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Foundation Center

Can We Move Beyond the Nonprofit Overhead Myth?

mythEver since last year’s Letter to the Donors of America from GuideStarCharity Navigator, and BBB Wise Giving Alliance there has been a growing movement to debunk the “nonprofit overhead myth,” the notion that donors should evaluate nonprofits based on the percent they spend on “overhead” (fundraising and administrative) costs.

More and more articles (a most recent one here) are cropping up explaining the overhead myth and highlighting donors who overcame it. And even fundraising journal Advancing Philanthropy is devoting their entire Spring issue to the topic.

But at the same time we have very obvious examples of the continuing strength of the overhead myth. The latest is nonprofit darling Charity:Water, which is often held up as the gold standard of innovative fundraising and nonprofit strategy, claiming that 100% of their donations go “directly to the field.” And thus the overhead myth lives on.

Will we ever be rid of the idea that nonprofits can somehow achieve a nirvana where very little (or no) money goes to boring things like salaries, technology, infrastructure, fundraising, leadership development, planning, R&D?

I wonder if we could gain more traction by talking less about the negatives of an overhead myth and talking more about the positives of nonprofit organization building.

For example, one of the things that is often considered “overhead” and rarely gets funded is nonprofit leadership development. But in the for-profit sector, leadership development is viewed as an incredibly important and worthy investment. According to a recent article by the Foundation Center, the business sector spent $12 billion on leadership development in 2011, whereas the nonprofit sector spent $400 million, or viewed another way, businesses spent $120 per employee on leadership development, whereas the nonprofit sector spent $29 per employee.

And leadership development can have such a positive return on investment. A stronger nonprofit leader can:

  • Recruit, train and manage a more productive and effective staff
  • Engage a more invested board of directors
  • Use money and other limited resources more strategically
  • Open a nonprofit to bigger and better networks
  • More effectively manage to outcomes
  • Create an overall more highly performing nonprofit

So what if we refocused the overhead myth discussion on the power of nonprofit organization building? Beyond leadership development, investing in nonprofit organization building means money for things like: talented, effective fundraising staff; smart long-term planning; performance management systems; effective technology.

At the core, organization building is about creating a smart, strategic nonprofit that can actually realize the outcomes it was set up to achieve. Organization building can make the difference between a nonprofit that is just getting by and a nonprofit that is actually solving problems.

If you want to learn more about funding nonprofit organization building, download the Power of Capacity Capital E-book or the Raising Capacity Capital Webinar.

Photo Credit: liquidnight

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Chatting About Social Entrepreneurship

As I announced in an earlier post, yesterday I participated in a Live Chat organized by the Foundation Center about social entrepreneurship. Abby Chroman from Ashoka joined me as a fellow panelist, along with The Foundation Center’s Katie Artzner who moderated.

We took questions from the audience about social entrepreneurship, social change, where nonprofits fit in the social innovation movement, social return on investment, measuring outcomes, fundraising and much more. It was a fast and furious hour with great discussion and great questions. This was a fun format because there was no audio, only text chatting.

If you missed it, you can still view the chat on the Foundation Center’s website here. And below is an excerpt from the discussion just to give you a taste.

_______________________________

Foundation Center’s Grant Space Live Chat

Comment From Dan:

How do you deal with accountability in the social entrepreneurship sector? Should social entrepreneurs be democratically accountable to those whose lives they seek to impact?

2:38
Katie:

How about we start with Nell.

2:38
Nell Edgington:

Dan, I’m not sure what you mean by “democratically accountable,” but they should absolutely should be accountable to their theory of change. Any social change org should have a theory of change (argument for how they are using community resources to create positive change). Once they have a theory of change they must measure whether that change is actually occurring.

2:38
Abby:

Accountability is a huge part of social entrepreneurship. It’s why we take a person’s “ethical fiber” as a very very serious part of our selection criteria for leading social entrepreneurs.

2:39
Katie:

“ethical fiber”? Can you explain?

