Too Many Nonprofits…Or A Weak Ecosystem?

Greenlights for Nonprofit Success, Austin’s nonprofit management assistance organization, today released the findings of a research study on the number of nonprofits in Central Texas.  The results weren’t surprising: we have more nonprofits (over 6,300) per capita than any other large Texas city and any other city in the Southwest region. And our nonprofits tend to be small: 93% (compared to 89% nationally) have a budget under $1 million, and 89% have a budget under $500,000.  In light of this study, Greenlights offers some good advice about looking towards cooperation, collaboration, and even  mergers given the number of nonprofits that exist and the increasing competition for funding, especially given the current economy.

What is missing from the study, however, is an analysis of the overall social sector in Austin, including philanthropy and other funding mechanisms, other social impact organizations–like social enterprises (creating social impact through market-based activity)– and the role of the public sector in all of this.  We need to take a bigger picture view and understand all of the elements and entities at play in the sector and how these elements could be better supported, analyzed, strengthened and winnowed, if necessary.  We need to take a look, as I explained in an earlier post, at the overall ecosystem for social innovation (ideas that solve existing public challenges). And we need to look at similar cities (like Portland, Seattle, San Francisco, Denver, Pittsburgh) to understand how their social sector is innovating and thriving and what we could learn from them.  The ecosystem for a thriving social innovation sector includes:

• An Engaged Public Sector: A city and/or state-level office for social innovation, similar to the White House Office of Social Innovation that puts public sector focus and resources toward strengthening an innovative social sector.  One-Star Foundation is moving in this direction.
• Larger, Innovative Philanthropy: An increased number of area philanthropists, giving more grants for capacity-building, providing growth capital to scale great ideas, giving seed funding for ideas that have potential, using mission-related investing and program-related investments, working as a group to discuss innovations in philanthropy and share and leverage projects.
• Social Investment: Adding a social element to the entrepreneurial investing that is already rich in our area, investors could create innovative funds that provide nonprofits and social enterprises financial tools such as loan guarantees, quasi-equity deals, and networks, advice, and entrepreneurial knowledge.
• Colleges and Universities Encouraging Research: Our local colleges and universities could launch centers for research on social entrepreneurship and social innovation. The RGK Center is a good start, but I’d love to see more.
• Discussions and Experiments: More events, gatherings, workshops, think tanks and other activities that help social entrepreneurship and innovation take hold in our region.

I think to truly understand where the Austin social sector is and how the number and capacity of nonprofits fit into that, we need to understand the entire ecosystem.  If we want to boast a thriving, innovative social sector we need to take a step back, analyze what we have and what we can do to encourage even more innovation.  The end result is a stronger, healthier city that ties its spirit of entrepreneurship and innovation to its desire to give back and strengthen the communities in which we live.  That is the Austin I envision.

Tags: Austin, Greenlights, nonprofit, One-Star Foundation, Philanthropy, RGK Center, Social Enterprise, Social Entrepreneurship, social innovation, Social Investing, White House Office of Social Innovation

Resetting Philanthropy

Challenging times are often an opportunity to restructure and rethink a broken system.  Just as the nonprofit sector needs to “reset” how they operate and how they raise money given the economic crisis and the crumbling social safety net, philanthropy, too, needs to take a step back and reset.  And there are some encouraging signs this month that that is exactly what is happening.  It seems that some philanthropists are taking unprecedented steps to rethink how they operate.

First, there was a secret meeting on May 5th of the wealthiest philanthropists, people like the David Rockefeller, Sr., Oprah Winfrey, Warren Buffett, Ted Turner, George Soros, Bill Gates, among others, in New York.  Gates, Buffett and Rockefeller called the meeting in response to the recession and the “urgent need to plan for the future.” Meeting details are sketchy, but such a meeting is unprecedented in our lifetime.  It is, however, reminiscent of similar meetings close to a century ago in a similarly challenging time in American history. At the turn of the last century, J.P. Morgan hosted gatherings of philanthropists to discuss how private citizens could stop the economic panic.

