perpetuity. By staging its investment, the foundation proved that a rigorous development process can work in an academic setting to increase the rate at which new technologies reach the market. It also demonstrated how such an approach can accelerate the translation of early-stage discoveries into marketable products. Other foundations with an interest in supporting the development and commercialization of products or services that can reduce the cost of health care in environments with limited resources—without sacrificing quality—could potentially pursue similar funding models.

CONCLUSION

Nearly all health care stakeholders now believe that the future of the entire system depends on gaining better control of rising costs. As a result, interest is growing in innovations that enable more efficient and cost-effective care. Traditional investors appear more open to funding such projects, as long as they can generate sufficient financial returns.

Social investors can play an important role in this movement. They can identify opportunities to reduce risks, change policy, and help establish dual markets for bold, potentially market-transforming ideas that otherwise could struggle to raise funding from traditional sources. They can also provide flexible, long-term capital in the form of targeted grants, program-related investments, social venture funds, or endowments. Through these mechanisms, donors, investors, funders, providers, and innovators can help ensure that high-impact innovations find their way to the patients who need them the most.

Stefanos Zenios is the Charles A. Holloway Professor in the Stanford Graduate School of Business. His pioneering work on maximizing the benefits of medical technology to patients when resources are limited has influenced policies in the United States and Europe.

Lyn Denend is the director of the Program in Healthcare Innovation at the Stanford Graduate School of Business. She has written numerous case studies and papers on health care and biodesign innovation.

Under Stauber’s direction, the St. Paul, Minn.-based foundation pursued a 10-year $200 million plan to reduce poverty across eight states. By partnering with those most affected by poverty—on tribal reservations, in struggling rural areas, and among the urban poor—the foundation hoped to generate high-impact solutions.

Before the decade was up, NWAF would be threatened with a lawsuit in one community, suffer stinging public criticism from a Native American organization, and endure staff churn and board dissension. Although there were some notable successes, by 2008 the foundation was ready for a new course and president.

Today the NWAF “has returned to its roots as a more traditional grantmaking organization,” says President Kevin Walker. It no longer invests in getting new organizations off the ground, focusing instead on grantees with proven track records. Ten-year investments have been replaced with more traditional three-year grant cycles. Yet despite these and other changes in board governance, the foundation has not given up on its long-term vision.

“They haven’t thrown the baby out with the bathwater,” says Carol Lewis, CEO of Philanthropy Northwest. “They are sticking with their commitment to poverty reduction, even when it’s hard.”

Instead of quietly closing this chapter, the foundation has bravely gone public with lessons learned. “If you’re trying to blaze a new trail, you have an obligation to turn to your peers and say, ‘Here’s what we think we found,’” says Walker. Gaining Perspective: Lessons Learned from One Foundation’s Exploratory Decade, a report prepared by FSG Social Impact Consultants, delivers a frank assessment: risky investments in untested programs, bold vision but fuzzy strategies, and a board often unaware of what was happening in the field.

The foundation’s willingness to learn from missteps has earned it the respect of fellow philanthropists and former critics. “What’s amazing about this story is that they totally addressed the issues,” says Nichole Maher, director of an urban Native American organization whose protracted relationship with the foundation proved “catastrophic.” She adds: “I’ve seen philanthropic institutions make mistakes and not hold themselves accountable. What they’ve done, in such a short time, is truly admirable.”

PARTNERSHIPS AND PITFALLS

The farm crisis of the late 1970s hit hard in Miner County, S.D. High school teacher Randy Parry watched bright young people exit in droves, leaving behind an elderly population and dwindling revenues. “We knew we had a problem,” Parry says with Midwestern understatement. By the mid-1990s, concerned citizens began meeting. Youth were put in charge of visioning sessions that attracted business owners, farmers, ministers, and others. “We knocked down the walls of the school and brought people together to identify issues and possible solutions,” Parry says.

Those conversations caught the attention of NWAF, which was looking for communities for its new Ventures program. The foundation’s cornerstone antipoverty program would eventually award $150 million in 10-year partnerships. Stauber describes the approach as “single outcome, not single focus. Communities were given great latitude in deciding how they wanted to reduce poverty.”

In 2001, Miner County became the first NWAF Venture site. Securing $5.8 million for a decade meant going through a lengthy strategic planning process and establishing a new regional nonprofit, which Parry left a 30-year teaching career to direct. “We were the guinea pig,” he says, but their initiative proved catalytic for the region. Foundation dollars attracted millions more for industry, housing, and community improvements such as a landmark Rural Learning Center and clean-energy demonstration site.

That first success proved hard to repeat. Some factors are clear in hindsight, says Parry, such as having a consistent program officer “who became like an adopted daughter here.” More critical, Parry suspects, was the community engagement that preceded the foundation’s involvement. “We were already on a path to change. This was truly our plan.” Elsewhere, outside consultants were brought in to help communities through the exploration phase with NWAF. “They’d call us and ask, ‘Who did your plan?’” Parry recalls. “I’d say: ‘We did. It took 341 meetings.’ Well, they didn’t want to hear that.”

Stauber, now president of Danville Regional Foundation in Virginia, sums up the key to success as “readiness. Ten years is a very short time for communities to become ready and to reduce poverty. You can’t buy readiness.”

FROM COLLABORATION TO CONFLICT

Portland, Ore., with a Native American population of 50,000, was one of four cities that collaborated on a proposal for an Urban Indian Community (UIC) Venture. Maher, executive director of the Native American Youth & Family Center (NAYA), recalls steady turnover and shifting messages from the foundation during the exploration phase. “We went through six staff in the first six months, a dozen in two years, tons of consultants. There were no templates or guidelines.” Instead, she recalls submitting drafts that her team had labored over “and being told no, that’s wrong. You’re not following best practice. We felt belittled.” Agreeing on a definition of “poverty”—a word that Native Americans don’t limit to dollars-and-cents metrics—revealed the cultural gap between funder and grantees.