2:39
Abby:

Yes, this is the level of trust we invest in our Ashoka Fellows that they will not only solve the social problem but that they will be accountable for their impact.

2:40
Abby:

It sounds odd, but imagine if you would stand on the edge of a cliff with someone…

2:40
Abby:

Do you trust them 100%?

2:40
Katie:

Depends!

2:40
Nell Edgington:

Can I jump in here for a second?

2:40
Katie:

Absolutely, Nell

2:40
Abby:

If no, why not? That’s the kind of rhetorical question we’d ask.

2:41
Nell Edgington:

That’s a really interesting concept to me. To me, social change is a very complex combination of people, money, ideas, structures, etc.

2:41
Nell Edgington:

It can never be dependent on just one person. So how can you know whether a single actor is actually going to make change happen?

2:42
Abby:

The person is will catalyze the change, but you’re right – it involves whole systems. So we’re back to systems!

You can see the whole live chat here.

Photo Credit: AlexDixon

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Are You a Social Entrepreneur?

I’m excited to report that a week from today, July 26th, I will be participating in a live online chat at the Foundation Center’s Grant Space website, titled “Are You a Social Entrepreneur?“.

Abby Chroman, leader of global community curation for AshokaHub, and I will be fielding questions from the audience about social entrepreneurship, social change, nonprofit innovation, capacity capital, social return on investment and much more.

Some of the questions we’ll be discussing include:

  • What qualities do social entrepreneurs possess?
  • How is this concept different from traditional corporate structure, even one with a socially-minded mission?
  • How do you truly accomplish social change vs. simply doing “good” work?
  • How can nonprofits especially incorporate some of this thinking to be successful in fulfilling their missions?
  • How do you measure social impact and return?

But the majority of questions are up to the audience. This live chat will happen entirely in the chat window on the Grant Space website. When the chat goes live, you can submit your questions and comments and interact with Abby and me and other readers, but you can also send questions ahead of time.

So join us! Registration is free at the Grant Space web site here. I look forward to your questions!


Photo Credit: Colin_K

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Can PRIs Support Fundraising and Capacity Building?

Lucy Bernholz is hosting a great conversation on her Blueprint Research and Design website called “What Capital When?” As part of their work with the John D. and Catherine T. MacArthur Foundation in their Digital Media & Learning initiative, Blueprint is hosting this online conversation around the theories and strategies of program-related and mission investing to advance knowledge and research in the field. They asked that I do a guest post on using PRIs (program related investments) to improve the fundraising effectiveness of nonprofit organizations. Below is that post. You can also read the post on their What Capital When site here, and you can read the whole series here.

I think there is a tremendous opportunity that most foundations and nonprofits are missing.  PRIs (program-related investments) are an under-used tool that could provide much needed capital for nonprofits to transform how they finance social impact.

PRIs are loans that foundations make to nonprofits at low, or no interest.  At the end of the loan period (typically 3-7 years) the loan is repaid, or forgiven.  PRIs are usually used for capital projects or land purchases in the nonprofit world.  But they could also be used to increase the fundraising capacity of a nonprofit organization, through increased fundraising knowledge, planning, tools and staffing.  The current economic climate seems like the perfect opportunity for this new use of PRIs when foundations are trying to hold on to their dwindling corpus while maintaining their past level of community support.

A nonprofit could use a PRI to improve their fundraising infrastructure in several ways:

