February 24, 2008

A Capitalist Jolt for Charity

By STEVE LOHR
IN the summer of 2005, Miles Gilburne and Nina Zolt had long talks over dinner in
their Washington home about what to do next. For more than six years, Mr.
Gilburne, a former AOL executive, and his wife, Ms. Zolt, a former lawyer, had
supported a philanthropy that used books and online tools to enhance skills of
inner-city students.

The program, which Ms. Zolt directed, had been moderately successful. Students
liked writing online about books and sharing their ideas with Internet pen pals,
including adult mentors. Many teachers embraced the project, called In2Books, and
participating students outscored their peers in standardized tests.

Still, the costly venture grew only gradually, classroom by classroom. The couple
had put $10 million into the charity, a “meaningful portion” of the family wealth,
Mr. Gilburne says. “It was enough money that I did lie awake at night thinking
about the size of the checks,” he recalls.

As philanthropy, the couple’s efforts, however worthwhile, weren’t sustainable.

But their vision of using the Internet for communication and collaboration to
improve education has taken on a new life — as a business.

Today, the once-struggling venture has morphed into a primarily for-profit

enterprise. And the striking transformation of In2Books is emblematic of a larger
trend: charities are changing their spots and making use of some of capitalism’s
virtues.

The process is being pushed forward by a new breed of social entrepreneurs who are
administering increasing doses of bottom-line thinking to traditional philanthropy
in order to make charity more effective.

To make a fresh start, Mr. Gilburne attracted like-minded angel investors, and at
the end of 2006 the group bought a for-profit company, ePals Inc., to expand on
the original mission and support the foundation. The ePals company has grown and
now offers classroom e-mail, blogs, online literacy tools and Web-based
collaborative projects on subjects like global warming and habitats.

EPals says 125,000 classrooms around the world are using at least some of its free
tools, reaching 13 million students, and its ambition is to become a global
“learning social network.”

National Geographic is to announce this week that it is investing in ePals, based

in Herndon, Va., and will supply educational content for the ePals learning
projects. Worldwide distribution should get a lift from Intel, which will soon
ship its Classmate laptops, designed for students in developing nations, with the
ePals icon on the screens. And ePals is also offered for use on the low-cost
computers from One Laptop Per Child, a nonprofit group trying to bring the content
and experience of the Internet to children in developing countries worldwide.

Various versions of efforts like this are appearing across the philanthropic
landscape as business-minded donors, epitomized by Bill and Melinda Gates and
their foundation, have treated their charitable contributions more like venture
capital investments. They seek programs that can be catalysts for broad changes in
fields like health, education and the environment, they measure performance and
results, and they encourage nonprofits to become more self-sustaining.

Yet to have the greatest possible impact, a further step down the capitalist road
is sometimes needed, analysts and others in the field say. Muhammad Yunus, the
microfinance pioneer and Nobel laureate, calls this next step the “social
business.” The goal, according to Mr. Yunus, is to create ventures that more than
pay for themselves — in other words, turn a profit.

Social business entrepreneurs, he writes, can help “make the market work for
social goals as efficiently as it does for personal goals.”

PHILANTHROPIES are discovering that for-profit status and financing can be a

useful tool. For example, many microfinance lenders, modeled after Mr. Yunus’s
project, the Grameen Bank in Bangladesh, aim to make the crossover to profit-
making institutions.

Mozilla, the nonprofit foundation that developed the open-source Web browser
Firefox, decided that it needed a for-profit unit to accelerate its business
activities and gain market share against Microsoft’s Internet Explorer. The
business unit is freer to spend on marketing, charge for software service and
technical support, and pay to compete for engineering talent in Silicon Valley.

Likewise, Google.org, the search giant’s corporate foundation, chose for-profit

status to be able to easily make investments in for-profit companies including
alternative energy start-ups like eSolar and Makani Power.

“Capitalism is a very mutable, flexible beast, and what we’re seeing is social
entrepreneurs addressing some of these social challenges in profoundly different
ways than traditional nonprofit organizations,” said John Elkington, co-author
with Pamela Hartigan of “The Power of Unreasonable People: How Social
Entrepreneurs Create Markets that Change the World,” a new book that was handed
out last month to attendees at the World Economic Forum in Davos, Switzerland.

Even among its hybrid peers, ePals has evolved into an unusual combination of a
business and a social venture. When Mr. Gilburne and Ms. Zolt established the for-
profit arm in 2006, they attracted like-minded investors, acquired ePals Inc. and
began hiring talented staff. They gave the original education foundation a 15
percent stake in the ePals company, and its endowment will grow if the business
prospers. The nonprofit division is focusing on educational research and bringing
technology into classrooms.

But the company is where the action is. “This needs to be a large business to have
a really significant social impact,” Mr. Gilburne said. “We couldn’t do what we’re
doing as a nonprofit.”

Very few nonprofits get big. Only 144 of the more than 200,000 nonprofits
established since 1970 had grown to $50 million or more in revenue by 2003,
according to a study published last year by the Bridgespan Group, a nonprofit
consulting firm that advises philanthropies.

With the rising influence of social entrepreneurs in philanthropy, many nonprofits

have sought to generate revenue to become more self-sustaining. But it is still
rare for a nonprofit to cross the chasm to become mainly a profit-seeking
business, as in the ePals experience.

