The Vertical Integration of Philanthropy

(Photo by iStock/Bim)

Since its modest beginnings in a California garage in 1976, Apple Inc. has aimed to “Think Different” not only about its products but about something equally important: its supply chain.

While competitors outsourced chip and device manufacturing and software development, Apple realized that only by keeping many aspects in-house, and by carefully monitoring and managing relationships with any suppliers, could it gain the control necessary to unlock certain technical advancements (e.g., improved battery life). Meanwhile, recognizing that how a product is purchased may be just as important to user experience as the product itself, Apple took control of the retail end of the chain, creating a network of more than 500 stores.

Of course, Apple isn’t entirely unique in this regard. For more than a century, companies from Carnegie Steel to Tesla have realized that through vertical integration—exerting greater control over up- or downstream dynamics that impact their business—they can mitigate risk or capture beneficial externalities that enable them to grow faster, deliver a better product, or guard against disruptions.

While the advantages of vertical integration are clear in the private sector, many of them also apply to philanthropy. Early signs of vertical integration are quietly beginning to surface among a new breed of social impact organizations that are not only embracing traditional tools of philanthropy but also investing in for-profit businesses (downstream), working to shape policy (upstream), and even acquiring mission-aligned nonprofit organizations themselves.

In a vertically integrated model, philanthropy can serve as the connective tissue, ensuring emerging solutions are interoperable or filling gaps in the value chain that would otherwise limit progress and impact. Some organizations, like Strada Education Network, which I help lead, connect multiple vertically integrated organizations with a shared services infrastructure, providing economies of scale that decrease overhead costs (e.g., HR, legal, compliance) for nonprofit affiliates.

Vertical integration has particular promise within complex areas like the intersection of postsecondary education and employment, where individuals’ economic mobility hinges on the behaviors and decisions of a series of interrelated—but often disparate—actors (individuals, policymakers, employers, and education and training providers). A generation ago, funders that largely would have underwritten independent efforts through grants or scholarships are now working to improve outcomes by not only investing in but actually building up- and downstream components that are critical to a more equitable education-to-employment ecosystem. 

Why Vertical Integration?

In most cases, for-profit companies vertically integrate to:

•  Support players in an ecosystem that impact their own viability and outcomes
•  Increase operational efficiencies and lower transaction costs
•  Capture beneficial externalities
•  Ensure reliability amid growing market uncertainty

Vertical Integration for Impact

Vertical integration may be particularly useful in addressing challenges typified by multiple players, spanning the public and private sectors, each with its own (potentially misaligned) incentives or timelines. It may also provide a solution for sectors where simultaneous investments of patient capital are required at multiple points within a value chain.

Combating climate change is one example, with many would-be solutions tempered by constraints that would benefit from a vertically integrated approach.

Lithium—or the lack of it—is one such constraint. Electric cars require lithium batteries, but lithium is a relatively rare element and is most often found in low concentrations. That makes it challenging and expensive to extract sufficient amounts of lithium to meet demand for electric vehicle batteries. As a result, increasing adoption of electric cars is predicated on improving the extraction of lithium, and improving lithium extraction represents an opportunity for upstream vertical integration.

Established in 2015 by Microsoft co-founder Bill Gates and a group of private investors concerned with the effects of climate change, Breakthrough Energy is an organization that “supports the innovations that will lead the world to net-zero emissions,” according to its website. In 2020, Breakthrough Energy led an effort to invest $20 million in Series A funding in the Oakland, California-based startup Lilac Solutions, which has developed a new method of extracting lithium from brine that has a higher yield and improved purity compared to existing methods. If successful at scale, it will improve the supply chain for lithium and, as a result, enable more (and less expensive) production of batteries for electric vehicles—and hopefully drive electric vehicle adoption by lowering prices.

Breakthrough Energy consists of a public-private network of investment funds, nonprofit and philanthropic programs, and policy efforts that work to move new technologies to market. It also brings together governments, research institutions, private companies, and investors in support of five “Grand Challenges,” targeting the five biggest sources of global greenhouse gas: manufacturing, electricity, agriculture, transportation, and buildings.

The components of the initiative are relatively new (the Breakthrough Energy Foundation received 501(c)(3) status in 2021). But over time, the shared focus on the five Grand Challenges will enable Breakthrough Energy to create a network effect: The philanthropic Breakthrough Energy Fellows program can serve as an incubator for entrepreneurs and as a source for new research to inform the sector on emerging environmental solutions; that research could inform Breakthrough Energy’s advocacy efforts; and the innovations that emerge will be aligned to the interests of Breakthrough Ventures’ investors.

