All About Multiple Sclerosis

More MS news articles for January 2003

High-tech philanthropy

January 8th, 2003
Jeffery Kosseff

Chris Marsh wants to help fight multiple sclerosis, a disease that struck a family member.

Marsh is the chief executive of Unicru, a growing software company with 160 employees. But as with many small companies, Beaverton-based Unicru needs to watch its spending.

"Cash donations are an impact to our income statement," Marsh said. "It limits our ability to give larger donations."

So Marsh turned to the Entrepreneurs Foundation of Oregon, a foundation that tries to persuade startups and other private companies to donate their potential rather than their cash. The foundation is announcing today that Unicru donated options on 50,000 shares of stock, marking the largest donation to the 1-year-old group.

The foundation represents Oregon's first organized effort at "venture philanthropy," a fund-raising technique that became popular in tech-heavy areas such as Austin, Texas, and the Silicon Valley during the tech boom. But like venture capitalists, these foundations only reap benefits when a tech company beats the odds and goes public or finds a buyer -- rare achievements these days.

If Unicru is acquired or becomes publicly traded, the foundation can cash in on the options and help Marsh direct the money to MS nonprofits and other causes. If Unicru fails, then the options will be worth nothing.

The venture philanthropy concept can be more rewarding than older forms of philanthropy, but it's also more volatile. And, on surface, this is a challenging time to launch a venture-related organization. An Oregon company hasn't had an initial public offering for more than two years. Merger and acquisitions have slowed dramatically, and when they occur, it's usually at bargain-basement prices.

The Oregon foundation doesn't expect to receive pay-outs for at least two or three years, said John McLaughlin, the foundation's chief executive and the former chief financial officer of The North Face. Until then, it will operate on a small budget funded by donations from various area companies and nonprofits.

Philanthropy in Oregon and nationwide is suffering along with the economy. But experts say now is a perfect time to launch a foundation that relies on stock options, because if the economy recovers and stock prices surge as they did in the late '90s, foundations will be able to cash in.

Skeptics wonder whether this increasingly popular charitable system is as efficient as traditional philanthropy, in which companies or individuals donate assets with concrete value, such as stock in established companies or cash.

"You can create these institutions, but they can sometimes be hollow," said Jim Ferris, director of the Center on Philanthropy and Public Policy at the University of Southern California.

Ferris said that like all philanthropic organizations, the Oregon foundation must be given at least a few years to prove itself.

McLaughlin thinks it will be able to. Besides Unicru, the foundation has received donations from three smaller companies and it is in talks with 10 more. The foundation allows donors to direct where 75 percent of contributions will be distributed. The other 25 percent funds the foundation and nonprofits chosen by its board.

The foundation asks companies to donate options that are roughly equivalent to a compensation package of a senior executive. In the case of Unicru, which make job applicant screening software, the foundation received about 0.2 percent of the company's 26 million shares.

At this point, neither the companies nor the foundation knows how much money the donations will yield. It all depends on how the companies perform.

"Some won't be successful, clearly," McLaughlin said. "But the ones that will will probably become quite successful."

Just ask the Community Foundation Silicon Valley, which was the first to receive a large chunk of stock from a hot startup. In June 1998, eBay contributed more than 100,000 shares of its stock to the foundation, under a separate fund called the eBay foundation.

The online auction site went public a few months later, and now the eBay foundation carries assets worth about $25 million, the bulk of which came from the original stock donation.

"Even if you have a young company that's not as successful as eBay, you still have folks in the company thinking about philanthropy at a point where most companies aren't," spokeswoman Michelle McGurk said.

Advocates of venture philanthropy say it gives nonprofits a new source of money from the potential Microsofts and eBays of the future.

"It's not a substitution for traditional philanthropy, but I do see it as a nice addition," said Randi Shade, executive director of the Austin Entrepreneurs Foundation.

So far, the Austin foundation is waiting to cash in on most of the companies that have contributed to it. Of the 131 local startups that contributed options or stock, 33 have gone out of business.

But Shade isn't discouraged. Eighty-nine of the companies are still operating, despite the downturn. And nine have been acquired or had initial public offerings, which resulted in cash for the foundation. It has distributed nearly $500,000 to nonprofits from those stock sales.

"That funding wouldn't have been available otherwise," Shade said.

Besides tax benefits -- which companies receive once the options turn into proceeds for the foundation -- the process of allocating money to nonprofits builds morale among employees, McLaughlin said. And the foundation also plans to hold community volunteer days for employees at participating companies.

"They like to work for a company that's doing something more than just trying to make money," he said.

© 2003