Apparently this month’s meeting of philanthropists lasted 5 hours and allowed each philanthropist 15 minutes to discuss how they were directing their philanthropy given the global economic crisis. The philanthropists claim that they are not hatching any big plans, but they do want to meet again.  It is fascinating to wonder what could come out of such ongoing discussions among people with so much wealth and such a desire for impact and change in the world.

Another sign of a beginning sea change in the philanthropic community is a growing desire among family foundations to spend their corpus, instead of preserving it in perpetuity, which is the norm.  The thought among some philanthropists is that the current problems facing the world are so challenging that their money should be spent now to adequately address the situation.  For example, the Beldon Fund, a foundation focused on the environment, is closing this year after having spent its endowment over the past 10 years.  Philanthropists John Hunting endowed the foundation with $100 million from the sale of Steelcase stock in 1998.  He decided to grant the entire amount within 10 years to build a national consensus to achieve and sustain a healthy planet.  Currently “limited-life” foundations make up about 10% of active family foundations, but this percentage has been growing since a 2004.  The current economic climate has increased conversations among family foundations around this topic, so the percentage may continue to increase.

Add to that a growing desire among the leading philanthropists to do more, on a larger scale, and you could see some pretty interesting changes to the philanthropic scene, which could mean a significantly larger amount of capital available to organizations working towards solutions.

Tags: Beldon Fund, Bill Gates, Foundations, George Soros, J.P. Morgan, Oprah Winfrey, Philanthropy, Rockefeller, Ted Turner, Warren Buffett

A Voice for Convergence

There is a great new voice in the growing movement towards the convergence of the public, private and nonprofit sectors.  Dan Pallotta, author of Uncharitable: How Restraints on Nonprofits Undermine Their Potential, has launched a blog on the Harvard Business site.  His first two posts expose the irrational dichotomy under which the American business and nonprofit sectors operate.  The private sector enjoys various financial tools, incentives and behaviors that are forbidden to the nonprofit sector.  Why do we offer those trying to make a profit every advantage, but make those trying to create a social good suffer hurdle after hurdle?

His first post takes on what he calls the “two rulebooks — one for charity, one for the rest of the economic world.” And he gives various examples of a double standard for charities:

• We let the for-profit sector pay competitive wages based on value, but have a visceral reaction to anyone making a great deal of money in charity.
• We let Coca-Cola pummel us with advertising, but donors don’t want important causes “wasting” money on paid advertising. So the voices of our great causes are muted.
• We let for-profit companies invest in the long-term to identify new sources of revenue, but we want charitable donations spent immediately to help the needy. All results must be measured against expenditures in twelve-month windows, and a 65% return is required.
• We aren’t upset when Paramount makes a $200 million movie that flops, but if a charity experiments with a $5 million fundraising event that fails, we call in the attorneys.

Yes!  Nonprofits exist within a system that in effect penalizes them for trying to do good.  The result is a sorely undercapitalized sector held together by bandaids, desperate for more talent and resources, bracing themselves against the increasing number of problems they are being called on to solve.  It is a horribly broken system, which requires a complete resetting.

In his second post, Pallotta takes on the nonprofit executive salaries debate, again with a view towards the double standard nonprofits face: “We give young people horrible mutually exclusive choices. We tell them that they can pursue their dreams of helping the world’s neediest citizens or they can pursue their dreams for their own economic futures, but they cannot pursue both.”  The end result is a nonprofit sector that struggles to attract enough of the top talent our country has to offer.

The problems we are facing are too complex and too deep to allow this continued lack of resources for a sector that is trying to find solutions while the for-profit sector pays enormous salaries to those  just trying to make a profit:

We must reject the dysfunction that calls a billionaire who spends all his time building his wealth a “philanthropist” but the three-hundred thousandaire who spends 100% of her time trying to end hunger a parasite for her six-figure salary. The notion that people should be compensated on the basis of the value they produce can no longer be denied to those who save lives while it is given freely to those who sell sodas and bounce basketballs.

Some might argue that despite lower salaries Generation Y is entering the nonprofit sector in higher numbers than previous generations, which is great, but that’s not sustainable.  If the system doesn’t change, as they get older, buy houses, raise families, many of the best and the brightest of that generation, too, will be lured away by big paychecks and greater resources with which to do their work.

