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Can’t Small Nonprofits Raise Capital Too?

By Nell Edgington



In our two part interview with George Overholser of the Nonprofit Finance Fund, George made an argument that gave me and some of my readers pause. He argued that only the largest nonprofits can really benefit from his “radical” idea of using a capital campaign to build their organization (instead of a building). But with Social Velocity I have seen small and medium-sized nonprofits raise capital to grow their impact or  build a stronger, more sustainable organization, albeit on a smaller scale.

George believes that raising capital for building an organization is currently only feasible for the largest nonprofits, as he argued:

Only a small percentage of nonprofit organizations actually aspire to undergo major growth, or any of the other disruptive transformations that are inextricably linked to a capital investment…Still, what about the small organizations that DO aspire to undergo a big transformation?…I believe that it is absolutely vital that we come up with a way to better capitalize these smaller organizations. Sadly, though, at this stage of capital market evolution, it is still quite expensive to prepare for a successful nonprofit equity campaign. Unless several million is being raised [the costs are] prohibitively high. This constrains us to campaigns of $5 million or more, which, in turn, constrains us to organizations that are already pretty large.

This argument got me and some of my readers thinking. As one reader wrote:

As the ED for a very small nonprofit (<300K) I am greatly disheartened to essentially read “yes, we can cure the large guys, but for the rest of you -80% – well good luck! No answers for you yet.” WOW…Really is education and awareness for buyers to support the whole organization vs. its programs enough? (Although I agree wholeheartedly, a needed step) I believe there has to be a way to “create compelling ‘asks’ for equity capital” that is less expensive. There has to be way to finance a small organization’s desire to meet the needs of the community which could mean doubling their impact. We are asked to relearn, redo, change our practices to support (finance) the organization’s mission to change the world, but is no one considering the relearning, redoing or changing the expensive processes/methods so all nonprofits can benefit?

I agree wholeheartedly, and that need–to strengthen and grow smaller nonprofits–is why I launched Social Velocity. There is a category of capital that smaller nonprofits, who aren’t interested in or able to achieve major growth, can access. It can be capital to grow a successful program to other clients, other cities, other regions. Or it can be capital to strengthen and make more sustainable the organization.  For example, as any small nonprofit will tell you, it is nearly impossible to get a funder to pay for a Development Director, a donor database, marketing collateral, a new website and so on. These are the tools that will allow the “sales team” to raise the income necessary to run programs. What if these smaller nonprofits could hold a mini-capital campaign to raise the capital necessary to increase the enterprise’s ability to raise income. Or to purchase technology to increase operational effectiveness?  Or to grow, not to scale, but significantly?

True, a $5 million equity capital campaign is beyond all but the largest, most sophisticated nonprofits. But there is still the vast majority of organizations that are struggling within the vicious starvation cycle of not having the right elements of their built enterprise necessary to effectively deliver or grow programs. Yet money can be raised to build out that enterprise.

Social Velocity has worked with a number of small to medium sized nonprofits to create a pitch for capital to help the organizations strengthen their revenue function, grow programs, and so on (read about this here, here and here). The idea is the same as George’s, but on a smaller scale. With a good plan and the right pitch, any nonprofit can raise the capital required to achieve more social impact through a strong, sustainable, bigger enterprise. A nonprofit equity campaign is not just for the largest and wealthiest nonprofits. The principle can be applied to even the smallest nonprofit, and in that way, George’s radical idea could become revolutionary.

Photo Credit: Stuart Conner

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About the Author: Nell Edgington is President of Social Velocity (www.socialvelocity.net), a management consulting firm leading nonprofits to greater social impact and financial sustainability. Social Velocity helps nonprofits grow their programs, bring more money in the door, and use resources more effectively. For more information, check out Social Velocity consulting services and clients.


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5 Comments to Can’t Small Nonprofits Raise Capital Too?

Steve Goldberg
September 21, 2010

Nell, I wanted to offer some comments on your thoughtful post. I hear this lament from small nonprofits all the time: how do we grow if we’re too small to raise growth capital? It’s a fair question to which the nonprofit capital market does not yet provide a satisfactory answer.

For the vast majority of nonprofits, there’s only one kind of money, regardless of the particular source: funding for programs. That money is secured the old fashioned way, by raising it from donors by (1) building relationships and (2) telling engaging stories about the nonprofit’s work. It’s a costly and time-consuming process that never raises enough money for long enough time. Hence, the nonprofit starvation cycle is the dominant fact of life for small nonprofits.

George Overholser pioneered a new kind of money that he calls “patient capital” or “equity-like capital,” and that I call “growth capital” (full disclosure: George disapproves of the way I use that term). The basic idea, as you say, is that investors fund the nonprofit’s entire business plan for an extended period (say 3-5 years) rather than some or all of the costs of particular programs for a finite period of time. The goal is to enable the nonprofit to permanently grow to a new level of operations that can be sustained by traditional program funding. George observes that it’s simply too costly for small nonprofits to make the case for this kind of funding, and he knows whereof he speaks. Small nonprofits are no less deserving than larger ones, but only the larger ones can undertake the kinds of planning and demonstrate the capacity to make effective use of funding designed to enable organizations to grow by factors of 2, 3 or more over the course of several years.

