A Flexible Approach to Funding Entrepreneurs

I spent eight years at eBay learning how businesses can create opportunities for people and benefit society. eBay supports millions of Internet entrepreneurs and $60 billion worth of commerce. But in my time as president of eBay International, I also realized that the firm’s social efforts wouldn’t necessarily reach poor people in less-connected parts of the world, because the expected financial returns in these geographies didn’t warrant expansion on our part.

This was much on my mind when I joined Omidyar Network three years ago to oversee its philanthropic strategy. The bottom line at ON is societal value. We believe in “flexible capital” — that is, we invest financial and human resources in both for-profit and nonprofit ventures. It’s not an either-or decision for us; we believe using both grants and for-profit investments can be powerfully complementary.

Since 2004, Omidyar Network has invested more than $350 million in more than 150 organizations. The range of sectors includes microfinance, consumer Internet and mobile applications, global entrepreneurship, government transparency, and property rights. Some 57% of those dollars have funded grants and 43% for-profit investments.

Philanthropy through grants can benefit society in many ways. Grants can help nonprofits provide public goods — for instance, the technology developed by the Rockefeller Foundation in support of the Green Revolution. They can help subsidize goods and services that produce positive societal outcomes — for instance, vaccines developed as a result of Gates Foundation grants. And they can spur investments in high-risk ventures — for instance, initial development of the microfinance industry.

Meanwhile, investments in for-profit ventures benefit society by leveraging the power of markets. When the primary motive is to generate profits, businesses will strive to deliver value in excess of costs and scale up. And, as Pierre Omidyar experienced first-hand, successful for-profit ventures can create substantial customer value, jobs, and economic activity.

But the combination of both can be quite powerful. Take microfinance’s phenomenal growth. In the 1980s and 1990s, most microfinance institutions were grant-funded NGOs. As microfinance’s impact and commercial viability became apparent, business investors, many with strong social motivations, invested heavily in commercial MFIs, helping them grow rapidly. The percentage of the world’s top 50 MFIs that were for-profit banks increased from 22% to 62% between 1998 and 2008. Grants sparked and nurtured microfinance while for-profit capital helped it scale.

Additionally, the Internet provides numerous examples of the ways for-profit and not-for-profit investments can complement one another. Nonprofit Wikipedia, for example, engages hundreds of millions of individuals in creating educational content, sharing information, and learning online. Meanwhile, the for-profit website ViiKii is a self-described Wikipedia-meets-Hulu platform where volunteers translate video content into a multitude of languages for subsequent viewing on ViiKii or partner sites. The site tears down language and cultural barriers while providing valuable content.

Increasingly, philanthropists and foundations are recognizing the benefits of the flexible approach. However, less than 1% of the capital U.S. foundations disbursed in 2007 (the last year of complete data) supported for-profit ventures. Moreover, only 4% of that 1% was invested in equity — precisely the kind of risk capital than can nurture businesses aimed at creating social good. With hundreds of billions of dollars flowing into philanthropy over the next few decades, the big urgent question will be: How can we best deploy these funds?

The private sector is being increasingly scrutinized for its ability to deliver societal value as well as profits, while the public sector, in this period of increased austerity, will be called upon to find creative ways to deliver more value with less. The flexible-capital approach holds great promise for both, in terms of improving the human condition.

We’d like to hear from the HBR community. How can philanthropists support innovative entrepreneurs — with both financial and human capital — to best help them succeed?

Matt Bannick is managing partner at Omidyar Network. He leads all aspects of the philanthropic investment firm’s strategy and operations.

If You’re the Boss, Start Killing More Good Ideas

Recently, I posted a list of 12 Things Good Bosses Believe. Now I’m following up by delving into each one of them. This post is about the ninth belief: “Innovation is crucial to every team and organization. So my job is to encourage my people to generate and test all kinds of new ideas. But it is also my job to help them kill off all the bad ideas we generate, and most of the good ideas, too.”

An evidence-based mantra is that, to get a few good ideas, you and your colleagues need to generate a lot of bad ideas. I wrote about this notion in my last post on Forgive and Remember where we saw that, to yield a dozen or so commercially successful ideas for toys, a group at IDEO generated over 4,000 non-starters. It turns out, however, that the best managed enterprises don’t just recognize the flowers among the weeds; they mow down a lot of the flowers, too.

I first started thinking about this five years ago or so after a conversation with a Yahoo! executive participating in the Customer-Focused Innovation program that Huggy Rao and I run at Stanford. Yahoo! had just had Steve Jobs in to address their top 100 or so bosses. Jobs advised them that killing bad ideas isn’t that hard — lots of companies, even bad companies, are good at that. He insisted that what is really hard — and a hallmark of great companies — is killing good ideas. For any single good idea to succeed, it needs a lot of resources, time, and attention, and so only a few ideas can be developed fully. The challenge is to be tough enough to do the pruning so that the survivors have a chance of being implemented properly and reaching their full potential.

Since then it’s also become clear to me that good product and experience design depends on tossing out most good ideas. If too many of them are thrown in, then the result is a terrible and confusing Frankenstein of an offering. (This seems to be many people’s objection to Microsoft Word: It does everything, so therefore is annoying and confusing to use for many single things.)

The implication, then, is that the “innovation funnel” where a lot of ideas are whittled down to a precious few — should contain two major filtering stages: one where you get rid of the bad ideas and then another where you toss the good ideas that aren’t quite good enough to justify a thinner spread of resources, a greater diffusion of focus, and possibly a more complex customer experience.

If you take this argument to its logical conclusion, it means that a great boss — and let’s define that for the moment as a boss whose team delivers innovation — might track these two metrics:

1. How many good ideas are killed? If this number isn’t high enough, that is a bad sign. It means either that not enough ideas are being generated, or that important hard choices aren’t being made.
2. How many people are complaining — even leaving — because of good ideas being killed? This really is what makes the pruning so hard. It’s tough on the people who came up with ideas and are emotionally invested in them. Being the direct cause of their complaining, and even departure, is awful — and certainly doesn’t make you feel like a great boss. But if no one is complaining, that’s a worse sign. This kind of frustration is an unfortunate byproduct of an effective innovation process, and if your people don’t have enough pride and confidence to get upset when their innovative ideas are killed, then something is wrong with them — or your culture.

These are weird metrics, but they make sense given Jobs’ argument. His argument also resonates with our experience teaching in the Stanford d.school and my experience working with creative teams in industry: The groups that often do the worst work have too many pet ideas and can’t bring themselves to kill enough of them, so they don’t do a decent job on any of them.

Groups that can’t kill enough ideas often suffer from bad group dynamics, either because multiple members won’t allow the group to kill their pet ideas, or because the group avoids difficult conversations and decisions. As we advise the creative teams we coach at Stanford and elsewhere, we always stress that this “Sophie’s Choice” point in the process will come, and will have to be well managed. The team will have to be prepared to kill ideas it has nurtured and come to love.

To put this in a broader context, although the words “creativity” and “fun” are often used together, there is a lot about doing creative work that is no fun, Failure, confusion, and conflict are par for the course, and, even when you are doing things right, it involves killing good ideas and making people angry. That’s why, as I compiled my set of Good Boss, Bad Boss distinctions, this one made the cut. Enterprises depend on bosses to manage innovation as well as implementation. The very best bosses teach and inspire their people to accept defeat gracefully and move forward to implement the selected ideas, even if none of their pet ideas made the cut.

Robert Sutton is Professor of Management Science and Engineering at Stanford University. He studies and writes about management, innovation, and the nitty-gritty of organizational life. His new book is Good Boss, Bad Boss, from Business Plus.