Funding Social Innovation: An Interview with Paul Tarini

In the July installment of the Social Velocity interview series we are talking with Paul Tarini of the Robert Wood Johnson Foundation. You can read our previous Social Velocity blog interviews with Clara Miller and Kevin Jones.

Paul Tarini is the head of the Foundation’s Pioneer Portfolio, which actively seeks innovative projects that can lead to fundamental breakthroughs in health and health care.  Because the Pioneer team is dedicated to thinking and talking about new ideas and groundbreaking approaches, including those from nontraditional sources and fields, Pioneer enables the Foundation to make conceptual leaps and take risks in grantmaking that would otherwise not be possible. Since funding is so critical to making social innovation a reality, we thought Paul would have a unique perspective on what funders can do to incentivize social innovation.

Nell: The Pioneer portfolio strikes me as a more risk-tolerant approach to giving than typical foundations are used to. Why is RWJF more comfortable with the risks inherent in this kind of portfolio of projects?

Paul: RWJF is comfortable with the higher risk, unconventional, future-facing ideas Pioneer supports because it first identified a specific niche that needed to be filled within the institutional ecology.  We call that ecology our Impact Framework.  It was conceived of at a time when RWJF was thinking hard about how we organized our work.  The Impact Framework helps us understand our grantmaking as a whole, so, not just what do the grants in a particular area add up to, but what does the whole enterprise add up to.  As we were thinking about the impact we wanted to have, we knew we needed to work in fewer, more focused teams that were/are accountable for specific outcomes.

But we realized that while focus brings power and discipline, it also can be limiting.  We wanted a way to look out beyond the work of these targeted teams.  We were thinking about how to stay relevant for the long run as a philanthropy that operates on a national scale.  We felt that in addition to the targeted work being done, we needed a place devoted to the exploration of new ideas, where we could bring in new concepts, work with different people, and support more unconventional and future-facing ideas.  Such work could help RWJF stay fresh, bring in new ideas and new grantees, continue to grow, stay ahead of the curve.  And, if we found some real winners, health and health care would benefit from the outcomes of those projects.

Out of this came Pioneer.  Here are some examples of the work we’ve supported…We funded a natural resources economist to work on the problem of antibiotic resistance (Don’t approach it as an infectious diseases problem; think about our stock of antibiotics as a natural resource that needs to be managed and develop new policy from that perspective; we’ve been funding research into whether and how digital games can be effective therapeutic interventions (Can a game that uses a breathing tube as the controller that moves characters around the screen help kids with cystic fibrosis improve their breathing therapy?); we’ve funded early work exploring whether there are specific health strengths which, if strengthened more, could serve to forestall disease and mitigate effects once disease strikes.  We’re also supporting work that builds platforms that could produce lots of new knowledge and improve care, including Kaiser Permanente’s Research Program on Genes, the Environment and Health; and, efforts to link electronic health records databases with millions of patient records in order to learn much faster about what works for patients (Rapid Learning).

Nell: I understand that the Pioneer program has a rolling unsolicited application process, but I imagine you probably need to do a good bit of on-the-ground scoping and cultivation of ideas in order to get the most promising projects into the portfolio. How do you create a deal flow for innovative projects?

Paul: This is a constant challenge for us.  We do have an open door, and we do accept unsolicited proposals at any time. But most of the proposals that come in through this door are not good fits for Pioneer. We were set up to explore unconventional and untested approaches to problems, to bring in ideas from other disciplines, to look to the future.  We were not set up to support projects that promise incremental improvements, however important those improvements may be.  We look for projects with the potential for transformative change, the kind of change that can reach beyond a single discipline or group.  Most of what comes in unsolicited doesn’t meet that standard.  Finding ideas takes work.  And because we look for ideas across the breadth of health and health care, we can’t focus on just one haystack to look for needles.  We network.  We connect with interesting people at conferences, we go to events, we take meetings and phone calls, we visit people.  We are experimenting with other ways to source ideas.  We’ve had some success with open-source competitions, though the back end, taking a winning idea and creating a fundable project, takes time.  We are putting a lot of time and energy into social media right now as another way to build networks and find ideas.  Half of me wishes there was an easier way to find ideas, but I suspect that easier would also mean more passive on our part and passive is really boring.