However, I believe there is an intermediate kind of funding between program funding and growth capital that small- and medium-sized nonprofits can raise and that is capacity-building funding. Of course, we all know what capacity-building expenses are — computers, specialized staffing, professional accounting and fundraising systems, and so on — and we also that almost no funders, either individuals or foundations, provide this kind of money, which we disparagingly call “overhead” or “administrative” expenses. The failure of the nonprofit capital market to provide capacity-building funding (and not growth capital) is what keeps small nonprofits locked in the Catch-22 of the nonprofit starvation cycle.

The emergence of growth capital is a recent development in the nonprofit sector and it is still very much in its infancy, even though courageous intermediaries like NFF Capital Partners and EMCF are demonstrating its importance for scaling what works. But you’re completely correct that a similar effort needs to be made for capacity-building funding. As you might be aware, Ken Berger at Charity Navigator is revising his rating methodology so that effective nonprofits won’t be penalized for making reasonable overhead expenditures designed to enhance their organizational capacity and extricate themselves from the starvation cycle. (Another disclosure: I consult with CN.) Hopefully, charities that would lose four-star ratings under the current CN rating system will attract greater funding when the new system goes into effect.

Growth capital is aimed at achieving true scale, but capacity-building funding is aimed simply at producing robust nonprofits that aren’t held back by the starvation cycle of program-only funding. Just as small businesses provide most of the jobs in this country, we need the kind of funding that can enable many more small nonprofits to meet the everyday needs of the communities they serve in a reliable and sustainable way. What George is doing for equity-like capital still remains to be done for capacity-building.

Steve Goldberg
September 21, 2010

One more thing: you can get an idea why it costs so much to raise growth capital by reading an NFF Capital Partner prospectus. http://nonprofitfinancefund.org/capital-services/growth-capital-prospectuses

Nell Edgington
September 22, 2010

Steve, I don’t think our arguments are that far off from each other. I absolutely agree with you that capacity capital is an enormous need in the nonprofit sector, and what George is doing for growth capital should be done for capacity capital.

However, there are a couple of areas where I do disagree with your argument.

First, I don’t think anyone has yet come up with a final definition for scale. What is “scale”? Does it mean that everyone in a city who could benefit from a nonprofit’s program has access to that program? Or everyone in the county, state, country, world? Or does it mean that the underlying system is changed? Or does it mean that policy has changed? What is true scale? I imagine that it’s probably different for each organization.

Therefore, if there is a small organization that is providing a powerful and unique solution, shouldn’t they be able to expand that solution, not through incremental growth, which is the nonprofit norm, but by factoral growth, which growth capital allows? Take my example of English at Work that provides a unique solution to English language needs at the workplace. They are currently offering their program only in Austin, TX, but the program could address enormous needs in the state of Texas, or in the Southwest region, or perhaps throughout the country. And honestly, they don’t have a lot of competitors right now. So what’s holding them back from really expanding this program to an ever growing population of immigrants? Growth capital. But English at Work would never catch the eye of the Nonprofit Finance Fund or New Profit or any other venture philanthropy fund or proponent of growth capital. So what English at Work and Social Velocity are doing instead is creating a growth plan and then educating their current and potential funders in their network about the power of growth capital.

Nonprofits like English at Work and the countless others who have a great solution and a vision for growth don’t have the luxury of sitting around waiting for the nonprofit capital market to evolve to a place where the bottom 80% of nonprofits have access to growth capital.

Second, creating a growth capital campaign doesn’t have to be prohibitively expensive for smaller nonprofits. Sure they can’t afford the larger fees that Nonprofit Finance Fund might charge, but they also don’t need that kind of money to be able to grow. Heart House is another example. They want to expand their afterschool program for at-risk kids throughout the state of Texas. They’ve put together a comprehesive growth plan to do this and the price tag is just north of $1 million. They have already raised a good chunk of that money, not from venture philanthropy funds, but again from their own circle of donors and friends who they are educating about the power of growth capital.

I think George, the Nonprofit Finance Fund, Charity Navigator, you and many others are doing a phenomenal job of bringing the ideas of growth capital and capacity capital to the consciousness of funders, regulators, nonprofits, etc. The case studies that NFF has provided are fabulous tools for those on the frontlines of the nonprofit sector wanting to raise growth and capacity capital, but needing help articulating and providing examples to donors, board members and others about what it is and what it can do.

The good news is that growth and capacity capital are already being raised among smaller nonprofits. So let’s not tell them to wait. Let’s give them more tools and examples to do more. Because the number of problems facing local and regional communities is only getting worse. Those smaller nonprofits that have solutions need all the help they can get to bring those solutions to more people.

[...] This post was mentioned on Twitter by VPP and Nell Edgington, Laura Tomasko. Laura Tomasko said: RT @nedgington A debate on whether small nonprofits can/should raise growth capital between me and @Steve_Goldberg: http://bit.ly/9CW5nn [...]

[...] var addthis_config = {"data_track_clickback":true};Last fall I wrote a blog post arguing that small nonprofits need access to philanthropic equity (money to build their organizations) just as much as larger, more sophisticated nonprofits do. My post was in response to George [...]

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