NONPROFIT INVESTOR I N D E P E N D E N T R E S E A R C H F O R P H I L A N T H R O P Y

Nonprofit Investor Research | nonprofitinvestor.org

SUMMARY

NewSchools Venture Fund (“NVF”) raises and invests capital to support education entrepreneurs to help them grow their organizations and connect their work with public school systems in targeted urban areas.

STRENGTHS ▲ High impact per dollar. NVF seeks to create a disproportionate impact relative to its dollar contribution by investing in and establishing Charter Management Organizations (“CMOs”).

▲ Proven, scalable model. NVF has proven its model with the inception of its fourth fund. NVF continues to scale with growing fund sizes, more specific goals, and diversification of its funds.

▲ Strong network of sponsors. NVF is supported by many recognized donors. Some, including the Gates Foundation, have shown strong support through repeated large endorsements.

CAUTIONS ▼ Transparency of results and impact. NVF has limited transparency of the performance of its investments, making it difficult to assess its effectiveness in achieving its goals.

● Expense allocation trends. While a healthy proportion of expenses are devoted to grants and assistance, an increasing percentage is being spent on administrative costs and other items. ● Performance measurement challenges. Data that NVF collects from CMOs is largely self reported and does not track individual student growth, making it difficult to make comparisons across other schools and districts. The indirect impact that NVF strives for is difficult to measure.

NewSchools Venture Fund Nonprofit Investor Rating:

NEUTRAL Mission Statement The NewSchools Venture Fund works as a nonprofit venture philanthropy firm to transform public education by raising capital from both individual and institutional investors. Those funds are then used to support promising education entrepreneurs, helping them grow their organizations to scale, and connecting their work with public school systems - particularly within targeted urban areas. Financial Overview $ in MM, Fiscal Year Ended August 31 2008 2009 2010

Revenue and Support $16.6 $20.6 $23.4

Operating Expenses $19.4 $20.2 $21.3

% of Total:

Program Expenses 93.6% 92.2% 91.7%

G&A 4.6% 5.6% 5.5%

Fundraising 1.8% 2.2% 2.9%

Year Founded: 1998 Contact Details NewSchools Venture Fund 1970 Broadway, Suite 350 Oakland, CA 94612 (415) 615-6860 http://www.newschools.org EIN: 94-3281780 Analyst: James Peng Peer Review: Ruth Yen, Katie Davis Publication Date June 4, 2012

RECOMMENDATION: NEUTRAL NVF offers an innovative approach to transforming public education. Their business model focuses on investing in and building CMOs, an education structure that NVF believes has a strong impact on student performance. NPI recommends that NVF make an effort to increase its reporting transparency to allow investors and potential donors to fully evaluate the organization’s impact and performance of its investments.

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OVERVIEW OF NEWSCHOOLS VENTURE FUND’S ACTIVITIES

NewSchools Venture Fund was created in 1998 by social entrepreneur Kim Smith and venture capitalists John Doerr and Brook Byers. NVF works as a nonprofit venture philanthropy firm to transform public education by raising capital from both individual and institutional investors. Those funds are then used to support promising education entrepreneurs in both for-profit and nonprofit ventures, helping them grow their organizations to scale, and connecting their work with public school systems - particularly within targeted urban areas.

Prior to making an investment, NVF screens an organization’s ability to impact problems in education. The venture must be aligned with NVF’s current strategy, must directly benefit the education of low-income students, must be scalable and sustainable, and must have a further indirect educational impact on students in need. After making an investment, NVF assumes board seats, provides guidance, planning, fundraising, and academic support, and helps to implement a framework for setting goals, monitoring, and measuring results. Further, NVF shares knowledge within its portfolio and connects its education entrepreneurs with each other through partnerships and summits.