Nell: You currently only invest in nonprofit projects, correct? Do you see the potential for investing in for-profit or hybrid organizations, through mission-related investing, down the road, particularly as social entrepreneurship grows and for-profit solutions to healthcare issues become more prevalent?

Paul: While the majority of our investments, our funding, are in the form of grants to nonprofit organizations, there is nothing that precludes us from supporting for-profit entities.  The largest award to come out of Pioneer to date—$15.6 million—went to a for-profit, Archimedes, Inc. However, before we can make an award to a for-profit, we need to clearly establish that RWJF’s dollars are going to fund an activity with a clear charitable purpose that relates to our mission.   This is just an additional test we need to meet.  The challenge we face on Pioneer is less about whether an entity is a nonprofit, a hybrid, or a for-profit.  Our challenge is whether that entity is doing work that isn’t merely an improvement, but is doing something unconventional, disruptive and future-facing and could produce breakthroughs in health and health care.  If we’re convinced the work meets that standard, we can usually figure out how to fund it.

Nell: What is holding philanthropy back from becoming more innovative and/or risk tolerant?

Paul: People who spend more time observing philanthropies are better suited to answer this question than I am.  That said, I think it’s hard to ask this question about philanthropy as a sector.  Philanthropies have a lot of latitude; you can’t assume they are fairly similar and that we can generalize our way to an answer.  In the same way there are differences between a business that employs 200 people and one with 20,000, there are big differences between a multi-billion-dollar philanthropy and a small community foundation.  Political contexts differ, staff sophistication differs (bigger isn’t always more sophisticated), boards and donors have varying levels of influence, so I think there’s a range of reasons — philanthropy by philanthropy — for being less risk-tolerant.

If I had to pick one reason, it would be that there’s no inherent reason for a philanthropy to be innovative and highly risk-tolerant.  A lot of good can come—and has come—from philanthropies that are cautious.  As I noted above, the decision at RWJF to have a portfolio that takes on more risk came from an institutional recognition of the long-term value to us—and to the field—of such investments.  So the niche-in-the-institutional-ecology point is important here. Also, frankly, our ecology is much larger than most, and so it can be more diverse.  Other philanthropies would need to work though their own reasons to embrace more risk-taking.

Nell: The nonprofit capital market overall is fairly immature compared to the capital market of the for-profit world. Do you see other foundations creating new giving programs or financial vehicles to expand the types of capital available to nonprofits?

Paul: There is a great discussion and a lot of effort being devoted to maturing the nonprofit capital market.  More money, philanthropic and otherwise, is examining and entering this space; and, more nonprofits are thinking about what they need to do to operate in this space.  It’s very exciting and I definitely think we’ll see more of that over time.  But I also think it will be years before we see a robust capital market for nonprofits.  As much interest as there is in moving into this space, the amount of money there and the portion of nonprofits positioned to take advantage of such a capital market is still relatively small compared with traditional ways of financing and operating.

Also, I think it will take a while to understand when it makes sense for nonprofits to access capital markets and when more traditional sources of philanthropic funding are more appropriate.  Philanthropies need to understand better—given what they’re trying to achieve—when a traditional grant makes the most sense and when some other financial vehicle does.

Nell: What do you think is the potential for greater partnerships between foundations and individual investors to bring more capital to social entrepreneurs, particularly in the healthcare sector?

Paul: Good question.  For large foundations such as RWJF, I think we need to consider carefully when looking at when individual investors as funding partners makes sense.  The projects we fund, by their nature, tend to be large.  The effort involved in soliciting individual investors might not be worth the result unless we are looking at folks who have considerable wealth at their disposal.  It’s a lift when you’re trying to aggregate a bunch of $100,000 contributions to reach $5 million; fundraising is not a core competency of ours.  I do think, though, that efforts such as the Social Impact Exchange, where individual dollars would flow directly to the organizations that need them, make a lot of sense.  So I think the opportunities for individual investors to participate as true funding partners on projects with RWJF are probably limited, though we are open to them if they make sense.  But there are definitely opportunities for foundations such as RWJF to help individual investors find groups that are worthy recipients.