Demonstrated demand-side interest from companies and investors will also spur new innovation as well as potentially impact policy. Renewable energy, for example, requires downstream integration necessary to make the most of emerging gains.

 As more businesses, families, and companies adopt solar technologies, the capacity for solar production has skyrocketed, growing over 40 percent in just one year from 2019–2020. Analysts expect that solar installations will quadruple by 2030. Making the most of this growing renewable energy capacity (and incentivizing others to adopt it) will require the development of more reliable, cost-effective batteries to store power for use when the sun isn’t shining (or wind isn’t blowing). And that’s where Form Energy, another investment of Breakthrough Energy, comes into play. Form Energy has built an inexpensive iron-air battery that can discharge power for days. The four-year-old startup says the devices will be able to cheaply store large amounts of electricity to power grids.

By understanding where promising work is happening—and where gaps in the value chain may derail current investments—an organization like Breakthrough Energy can focus the combined attention of its investors, innovators, and researchers to create the building blocks that together can shift a sector. And, perhaps most importantly, it can do it faster than if the pieces had to move independently—which, given the urgency of climate change, is an important part of Breakthrough Energy’s mission.

Our Story

Strada Education Network’s mission is to help learners unlock the power of education as an engine for social and economic mobility. To do that, we support purposeful connections between education and employment, aiming to achieve impact at scale. 

“At scale” is perhaps the most challenging part. Research shows us that there are several effective models that exist, whether it’s better coaching and guidance to support learners or better work-based learning models to tie education to career objectives and preparation. But taking what we know works, bringing it to scale, and ensuring the intervention maintains its impact along the way is a significant undertaking.

For the past six years, Strada has worked to expand its strategy beyond traditional philanthropy, deploying $120 million to acquire and support mission-aligned nonprofit “affiliates.” Those affiliates are parts of our Network, similar to how for-profit entities own and operate subsidiaries. (We are using the term “acquire” broadly to cover the process of affiliation, combination or asset acquisition between Strada and the organizations we support with shared services. In many cases, we’ve pulled nonprofits under our umbrella that can’t technically be acquired.)

In 2017, we acquired a venture-backed startup called InsideTrack that pioneered the field of on-demand coaching and advising for college students. InsideTrack was unique among startups operating in the space in that it had demonstrated a statistically significant impact on student persistence through multiple Randomized Control Trials (RCTs), leading it to be included in the Department of Education’s What Works Clearinghouse. Founded by education entrepreneur Alan Tripp in 2001, InsideTrack began its life as a for-profit company, a structure that enabled it to attract the venture funding that fueled its initial growth (and investment in a robust infrastructure to enable growth). But while InsideTrack always had a mission orientation, the commercial realities of its business model and investors created incentives to focus on the most lucrative, but not always most impactful, commercial opportunities. That meant prioritizing contract value over targeting the end users who could most benefit from coaching, pushing InsideTrack away from community colleges, for example, and toward private institutions with deeper pockets.

InsideTrack had both reach and infrastructure necessary for scale—characteristics that differentiated it from similar, often grant-reliant organizations in the space. Strada understood that coaching and advising to help individuals navigate between education and employment were critical to our mission. We also recognized that market forces could push InsideTrack out of the role we needed it to play. Colleges, for example, kept pushing InsideTrack to move into admissions coaching (to help them overcome declining enrollments) rather than retention coaching. 

Acquisition by Strada Education Network (and then conversion into a nonprofit) gave  InsideTrack the financial runway to explore important questions around dosage and the (related) interplay between efficacy and scale, as well as to work more as a public good, supporting the types of schools—and students—that would most benefit. It also enabled Strada to capture the positive externalities that InsideTrack was creating through research, insights, and best practices development.

Thirty-six million Americans have some college but no degree. Strada’s mission of supporting economic mobility for those individuals requires understanding what supports are necessary to get more people not just to but through whatever postsecondary path they choose. In aggregate, the data from InsideTrack’s persistence coaching offer valuable insights that can inform the work of the Strada Education Network, grantees, and the sector as a whole. 

Just as Apple can optimize battery health by controlling multiple variables (e.g., battery chemistry and software), we are in the early innings of exploring how a range of supports can work together to provide learners with the guidance they need. Strada affiliate Roadtrip Nation, for example, helps individuals find fulfilling careers by telling the stories of other professionals—highlighting the variability in occupations and the different paths people have taken to get there. Roadtrip Nation resources are used in K–12 schools to help students plan for their future, as well as by groups like the Chicago Cook Workforce Partnership (the publicly funded entity responsible for helping Chicago-area workers find jobs).