Dan Pallotta provocatively demonstrates the tremendous inconsistencies that exist in a system that unnecessarily drives a wedge between the nonprofit and private sectors.  I look forward to more of his posts.

Tags: convergence, Dan Pallotta, nonprofit, resetting, Uncharitable

Messaging Impact

There is a missing link, I think, in how many nonprofit fundraisers approach their work. And that missing link is effective messaging.  Fundraising often uses the messaging of need.  “We need $100 to provide our programs.” “We need $1,000 to meet our goals.”  And many who counsel fundraisers continue to stress the messaging of need, for example Mal Warwick’s most recent article in the Stanford Social Innovation Review. Mal encourages fundraisers to strengthen their case for giving, but, for Mal, this case for giving is about the organization’s need: “be certain your donors understand both the more urgent need for your services during tough times and the many concrete steps you’re taking to increase your efficiency and effectiveness.”

That’s not how to raise money effectively.  To raise significant money you need to focus on impact. The messaging of impact is very different from the messaging of organizational need.  The messaging of need gets you donations.  The messaging of impact gets you investments.  And the two are very different:

Donations:

• Focus on organizational needs
• Tend to be smaller in size and shorter in length
• Are a response to an apologetic ask (the “tin cup” mentality)

Investments

• Focus on the impact (the change in outcomes) that an organization makes in the community
• Tend to be larger and longer
• Are presented as an opportunity

To raise significant, sustainable revenue, nonprofits have to move towards developing investors.  Here is how raising investments differs from raising donations:

A successful fundraiser looks for investors who share the organization’s values and theory of change, and then  demonstrates to them how the nonprofit creates that change in the community.  The organization is merely a conduit for investing in change in the community. For example, an afterschool program for at-risk children is translating dollars into positive outcomes for the children in their charge (increased student achievement, fewer high-school drop outs, lower crime rates, etc.).  If the organization were to fundraise around the organization’s needs, “Help us  reach our goal of raising $100,000 for our program,” they would raise far less than if they were to fundraise around impact, “Invest in our organization so that we can improve opportunities for children, which creates fewer burdens on our community, more contributing members, and a healthier overall community.”  The first message is about strengthening an organization, the second message is about strengthening a community.  Which is more compelling?  Which would make someone give more and continue to give if the promised impact is actually delivered?

The recession is, no doubt, a difficult time to raise money. But within this structural constraint there lies an opportunity.  By moving an organization’s messaging from need to impact, from donation to investment, there is the opportunity to raise much more money and in so doing, to deliver much more impact.

Tags: donation, Fundraising, impact, investment, Mal Warwick, messaging, nonprofit, recession, Stanford Social Innovation Review

A False Dichotomy: Non-profit vs. For-profit Solutions

In a recent blog post, Tony Wang, a brilliant researcher at Lucy Bernholz’s  Blueprint Research & Design, a strategy consulting firm for philanthropy in the Bay Area, makes a thought-provoking, yet ultimately flawed argument about the social impact of nonprofits (which he calls charities) versus social businesses. Tony and I have sparred before on PRIs and mission-related investing, and I had to take up the cause again with his argument that poses a false dichotomy.

Tony’s underlying argument is that a for-profit business model is better able to deliver social impact per dollar than a nonprofit one.  He gives many reasons for this:

1. Dollars for charity are limited. True the nonprofit sector is undercapitalized, but that is changing, and will continue to change as the public, private and nonprofit sectors continue to converge and the social capital market, for both for-profit and nonprofit social impact organizations, grows.  The mere fact that nonprofits are undercapitalized is not a reason to dismiss nonprofit solutions out of hand.
2. Charity is often inefficient “ because of its lack of accountability to the people who are the primary beneficiaries of aid.”  This has been true in the past, but I think it is changing.  An increasing focus on metrics, brought on by the venture philanthropy movement and others, has encouraged nonprofits to track and demonstrate outcomes.  These aren’t perfect by any means and there is much work still to be done, but why not work to encourage better accountability rather than simply say nonprofits are inefficient?
3. Charity is often harmful and insulting to its recipients.  I agree that Western solutions to third world problems can sometimes be full of hubris, but this is no less true in social businesses than it is in nonprofits.  Read my post on the “missionary” nature of some social business solutions.
4. Business has a much easier time scaling: “it will be difficult for domestic nonprofits to scale when the federal government is the only viable answer and that international nonprofits will still struggle mightily with the issue.”  Government isn’t the only viable answer.  Some great organizations have been able to scale without government assistance (Teach for America, KIPP, Citizen Schools). And the beauty of nonprofit organizations is that scale doesn’t have to mean just the expansion of a single organization.  Rather, scale can mean the dissemination of a solution that works.  Because nonprofits worry less about competition, they are more likely to want to share best practices, models that work, and allow local adaptations of a solution from another area.

