Just imagine a wealthy private equity investor with a broad portfolio of investments ranging from IT and financial services to the travel and food industries, approaching a successful tourism company that is looking for growth capital. The company is financially strong, has an excellent overall reputation for its leadership and professionalism, and a sound strategic plan for expanding its operations. What would happen if the private investor demonstrated interest in co-investing, but only under strict conditions, namely:
– the funds must be used exclusively for the additional costs of expanded operations, not for overhead, salaries or other general expenses;
– furthermore, the private equity investor requires a stringent breakdown of the budget for the expanded operations and imposes a cap on maximum allocations for each line item;
– the investor also thinks it prudent to underfund the approved budget while requiring the same level of expansion outcomes, as he is convinced that in this way he will contribute to the efficiency of the company;
– additionally, the company must also agree to offer new products and services that have not formerly been integral to their core business mission; while the company has built its reputation by offering short holiday trips to the beaches of the Mediterranean, Florida and the Caribbean, the investor also wants it to now offer alpinism trips on Mount Everest and Amazon expeditions;
– and finally, the investor also makes it clear that despite all these imposed conditions, he will not stay with the company beyond an initial period of two years, as he believes that a long-term relationship would create unhealthy dependency.
This business partnership framework would naturally leave us flabbergasted about the investor’s paternalistic arrogance, his foolish disregard for the company’s proven acumen and expertise and, above all, the dysfunctional lack of balance in the client-investor relationship. However, don’t worry, this would be a rather exceptional scenario in the business sector.
Most investors, smart investors want to build on the skilled competencies and professionalism of the organisations they fund. This is enlightened self-interest. Of course, to be a critical interlocutor and not just a passive provider of venture capital is an essential asset in business mutuality but can also become a liability if the client’s vision and skillsets are ignored. It is generally felt that when there is reciprocity between investors and clients, both can achieve the highest levels of return on their respective objectives.
One would expect that the same relation of reciprocity would exist between private foundations and their grantees. And indeed, many foundations want to create equitable partnerships with grantees that are grounded on respect, understanding, trust and shared learning approaches. Those who follow this call to action, pursue the social return goals they share with grantees through constructive dialogue, not prescriptive management interference. They value and invest in grantee expertise alongside their overall organizational capacity. They build strong, long-term partnerships with rewarding outcomes.
However, there remains a tremendous gap between the talk and the walk across the philanthropic sector. Too many foundations and wealthy donors simply pay lip service to building such holistic partnerships, while in reality they operate with unilaterally prescribed concepts, performance indicators, timelines, evaluation metrics and ‘theory of change’ demands. We both have witnessed how the power imbalance in donor-grantee relationships can give rise to attitudes of self-appointed virtuous and superior knowledge among funders, which dismisses the very expertise they need—that of the actual practitioners and the constituencies they serve.
This is a dynamic that disregards best practices and reduces grantees to contractors, to mere instruments of implementation for their ideas. As philanthropy scholars have long documented, it also thwarts trust and hinders non-profits’ ability to engage with authentic agency. The notion that donors have inherently greater brainpower and ingenuity for solving complex social problems outside the province where they made their wealth is a leading barrier for achieving effective mutuality. And, by extension, the full potential of the very word philanthropy, whose Greek origins literally mean: “love of humanity.”
Yet, amid the unprecedented COVID-19 crisis, we are also seeing an encouraging rise in solidarity and trust across funder-grantee relationships. Many foundations, both in the U.S and in Europe, have pivoted project grants for operating support, simplified grant application and reporting procedures, lifted hiatus policies, increased overall spending and, more than ever, are acknowledging the importance of investing in technology infrastructure and core operations.
It is our hope that this moment of historic adversity shall also lead to a more enlightened philanthropic ecology where the YouTube video that prompted this article may naturally have a very different ending.
Please take moment to view “Everybody Deserves a Fair Slice” (subtitled “what if pizza shops where funded like human services non-profits?”) It shines a very humorous but also very serious light on the damaging impact of transactional relationships between businesses and investors. It was produced by the Human Services Council of New York but does not just deserve the attention of U.S. foundations, as it is equally relevant for the European foundation ecology. It is very funny but also very tragic: