Philanthropy in a New Key

John Sage and Christopher Dearnley weren't like most of their peers at Harvard Business School. Neither had financial training before enrolling and both are religious, in the God-is-behind-all-I-do sort of way. They became fast friends. When they worried about failing their classes, they'd meet for breakfast and pray for each other. After graduation, however--both earned M.B.A.s in 1989--their lives diverged. Six years out of school, Dearnley decided to forgo his business life, and he and his wife started a church in Costa Rica, where he had been involved in business years before. The church is part of the international Association of Vineyard Churches; their mission, among other things, is to teach people about Jesus and train them to help the less fortunate members of the community.

Sage, meanwhile, was getting rich. He moved to Seattle and took a job with Microsoft, where he led marketing teams for products like Microsoft Office. After five years he left to join the start-up company Starwave, which was later acquired by Disney and Infoseek. "I was fortunate to be in high tech at the right time," he says. He had become a multimillionaire.

In 1997, Dearnley and Sage met for their annual golfing reunion. Sitting by a pool after the game, Sage, now 40, told his friend that he was "long on cash but short on vision." "For as long as I can remember," Sage says, "I wanted to be in business, but also have a direct impact on community work and ministry--realms that don't often coincide." Dearnley had the opposite problem. He had been funding his ministry--which brings food, medicine, drug rehabilitation, shelter, and job training to Costa Rican children at risk and to adults--with a family inheritance that was running out. When he gave his friend a bag of coffee from Costa Rica, "in an instant, it all became clear," says Sage, who had been consulting for Starbucks and so had the coffee business on his mind. On the back of a napkin, the two men jotted down a business plan for Pura Vida--which means "pure life" in Spanish, but in Costa Rican slang translates as "way cool."

Within six months, a website was up and handpicked Central American coffee was for sale. Sage runs the business from a two-story building in south Seattle. The space looks like other dot-com start-ups: an exposed-brick warehouse crowded with computers, servers, coffee, an industrial-strength espresso machine, and eight busy employees. But on the walls there are pictures from Dearnley's ministry in Costa Rica, a reminder that the coffee sold here provides food or other support not readily available there. (The Pura Vida business model is novel, although a non-Web version has been done before: Paul Newman's "Newman's Own" food business gives all of its profits to charity.) The office sits directly across the street from Starbucks headquarters, a fact that Sage calls "highly motivating." He says he's grateful to Starbucks, mostly because it introduced a lot of people to good coffee. But, he adds, "We provide a very different Seattle coffee story." 

Money from sales, customer donations, and grants (from companies like Microsoft) is given to people who desperately need it. Most proceeds help children and adults in San José, Costa Rica, though some money has gone to hurricane and flood relief in parts of Nicaragua. Dearnley and volunteers from his church work with local social-service organizations, like a drug rehabilitation center, in poor neighborhoods around the city. They regularly go into dangerous parts of town, where, Dearnley says, even police officers are wary of venturing, to visit children who see violence and drugs daily on the streets and are often underfed. Pura Vida funds have helped pay for a soup kitchen and four computer centers (funded by a cash grant from Microsoft) in areas where men smoke crack on the street corners and the neighborhood river reeks because it doubles as a sewer.

In Dearnley's monthly ministry updates, posted on the Pura Vida website, he tells customers and potential donors how the company helps aid recipients. He writes about the children and adults in town who are elated about new shoes or a Christmas party, or are learning to use a computer for the first time. Of a six-year-old deaf girl who recently received a hearing aid with Pura Vida's help, Dearnley wrote, "To hear sounds for the first time frightened little Karina, yet terror soon faded into amazement. Now she's wearing the aid an hour a day until she adjusts to a world filled with sound. Karina's doctors believe she can learn to speak as well." Mocking business-school jargon, Sage says of the gift: "I'm not sure if that's strategic or leveraged or whatever, but it makes a difference."

So far, word of mouth has generated much of the company's sales revenue, though Sage plans to market the coffee, and solicit donations, more aggressively. Pura Vida now has customers in almost every state and several countries, and has put more than $100,000 into Dearnley's ministry. Sage doesn't necessarily target Christians, though he notes there may be upwards of 50 million Christian coffee drinkers in America. But he says it makes sense to sell the coffee to churches, whose parishioners may be inclined to support a Christian cause. He estimates that there are 400,000 churches in the United States, and "the only thing they can agree on is that they have to have coffee on Sundays. There's no reason we shouldn't be able to take a piece of that." He and his wife have financed Pura Vida for three years, but he expects the company to be profitable by the end of 2001. And even though he doesn't need to take a paycheck, he says it "would be nice not to be cash-flow negative every month."