Because of all of this, Tony believes that “a lot of young social entrepreneurs…are starting to realize that business solutions and not charity solutions can be more ideal when it comes to maximizing impact (and philanthropy’s impact would be multiplied if it leveraged its capital to fund social impact businesses with true potential).”

I’m sorry, Tony, but I really disagree with this.  Why does it have to be either, or?  Why is one model inherently better able to create value than another? Rather, I would say that it depends on the problem and what the best solution is.  Yes, there are problems and inefficiencies within the nonprofit sector, but there are also some pretty major problems, and inefficiencies in the for-profit sector (dot-com bust, financial crisis, anyone?).

Rather, we need to take a holistic approach to social impact.  There need to be multiple tools available to social entrepreneurs, whether they be for-profit or nonprofit  (different business models, various financing, etc).  And let’s remember that there are some inherent problems with for-profit social impact models as well.  When a solution requires the appearance of impartiality, a nonprofit model might be more effective.

I think the whole point of the convergence and “resetting,” to quote Lucy Bernholz, that is going on is that the old dichotomies and definitions don’t work anymore.  We have to break out of the notion that the way we used to categorize things doesn’t apply anymore.  Structures are changing, new models are emerging.  We need to be flexible and analyze the best solution to each problem that faces us.  “One or the other” thinking just won’t cut it anymore.

Tags: Blueprint Research and Design, charity, Citizen Schools, KIPP, Lucy Bernholz, nonprofit, social business, Teach for America, Venture Philanthropy

A Call for Mission Related Investing

In order to maintain their legal status, foundations are required to distribute 5% of their earnings each year to nonprofit organizations.  This 5% is determined by a 2-5 year rolling average of earnings.  In years like these when earnings are very low foundations have less to distribute, which makes ideas like mission-related investing more appealing.  Mission-related investing is when  a foundation uses part of it’s corpus (the 95%) to invest in social enterprises that are related to the foundation’s mission.  For example, a foundation interested in the environment could invest part of their 95% in wind farms, thereby receiving a social return in addition to a financial return and extending the reach of their mission despite an economic downturn.

Scott Collier, Managing Director of Triton Ventures, has thought a lot about mission-related investing, and I’ve asked him to do a guest blog on the topic.  Scott has been a venture capital investor since 1991. He has experience in all aspects of venture capital fund formation and management and the associated growth, financing and exit strategies for a diverse range of companies.  Scott serves on the board of the Entrepreneurs Foundation of Central Texas and is an active participant in microfinance and social enterprise initiatives, primarily focused on financing for social business. Here is his post:

From the largest foundation to the smallest donor-advised fund, the philanthropic world tends to manage assets in a way designed to preserve fund corpus while generating enough growth and/or income to achieve the 5% grant level necessary to maintain tax-free status. However, what has evolved from this mindset is a bifurcated structure where grant programs are expected to be the sole means of performing the mission while the asset management function focuses on optimizing returns.  In fact, people speak of a firewall between these two activities.  Unfortunately, this leaves much of the talent (and operating expense) dedicated to investment work that does nothing to further the organization’s mission.

More problematic, asset managers can and do end up making investments that generate a good rate of return but support companies that happen to work at cross purposes to the mission.  This sort of problem was brought to light a couple of years ago when the LA Times questioned why the Gates Foundation would invest hundreds of millions of dollars in companies generating toxic pollution blamed for sickening people living in communities receiving tens of millions in Gates-funded medical aid. Setting aside the moral implications of this situation, it’s irrational to allow the two parts of any organization to work at such obvious cross purposes.