The planning team persisted for two years, Maher says, “because it was such an opportunity to do something significant for our community.” But the tantalizing pot of gold remained out of reach—exactly as elders had warned might happen. An initial proposal of $20 million for four cities shrank to $14 million for 30-plus cities. Then in 2006, the foundation denied the UIC’s plan altogether.

Maher went public with her frustration, speaking out on behalf of all four cities. In a lengthy point-counterpoint with Stauber in Responsive Philanthropy, she called the proposal process “disastrous,” accusing the foundation of cultural incompetence bordering on institutional racism.

More conflict erupted in Yakima, Wash., where a local resident threatened a lawsuit (eventually withdrawn) when two years of exploration ended in a turndown from NWAF.

Clearly, launching new partnerships proved harder than the foundation expected. Looking back, Stauber can see that each site needed “a backbone organization, a competent local partnership with adequate capacity and sufficient standing in the community to play a critical leadership role. NWAF had few of these partners.”

Power dynamics between funder and grantees also proved tricky. “We helped to stand up new organizations in hopes that they would bring all voices to the table. But did they have community credibility or were they the creation of an out-of-town funder? There was ambiguity at best,” Walker says. Gaining Perspective blames implementation challenges on a combination of ambitious goals and ill-defined strategies: “Foundation board and staff agreed on a broad definition of the ‘what’ (the foundation’s mission of reducing poverty), but did not come to agreement on the ‘how.’” Unclear expectations left staff in a position of “shooting darts at a moving target.”

BRIGHT SPOTS, FRESH STARTS

When Walker arrived as NWAF president in 2008, he found a board “ready to do things differently.” The board changed its governance structure, for example, to keep members better informed about programs and more engaged with staff.

What didn’t change was the goal of reducing poverty. To that end, NWAF has adopted three key programming strategies: expand assets and wealth for low-income people; build leadership and organizational capacity; and seek better public policy solutions. The foundation that once took a go-it-alone approach to funding novel programs is now open to public and private collaboration, Walker adds.

NWAF also has committed itself to becoming “a better listener,” says Walker. “We want to organize our work around questions rather than around answers. We’re trying to listen carefully to people in low-income communities and help them figure out their agenda for making change.” The foundation is working especially hard to do better with Native American communities, who receive a third of NWAF grants. Nationally, less than a fraction of 1 percent of philanthropic dollars reach Native Americans.

Cheyenne River Sioux Tribal Ventures in South Dakota was the last site awarded funding under the NWAF Ventures program. The reservation has benefited from lessons the foundation learned in other communities, says Eileen Briggs, the project’s executive director. “Indian country is a small world,” she says. “We’d heard the stories.” Briggs credits NWAF support for empowering her tribe “to try out our most creative ideas and do the best work we could do.” When she read the criticism of NWAF in Gaining Perspective, she thought: “Is this the same organization we’ve been dealing with? It doesn’t describe our experience.”

Last year, Walker and others from NWAF attended a powwow at the new 10-acre site of NAYA in Portland. It was purchased with help from NWAF, which eventually granted $10 million to the four urban Native American programs it previously had turned down. “Everyone in our community knew what had happened and totally embraced them,” Maher says. “Our relationship has been transformed. One of the hardest challenges we ever faced has turned into one of the most positive for our community. This process helped us gain our voice.”

Suzie Boss is a journalist from Portland, Ore., who writes about social change and education. She contributes to Edutopia and is co-author of Reinventing Project-Based Learning.

The Shell Foundation gives away about $16 million a year. Although it isn’t one of the larger foundations, it plays an outsized role in philanthropy, in part because of its ties to the world’s fifth largest corporation —Royal Dutch Shell—but also because of its innovative approach to grantmaking.

West and the Shell Foundation are unabashed about taking a businesslike approach to social change. West describes one of his roles as that of an angel philanthropist—taking big risks to help unproven social ventures get on their feet—and another as providing growth capital to proven organizations to help them scale.

Instead of spreading its resources around to lots of organizations, the Shell Foundation has a small portfolio of forprofit and nonprofit social enterprises that it devotes the bulk of its time and money to. Like the foundation, these organizations all take a business approach to social change. They include GroFin, which provides advice and capital to small- and medium-size African businesses; and Envirofit, which helps develop and sell clean cooking stoves that reduce indoor air pollution.

In this interview with Stanford Social Innovation Review Academic Editor Johanna Mair, West explains why a business approach to philanthropy is effective, how the foundation partners with its grantees, and why, despite its many successes, Shell Foundation has been so candid about its failures.

Johanna Mair:Tell us about the Shell Foundation’s approach to philanthropy. You have described it as providing enterprise-based solutions to development challenges. What does that mean?

Chris West: Our view is that many development challenges are a result of a market failure in one way or other. And that as a result, we need an approach that tries to find solutions that can scale globally and be financially sustainable. It could include some degree of subsidy dependence, but our goal is to get the market to pay for the service or product where appropriate.

Overall, we try to adopt a business-based approach. We have clear targets to judge per- formance and delivery, and we focus on only a few issues where we can provide more than money. We view the people we’re ultimately trying to benefit as customers for a particular product or service rather than as victims or beneficiaries of a handout. As customers they have to value an offering and ultimately decide whether they want to pay to receive it. That customer focus is the key to our definition of an enterprise-based approach.

Have there been instances where you had to say, “We are not going to engage in this particular issue because this approach would not work”?