Last fall, Pura Vida became the first on-line case taught in a course as part of the Harvard Business School's Initiative on Social Enterprise. The way Sage chose to give appealed to McLean professor of business administration James Austin, who taught the course with Allen Grossman, Bloomberg professor of management practice in philanthropy. Rather than donate to a nonprofit, Sage created a credible business. Rather than contributing only his money, he supplies his marketing skills. "Chris and I are very much business people," says Sage. "We're aggressive, competitive, we want to win, we want to put out a good product. But we define our shareholders--the kids--differently than any other gourmet-coffee company. Business can be about something more than what's classically defined by business schools." "Sage is deploying core talents, which is oftentimes more valuable in terms of social value than writing a check," Austin comments. "Anybody can write a check."

Sage's brand of hands-on philanthropy has recently been touted in the media, perhaps because the youngish, mega-wealthy, and enterprising new-economy elite, whose for-profit businesses often make the news, have embraced it. Bill Gates '77, for example, has become well-known almost as much for his philanthropy as for Microsoft. He and his wife, Melinda, have endowed the largest foundation in the United States, which donates millions of dollars to causes like global health research and education. Governmental funding to nonprofit organizations is shrinking at a time when the number of rich Americans has been swelling: there are about five million millionaires in the United States today, according to the Boston-based Philanthropic Initiative, a group whose purpose is to promote strategic philanthropy. Private-sector philanthropy, therefore, is becoming both increasingly important and feasible.

The new-economy philanthropists often have more to give than money: many are marketers, innovators, and gifted managers. They have valuable connections, and they're spry enough to initiate novel ways of giving. "It's an important phenomenon," says Austin about the young, new-economy moneyed like Sage and Greg Carr, M.P.P. '86: "What do you do with most of your life still in front of you?"

If Greg Carr had been a millionaire a generation ago, he might have waited until he died to give his money away. Carr might have provided funds for a familiar and reputable foundation, like the United Way, or endowed an existing program or library at his alma mater. He might have created his own foundation (as he has done), donated money to various charities, and sat on the boards of a few nonprofits. But a generation ago, Carr probably would not have made his money before he turned 40. In fact, he made his fortune in his thirties as cofounder of the voice-mail company Boston Technology in 1986 and as chairman of the investor group that purchased Prodigy in 1996 and reinvented it as an Internet service company. In 1999 he gave $18 million to the Kennedy School of Government when, he says, "I noticed that my alma mater didn't have a human-rights center." It was the largest gift an alumnus had ever given the school, and funded the Carr Center for Human Rights.

Granted, Carr wrote a check. But it was a strategic check. A few years ago, when he had already made enough money to stop working for a living, he started to read about cognitive psychology, bioanthropology, Chinese history, and human rights. He met Harry Wu, a Chinese dissident and human-rights activist who impressed him deeply. Dillon professor of government Graham Allison, former dean of the Kennedy School, who has become faculty chair at the Carr Center, helped Carr formalize his plan to give money to Harvard.

Carr chose Harvard, he says, because he realized that he'd get more for his money if he let academics and policymakers--experts in the human-rights field--do the work that he could not. "My goal was doing human rights, which I could have done anywhere in the world. The question was where to do it," he says. "Harvard is powerful and influential. I was trying to change the structure of something." To implement that goal, the center, under the direction of historian Michael Ignatieff, Ph.D. '76, offers courses like "Human Rights and International Politics: The Basic Policy Dilemmas" to the next generation of policymakers and hosts workshops for practitioners like the group Physicians for Human Rights, which met recently in Cambridge to review human-rights violations in Kosovo.

Though he created it, Carr, now 41, is no longer involved in the day-to-day operations of his eponymous center. During a trial year in 1998-99, however, he was an "active donor": working with faculty members to decide how the center should be structured and what issues it should pursue. "I was involved with the understanding that once it was launched I would appropriately step back," he says. "If I had wanted to be more involved, I wouldn't have gone to Harvard in the first place."