What seems to make sense is a holistic view of foundation management that considers all investing to be mission related investing with the result that all cash outflows balance risk, return and mission impact. This approach implies five categories of investment along the continuum of philanthropy:

1. Program Grants: Currently maintained at a nominal 5% of total assets, these investments are absolutely certain to produce a negative 100% financial return.  So perhaps it would make sense to take this allocation to a lower percentage to make room for other investments that carry better returns (you can’t do any worse after all) and a different type of impact.  Perhaps even a more lasting and healthy impact.
2. Program Related Investments: Nell had an excellent post on this topic.  Deployed as loans at below-market yields, the risk-adjusted returns over time might be zero or negative but still better than the negative 100% generated by Program Grants.  Structured correctly, a PRI is counted by the IRS in the required 5% and if it were taken to a level of just 10 or 20 percent of the Program Grant spend it could transform the relationship that foundations have with their investees.  After all, in the right situation, a loan to support a move to self-sufficiency can be healthier for the recipient than a handout that creates a cycle of dependency.
3. Mission Related Investments: This category comprises mission-directed investments that fall outside the limits of what can be considered part of a foundation’s 5% qualifying distributions.  In aggregate these MRIs would target, on a risk-adjusted basis, just a return of capital or perhaps a small return beyond that, but still a below market return in exchange for driving a substantial mission impact.  Investments in this category could provide a tremendous boost to the nascent social business space.
4. Mission Aligned Investments: After evaluating for ROI potential, investments would get priority in this segment given the degree to which they enhance the mission.  A good corporate citizen in a country where the foundation does work might be enough to tip the balance in favor of investment.  Over time this could become a significant percentage of the income-producing portfolio and given the magnitude of dollars involved it could encourage corporate behavior to move in positive directions.
5. Mission Neutral Investments: The lowest social standard of the five, investments in this category would be held after ensuring that a reasonably sound “doing no harm” standard is upheld.  Verification of the standard would of course be subjective and based on limited insight into the business, but perhaps even such a sniff test is better than no test at all.

So consider a typical foundation that during the course of a year has 95% of its assets spread among the usual allocation of bonds, equities, and a smattering of alternative assets, leaving 5% to be distributed as grants.  If this allocation produced a 9% blended return on the investment portfolio, then net of Program Grants the overall annual rate of return would be 3.55%.

Now consider what happens if this foundation makes 2 small changes:

1. Program Grants are reduced to 4% with 1% going to PRIs that generate a negative 10% annual rate of return, and
2. 2% of the 95% portfolio goes into MRIs that only return capital.  The remaining 93% remains allocated in the same proportions as the 95% was before with the same 9% rate of return.  These changes produce a 4.27% rate of return: an overall improvement of about 70 basis points.

Starting with a $10 million foundation and compounding this difference over 10 years, this new allocation would mean the foundation would end up about $1 million larger than if it had stuck with the traditional 95/5 split.  More importantly, such a foundation would have been deploying 7% of its assets in mission-focused work instead of 5%, a $3 million aggregate difference over 10 years.  About 40% of that money would have been in the form of loans which, properly chosen and structured, enable local ownership and sustainable employment capable of going beyond where charity too often ends.  Replicated gradually across the trillions of dollars locked up in philanthropic corpus, such a rethinking of foundation asset management and mission investing could produce dramatic results.

Tags: financial return, foundation, Gates Foundation, mission related investing, PRIs, social return, Triton Ventures

Understanding Social Innovation

If you are interested in learning more about the social innovation movement and will be in Austin on May 14th, join me for a seminar, “New Models: Social Innovation.” This 90-minute session will discuss what social innovation is, what the terms social entrepreneurship, growth capital, venture philanthropy, mission-related investing, and social enterprise mean, and what some really innovative organizations are doing in this space.  If you run a nonprofit, serve on a board, run a social business or are thinking of launching one, donate to social impact organizations, or are interested in solutions to social problems, there is great significance for you in the social innovation movement. And because Austin  has a lead role to play in the movement, I’ll examine how Austin compares to the rest of the country.  You can read some of my past posts on Austin’s social innovation ecosystem, where Austin is going and what it needs to be a leader in this space here, here and here.