We haven’t yet encountered a constraint to applying our approach. The challenge has been how deep into the market we can penetrate. For example, there are limits on the very poor’s ability to pay for new products or services. Our response has not been that the approach is wrong; it just means that the target market that we are able to service is not necessarily the poorest of the poor.

Take cookstoves as an example. We have a partnership based on providing clean cookstoves to poor families who are affected by indoor air pollution because they cook food using wood or charcoal. Some of the earlier clean cookstoves were priced around $25 and were not immediately affordable for the poorest families. But the early adopters, who earned maybe $2 a day, are interested in buying these products. What you find is that once the early adopters buy this product or service, poorer people then start buying the product as well. So one doesn’t necessarily start with the poorest, but over time we’ve found that we can reach many of the poorest people through an enterprise-based approach.

What is the limit of enterprise-based solutions? It’s fair to say that without a conducive policy environment it is difficult to apply some of these approaches. There are some countries in Africa, for example, where the policy environment is not conducive to small businesses starting up and running. I’ve always taken the view that first I want to demonstrate potential solutions, and then I can join others in advocating for policy reform. That way I can present governments with proven, verifiable results.

Implicit in your approach is the idea that business thinking and business models—call it business DNA—are beneficial. Why do you believe that?

You need two DNA sets to tackle some of these big development challenges. You need a development DNA—an understanding of the particular needs and characteristics of your customers, the poor people that you’re trying to reach. And you need business DNA—how do we structure solutions that are fit for purpose, scale, and sustainability?

That doesn’t mean that all solutions have to be for-profit or sustained only through profitable ventures. In our definition of financial viability, we would include solutions that can be sustained through continued support from the public or otherwise. Although we still think the biggest opportunity lies in getting customers to see the value of a particular product or service and then pay for it themselves.

Adopting a business-based approach is deploying all one’s resources, nonfinancial as much as financial, and coming up with solutions that are viable, performance based, customer driven, and therefore scalable. One needs to think about how to help the partner come up with a solution that is relevant to an ever-changing market demand.

You mentioned the need for partnerships. Was partnering always on your agenda?

The word partner is very easy to use, but it’s often misused. And I would apply that to our own thinking and practice. In the early days of our foundation, we, like lots of others, put out requests for proposals to other organizations that were interested in doing things that were relevant to our agenda. We then essentially gave them money and support to do those things.

What we learned was that the majority of these relationships did not realize any significant impact. That forced us to reflect on our own strategy of partnering. What we found was that we were giving what can best be described as short-term, project-based support. By drip-feeding our support we constrained their ability to act, and as a result the solution wasn’t really viable. That led us to fundamentally rethink our strategy.

Now we have deep-rooted joint venture partnerships with organizations that we’ve carefully selected. We know absolutely everything about these organizations. One of my team members will work almost as part of their organization in developing, testing, and scaling up their solutions. We keep performance indicators on our partner and on us to measure what’s expected. It’s much more of an open, long-term, patient relationship than we ever had before.

A lot of our early work that was branded as partnering was more of a contractual relationship. Those have a place, but our experience has been that that type of relationship is less likely to lead to the scale and sustainability of output that we’re seeking.

You imply that partnering is based on trust. At the same time, you are clear with your partners about what you are trying to achieve in a project and that those things have to be measured. Do you see a discrepancy between the two, or are they complementary?

First of all, I’ve banned the word project. A project mentality is inevitably linked to a culture of short-term giving and relationship at a distance. There’s a time and place for projects, but it isn’t synonymous with partnerships for achieving long-term change and scale. Getting back to your question, trust is absolutely essential. But trust takes time to build and doesn’t happen automatically.

Now when we look for partners it’s essential that we find an organization or individuals who share our vision from the outset. That mindset is critical because it helps map out the journey. And it’s not a journey for the fainthearted, project-mentality organizations because it does take a long time.

Our focus on disciplined implementation is a way to help our partners achieve their goals in the most viable and effective way. For example, getting people to do monthly or quarterly financial reporting is not something to satisfy our monitoring and evaluation requirements; it’s essential to running any venture. If you don’t understand cash flow management, you’re not running an effective business.

I’ve always believed that the only things that people should monitor are ones that make sense to their venture. If I need information that exceeds their core reporting, I should pay for that.

Can you elaborate on what it means to be catalytic as a philanthropist and how it relates to your own endeavors?

Let me answer that by starting with an example. Back in 2002 we co-founded EMBARQ as our center for sustainable transport. (For a profile of EMBARQ, see “Networking for Sustainable Transport.”) We took the view nearly 10 years ago that no amount of project support would ever have a significant impact on the problem. If we were to have a global impact, then we needed to operate in a different way. That led us to say: “Let’s catalyze. Let’s create a new center for sustainable transport that can offer advice to cities that will allow them to implement a range of sustainability mobility solutions.”

It moved quite radically from a project approach to a knowledge and independent advisory center approach. Ten years later, EMBARQ has achieved huge, huge benefits in improved mobility solutions in cities around the world, iconic cities like Mexico City and Istanbul. We’ve invested large amounts of time and money over the last 10 years to get it to the point now where it is going to scale and is reaching multiple countries. But it’s taken a long time. It happened because we catalyzed something new with a partner.

In the foundation’s 10-year anniversary report you mention things that did not work. How transparent should organizations be?

If someone else can achieve the scale of impact that we’re after in a far more cost-efficient way, then I should either be learning from them or giving them the money. But at the moment I have no ability to determine how other people are succeeding in their various efforts to achieve the same goals, because so few organizations are transparent about what worked and what didn’t work.

For me, transparency is fundamentally related to learning. And learning is not helped by a lot of the reports that are published— from foundations in particular—that are more like marketing materials. That is why I wanted to produce a report to mark our first decade that was more introspective about what we’ve learned, both good and bad, in the hope that others can learn from it.