Tags: Archimedes Inc, community foundation, grantmaking, Kaiser Permanente, nonprofit capital market, Paul Tarini, Philanthropy, Pioneer Portfolio, Robert Wood Johnson Foundation, Social Entrepreneurship, social impact exchange

Foundations Can Lead the Charge Toward a New Philanthropy

The news in the philanthropy world this week is not good.  It seems that our fears about the effect of the economic downturn on philanthropy are being confirmed in spades.  The Ford Foundation and Robert Wood Johnson Foundations, two of the largest in the country, are both reducing their staffs by 30%+ and making other cuts in expenses in order to maintain previous years’ giving levels.  The report on 2008 charitable giving released by Giving USA last week shows the largest percentage decline on record, although as Sean Stannard-Stockton of the Tactical Philanthropy blog wisely points  out:

Charitable giving behaved more or less as it normally does when the economy sours. This is, by most measures, the worst recession in a very long time and so we’re seeing charitable giving get hit. But it is only declining in line with the way it normally behaves. Things are tough, but there was no apocalypse.

Still, the news is troubling.

Although foundation giving makes up only 13% of the charitable giving pie, their reaction to an economic crisis can have a dramatic impact on charitable giving overall.  Foundations are in some ways viewed as the philanthropic experts and can set trends that can transform the impact of philanthropy. Take the Gates Foundation for example.  Last year they received $10.4 million in unsolicited donations simply because other philanthropists think that Gates is a philanthropic leader.

So now is the time for foundations to lead the way towards more effective philanthropy–philanthropy that builds and scales organizations rather than buys services, as Michael Selzer, writer, educator, nonprofit leader and PhilanTopic contributor, points out in his recent post.  Michael argues that the economic crisis provides a natural impetus to foundations to become builders of organizations rather than buyers of services, and in fact he poses a provocative question:

A growing number of foundations are beginning to think of themselves as “builders” rather than “buyers”…buyers award grants with an eye to achieving specific programmatic outcomes, while builders, always mindful of outcomes, seek to help grantees strengthen their organizational capacity so as to achieve greater impact in the future. To the extent that “buying” is limited to a relatively short-term transaction rather than a longer-term interest in the organizational well-being of the grantee, it is not an especially productive activity. Which leads me to ask: What foundation would want to be a buyer rather than a builder in today’s environment?

Michael goes on to somewhat equate “building” funds with general operating support, pointing out that only 20% of all grants go to operating, whereas 50% of all grants go to specific programs or projects.  He offers a list of ways for foundations to increase their “builder” funding while still supporting specific programs. His list includes giving grantees the latitude to adequately account for indirect costs, expediting grant approval processes, expanding grant periods to more than a year, and sharing responsibility with grantees for securing remaining program costs if the foundation is only funding part of the program. Michael calls these “extraordinary measures” for “building the capacity of the nonprofit sector for the long haul.”

I disagree.  Nothing in his list seems extraordinary to me.  The economic crisis and the resulting effects on philanthropy and the nonprofit sector does call for extraordinary measures, a resetting of both realms: the nonprofits and the philanthropists who fund them.  And because foundations lead the charge in the philanthropic realm they have an obligation to take a hard look at how they do things and try some truly extraordinary measures.  A list of truly extraordinary measures that foundations could take includes:

• Increasing the use of program-related investments (PRIs) to include capacity building projects like upgraded nonprofit fundraising functions.
• Exploring mission-related investing, investing part of a foundation’s corpus in social businesses that meet the foundation’s mission, to a much larger extent as a way to expand the reach and impact of the foundation.
• Increasing the percentage of capacity building and unrestricted grants that the foundation makes. Instead of 20%, let’s bump that number up to 40%.
• Exploring becoming a spend-down foundation that doesn’t exist in perpetuity, but rather spends their corpus in order to have a larger impact on social problems in this generation.
• Increasing growth capital investments–large ($500K+), 3-5 year investments that pay for the infrastructure required for a proven nonprofit to scale.
• Reducing the strings and reporting requirements placed on nonprofit grantees.
• Decreasing the push towards funding of new programs and investing more money and time in the infrastructure of proven programs that could grow to serve more people.

That’s not to say that there aren’t foundations out there that are doing these things.  There absolutely are, but they are in the minority. Foundations as a group could help transform philanthropy by becoming builders more often than buyers. These are challenging, demanding, restructuring times.  They call for bold, risky, extraordinary action.  Foundations can lead that charge.

Tags: Ford Foundation, Foundations, Gates Foundation, Giving USA, growth capital, Mission-Related Investing, Nonprofits, Philanthropy, PRIs, Robert Wood Johnson Foundation