That layered support approach could extend even further: Learners could begin with Roadtrip Nation’s storytelling and video-based career exploration. Chatbots powered by artificial intelligence and machine learning (through our investment in Mainstay, formerly AdmitHub) could provide answers to common questions about career exploration or academic offerings, and finally, InsideTrack coaches could engage on issues that need human, one-on-one support.

By acquiring organizations with the infrastructure or other capacity to provide services at scale, investing in emerging technology and funding what works, we can expand our impact by—among other things—ensuring learners receive the tailored support they need.

Risks and Opportunities

Of course, the vertically integrated model is not without potential risks. Owning (or being deeply invested in) a particular approach can lead to tunnel vision. At the turn of the century, the idea of creating a norm-referenced test to level the playing field in college admissions was an innovative approach. Today, critics question whether assessments designed to sort and filter college applicants might actually do more harm than good. Organizations like The College Board, a mission-driven nonprofit and purveyor of tests, must—in turn—reconcile its commercial sustainability and impact aspirations.

Within our own organization, we are mindful that owning and operating developers of interventions can lead to a challenge akin to the innovator’s dilemma: By focusing on an approach they know works and continuing to refine it and invest in it, funders may miss the opportunity to support a new, disruptive approach that may drive even greater impact. 

But the forced focus of vertical integration also presents an opportunity. By deeply understanding the interconnected dependencies that can catalyze or hinder an approach, funders are well-positioned to make thoughtful investments that explore different solutions to the same problem. For example, while Strada owns InsideTrack, which offers success coaching, we have also invested in a startup called ReUp, which offers similar services to re-engage those who have stepped out of higher education. Similarly, Strada has invested in Mainstay, a pioneer in artificial-intelligence-enabled coaching, which in some ways holds the potential to disrupt, rather than augment, InsideTrack’s model.

Organizations eager to tap the value of vertical integration (particularly if the work extends to the for-profit sector) must also be thoughtful about the potential for private benefit or conflicts of interest. Those may arise either from the commercialization of (and investment in) something developed with grant funding or as a result of a nonprofit investing on less-favorable terms than a commercial investor (e.g., taking more downside risk). Private benefit and conflicts of interest are often avoidable and need to be kept in mind during any vertical integration efforts.

What’s Next

The urgency and complexity of today’s challenges have given rise to an emergent category of social impact organizations. In a recent paper that Strada commissioned, authors Erica Burns and Michael Horn explain why organizations not only embrace traditional tools of philanthropy (e.g., grants) but are backing venture funds, investing in for-profit companies, and—increasingly—acquiring mission-aligned organizations. As former US Deputy Secretary of Education Jim Shelton noted, “we can’t leave any tool off the table if it could tilt the scales and produce a system that boosts equal opportunity. That’s why philanthropic funders being willing to use their resources, in whichever way will produce and maximize impact, is so critical.”

A few examples:

• Omidyar Group’s Imaginable Futures, which operates through a unique hybrid structure that combines a foundation and a limited liability corporation, deploys both for-profit and nonprofit capital. Omidyar Group also operates First Look Media, which includes both the for-profit Topic Studios and the nonprofit outlet The Intercept.
• Emerson Collective backed the management buyout of ed tech company Amplify, preserving school district access to high-quality curricular assets after previous owner NewsCorp made the decision to exit the education business altogether. 
• The Chan Zuckerberg Initiative supports Gradient Learning, the parent organization of Summit Learning Program, along with grants, product development, and access to the latest research from the science of learning and human development.

The contours of this new approach to identify and scale greater impact are just beginning to emerge, but all of these efforts point to a common idea: Philanthropy must not just nurture promising ideas but work to influence the larger process, creating the conditions under which its efforts can move beyond limited success and grow rapidly.

By vertically integrating mission-aligned entities, social impact organizations can provide needed capital and know-how to sustain and scale impact. They can create more efficient, shared services infrastructure. They can reduce transaction costs by connecting innovators to buyers or investors. They can capture valuable externalities, including research and insights that could improve programs or shorten time-to-market for new innovations. Most importantly, vertical integration holds greater potential to reach scale and sustainability for a variety of different strategies across the social sector and to change lives for the better.

Read more stories by Tom Dawson.