In our report we mention that 80 percent of what we did during our first three years failed our definition of achieving scale of impact. But through changing our strategy, we now find that 80 percent of our support meets these objectives. But I’ve still got no idea how our performance compares to others, because we cannot find many other organizations reporting in similar ways.

You share the brand with Shell corporation. You define that relationship as independent yet linked. Can you elaborate on that relationship?

During the conversations that led to the creation of the foundation we said that we wanted to do things a little bit differently. One of the ways we were going to be different was to approach development problems in a business way by deploying more than money on a focused set of issues. To be effective we needed to focus on issues that were aligned to the energy challenge of development, because that would allow us to leverage our links to our corporate parent. We focused on energy as opposed to doing something in education, for example, because all we’d have to offer would be money.

From a governance side we have a mixed board, which is, again, a little bit different from other corporate foundations. We have three Shell executives and three externals, so it’s an equally balanced board. We’ve set principles down that enshrine what we do, where we do it, and who we do it with. That gives us the control of this relationship.

Ten years ago it was quite novel to have this alignment between the work of the foundation and the work of the corporation that spawned it. We genuinely didn’t know how much value we could actually leverage from our link to our parent. But we have been successful in a number of instances in being able to leverage technical skills and support from our parent to the benefit of us and our partners at no cost. For example, some of the leading executives from Shell have advised us on setting up and managing distribution channels for products. That’s been hugely beneficial to our partners involved in distributing solar lanterns and cookstoves. More recently, experts in Shell, who have huge knowledge about health and safety issues, have helped our partners address some of the health and safety risks associated with their approach and reduce those to much more acceptable levels.

Overall, we haven’t been able to leverage as much from Shell as we thought we would when we set up the foundation. That’s for a number of reasons, but primarily because neither we nor the corporation had any experience doing this, so we had to learn. In the next decade I’m looking forward to being able to draw far more value from our links to Shell than we have done to date.

For the last question I want to ask you about impact investing. You are a charitable foundation, and yet you also label yourself as an angel philanthropist. Can you elaborate on what role you see the Shell Foundation playing in the emerging industry of impact investing?

Historically we’ve used grants to help organizations build up the capacity and the systems that would allow them to scale. For example, systems that allow you to operate across multiple geographies, which is quite complex, whether it’s IT or other operating systems. I’ve now come to the view that there is a real need for early-stage grant funding to new organizations to help them test and do new things.

There are a growing number of impact investors out there who are providing either debt or equity finance. But these are still relatively risk-averse investors who will not back a complete startup. What we’ve learned is that our comparative value in this landscape is to play a very early-stage, highrisk role as an angel investor, providing a grant-like investment into an organization to help them test a solution or product, and obviously test our relationship. When those partners do succeed and have a track record, then we can present them to others who can help finance them for growth.

When I returned to the United States, a neurologist confirmed what the doctor in Germany suspected. I had a relapsing-remitting form of MS in which my immune system, without warning, would attack the insulating substance on the nerves in my brain and spinal cord, called myelin. These attacks would weaken or disrupt the electrical signals passing among my nerve cells, causing a wide range of possible symptoms, including paralysis, vision and hearing loss, focus and concentration problems, and incapacitating fatigue. Today, I am one of 2.5 million people living with these unpredictable, debilitating symptoms. There is no cure.

Like many people diagnosed with MS and other chronic diseases, I did my best to hide and ignore it. Though occasional attacks slowed me down, I completed my undergraduate civil engineering degree at the University of California at Davis and an MBA at the University of California, Berkeley’s Haas School of Business. I married my girlfriend, launched a career in business with the Boston Consulting Group, and eventually led three startup companies. By MS standards I have been more fortunate than most. But the attacks have taken their toll. My right arm no longer works, and without a brace on my right leg I am unable to stand or walk.

Over the past 35 years, I have experimented with several available MS treatments on the market—treatments designed to tamp down a self-destructive immune system or to reduce inflammation during attacks—but the potential benefits have eluded me. MS has affected every day of my life. And with each year and each news story promising a cure, I have hoped that I would benefit from the millions of dollars spent on finding a cure.

In 2001, I read a brief article in Businessweek about discoveries made at Yale University, which suggested that myelin damage in MS could be reversed. Repairing the myelin had the potential to restore lost function in MS patients. This news was especially exciting because the proposed treatment did not rely on suppressing the immune system to slow the progress of the disease. Instead, it relied on repairing and restoring the myelin damage caused by the disease.

Developing a myelin repair treatment was an irresistible problem to solve. I began to research what was known and not known about myelin biology, who the experts were, and the process of medical research. What I discovered was a large and complicated ecosystem with independent players who operated within their own cultures. Further, the incentives within these cultures were not always related to an outcome that would benefit patients. And most surprising from a business perspective, there was no plan to guide the players toward a cure. Soon it was clear why so much money was being spent on medical research with so little benefit to patients.

FREE AGENTS, COMPETING INCENTIVES

The US medical research ecosystem is a pipeline that depends heavily on the contributions of academic scientists, commercial biotech and pharmaceutical companies, and the Food and Drug Administration (FDA). Below is a snapshot of each of their worlds.

Academic scientists are funded largely by the National Institutes of Health (approximately $35 billion annually) and by universities, philanthropic foundations, and independent research institutes (approximately $15 billion annually). For the most part, each scientist pursues an area of personal interest and hides discoveries until her work is published in a peer-reviewed scientific journal or presented at a professional conference. It can take as long as four years from the time a scientist writes a proposal until successful results are considered publishable. There are no records of failed experiments.

Each academic laboratory is like a small business. The CEO is the principal investigator, and the staff members are postdoctoral and graduate students. Academic laboratories in the same discipline compete for funding and the best students. A successful laboratory is one that can produce proposals that are funded and results that are publishable. The result of this $50 billion annual investment? Some 800,000 published papers each year.

