The Chicago Public Education Fund

“It is a pleasure to be here and an honor to be asked to speak today.

You may wonder why an economist, and heaven forbid, a University of Chicago economist is on the program today. I assure it is certainly not to lighten up the proceedings.

I was asked to be on the program because I teach a course in Social Entrepreneurship at the University of Chicago Graduate School of Business. It is an MBA course, but one that also attracts students from the Public Policy School, the Law School and the School of Social Services Administration. In the course, we study venture philanthropy and one of the venture philanthropies we study is the Fund. So I was asked to relate my perspective as well as my students’ perspectives on the Fund and venture philanthropy more broadly.

In the service of full disclosure, I should add this course was initially a bit of a stretch for me. My research is not primarily about non-profit organizations, but is in organizational economics, corporate finance, and strategic decision-making. Most of my teaching is traditional strategy classes, including a fairly technical course on the border between strategy and finance called Strategic Investment Decisions. So, I think about and teach Social Entrepreneurship from an economist’s perspective. I couldn’t help it if I wanted to; we economists tend to see everything from an economist’s perspective. It makes for a somewhat complicated family life at times – but that’s another story.

Economists are fundamentally interested in how society allocates scarce resources. We have understood since Adam Smith in the 18th century that the combination of profit-maximizing competitive firms and self-interested individuals leads to good outcomes, or more technically, static allocative efficiency, the so-called “invisible hand.” More important for my remarks today, and arguably more important for society, we have known at least since Joseph Schumpeter, in the middle of last century, that dynamic allocative efficiency may be at least as important as static efficiency.

The question of dynamic efficiency can be summarized as whether or not resources flow to the organizations, entrepreneurs, and individuals with the most promising ideas and greatest ability to execute on these ideas, so that these organizations grow and prosper and innovations diffuse throughout society. Capital market institutions exist to find and fund such organizations and venture capital is most directly associated with uncovering and providing funds for innovative companies and individuals. The size, expertise, and competitiveness of the U.S. venture capital
market are important elements of our economic success. Of course, there are many other complementary American institutions that support dynamic allocative efficiency, institutions that allow our society to approximate a meritocracy, including the cultural ideal of the American Dream, an education system that does not funnel children into specific careers at an early age based on test scores and social status, the diffusion of best practices and innovation through competitive forces and dynamic labor markets, market forces not governments choosing winners and losers, limited regulation that impedes business startups, growth, and decline, and relatively little corruption. Last in my incomplete list, and certainly not least given this audience, is that we try to live up to the ideal of equal opportunity through public education and affordable access to excellent higher education. It doesn’t all work perfectly, but it works pretty well and the capital markets piece probably works better in the United States than anywhere else. It is what you know, not who you know that matters (approximately) and although many successful and unsuccessful entrepreneurs will whine about the process, organizations with good ideas and prospects for profits find funding.

Let us contrast this with the world of non-profits. Do we think the organizations and social entrepreneurs with the best ideas get funding? Do the organizations that are more effective in delivering social services, either through innovative models of social change, or better management, organization, and execution obtain the resources to grow? Do ideas from more effective organizations diffuse to less successful ones? Do foundations and individual donors identify the best organizations for funding? How do they make these decisions and what information and incentives do funders have to allow them to do this?

These are fundamental questions which go to the heart of the effectiveness of a large and enormously important sector of society. They are also the big questions that make teaching social entrepreneurship so interesting for me.

I would argue that the traditional non-profit capital market performs quite poorly. Foundations lack the incentives and often the ability to identify the best organizations and the most innovative ideas. They do not have to perform to receive funding themselves as they have a fixed endowment. There are gaps in the lifecycle funding of non-profits, little for startups and maybe even less for large-scale expansion. And individual donors are often at a bigger information disadvantage than foundations. Despite no competition for profits, or maybe because of it, best practices do not diffuse effectively. Of course, the hard question is not whether our institutions are perfect but can we do better, how we can do better, and how will effective institutional innovation diffuse?

The problems are difficult and there are no obvious quick fixes. But there is need for innovation, experimentation, learning, and institutional change in non-profit capital markets. This is where venture philanthropy comes in. I think it is the most exciting, innovative challenge to the traditional non-profit capital market.

Can I define venture philanthropy? Well there are large differences among organizations that call themselves venture philanthropies, but at its most basic level, venture philanthropy borrows ideas and practices from venture capital and applies them in funding social enterprises.

Which ideas and practices? Well there is enormous variety in what venture philanthropies do. Just as it sounds cooler to call oneself a “social entrepreneur” than executive director of a non-profit, it sounds cooler to be a “venture philanthropist” than a foundation officer. I am also guilty, because it is way cooler to say you teach “social entrepreneurship” than “non-profit strategy”. So some organizations that call themselves venture philanthropies borrow only a little, others such as the Fund borrow a lot.

