What a Founders Pledge is NOT

Just had to find a way to use this photo. (source)

One of my first posts defined a concept sometimes known as a ‘founders pledge’, a form of pre-exit philanthropy. This is a relatively new kind of giving, in which startup equity is pledged to charitable causes, with the pledge fulfilled only in the event of an IPO, acquisition or other liquidity event.

A lot of people read that post! As someone who believes wholeheartedly that this idea can transform university entrepreneurial ecosystems, I embrace this huge wave of interest.

But it also makes me a bit nervous. These programs take years to unfold — just like any startup — and above all, I hope the idea reaches its full potential. That’s not a given in this Higher Ed fundraising environment.

Overall support to Higher Ed is up, but unrestricted giving and participation rates are down. Rising costs mean institutions need philanthropy now, and they face stiff competition for alumni support and attention. Advancement teams need ideas that bring in new dollars, new donors, and new efficiencies that add to the working capacity of their fundraisers.

In that context, it’s equally important to understand not just what pre-exit philanthropy is, but also what it is not. Launching a program using this new concept requires some level of time and dollar investment. More info can help universities plan and execute these programs successfully — and that's good for everyone as we learn from each others' wins.

It’s not a venture fund. But it might be a pretty good stand-in.

Institutions have begun to invest in alumni startups directly through their own venture capital funds. A direct investment guarantees the institution a defined ownership stake in a startup — still subject to dilution, of course. It’s too early to say whether these funds can produce returns that outpace those of professionally managed venture capital funds, but they do have benefits.

A pre-exit philanthropy program does not offer a defined ownership stake, but instead relies on a social contract between the institution and the pledging donor — the so-called ‘founders pledge.’ In this way, a school potentially benefits from the upside of an unlimited number of startups. What is sacrificed in terms of that defined ownership and the ‘certainty’ of its value —is there such a thing in entrepreneurship?— is gained in the creation of a sort of low-cost, highly-diversified proxy VC portfolio.

It’s not very good at boosting annual giving, or laddering up support.

Our instinct as fundraisers is to sift and segment our prospect pools, ideally building their support over time through a ladder of increasing gifts. But in this case we must fight that instinct to some extent. We can’t lose sight of a core function of pre-exit philanthropy programs — as a solution for the engagement gaps between a university and its entrepreneurs as they grow their companies.

Giving circles are powerful tools that help donors imagine the impact when they ladder up their support. At each level, a donor receives more — attention, premiums, access — in return for their increased giving. But that model is all about leveling up donations, and it doesn’t work quite as well when applied to building connection before there are any assets to donate.

You’ll probably see a boost in participation among members, though annual gift revenue will be more uneven, especially in the beginning.

You can’t count on short-term returns.

This is a long-term play that works best with a fairly robust community of members. Startups typically exit in 5 to 8 years. Realistically, many (most) of your members will not hit stratospheric levels of growth and exit. Even venture capitalists work within this dynamic. For example, a fund might need to target 30-40 investments, over 8 years, in order to experience 1 home run, 5–6 more solid hits, and another half dozen that break even. The rest don’t make it. Just the top handful of exits powers the strong returns that VCs shoot for across the entire fund.

Try stacking your early members with mid- or later-stage companies. They attract other members and may help demonstrate some early wins.

Still. Be patient. And build the largest program you can support!

It’s not a substitute for active stewardship and fundraising.

Despite the fact that most of these gifts will not mature for years, you can’t just set it and forget it. The engagement piece is important for members at all stages — even those who likely won’t be philanthropists for some time. Members in early stage companies can find (and offer!) genuine value in high-volume, low-overhead activities that are easy and economical.

For example, a once or twice-yearly meetup that all members can attend. A résumé book. Basic, informative content on the philanthropic process. A topical roundtable would also be a high-value way to distribute your team’s time and effort across a dozen members.

For members who seem — or who tell you they are — close to an exit, you’ll use the same tools you normally do with a donor to support their personal philanthropic exploration. The trick is finding ways to spend the appropriate amount of time with each member.

Fortunately, it’ s not expen$ive.

Your greatest expenditure will be the time of your Chief Architect — the point person who drives the program forward. And the first gift from your pre-exit philanthropy program will likely cover the dollar cost several times over. The community you’re building is the most valuable asset of all, and community doesn’t have to be pricey.

Manage these costs by thinking like an entrepreneur yourself — leverage what already exists, and test small ideas before launching big ones. Want to create an awards dinner for Entrepreneur of the Year among your members? Start by honoring one member with an informal hosted happy hour. Test the idea with these guests, and ask them to help you shape the next one. Try it again a quarter or two later, making it a bit bigger. Rinse, repeat. Entrepreneurs are comfortable with a certain level of scrappiness and informality. Only lay out the capital that is necessary, and take thoughtful risks with your time and budget.

It doesn’t sit neatly within the typical silos of higher education.

This is by far the most challenging aspect of building a pre-exit philanthropy program. They skew toward alumni relations work for early members, and development work for later stage members. The line between those stages, though, isn’t always easy to draw. Plus, you’ll have members at multiple stages in the program at any given time.

To fully unlock the magic of this model, collaboration between the domains of fundraising, alumni relations, the academic entrepreneurship enterprise is essential.

Our institutions don’t always have the channels to do this. Everyone has a fairly specific and important job along the lifecycle of educating, engaging and cultivating potential donors. We don’t always speak each other’s languages, and we work toward different success metrics.

So find those points of alignment where an effort from one team can produce a win for all. Can your founders pledge members serve as a ready and responsive pool of speakers, competition judges, social media ambassadors, or mentors for campus programs? Can member companies offer internships, help scope student projects, or offer feedback to jobseeking students? By matching the needs of one group with the assets of another, you can create strong internal partnerships, and real value exchange.

It’s not a silver bullet. But it IS powerful.

Pre-exit philanthropy is not a silver bullet. But when the system is humming, it can supercharge your innovation initiatives, and open new frontiers in philanthropy. It’s unlike anything we’ve seen, weaving together the domains of entrepreneurship and philanthropy in Higher Ed so that each of them functions at a higher level.

So what will it take for this idea to reach its full potential? I think it takes you and me. Caring fundraisers, who believe in the power of higher education, who are curious about the interesting research and products coming out of our universities, and who enjoy building authentic relationships with donors. I think that’s pretty much all of us.

If you want to help push this movement forward: subscribe, stay tuned, reach out, share stories, spread the word. So much more to come!