In 2009, commercial biopharma, whose strategy is based on increasing shareholder value, invested more than $75 billion in research. But today’s biotech and pharmaceutical companies are facing some steep challenges: The cost of bringing a new drug to market now exceeds $1 billion. Venture capital investment in new biotech companies has fallen off. The patents on large numbers of blockbuster drugs worth billions of dollars are expiring, creating competition from generic drug manufacturers. Studies have estimated that to meet its commitment to shareholders, pharmaceutical companies spend nearly twice as much on marketing as they do on research and development. New drug targets in the pipeline are fewer and fewer. All this adds up to a bleak picture for a once flourishing industry whose projected price-earnings ratios today are approximately half those of consumer products companies.

And finally, the FDA, whose job it is to regulate drug development, is caught in an unending balancing act: to protect consumers from ineffective or unsafe products, and to get valuable new drugs to market that will save or improve lives. As few as 9 percent of all Phase III clinical trials succeed. This statistic alone should raise important questions about an ecosystem in which such stunningly negative outcomes are the norm.

ACCELERATED RESEARCH COLLABORATION

In 2002, I founded the Myelin Repair Foundation (MRF) to solve two problems: to unravel the scientific mysteries that trigger the formation of myelin, and to transform a scientific ecosystem fraught with barriers into a more adaptive process that could fast-track new treatments.

We set out to recruit the best scientists who had expertise in myelin biology and were willing to break the rules. The ground-breakers included Stephen H. Miller of Northwestern University, Brian Popko of the University of Chicago, Ben Barres of Stanford University, Robert H. Miller of Case Western Reserve University, and David Colman of the Montreal Neurological Institute.

In exchange for funding, these scientists committed to developing and executing a research plan and to sharing their results, both successes and failures. This created a highly collaborative environment in which multiple experiments were done in parallel across labs. The experiments were overseen by a scientific advisory board of senior neuroscientists who helped us ensure that the work remained within the scope of the research plan. We call this model Accelerated Research Collaboration, or ARC.

Now in 2011, it would be difficult to find a research consortium that does not tout collaboration. But in 2004, although conversations about speeding medical research were surfacing in forums hosted by organizations such as Michael Milken’s FasterCures, MRF’s approach was novel and ultimately would prove groundbreaking. What most collaborations still lack is external management oversight, which keeps scientists focused on patient treatment. Back in 2002, we also put in place contracts with the participating universities to ensure that all relevant discoveries would be protected and ready for commercial licensing.

Fast forward to 2011. MRF’s scientists have produced 150 drug targets against which various compounds can be tested and measured for their effect on myelin repair. They also have produced 24 new research tools—animal models and assays—that can be used more broadly in neurological research. Four patents have been awarded.

CROSSING THE VALLEY OF DEATH

In 2008, with several discoveries in hand, we began approaching pharma. We quickly learned that our best work lacked the level of validation—a rich set of data from multiple tests and animal models—that industry required for licensing. Although we had succeeded in building an academic collaborative that more rapidly produced large numbers of drug targets, crossing the valley of death from academic science to pharma was going to require more infrastructure—infrastructure that could produce industry- standard data compelling enough to attract pharma’s billiondollar investment.

We needed to add a more sophisticated level of industry expertise to our own staff. Jay Tung, our first pharma veteran, came aboard as vice president of drug discovery. Within a year we put in place a drug discovery advisory board whose members had successfully brought drugs to market. The payback of establishing this advisory group was quick and powerful. With their guidance, we have been able to identify 40 targets that are in clinical development for MS and other diseases. And we have been able to attract more top-level scientists, such as Mike Gresser, our chief scientific officer, who headed neuroscience and inflammation research at Amgen.

Our story would not be complete if I did not mention the challenges we have faced in raising the necessary funds to accomplish this work. Although we benefited early on from the generosity of many foresighted Silicon Valley entrepreneurs, venture capitalists, and foundations, including the Robert Wood Johnson Foundation and the Donaghue Foundation, we also have faced the challenge of raising money during one of the worst economic downturns in US history. It has been a job no less difficult than understanding myelin biology or executing a plan to cross the valley of death.

Not all social innovations are fast. The ARC model is a work in progress. Getting a myelin repair treatment on the market will not be the end of our story. It will be the beginning of a process to scale and replicate the model for other diseases. This is a day I hope will come sooner rather than later.

Scott Johnson is the president and founder of the Myelin Repair Foundation. His work on developing an accelerated model for medical research that turns basic biological discoveries into treatments or cures has been broadly recognized for its potential to bring new medicines to market.

A better picture of the work that nonprofits do is coming into focus, thanks to increased collaboration by organizations that report on charities. User-generated content, written by those who have direct experience with nonprofits, now appears alongside more formal evaluations of charities on a variety of websites. For potential donors and volunteers, it adds up to “a 360 view of nonprofit effectiveness,” says Perla Ni, who founded GreatNonprofits in 2007 with this goal in mind.

Ni (founder and former publisher of the Stanford Social Innovation Review) launched GreatNonprofits in the wake of Hurricane Katrina. She recalls being frustrated by not knowing which organizations were doing a good job of responding to the disaster. As survivors’ stories emerged, she realized that some of the best response came from small organizations unknown outside New Orleans. Technology offered a solution to gather this scattered wisdom, leading Ni to create a Zagat-style charity review site.

It wasn’t long before Great- Nonprofits—an upstart in the field—caught the attention of GuideStar, established in 1994 to create more transparency in the nonprofit sector. By partnering, the organizations have enabled user reviews to flow across both sites. Content sharing extends the reach of GreatNonprofits and adds another dimension to the information that GuideStar publishes about nearly 2 million tax-exempt organizations.