“It’s tricky, but it makes sense when the business is highly aligned with the
mission of the social entrepreneurs,” said Jeffrey L. Bradach, a managing partner
of Bridgespan.

As a for-profit business, ePals can more easily attract financing for growth. But
outside investors raise the risk that the original social ideals will be lost in a
single-minded pursuit of profit. Mr. Gilburne has tried to avoid that pitfall by
gathering a stable of angel investors among his longtime business friends, who
bring not only money but also a shared belief in the promise of the Internet to
improve education.

The group includes Stephen M. Case, the former chief executive of AOL; Mitchell
Kapor, the founder of the early spreadsheet maker Lotus Development and an open-
source software supporter; and Yossi Vardi, an Israeli Internet entrepreneur.

“None of our investors are interested just in making another financial score,” Mr.
Gilburne said.

AFTER pooling their money, the angel investors bought the ePals company in
December 2006 for an undisclosed price. Mr. Gilburne had watched ePals for years,
starting when he was at AOL in the 1990s, and he saw it as the foundation on which
to build an educational social network.

EPals started as a Web-based electronic pen-pal service in 1996, offering point-

and-click tools that teachers could use to control how students use e-mail. A
teacher in California, for example, set the controls so her class could
communicate online only with a class in China that was engaged in a joint cultural
exchange project.

Since the angel investors came aboard in 2006, the ePals work force has more than
doubled, to 43, and the company continues to hire. It has improved the e-mail and
blogging software and added links to outside resources, like National Geographic’s
digital library, to its Web-based software for online projects.

“We were a small company with little capital,” said Tim DiScipio, a founder of the
original ePals, who is the chief marketing officer of the revamped company under
its new ownership. “But now we have the resources to really pursue the vision of
social learning over the Internet.”

Until last fall, ePals charged $3 to $5 a year for each student e-mail account,
but the service is now free. The effect of free distribution was immediate and
dramatic. The number of registered users has nearly doubled, to 13 million, since
September.

The growth and ambition of ePals have impressed National Geographic enough to make
an investment and forge a partnership.

“We’re looking at them as a global network to distribute National Geographic

content,” explained Edward M. Prince, the chief operating officer of the venture
arm of the nonprofit scientific and educational organization.

The ePals team is betting that it can build a worldwide social network in
education — a serious, controlled version of Facebook, for students in
kindergarten through 12th grade. “When markets go digital, they go collaborative
and sharing,” said Edmund Fish, the chief executive of ePals and a former
executive of AOL, where he oversaw online education offerings. “That can happen in
education, too. A learning social network is not an oxymoron.”

Even the basic social networking of ePals e-mail exchanges, teachers say, helps
improve writing skills and stirs curiosity about other cultures. Mirjana Milovic,
a teacher in Kragujevac, Serbia, says ePals has helped the 120 students in her
school with their English-language skills. Their correspondents in Alabama and
Kansas have also learned that jeans and Nike shoes are popular in Kragujevac but
that the McDonald’s in town closed for lack of business.
“We usually prefer our domestic food,” wrote Marija, an 18-year-old.

Candace Pauchnick, who teaches English and sociology at Patrick Henry High School
in San Diego, has been using ePals for what she calls “virtual field trips.” In
their online exchanges with students in Italy, China and the Czech Republic, her
students have learned about family life and political systems in foreign lands and
improved their writing skills.

“If they were just writing for me, they wouldn’t be as careful,” Ms. Pauchnick
said. “But they’re writing for a student in another country. It’s not drudgery for
them. They buy in and they enjoy it.”

Ms. Zolt, the chief program architect of ePals, endorsed the for-profit route but
insisted that the digital network also provide a free searchable database for
educational research.

“The promise here is to be able to study, with vast amounts of real-time data, how
children learn,” she said.

Scholars are enthusiastic. “Its potential is very exciting,” said Linda B.

Gambrell, a professor of education at Clemson University, who is one of the
academic advisers of ePals. “This should help us quicken the pace of translating
innovative research into best practices in the classroom.”

Like many start-up companies, the revamped ePals is still working on its business
model. Mr. Gilburne, the chairman, says it will pursue corporate sponsors for
certain project areas. These could be part of a company’s community and social
responsibility activities, providing approved adult experts to help students
online. For example, General Electric might sponsor ePals’ global warming section
by providing environmental experts as online mentors, Mr. Gilburne said, or
perhaps Intel or I.B.M. would help in engineering projects.

There are commerce opportunities, Mr. Gilburne added, for education publishers who
might want to market books or curriculum materials for home-school students over
ePals.

Eventually, Mr. Gilburne said, advertising will be part of the mix. “But we’ll go
gingerly to figure out what is appropriate and doesn’t impose on the classroom,”
he said.

The failure rate for entrepreneurs — whether social or purely capitalist — is

high. Still, ePals’ backers are betting that it is worth the risk. “These kinds of
opportunities to do well and do good at the same time don’t grow on trees,” said
Mr. Kapor, the ePals investor and a philanthropist. “But I do think that ePals
could be one of them.”

Copyright 2008 The New York Times Company