FOR CENTURIES RICH PEOPLE

have given money away in the names of the causes dear to their hearts be it libraries, dreaded diseases or miniature schnauzers (more on the latter below). Today the wealthy are opening their wallets like never before. From 1995 to 2004 there was a 61% increase in the amount given by grant-making foundations, according to the Foundation Center, with total giving for 2004 hitting $31.84 billion. Yet even as vast amounts of wealth pour into philanthropic endeavors, expectations on how those funds will be used are undergoing a shift away from their purely altruistic roots.

"There is change in the field," says Peter Frumkin, director of the RGK Center for Philanthropy and Community Service at the University of Texas at Austin. "What we've seen in the last 10 years has been high-visibility, high-net-worth individuals playing a much more active role in philanthropy."

Among the new breed of donors are the big investors (Warren Buffett) and corporate executives (Bill Gates) who've grown rich thanks to the stock-market boom, bust and subsequent re-boom of the last decade. Recently, hedge-fund managers have taken a more prominent role in the mix. In 2005, the 25 biggest family foundations created by hedge-fund managers were worth $1.6 billion, compared with $360 million in 2003, according to Absolute Return, a magazine that covers the hedge-fund industry. The flood of hard-driven, hyper-aggressive type-A givers has led to a different way of thinking about how donated dollars are used that Frumkin terms venture philanthropy.

"Venture philanthropy is an attempt to bring the principles of venture capitalism active engagement in the organizations and heavy involvement in operations to philanthropy," says Frumkin, author of "Strategic Giving: The Art and Science of Philanthropy." "They're applying the models they're comfortable with from the for-profit world and using them in the context of the nonprofit world."

The problem with venture philanthropy, of course, is figuring out just how to measure returns on charitable investments. Nonprofits operate on a different plane and their directors aren't as attuned to the rigorous number-crunching of the hedge-fund world. Besides, accurately measuring the value of an inner-city after-school program isn't the same as comparing a portfolio's returns against the S&P 500 index. We asked Frumkin how he thinks this dichotomy will pan out if hedge-fund managers and the like continue to play an increasingly prominent role in philanthropy.

SmartMoney.com: Why does it seem private philanthropy is getting more media attention these days? Does it have anything to do with Bill Gates and Warren Buffett giving billions away to fight malaria and other diseases?

Peter Frumkin: Well, first a little background. I have a chart I use when I give talks that shows one line as the government's total nondefense discretionary spending and the total spent on philanthropy in the U.S. If you look at the lines, it was a 6-1 ratio [in the early 1960s]. Today the ratio has narrowed to 2-1. It's only a matter of time when the two lines are going to cross. Philanthropy has become a more important source of capital for social innovation and problem solving than the government. You have so much of the budget for all these other things. The amount of money left over for new programs is modest. Philanthropy is going to become an increasingly critical locus of problem solving. It's going to be a massive shock; private philanthropy, private foundations are going to usurp the federal government in terms of total resources available. It's going to be a different world 20 to 30 years from now when philanthropy starts to outstrip the government.

SM: What's going on in field now? How are the newly wealthy impacting philanthropy?

PF: There is change in the field. What we've seen in the last 10 years has been high-visibility, high-net-worth individuals playing a much more active role in philanthropy. Venture philanthropy is an attempt to bring the principles of venture capitalism active engagement in the organizations and heavy involvement in operations to philanthropy. They're applying the models they're comfortable with from the for-profit world and using them in the context of the nonprofit world.

SM: How novel is that more businesslike approach?

PF: The idea of trying to improve philanthropy is an old one. You go all the way back to David Carnegie and John Rockefeller at the beginning of the century. They called it scientific philanthropy, which they said would be better than traditional, Victorian-era philanthropy because they'd demand something of the recipient. And that would be a huge improvement over charity. It was the idea that philanthropy is better than charity, it has to be more rigorous and effective. It was an attempt to differentiate philanthropy from charity.... And the big idea du jour now is applying business concepts to philanthropy.

SM: Is that working well?

PF: I think lately it's hit something of a wall. There was some excitement in the beginning. But the problem is no one has been able to crack this difficult nut of performance measurement. How can you have social investing or venture philanthropy if you cannot measure return or net effect? It's frustrating for business people. In a for-profit context, how do you measure performance? Profit, market share, revenue growth. There are a lot of metrics that can track closely a firm's performance because you have a bottom line. Now those same business leaders go over to philanthropy and say we'll be just as tough there. How do you measure a return on investment of a homeless shelter? How do you quantify the value of mentoring? It wants to be more hard-nosed, more focused on investing as opposed to giving, but has difficulty measuring and assessing returns. The tools in philanthropy are much softer, incommensurate and elusive. The field right now is still attracted to a systematic strategic idea of philanthropy, but it's struggling with how to operationalize it.... So there's a huge amount of new language in philanthropy but the practices are still lagging.

The bottom line is what you're seeing is just like the turn of the century, an attempt to reinvent social philanthropy. That transition has been less than full. One part of that transition that has taken hold clearly and nicely is the second leg, which is high engagement. Donors don't just write checks. They actually get their hands dirty, and get involved with boards. It's also like the traditional business model to get involved. You see high engagement philanthropy donors want more than just a financial interaction, they want a personal connection. And that's been more fully executed.

SM: Wouldn't that be more effective, to have a personal stake in whatever cause they're giving time and money to?

PF: It's actually not more effective; it's more satisfying. People tend to think of philanthropy as this thing wealthy people do for the world, that it's all about public needs and satisfying critical community desires. That's true. But philanthropy is also about the values and beliefs of donors. Engagement gives them a measure of psychic satisfaction. Philanthropy cannot survive if it's just about this agnostic, neutral, dutiful satisfaction of public needs.... Donors want this experience. They want a sense of validation and values enactment. They get that through higher levels of engagement. It's a more expressive, more donor-centered philanthropy.

For example, you have David Duffield, the founder PeopleSoft. He had a profound relationship in his life. That relationship was with his little dog. He established Maddie's Fund, a foundation set up because of his love of his miniature schnauzer. He set up $200 million no-kill animal shelter network. Some people would say that's a rather personal form of philanthropy. I actually believe the best philanthropy involves both private expression of personal beliefs and fulfilling community needs. In my book, I go through a lot of examples meeting both criteria....

A big part of the struggle of philanthropy now is finding the right mix where both the donor's needs are met and the public's needs are met. You see a lot of philanthropy where it's all about donors. It's agnostic, neutral and technocratic at many big institutional foundations. They're very technical in their analysis; what's missing is passionate feeling.... I think the best way is to find a middle ground. There's a struggle between public-oriented institutional, neutral giving and the idiosyncratic, value-laden giving done by individuals. A lot of my book is about finding a combination of those two, and do strategic giving.

The founders of eBay and Google are trying to innovate on the organizational form in philanthropy. Particularly [eBay founder] Pierre Omidyar he says he's going to fund for-profit and nonprofit social organizations. They're trying to say the traditional boundary between investment houses and private foundations is no more. What he's trying to do is fund a hybrid organization, a new organization form that does both for-profit and social work. Younger founders of big companies are trying to innovate on the forms.