While the capital NVF manages and invests is small relative to annual education spend, the organization seeks to create a disproportionate impact relative to its contribution. Since its inception, NVF has been one of the leading private funders of CMOs – nonprofit integrated networks of charter schools. NVF believes that creating multiple schools in a concentrated region helps to boost student performance and may lead to overall district improvement. CMOs in the NVF portfolio generally operate 10-20 schools, serve thousands of children, and have centralized administrative and educational support services. Through its four funds, NVF has raised nearly $180 million and has invested in more than 100 nonprofit and for-profit organizations since its inception:

• NewSchools Fund I ($20 million, 1998–2002): Supported nine entrepreneurial nonprofit and for-profit ventures, intended to test the hypothesis that entrepreneurs can act as agents for change, capable of influencing and possibly even transforming large public bureaucracies.

• NewSchools Fund II ($50 million, 2002–2006): Aimed to help create dozens of new public charter schools by developing strong, scalable, and sustainable school management organizations with the capacity to provide thousands of underserved students with an excellent education.

• NewSchools Fund III ($75 million, 2006–2010): Backed new and expanding CMOs, continued to develop charter support organizations to address critical infrastructure needs, invested in new tools and services designed to improve instruction through the rigorous use of performance data, and expanded alternative pathways into teaching.

• NewSchools Fund IV (2010–Present): NVF is currently operating out of its fourth fund, which includes the Innovation Fund and the City Funds. The Innovation Fund seeks to build entrepreneurial organizations that will work in concert to close the achievement gap by preparing underserved student populations for success in college and life. The City Funds are a set of city-based funds that aim to drive impact for students in specific low-income communities.

• NewSchools Seed Fund (2012–Present): Investments to support high-impact, K-12 education technology companies that promote high quality, scalable learning content, and information sharing. The Seed Fund seeks to partner with angel investors to build an ecosystem for innovative education startups.

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Representative NewSchools Investments

NVF is very selective in its investments – it finances a small portion of the ideas it considers; between 10 and 15 entrepreneurs with education technology proposals apply for funding each week, while NVF's Seed Fund makes only 6-10 investments each year. NewSchools chooses to be selective because the seed fund invests in early-stage companies, which have the highest rate of failure. The Seed Fund’s total investments for 2012 will be about $1.5 million, part of NewSchools’ $20 million overall annual investment in education entrepreneurs.

NewSchools CMO Demographic Mix NewSchools CMO Performance

PROGRAM RESULTS AND EFFECTIVENESS

While several investments are listed on its website, NVF does not publicly disclose information regarding the performance of these programs. Measurement of investment performance is challenging, as NVF’s data is largely self-reported by CMOs, does not track individual student growth, and is difficult to compare across other schools and districts. A Fall 2011 article written by managing partner James Peyser states that about 70% of NVF CMOs are outperforming their local districts, while 20% are performing about the same and the remaining 10% are underperforming. Performance varies from CMO to CMO, and often even for schools run by the same charter operator, with at least a few schools showing disappointing results.

The following statements are made on the organization’s website regarding its impact:

• NewSchools ventures run 250 schools across the country — equivalent to the 33rd largest school district in the country

• In the 2009-10 school year, 88% of the 115,000 students served by NewSchools’ portfolio schools went on to college

• NewSchools human capital ventures have trained more than 120,000 teachers, who have reached over 12 million students

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TRANSPARENCY

There is very limited transparency into NVF’s activities and the impact of its investments – while its P&L, assets, and granted amounts are available through the Form 990, the organization does not provide performance updates or an annual report online. NVF does not make its Form 990s, annual reports, or any performance metrics available on its website. There is also no MD&A or commentary surrounding annual performance, making it difficult to assess the causes or rationale behind certain line items in the tax filings. Without data surrounding the organizations, school districts, or performance, it is difficult for an outsider to assess how effective NVF has been in achieving its goal of benefitting the education of low-income students.

FINANCIAL OVERVIEW

Revenue

NVF is almost exclusively reliant on contributions (~99% of total) for its revenues. The organization uses these funds to invest in and support education entrepreneurs that are aligned with its mission. NVF has a strong network of sponsors including the Walton Family Foundation, Google, and the Michael & Susan Dell Foundation. While contributions have fluctuated greatly, nearly doubling in certain years, much of this has been due to large one-time contributions. In 2007, NVF received a $30 million grant from the Gates Foundation to support up to 20 charter school developers. The Gates Foundation previously made a similar contribution in 2003 to support the creation of five new CMOs. Contributions have gradually increased from FY2005 to FY2010 at a CAGR of 11.6%.