Here is my short list of some of the key parallels between venture capital and venture philanthropy that most VPs follow:

• VPs have long-term funding relationships with portfolio organizations;
• VPs fund organizations and their capacity-building rather than grants for specific programs;
• VPs measure performance of portfolio organizations and make future funding contingent on performance;
• VPs try to add value beyond funding through expert services, access to talent networks, and provide reputational benefits that help attract additional people, funds, clients, and partners.


A number of foundations that do not call themselves venture philanthropies have adopted some of these practices, so the lines can be difficult to draw.

Let me mention a few places where the analogy to venture capital typically, but not always, breaks down:

• VPs typically do not exercise significant formal or informal control over portfolio organizations;
• VPs typically do not have an exit strategy for their investments;
• VPS typically do not impose market discipline on themselves.


In class, we read case studies of several venture philanthropies including the Chicago Public Education Fund. My students are typically very enthusiastic about all the organizations. Although there are usually some defenders of traditional foundations, all think that a focus on performance and strong relationships with portfolio organizations are valuable. Only when forced to compare organizations, are they at all critical.

On the other hand, economists are trained to be skeptics and cynics, so I always play the skeptic in class. Here are some of my skeptic’s questions: How do we know that VPs add value rather than just another layer of costs? More narrowly, how do we know that the expertise and services are valued by the organizations and valuable to society? How do we know that the underlying belief that social innovation originates with entrepreneurial social enterprises rather than foundations and academics is correct? Do VPs simply pick winners, organizations that will be successful without them, or do they identify the hidden gems that would otherwise go unfunded?

I do not by any means want to suggest that I think the answers are negative to all or any of these questions. I am actually quite hopeful, but the case has not been proven, nor do we yet know what VP structure will be most successful. My standard answer would be that we will need to wait and let the market tell us what works, but the problem here is that we can’t rely on the market to choose the institutional structure that is most effective.

So let me explain why, despite my required skepticism, I am enthusiastic about the Fund and believe that it, more than many other VPs, will serve as a model for successful VPs in the future.

I want to discuss three distinguishing characteristics of the fund: focus, self-evaluation, and exit strategies. The Fund is very focused. Some venture philanthropies are willing to invest in virtually any type of social enterprise, more common are VPs with domain specialization such as education or family services in a particular metropolitan area. The Fund is narrower still. The focus on organizations with specific missions within the Chicago Public Schools allows the Fund to exercise and leverage expertise, provide access, help organizations overcome a variety of obstacles, and access networks in ways that are clear and powerful. In contrast, I often wonder if the consulting services provided by other VPs are really valued rather than an imposition that goes along with the much-needed funding. I wonder if portfolio organizations would pay for these services; I think we know what the organizations supported by the Fund would say.

The focus also allows for an extraordinary level of board and investor engagement and a fundraising focus that goes beyond an unlikely to be effective pitch of, “we know better what to do with your money than you do.”

The second uncommon feature I admire about the Fund is its extraordinary devotion to self-evaluation and accountability. All VPs seem to insist on performance measurement of its portfolio organizations, but the Fund takes it an important extra step. It measures not only the performance of its portfolio, but itself. The Fund sets public, quantifiable goals for itself and reports performance against these goals. This coupled with a second feature, the Fund’s organization as a sequence of limited-life funds embraces the idea of accountability. It sends a clear message that it wants to be evaluated closely for what it has done in the past and what it plans to do in the future. This may be the single most refreshing aspect of the entire structure. Also note that this is made possible, or at least a great deal easier, by the Fund’s narrow focus.

The third feature I want to discuss is exit strategies. My initial reaction was that this is taking the venture capital analogy too far. Since the exit strategies for VCs -- IPOs and acquisitions are unlikely, how can exit strategies be feasible or realistic? But, of course, the key point at the Fund and in many other settings is that government must be the ultimate funder if a social innovation is going to have widespread impact. The Fund institutionalizes this by saying, if we can’t get the CPS to see the value in a reasonable length time, no matter what we believe about the performance of the organization, it is time to move on. This too provides a level of discipline and focus, not necessarily on what is interesting, innovative and cool, but on what can have a large impact. And that after all is what we care about.

These three uncommon features of the Fund make it an extraordinarily exciting institution to watch as a student of institutional innovation in the social sector. Let me conclude by complimenting all of you in creating, managing, and supporting this extraordinary experiment. I hope that your success continues and the model proves robust and replicable.”