User reviews offer authentic insight “into the inner workings of a nonprofit and show real-time feedback that begins to paint the picture of effectiveness,” says Bob Ottenhoff, GuideStar president and CEO. His organization has invested time and resources in the partnership, he says, because “we believe that user reviews can ultimately be an important tool in measuring the impact and effectiveness of nonprofit organizations.”

User reviews are just one of several tools donors and nonprofits need, Ottenhoff cautions. GuideStar recently acquired Philanthropedia, which surveys social cause experts to identify nonprofits that are having the greatest impact in specific areas. Bringing together multiple perspectives fits GuideStar’s goal to “facilitate innovation and thought leadership in the marketplace,” Ottenhoff says. “We consider our partnership with GreatNonprofits as part of our test laboratory, for us and for the sector.”

The sector is responding. Two more organizations, Charity Navigator and GlobalGiving, have now joined the content syndication effort, which is managed on the back end by GreatNonprofits. Charity Navigator rates the financial health of more than 5,500 of the largest nonprofits using a star system. GlobalGiving is an online marketplace for nonprofits around the world.

User reviews posted on any of these sites now appear on all of them. “All our partners have their unique ways of reviewing charities and thinking of what their audience wants,” says Ni. By getting more organizations on board, she hopes to build a critical mass of reviewers. The number of reviews has increased threefold in the past year, with partner sites generating 35 percent of content. “Working together makes this information credible,” she says.

For nonprofits like DC Central Kitchen, there’s value in “empowering our volunteers,” says Egger, and inviting them to be critical. They can offer feedback that nonprofits need to hear. But, he adds, “it needs to go beyond ‘I (heart) this nonprofit.’”

As the charity evaluation field continues to evolve, Egger sees nonprofits searching for right-sized tools. “Everybody’s asking: What can the average nonprofit afford? What can the average volunteer (or donor) understand?” A platform that gives users a voice “has the potential to be a revolutionary tool in the sector,” Egger predicts.

My first encounter with Bass and Community Coalition was in the early 1990s, while sitting on the funding board of Liberty Hill, a Los Angeles foundation that supports community leaders and community building initiatives. There I became keenly aware of the power of small grants to leverage big policy change, such as living wage ordinances for low-income workers and bills to reduce toxic waste dumping in low-income neighborhoods.

A more recent report issued by the National Committee for Responsive Philanthropy confirmed what many organizers and advocates know intuitively: One dollar invested by foundations in policy advocacy, community organizing, and civic engagement results in $91 in benefits for local communities. Despite the power of supporting community organizing and public policy, however, many foundations shy away from such work, preferring to support direct services. A recent Foundation Center survey indicated that 76 percent of foundations do not fund or engage in direct charitable activities that could be considered policy related.

Yet the current US budget crisis requires that foundations reassess their attitude toward public policy engagement. Increased scrutiny of the philanthropic sector and the expectation that foundations can fill the gap created by diminishing public resources have created a need for foundations to step up and participate in the public policy debate in an organized and strategic fashion.

STRENGTH IN NUMBERS

Perhaps the timing is fortunate. In the past two decades, we have witnessed tremendous growth in the number, scale, and impact of foundations. In fact, the nation’s 76,000 foundations, nearly two thirds of which were established since 1990, possess more than $590 billion in assets. Many are small and unstaffed, focusing on local causes dear to their hearts—churches and synagogues, educational institutions, soup kitchens and shelters, and youth programs.

Public policy and advocacy are often seen as the domain of large, private, national foundations and not usually perceived as relevant or appropriate strategies for many community-focused foundations and their governing boards. Foundation boards are often reluctant to engage in what they perceive as political activities. Furthermore, there is sometimes confusion about whether activities such as advocacy and lobbying are permissible and legal for foundations.

So how can foundations, especially community-oriented ones, influence public policy?

They can collaborate. Although foundations often require nonprofits to collaborate, their own track record is unimpressive. Yet public policy and advocacy are areas where collaboration is not only appropriate, but imperative. Collaboration also makes sense. For example, smaller foundations in a collaborative can benefit from institutions with in-house research and evaluation expertise. Ones with cautious boards can see that they are not the only ones engaged in risk. And smaller-asset foundations can leverage their dollars by partnering with others. Furthermore, legislators may be more apt to listen when messages are consistent and being delivered by more than one organization.

Fortunately, the recent growth in philanthropy has been accompanied by an increase in infrastructure organizations that support the sector. These include research and training organizations (for example, Alliance for Justice); associations of grantmakers (the Council on Foundations, Southern California Grantmakers, and the European Foundation Centre); affinity groups (the Association of Black Foundation Executives); and public policy organizations (the Center on Budget and Policy Priorities). This community of practice can help funders examine how their mission and grantmaking can better align with public policy opportunities, while also maximizing philanthropic impact and effectiveness.

FOCUS MISSION, LEVERAGE ASSETS

As the intersection between public policy and philanthropy can be vast, foundations may find that their work has greater impact if public policy efforts focus on the issues closest to their values and vision. Some already do that. The Rosenberg Foundation, for example, has a special focus on policy changes that can reduce California’s high rates of incarceration and recidivism and increase former convicts’ participation in the workforce and civic life.

The California Endowment is another example. It uses its assets to advance social change. In 2010, the foundation announced plans to reconsider more than $5 million in investments in Arizona-based companies in reaction to the state’s harsh anti-immigration law. This was the first time the foundation had attempted to influence public policy through the investment side of its work. In addition, the foundation’s headquarters at the Center for Healthy Communities in downtown Los Angeles leverages the endowment’s physical assets to bring together policy and advocacy groups, government agencies, and community organizations in a shared conference space. In an era of limited budgets, the center has become a hub for social change agents in a vast geographic region without a core.

Another noteworthy example of collaborative systems is in the area of children’s health insurance coverage. Several California health foundations, including the Alliance Healthcare Foundation, Blue Shield of California, the California HealthCare Foundation, Kaiser Permanente, the California Endowment, and the UniHealth Foundation, came together to help find a solution to the approximately 1 million uninsured children in the state. The results of this collaboration yielded impressive results, contributing to a reduction of uninsured children by more than 40 percent between 2000 and 2008. Although the economic downturn and the budget crisis may have affected the momentum gained, many lessons were learned.

Foundations also can play an important role in the public policy arena. When I worked with the Open Society Institute’s Emma Lazarus Fund—a $50 million initiative to assist immigrant and refugee communities—grants often focused on supporting and connecting grassroots coalitions and networks with national policy organizations to impact immigration issues.

Bringing together diverse institutions, strong leaders, and varying theories of change can make collaboration messy and slow. Yet the long-term benefits can be worth it.

PRIORITIZE ACCOUNTABILITY

Foundations active in the public policy arena must be prepared to answer questions about their accountability—and for a possible backlash to their involvement. Whereas governments are accountable to voters, public companies to shareholders, and nonprofits to funders and communities served, foundations can operate in a less transparent manner. If they attempt to influence policies and programs that should be responding to democratic processes, they may be perceived as lacking legitimacy and accountability; the worst-case scenario is that they are seen as directed by the whims of the wealthy.

How best can foundations address the perceived and real challenges surrounding accountability? Foundations—with their long-term view on social change and relative independence—can bring together diverse stakeholders and communities to build a stronger, more vibrant, and democratic public sphere.

But foundations must be careful to strike a balance between being inclusive and moving the needle. After all, on any single public policy issue there are divergent perspectives on the best way forward. Do we strengthen public education or offer vouchers to private schools? Should health care be provided to undocumented immigrants or be restricted to citizens? Foundations can respond best by focusing on those most disenfranchised, those whose voice is most excluded from the public policy conversation.

In 2001, while serving as a program officer at the Ford Foundation’s New Delhi office, I helped convene a group of Dalit activists and researchers to discuss the issue of caste discrimination, a human rights situation that affects more than 160 million Indians. Out of that consultative process was created the Dalit Foundation, the first grantmaking institution in South Asia working for the empowerment of Dalit communities.

Not all foundations are created in this manner, but they can incorporate the values of inclusion and equity in their public policy and grant strategies. The International Budget Partnership, funded by the Ford Foundation and the Open Society Institute, provides an example of foundations convening and supporting a network of civil society organizations around the world. The partnership uses budget analysis and advocacy as a tool to improve governance and reduce poverty. Based on the belief that people’s participation is critical to the budgetary processes, the partnership’s programs help to ensure that the public has timely and meaningful information on how governments manage public funds. In countries where governance reform can make or break the development prospects for society, budget analysis and advocacy are important strategies for funders to pursue in order to meet development goals.

Although the foundation community has historically preferred to work behind the scenes in regard to public policy issues, the current political and economic environment necessitates a shift in thought and action. Today, a stronger, more engaged philanthropic sector must understand and operate in the broader political environment to increase its impact and effectiveness. It can do that by focusing its efforts on collaboration and accountability.

Sushma Raman is president of SouthernCalifornia Grantmakers and a senior fellow at the UCLA School of Public Affairs. She previously worked for the Ford Foundation and Open Society Institute.

Health care in America has increasingly priced itself out of the reach of customers. Consumers and employers have long complained about the system’s lack of affordability. And the payer of last resort—government—is now facing the same reality.

Indeed, the current debate over how to manage the country’s deficit has produced a striking milestone in American politics: Bipartisan agreement essentially exists on the need to dramatically rein in government health spending. The argument is not about whether to cut costs, but how.

Some see innovation as the principal problem in health care, concluding that the hunger for the latest new technologies and devices, without regard to value, has brought the nation to this point. Although there is no question that high-cost, low-value products and services have been created in the name of innovation, we believe that bold new clinical and business models, often aided by technical breakthroughs, are instead a vital part of the answer.

At the California HealthCare Foundation (CHCF), we have collaborated with academics, philanthropists, investors, and entrepreneurs to support innovations that provide better care at a lower cost. And we have had some successes—such as a low-cost, technology-enabled program that screened more than 53,000 diabetics who otherwise wouldn’t have access to eye specialists, and saved the sight of more than 1,400 Californians.

But too often we have seen the paradox of a “successful” pilot that has failed to gain wider traction. Numerous challenges face innovators during the early development of new care models, perhaps the greatest of which is bridging the gap from testing and early adoption to mass adoption. Crossing this chasm requires extraordinary leadership, entrepreneurship, and collaboration among creative talent of all kinds.

Our experiences in the field have led us to create the CHCF Health Innovation Fund. The initial $10 million fund is dedicated to identifying and investing in both nonprofit and for-profit companies developing technologies and services that have the potential to create a dramatic impact on the cost and accessibility of care. As we developed the fund, we paid close attention to the creative approaches of other health care foundations in this area. Although most “impact investing” in health care to date has been from foundations working internationally, we see a growing interest among social investors and entrepreneurs in tackling health care costs and inequities inside the United States. This sponsored supplement to the Stanford Social Innovation Review explores the challenges of investing for lower-cost devices, services, and technologies in health care. The topic is ripe for inquiry, given the pace of innovation in health care and the significant funds that flow from traditional investors into the sector each year.

The report begins with an article by Stefanos Zenios and Lyn Denand at the Stanford Graduate School of Business that explores the challenge of funding innovations for the health care “safety net,” or those providers who care for low-income populations. To follow this piece, we invited two investors and an entrepreneur to offer their perspectives on the challenges and opportunities in health care innovation.