Revenue Breakdown Contribution Growth $ in '000

$43,842

$16,627 $20,630

$23,405

$0

$10,000

$20,000

$30,000

$40,000

$50,000

2007 2008 2009 2010

Contributions Program Services Investment Income

$ in '000

$13,011

$30,000

$11,916

$24,445

$43,011

$15,622 $20,099

$23,082

$0

$10,000

$20,000

$30,000

$40,000

$50,000

2005 2006 2007 2008 2009 2010

Contributions received Gates Foundation

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Expenses

Though this figure has trended downwards slightly over the past few years, program expenses hover around 92% of total expenses, a generally healthy portion for similar organizations. Fundraising expenses have more than doubled as a percentage of total expenses from FY2007 to FY2010, bringing in less contributions per dollar spent on fundraising year over year. While NVF has shown success raising contributions over the years, the higher relative spend reflects a more challenging fundraising environment.

When viewing expenses by spend category, there are some noticeable trends. The percentage allocated to grants (NVF’s investments in organizations) has decreased by about 7% since FY2007 while spending has increased for salaries, wages, benefits, and other expenses (occupancy, IT, service fees, and other), indicating a negative trend that we should continue to keep an eye on. More specifically, according to their Form 990s, over the past three fiscal years NVF has increased spending on “other” fees for services and conferences/meetings, totaling $1.7 million (8% of total expenses) in FY2010. With no MD&A surrounding increased expenditures, it is unclear what these costs are attributable to.

Expenses by Function Expenses by Category $ in '000

$19,391 $19,444 $20,177 $21,306

88%

89%

90%

91%

92%

93%

94%

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2007 2008 2009 2010

Pro

gram

Exp

ense

% o

f Tot

al

Exp

ense

s

Program Expenses Fund-RaisingAdministrative Expenses Program Expense % of Total

$ in '000

$19,391 $19,444 $20,177 $21,306

58%

60%

62%

64%

66%

68%

70%

72%

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2007 2008 2009 2010 Gra

nts

& A

ssis

tanc

e %

of T

otal

Exp

ense

s

Grants & Assistance OtherSalaries, Wages & Benefits Grants & Assistance % of Total

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Fiscal Year Ended October 31 2007 2008 2009 2010 Source:

Revenue and ExpensesSupport: 98.1% 94.0% 97.9% 98.6%

Contributions $43,011,182 $15,621,678 $20,198,842 $23,081,820 IRS Form 990 (Tax)

RevenueProgram Services 94,621 278,207 134,560 213,439 IRS Form 990 (Tax)

Investment Income 736,238 727,101 296,659 110,146 IRS Form 990 (Tax)

Total Support and Revenues $43,842,041 $16,626,986 $20,630,061 $23,405,405% Growth 76.0% (62.1%) 24.1% 13.5%

Expenses:Program Expenses $17,987,133 $18,201,119 $18,597,199 $19,531,817 IRS Form 990 (Tax)

Administrative Expenses 1,154,144 894,985 1,130,962 1,165,324 IRS Form 990 (Tax)

Fundraising Expenses 250,213 348,176 448,658 609,055 IRS Form 990 (Tax)

Total Expenses: $19,391,490 $19,444,280 $20,176,819 $21,306,196% of Revenue 44.2% 116.9% 97.8% 91.0%

Revenue Less Expenses $24,450,551 ($2,817,294) $453,242 $2,099,209

Expenses by CategoryGrants and Assistance $13,730,494 $12,493,436 $12,732,741 $13,638,140 IRS Form 990 (Tax)

Salaries, Wages & Benefits 3,620,920 3,988,966 4,794,842 4,589,898 IRS Form 990 (Tax)