But it's no surprise that, two years later, the center is involved with Carr's own human-rights efforts in Idaho, his home state. He travels there regularly to work with mayors on a human-rights campaign, give speeches, and fight for minimum-wage reform. His Carr Foundation also supports the Idaho Human Rights Education Center, a group that focuses on human-rights education in Idaho schools. This past March, he announced that the foundation had spent $250,000 to buy a 20-acre, former neo-Nazi compound near Hayden Lake, Idaho, with the intention of converting a church on the site into an educational museum about human rights. (The property was awarded, following a lawsuit brought by the Southern Poverty Law Center, to a mother and son who had been beaten at the compound by Aryan Nations members; Carr bought the site from the victims.) The Carr Center at Harvard also provides training to Idaho state leaders doing human-rights work, some of which Carr initiated.

Lately, Carr has turned into an avid reader of plays. Last year, he bought a building in Harvard Square, gutted it, and helped design a theater that opened in April (see "Grendel's Playhouse to Wax, Hasty Pudding to Wane," January-February, page 72). The Market Theater, says Carr, will take a chance with unknown writers and directors and may be used for human rights-related projects, such as a film series. "When I think about the kind of philanthropy I want to do, I have two objectives--a moral objective and an aesthetic objective," he says. "These two pursuits feel really right to me."

Carr's kind of private, agenda-driven philanthropy is the most valuable, according to Peter Frumkin, assistant professor of public policy at the Kennedy School. That's because donors like Carr put a lot of money towards solving a problem themselves, rather than relying on an established foundation, or the government, to do it. "Often the best philanthropy I've seen doesn't start with, 'How do we supplement the public sector?'" Frumkin says. "The best giving comes when the underlying concern is a personal one. It comes from the interests and values of the donor."

Gary Jonas, M.B.A. '68, isn't a mega-donor with an agenda, but he works on behalf of a group of them. Jonas is managing partner at Venture Philanthropy Partners (VPP), one of about 40 such nonprofit "venture philanthropy" organizations in the country. Venture philanthropy uses business strategies to make giving more effective. With partners Jennifer Brown Simon, M.B.A.-M.P.P. '94, and Selma Gomez Orr '85, M.B.A.-Ph.D. '91, Jonas runs the day-to-day operations of VPP, which attracts money from stars of both the new economy, like AOL's Steve Case, and the old, like Katharine Graham, LL.D. '83, of the Washington Post Company. VPP has a lot of money (more than $32 million so far, making it one of the largest venture-philanthropy organizations in the country) and expects to be influential in a couple of ways: its investors and employees want to help children, and they want to change philanthropy. Both, they hope, can be achieved simultaneously.

"Our theory is that if you want to make a nonprofit great, it has to have a core managerial capacity," says Jonas, explaining the venture-philanthropy model. (He hasn't contributed to the fund himself: it requires a $500,000 minimum donation and "I don't have that kind of money," he says.) VPP's structure is entirely strategic, down to the choice of children as funding recipients. "[I]nvestments will be made to leverage the strengths of organizations that offer great promise to benefit children, thereby maximizing the social rate of return," the VPP website states.

The philanthropy works like this: after getting recommendations from nonprofit leaders in and around Washington, D.C., VPP sought out organizations--potential investments--that help children from low-income families in the D.C. area. Then VPP narrowed the field from 255 to four, and spent a few months performing due diligence, an in-depth review of each organization. Typically, a venture-capital firm or an investment bank will give a company due diligence before making the decision to invest. In VPP's case, Jonas says, "we do it in a more culturally sensitive way"--these are, after all, nonprofits. Still, VPP is looking for competent leaders who recognize both the strengths and weaknesses of their organizations, and who don't expect handouts--they have to be committed to the "help people help themselves" philosophy of venture philanthropy. "We're not going into this with the idea of telling them how to run their business," Jonas explains. "We're trying to make them successful."

The nonprofits VPP is considering as investments include a child-care provider, an out-of-school program provider (which includes before- and after-school activities for kids), and a mentoring organization. Once VPP decides what investments to make (it will make two or three annually), the nonprofit leaders will develop strategic plans for the next five years. VPP will follow their lead; the nonprofits decide what needs to be fixed.