In addition to new technologies, new models for service and care delivery also will have to be invented if the United States is to meet a growing need for health care within a shrinking budget. Arnold Milstein, MD, explains what he is hoping to achieve in this area through the work of the Stanford Clinical Excellence Research Center.

Because the government pays for nearly 50 percent of the nation’s health care costs, we have included a piece from Carleen Hawn about how Todd Park of the US Department of Health and Human Services is trying to infuse the innovation culture of Silicon Valley into the largest of bureaucracies. And for a perspective on cost-lowering innovation in the developing world, we have Jaspal S. Sandhu’s examination of how global initiatives in mobile health might inform care in the United States.

In the final article, John Goldstein, co-founder of Imprint Capital Advisors, and Margaret Laws, director of the Innovations for the Underserved program and the CHCF Health Innovation Fund, describe some of the ways that foundations are using their capital to support emerging market-based approaches to health care innovation.

We hope that this collection captures the creativity and excitement we see coming from innovators, investors, and providers who are joining together to take on the formidable challenge of innovating for high-quality, lower-cost care.

Browse the latest SSIR articles, including the sponsored health care supplement articles.

See the complete health care supplement.

Mark Smith is president and CEO of the California HealthCare Foundation.

Barbara Lubash is managing director of Versant Ventures and a board member of the California HealthCare Foundation.

Into the breach step the editors of Giving Well, an interdisciplinary volume of essays. Patricia Illingworth, Thomas Pogge, and Leif Wenar promise an “unmatched introduction to the ethical issues surrounding giving.” With contributions from such academic luminaries as Peter Singer, Thomas W. Dunfee, and Pogge himself, expectations run high, and many of the essays are indeed substantive and stimulating. The problem is that much of the information in the book isn’t new; the contributions from Singer, Dunfee, and Pogge repeat ideas and even entire essays published elsewhere. And the ideas presented in the new essays in the collection are often inaccessible because of excessively turgid academic prose.

Exceptions exist. For example, the essay by Stanford University political scientist Rob Reich is both clear and illuminating, extending his prior explorations of tax incentives for giving. Reich finds wanting the two main justifications for charitable deductions: taxable income and government subsidies to charities, which as currently implemented tend to benefit wealthy citizens instead of the general public or the poor. But he notes that a third, even more defensible rationale for giving—encouraging pluralism—also fails, because the regressive design of deductions in most countries disproportionately favors the rich. (I might add that the bias toward supporting particular dominant religions in the United States and many other countries also could undermine the pluralism rationale.)

Truly indispensable, despite being reproduced from elsewhere, are Singer’s essay on the duty of citizens of more affluent countries to help the global poor, with giving based on citizens’ income levels, and Pogge’s essay on the complex array of issues, such as maximizing the number of lives that can be saved, that international non-governmental organizations should consider. Although readers may disagree with some of the points made by these authors, no one serious about ethical giving can fail to engage with them at some level.

Still, I would have hoped for more insights into current philanthropic trends, such as the mechanisms by which the Bill & Melinda Gates Foundation is transforming global health through its public-private partnerships, investments, and strategic and business approaches. Notwithstanding Dunfee’s insightful essay, “The Unfulfilled Promise of Corporate Philanthropy,” there is too little information about the exciting new contributions many corporations are making to persistent global challenges, such as poverty, inequality, health, water, food, illiteracy, climate change, conflict, and war.

Multinational corporations are recognizing that the natural and social systems in jeopardy are important to their businesses and to people around the world. They are bringing their core competencies, strategic resources, and drive for results to help address root causes as well as symptoms of problems. This is significant, since the scale of the world’s challenges transcends the abilities of any single player. What we need are multi-stakeholder and rights-based approaches to sustainable development, as evidenced by the United Nations Global Compact and the call to action for corporations to support the U.N.’s Millennium Development Goals.

Illingworth’s essay highlights the crucial importance of fostering social capital through infrastructure, laws, norms, and values that enable trust and cooperation. She rightly points out that global social capital is undermined by the policy of limiting deductions to donations to charities within the United States. She could have included, however, examples of concrete philanthropic initiatives enhancing social capital besides microfinance, especially given the criticism it has encountered recently.

The rest of the essays in this collection vary in quality from the outstanding (Roger C. Riddell’s survey on the value and limits to foreign aid), to the relevant and interesting (Alex De Waal’s examination of how humanitarianism in Sudan has contributed in unexpected ways to good and evil outcomes), to the ill-conceived and misleading (Leif Wenar presents stale and sophistical arguments against aid, as does Ken Anderson against international NGOs).

Wenar unfairly and myopically evaluates Singer’s approach to poverty alleviation, excluding all the nuance and recognition of the complexity of giving in Singer’s argument. He adopts such an unrealistically skeptical view of aid that—his disclaimers notwithstanding—his argument would seem to discourage donations altogether. Anderson attacks multi-stakeholder action by calling it “global governance,” inaccurately defining this well-established concept as “one overarching lawgiver for the planet,” without addressing its widespread acceptance as coordinated action involving nonstate and state actors. Although it’s fine that such contrarian views are included in this collection, it is too bad that Singer and the others were not given a chance to respond to these mischaracterizations.

Giving Well may gloss over some of the most salient aspects of giving trends, but it usefully brings together a number of valuable essays that explore the promise of new directions of philanthropy. Its main contribution may be that it highlights the vital need for greater and more ethical generosity—and for continuous improvement of the effectiveness of the “new philanthropy.”

Chip Pitts teaches corporate social responsibility at Stanford Law School and Oxford University. He is the co-author and editor of Corporate Social Responsibility: A Legal Analysis.