If you’ve been intrigued by social innovation and want to learn more, join us:

Lunch and Learn: New Models  – The Social Innovation Movement

May 14, 2009
11:30am-1:00pm
At Greenlights

Click Here to Register

Tags: Austin, nonprofit, social business, Social Enterprise, Social Entrepreneurship, social innovation, Venture Philanthropy

A Strategic Approach to Generating Revenue

The one common frustration shared by the various organizations I work with is money.  How do we get more of it, how do we use it more effectively, how do we generate it more easily, how do we make it sustainable?  My answer to all of these questions is to take a more strategic approach.

I’ve written before about how revenue in the nonprofit sector is often thought about separately from mission and core competency.  It is sometimes (more often than not) viewed as the step child of the true work of an organization.  Money is the stressful, dirty, tireless work that takes an organization away from what they should be doing.

However, if an organization can fully integrate money into their overall organization, it can become a powerful resource which can help the organization do more in a more sustainable way.  But how does an organization get there?

The first step is a comprehensive, easy to implement strategic plan.  When working with organizations, I employ an 8-step process for creating a strategic plan that takes away the mystery and ineffeciency present in many strategic planning processes.

But what does strategic planning have to do with fundraising?  Absolutely everything.  Without a clear vision and direction for an organization–a clear path forward–what donor wants to invest?  No one wants to throw money at a problem.  People want to understand what they are buying, or investing in.  What is the end goal? How are you going to get there?  How do you know this is the right approach?  Even the smallest donor will give more over a longer period of time if they can understand how what they are giving fits into a larger picture and will result in some significant change in their community.  So an overall organizational strategy will reap tremendous financial rewards.

But any effective strategic plan must have an integrated financial plan.  What are the resources at your disposal (staff, technology, buildings, materials, programs), how much will they cost and how will you generate the money to pay for them?  You cannot have a realistic strategic plan without a corresponding financial plan. The financial plan lays out the revenue and expenses over the period of the strategic plan.  What is it going to cost to get to your goals (expenses) and how will you pay for them (revenue)? Going back to the critical importance of aligning your mission, resources and core competencies, you must weigh your expenses against your realistic ability to raise that amount of money.  Can you really raise enough money, given where you are right now, to meet all the goals of your strategic plan?  If not, then one of two things has to change. The first option is to limit the goals of your plan to make them more affordable.  The second option is to increase your revenue engine to meet the cost of these goals.  Therefore the strategic plan and financial plan have to be created in conjunction with each other.  It is a back and forth process where one plan feeds and is altered by the other.

Once you have a realistic financial goal, you need to create the annual revenue plan to get there.  Notice I didn’t say “fundraising plan.”  Nonprofit organizations need to elevate how they think about the money required to reach their organizational goals.  Fundraising, raising money from private sources (individuals, foundations, corporations), is just one part of the revenue options available to nonprofits.  Other options include: earned income (selling a product or service), government grants, fee for service, corporate sponsorships, debt, growth capital, and so on.  By using the term “revenue plan,” as opposed to “fundraising plan,” a nonprofit begins to explore other revenue opportunities.  That is not to say that every nonprofit should explore every revenue opportunity.  Nonprofit organizations do, however, need to expand their options.

Just like a strategic plan, a revenue plan should have 3-5 broad goals.  So, perhaps you break your revenue types into 3-5 buckets.  Then create the road map for hitting those revenue targets in each area.  What infrastructure needs to be in place, what campaigns will you take on, how will you go about bringing that money in the door, who is responsible for each activity, what is the timeline?  And you begin to craft a comprehensive revenue plan.  It can seem like an overwhelming process, but if you are strategic and systematic about it, you can break an overwhelming goal down into manageable chunks and pretty soon you are raising more money that you thought possible.  I did this at KLRU, increasing annual operating revenue by $1.6 million.  And I’m helping several of my clients create and implement similiar revenue plans.

There is a way, even in the midst of a recession, to generate the money necessary to achieve your goals.  But it requires an integrated, strategic approach.

Tags: financial plan, Fundraising, KLRU, Nonprofits, revenue, strategic plan