More foundations dipping their toes into tbed waters

You may have caught the news that a coalition of 10 Michigan foundations has committed $100 million to an eight-year New Economy Initiative for Southeast Michigan, an effort to reinvent Detroit’s auto-centric economy through an intensive program of grant-making in science and technology fields.

There’s a lot of local politics involved here: for example, the state attorney general strong-arming Ford Foundation to pay more attention to the region in which it is still incorporated and whence its endowed wealth derives. But what interests me is the frank interest in the role of science and technology in regional economic health by such a large set of staid foundations, including two (Mott and Kellogg) that explicitly disclaimed interest in tbed when I spoke to them for a Battelle project six or seven years ago.

According to the job description posted, the NEI seeks to fund projects including those which: “. . . . improve technology transfer from university and private labs; coordinate and expand local capital networks; . . . launch a promising nonprofit enterprise, such as a new university research center; expand a high-tech enterprise in an inner city. . . ; provide start-up capital to a for-profit enterprise to launch a new high-tech product. . . . ”

Yes, there’s plenty of equal attention to workforce training for targeted populations (the working class and disadvantaged) but this initiative will not be embarrassed to fund university-based S&T projects for their own sake, and even to help spin-off for-profit enterprises get capitalized. Wow.

It used to be that only a very few foundations did this work, and those that did (like Lilly Endowment) couched their support for advanced S&T in other terms (Lilly said it was fighting to retain college students, as a way to assist the overall Indiana economy). Most private foundations either didn’t see the issue at all, or were worried they’d lose their tax exempt status if they admitted and addressed the real connections they saw. Fund science for its economic outcomes? Support for-profit business? How is that assisting our targeted populations? The worries were real.

Slowly, with leadership from foundations like Danforth (St. Louis), Flinn (Phoenix) and a large group of foundations in Pittsburgh, a new consensus is emerging that in the current global macroeconomic climate, communities that have lost traditional manufacturing jobs no longer have a choice between regaining those mid-skilled jobs and pursuing high-tech jobs (for which targeted populations are considered ill matched). In reality, the country faces choice between a high-tech economy and no economic growth to speak of, and if that creates a mismatch between opportunities and skills, it will simply have to be addressed through better education and training. There is no other choice.

The NEI is not the first such consortial effort. In 2004, a group of foundations in Northeast Ohio (Cleveland/Akron area) formed the Fund for our Economic Future, a $20 million effort with similar goals and a similar willingness to transcend traditional grant-maker worries that pursing tbed would invite unwelcome IRS attention to whether restrictions against private inurement were being violated.

There are some important differences between the programs. In the Fund for Economic Future, there is no legal entity involved an independent 501(c)(3) involved (UPDATED to reflect current status 2/4/10; see also here). Participating private foundations have loaned staff to what is essentially an exercise in coordinated grant-making. In the NEI, participating private foundations are making grants to the existing Community Foundation of Southeast Michigan, which will make the end-use grants.

They do this for a clear reason, I think. There are serious legal barriers to private foundations holding significant equity stakes in any for-profit enterprise (even if the latter pays all its taxes), and these initiatives may end up holding equity in either spin-off companies or pre-seed venture funds. Community foundations (because they pass the IRS public support test based on many, small contributions from individuals) are public charities and face no barrier to holding controlling equity in pursuit of their exempt purposes, again so long as taxable entities pay their taxes. That — and probably the enduring sense that working through a public charity provides the private foundations further insulation against unwanted charges of private inurement — explains the use of the community foundation.

Community foundations, as was explained to me by one of the steering members of the NEO effort six years ago, rarely have enough “discretionary” or uncommitted endowments to take on tbed projects, so CFSEM will enter the rare ranks of those community foundations (including for historical reasons the Cleveland Foundation) that have done so.

Overall, we are seeing a major change in attitudes and risk-taking, because grant-makers have come to realize that to revitalize the communities they care about, there is no option except tbed, and workforce training will simply have to develop in parallel. When I did that work six years ago, staffers at the Foundation Center told me (correctly, I believe) that there then was no code in the taxonomy maintained by the National Center for Charitable Statistics that really covered S&T grants made for economic development purposes, rather than to advance medical science, and no way to distinguish tbed from conventional community economic development. Now, I notice, code S02 of the 2003 taxonomy specifically lists “technology transfer” and has several subcategories addressing traditional tbed programs.Let’s watch these programs carefully for how daring they will be.


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