Jonas and others enter as expert managers, with a good idea of what a successful organization looks like. He has more than 30 years experience as a professional manager in both the private and nonprofit sectors. He'll run a couple of investments, which means he'll spend about three days per week at the nonprofits' offices, at least for the first year. He could, for example, help the out-of-school program grow from six neighborhood centers to 16, or help the childcare centers get national accreditation. To do this, the centers would need more staff, an improved curriculum, and better facilities. Jonas would therefore help the nonprofit's leader figure out how to raise money for better facilities, or sit in during the process of hiring new staff members. "We build their ability to do it themselves, not do it for them," he says.

VPP members hope their business-style philanthropy will make their giving more effective than traditional methods could. And by publishing reports about their work, giving speeches, and meeting with potential donors, they seek to encourage other foundations to start investing in nonprofits in a similar way.

The Hestia fund (named after the Greek goddess of the hearth) is like a microversion of Venture Philanthropy Partners. The style of this "giving circle" is roughly analogous: a group of people pool money, research potential grant recipients, and expect their money to change something. "Venture philanthropists would be there making sure management meets its goals," says Hestia founder Susan Priem, M.P.A. '98. "And we will have a little of that, but with a little 'v' and a little 'p.'"

That's because the fund, at $100,000, is admittedly tiny and the group itself is relatively informal. Priem created it about a year and a half ago after talking with some of her women friends and deciding that pooling their money and learning about philanthropy in the process would interest them. Within a year, 20 women--Priem's friends, plus their friends--had each committed to investing $5,000 a year for three years. This spring, the women gave their first grants to after-school programs for low-income children in the Boston area.

The women who give to the Hestia Fund meet monthly for a couple of hours, often in Priem's Beacon Hill living room. There's no managing partner, no outside group of investors, no bylaws. The women, who range in age from the thirties to the eighties, talk through their decisions because everything is done by consensus; there's no voting. "That's worked beautifully," says Priem. "Just talking it out, 'What do you think?' And a nod of the head and you can just tell." (Because Priem plans to double the group's size by next year, she admits with some trepidation that the cozy atmosphere will have to change.)

Priem has another reason for assembling an all-female group. Like VPP, she wants to influence philanthropy and in her case, she wants to help women feel comfortable as philanthropists. "I hate to say this, but women-in-philanthropy is more my passion than the after-school focus," she explains. "That focus could have been anything and I'd probably be right there driving whatever it was. I think women are the ones who are going to have all of the wealth."

It's true that women are making more money now than ever before. They also live longer than men, about seven years on average. And even if men are paid more than women, women tend to make more of the spending decisions. There are nearly 100 women's funds like Priem's in the United States, according to the Women's Funding Network.

Priem has discovered that learning to give money away is harder to do than one might think. Hestia members formed committees to devise a mission statement (targeting low-income women and children in Massachusetts) and a focus within that mission (after-school programs). It took half a year for the women to choose after-school programs instead of mentoring or scholarship projects. They spent three meetings narrowing the field of nonprofit candidates from 22 to six, and a couple more months deciding where to give their money. "If you're a group that really wants to make a difference and see some difference, it's very hard to figure out where to give," says Priem. Group members have "really gotten interested in how to compare the different nonprofits so that we can choose and be strategic: what kind of budget do they have, what kind of staff training. Not that you can compare everything, we have learned that. We did a lot of sharing of our biases, and all that takes a lot of time. You give a lot. But in the end we really bonded, and that's so important in a giving circle."

Giving has also been difficult, Priem reports, because the nonprofits the group researched are all worthy candidates. They include a team-sports program for adolescent girls, a science and nature program tied to a settlement house, and an after-school arts program. Their budgets range from a scant $150,000 to $1.5 million and they need money for a range of things.

But they all want money for support structure, like staffing and professional training--which VPP funds exclusively, but which the Hestia Fund initially shied away from. "We were less inclined to do operation," says Priem. "All those things seem mundane and less sexy." But fund members may change their minds. Priem says they plan to evaluate what they've done in their first year as venture philanthropists and then mobilize for year two.

In the social capital market, as in the commercial market, says the Business School's James Austin, funds can come from various places and fulfill different needs: "You will have coexistence and co-learning." It's not likely, therefore, that one giving style will displace another. Nor does size matter that much. "There are mega-givers, like the Turners and the Gateses," Austin says, "and millions of microphilanthropists who, when you add them up, are in the same order of magnitude." What matters is that when the old, new, big, and small philanthropies fit together, they work.