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February 10, 2010

Multiple elements of a new paradigm have emerged, although they have not yet gelled into a coherent alternative to the old paradigm and, therefore, have not yet replaced it.
One element of the new paradigm is the emphasis on scale and management reflected in the venture philanthropy movement. We no longer trust that government will adopt and implement promising solutions to social problems piloted by funders and nonprofits. Therefore, we have begun to focus on how to scale the nonprofits themselves. Fifty years ago, for example, we might have expected that government would take over the Teach for America model once its success was demonstrated. Today we focus instead on how to scale and sustain Teach for America itself so that it can achieve lasting national impact with private support. Government funding may remain part of the answer, as AmeriCorps funds City Year, but the funding is administered through the nonprofit, rather than expecting the nonprofit to hand its project over to become a government program.
The challenge of raising “mezzanine,” or growth, capital and concerns about the limitations of the nonprofit capital markets are also a direct result of this shifting paradigm. The old paradigm did not require that foundations be concerned with how the new ideas they funded might scale up, and foundations that continue to operate under that paradigm rarely provide the ongoing support needed to scale the organizations or projects that they help start. By contrast, the Edna McConnell Clark Foundation has achieved considerable success by abandoning the old model and marshalling the capital to scale up its most promising grantees, but it is surprising how few other foundations have yet followed their lead.
A corollary of the need to scale nonprofit organizations is the need for strong and effective management. The old paradigm was concerned only with testing the new idea. As long as it could be piloted well enough to be evaluated, it did matter whether or not the implementing organization had a management team capable of leading a national enterprise. Today we recognize that nonprofit organizations need an economic model and a management team that is the equal of any for-profit venture. MBAs and social entrepreneurs are joining social workers at the core of our nonprofit sector. Management and strategy consulting firms that focus on funders and nonprofits, such as Bridgespan and FSG, are growing rapidly.
This new emphasis on management is often referred to as “capacity building,” a polite euphemism that has made foundations more comfortable funding what might once have been seen as mere overhead. Yet it is the underlying paradigm shift about how philanthropy works that has given capacity building and venture philanthropy so much traction in recent years.