Other 2,040,076 2,961,878 2,649,236 3,078,160 IRS Form 990 (Tax)

Total Expenses $19,391,490 $19,444,280 $20,176,819 $21,306,198

Expenses by Function (% of Total Expenses)Program Expenses 92.8% 93.6% 92.2% 91.7%Administrative Expenses 6.0% 4.6% 5.6% 5.5%Fundraising Expenses 1.3% 1.8% 2.2% 2.9%

Total 100.0% 100.0% 100.0% 100.0%

Expenses by Category (% of Total Expenses)Grants and Assistance 70.8% 64.3% 63.1% 64.0%Salaries, Wages & Benefits 18.7% 20.5% 23.8% 21.5%Other 10.5% 15.2% 13.1% 14.4%

Total 100.0% 100.0% 100.0% 100.0%

Abridged Balance SheetCash and Short Term Investments $8,177,363 $5,193,865 $6,374,806 $7,996,152 IRS Form 990 (Tax)

Grants Receivable 35,055,433 22,207,694 19,291,614 15,583,599 IRS Form 990 (Tax)

Investments 9,364,341 21,758,089 26,146,544 31,684,285 IRS Form 990 (Tax)

Other Assets 1,313,864 1,850,212 350,810 245,850 IRS Form 990 (Tax)

Total Assets $53,911,001 $51,009,860 $52,163,774 $55,509,886

Accounts Payable $1,257,458 $1,187,414 $1,833,052 $3,104,098 IRS Form 990 (Tax)

Fund Balances 52,653,543 49,822,446 50,330,722 52,405,788 IRS Form 990 (Tax)

Total Liabilities and Net Assets $53,911,001 $51,009,860 $52,163,774 $55,509,886

NVF has maintained a strong balance sheet over the past several years with minimal liabilities, large cash balances, and healthy grants receivable.

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THIRD PARTY RATINGS

• Charity Navigator rates NVF with an Overall score of 57.65 out of 70.00, or a 3-star (out of 4) rating. NVF is also assigned a 56.45 for Financial and 59.00 for Accounting and Transparency. While NVF satisfies Charity Navigator’s checklist for information provided on the organization’s Form 990, it notes that the website lacks a donor privacy policy, audited financials, and access to its Form 990.

• Philanthropedia’s expert network rated NVF a “2010 Top Non-Profit” with 32 experts viewing NVF as the nonprofit with the most impact in its field, while 4 experts disagreed with that assessment

o Strengths include:

Significant track record bring various organizations together and getting good work from them

Ability to pull together thought leaders from around the country and deliver meaningful networking opportunities

Staff – NVF is a magnet for talent, the brightest and most savvy in any sector

o Areas for improvement include:

Suffering from a lack of leadership energy and could use a higher, more vibrant profile

Junior staff is not as strong and does not add as much value to their supporting organizations

The melding of conservative methods for a liberal cause is under political scrutiny from labor unions and the democrats that represent their interests

GET INVOLVED

• Submit an idea for funding from NVF: http://www.newschools.org/entrepreneurs/submit

• Invest in NVF: http://www.newschools.org/invest

• General information: info@newschools.org

• Opportunities at NVF: http://www.newschools.org/team/join, dcrecruiting@newschools.org

DISCLOSURES

James Peng certifies that he does not have any affiliation with NewSchools Venture Fund and has never made a donation to the organization. Additionally, James has not supported directly competing organizations in a greater capacity than a nominal donation. NPI analysts and NPI as an organization do not receive any form of compensation from reviewed charities. This report is for informational purposes only and does not constitute a solicitation for donations. While the reliability of information contained in this report has been assessed by NPI, NPI makes no representation as to its accuracy or completeness, except with respect to the Disclosure Section of the report. Any opinions expressed herein reflect our judgment as of the date of the materials and are subject to change without notice. NPI has no obligation to update, modify or amend any report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject organization is withdrawn. Opinions and recommendations in our reports do not take into account specific reader circumstances, objectives, or needs. The recipients of our reports must make their own independent decisions regarding any organization mentioned by NPI.