The New York Times, October 14, 2001, Sunday
Money and Business
Personal Business: How to Hatch a Foundation Without a Gold Nest Egg
By KARL SCHOENBERGER
PALO ALTO, Calif. – Despite the rocky economy and the volatile stock market, interest in starting private charitable foundations remains remarkably strong.
One good indication of that came last week here in the heart of Silicon Valley, long regarded as an incubator for start-up businesses. The region officially became home to the Foundation Incubator, an organization for fledgling philanthropists. The incubator -- housed in an 11,000-square-foot space and billed as the first of its kind -- provides guidance from established foundations on how to disburse wealth.
Setting up a private foundation remains a dream for many families and business owners alike -- they have worked hard, achieved financial success and now want to establish a legacy of giving something back to others. And in the aftermath of Sept. 11, more people may be expanding their philanthropic goals.
There are more than 55,000 active foundations in the United States, up from 40,000 in 1995, according to the Foundation Center in New York. They contribute a total of $24.5 billion to various causes, double the amount six years ago. About 5,000 private foundations were created nationwide last year alone, compared with 4,600 in 1999, according to the Association of Small Foundations, based in Bethesda, Md.
To establish a foundation, you need not have the wealth of a John D. Rockefeller or a Bill Gates. Many foundations are created through the estates of ordinary people. "The vast majority of foundations in this country are under $10 million in assets," said Charles Scott, executive director of the Association of Small Foundations. He added that 14 percent were under $500,000, and that half of those were under $100,000.
But getting started is not all that easy, which is why organizations like the Foundation Incubator can be useful. Among the many issues are these: What charities and causes should the foundation help? How much money should be put into the foundation? What are the tax ramifications?
"The very first place to start is with a personal vision of how the world could be better," said Barbara Kibbe, director of the Organizational Effectiveness and Philanthropy program at the Packard Foundation of Los Altos, Calif. "You need a vision to find a pathway to your own philanthropy." The Packard Foundation is among the incubator's 20 backers; they also include the AOL Time Warner Foundation and the Kellogg Foundation.
Ms. Kibbe and other experts said it would be a mistake to approach a foundation as if it were a company. "Don't insist on developing something unique or competitive; that doesn't work as well in philanthropy as it does in business," she said. "The real intractable human problems have been with us for a long time, and will continue to be so. Look for people who are working on that problem you care about."
The incubator, whose Web site is www.foundationincubator.org, plans to assist as many as 20 fledgling foundations at a time. It is now host to seven, each with an asset base in the millions of dollars, by providing shared sites and mentoring. Member foundations are expected to spend six months to three years in residence at the incubator, learning the essentials of philanthropy. Members pay rent for their space.
Catherine Muther, who founded the Three Guineas Fund, a San Francisco foundation that helps women and girls enter technology careers, is one of the incubator's founders and mentors. Ms. Muther, a former marketing executive at Cisco Systems, started her foundation in 1994 with an initial investment of $2 million after cashing in stock options.
She said the incubator should have no problem reaching its capacity of foundations. "Lots and lots of people are starting new foundations -- many of them are my friends," she said. "I keep hearing stories of people meeting each other over lunch at nice restaurants and saying, 'Gee, now what do I do?' " She said she hoped the incubator would lead to others around the country.
For people looking to establish foundations, perhaps on a far smaller scale than those at the incubator, there are many other sources of help. The Association of Small Foundations (www.smallfoundations.org), for example, is planning to have a "Foundation in a Box Resource Kit" ready by next spring. It will provide a wide range of material, including information on legal documentation.
Mr. Scott of the association said aspiring philanthropists must first fill out tax forms to apply for foundation status. That includes providing information about goals and budgets. He recommends hiring a lawyer for this work.
Then, Mr. Scott says, the benefactors need to decide how to manage the fund's endowment and subsequent earnings. The foundation's officers can handle the investments themselves, but they might be better off hiring a money manager. (The earnings within a foundation are not subject to taxes because a foundation is considered a not-for-profit corporation, which qualifies it as a tax-exempt charity under the Internal Revenue Code.)
"To maintain that foundation status you have to do certain things, and one of those things is to give away at least 5 percent of the value of the assets every year to public charities," he said.
Money managers generally charge a fee of 1 percent to 2 percent of the foundation's assets. About 70 percent of the members of Mr. Scott's organization hire outside money managers.
While interest in charitable giving has been spurred in the aftermath of Sept. 11, although largely to the disaster relief efforts, organizers of the foundation incubator say it was pure coincidence that the opening of their organization was scheduled for last Thursday, one month after the terrorist attacks on the World Trade Center and the Pentagon.
But the symbolism was not lost on the incubator's first residents. The organization is planning a symposium entitled "Philanthropy in the Aftermath of Sept. 11" for later this month, according to Elizabeth Bremner, its executive director. And three of the incubator's resident foundations have already decided to work together in financing a team of medical volunteers to aid Afghan refugees streaming toward the Pakistani border.
That project, the Mobile Health Clinic, is an example of how fledgling foundations can collaborate in an incubator setting and accomplish things they might not try on their own, said Steve Toben, director of the Flora Family Foundation, an incubator member. His group is a spinoff of the William and Flora Hewlett Foundation that is endowed by the assets of the second and third generations of the family of Mr. Hewlett, a founder of the Hewlett-Packard Company.
Another incubator partner in the Afghan refugee project is the Global Catalyst Foundation, which has sent a program manager to Islamabad, the capital of Pakistan, to work with the recipient, Relief International, based in Los Angeles.
Mr. Scott said he did not think the terror attacks would lead to a sharp increase in the number of foundations. But, he added: "The world is now consciously aware of those who are in need. My sense is that Americans are very generous people and establishing a foundation is just one of the ways of expressing that generosity."
GRAPHIC: Photo: Bess Bendet, director of the Three Guineas Fund, a foundation in San Francisco, leads a technology seminar for young women. (Peter DaSilva for The New York Times)