  • Create a strategic development plan. Many nonprofits don’t have the expertise or time to put together a strategy for how they will bring money in the door.  With funding to hire an outside consultant to put together such a plan, the nonprofit would have a much better chance of increasing their fundraising revenue.
  • Get fundraising training for their staff and board. If a nonprofit staff and board have the tools and expertise for successfully raising money, they will be more likely to do so.
  • Hire a seasoned Development Director. Many nonprofit organizations can only afford to pay the bare minimum for a Development Director, which means that they are often forced to hire someone with little experience who must learn on the job.  If instead they had enough funding to pay a market rate salary for a seasoned fundraiser, they could hit the ground running, increasing the likelihood of fundraising success.
  • Purchase a new donor database. A key element to success in individual donor fundraising is an organization’s ability to capture and use data about donors and prospects.  A good donor database makes this effort easier and more successful.
  • Upgrade their website, email marketing, social media efforts. As direct mail appeals (a nonprofit fundraiser’s traditional standby) continues to become less and less effective, nonprofits need to move effectively into the online world.  Funds for technology upgrades and staff could help them do this.
  • Launch a major gifts campaign. The vast majority of private funding in the nonprofit sector comes from individuals (80+%), so to stay competitive nonprofits need to move into the world of major gift solicitation.  But that takes expertise, staff, collateral and other infrastructure elements.

These are just a few examples of how nonprofits could make investments to strengthen their fundraising efforts. But currently it is difficult to find funding to support things like this.

But a PRI could provide an initial investment that sets the nonprofit on a path toward more diversified, more sustainable fundraising for the social impact they are working to create.

There are tremendous benefits to a PRI program like this.  First, for the foundation:

  • Increases their ability to meet past levels of giving, despite any losses they might have found in the market, because the loaned money will eventually come back to them.
  • Encourages their nonprofit grantees to be proactive in creating fundraising streams that will make them more sustainable.  Thus, increasing the likelihood that their nonprofit grantees a) won’t have to come back to them year after year for ongoing support and b) will become more sustainable and thus achieve greater social impact.
  • Stretches their capacity-building dollars further. Because PRI money eventually comes back to the foundation, they can increase their level of impact by helping more nonprofits improve their capacity than they could with grants alone.
  • Increases the level of accountability among nonprofit recipients because of the expectation of repayment.

And second, for the nonprofit:

  • More diversified and sustainable fundraising streams.
  • Increased fundraising knowledge and experience.
  • Increased ability to work towards social impact.

Although PRIs used in this new way seems, at least to me, to be an obvious win-win, very few foundations are doing it.  PRIs in general are used (according to the Foundation Center) by only a few hundred of the thousands of grantmaking foundations in the country.  And I know of only one example of a foundation using a PRI to upgrade the fundraisng capacity of a nonprofit (the KDK Harman Foundation in Austin just launched a program like this last Fall, but does not yet have any participants).

So what is holding foundations back from launching a PRI program like this?  A number of things:

  1. Nonprofits lack the expertise to put a plan together and pitch it to foundations. This is where Social Velocity comes in to help nonprofits create a plan to upgrade their revenue function and pitch that plan to foundations and other funders.
  2. Most foundations  have an aversion to capacity building funding and prefer that their money go to direct program service.  However, as more nonprofits can demonstrate to funders that capacity building actually results in even more impact, this aversion can be alleviated.
  3. Foundations lack awareness of or experience with PRIs.  However, this is changing, especially in the last year when the poor economy has made foundations increasingly interested in finding alternative ways to maintain community investment levels.
  4. Foundations that are experienced with PRIs are not aware of using them to improve a nonprofit’s fundraising function.

So there is a disconnect.  But I am optimistic that as nonprofits learn to put a plan together to upgrade their fundraising function and articulate to funders how PRI’s could finance it, more examples of this new use of PRIs will surface.


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But Change We Must

The social sector, or perhaps more appropriately, those writing about the social sector, seem particularly analytical and reflective this past week. Perhaps its the looming end to a horrible year for the general economy, and nonprofits in particular.  Whatever the reason, the nonprofit sector and the philanthropy that funds it are at an important crossroads.

First, the picture for the current state of the social sector continues to be bleak. A recent Foundation Center advisory reports that foundation giving will decline 10% this year and more next year. And a new survey by Opportunity Knocks reports that more than half of nonprofit organizations froze the salaries of, or laid off employees this year. You begin to see a bad situation getting potentially worse.

But at the same time, there is the flip side of adversity: the opportunity. The nonprofit and philanthropic worlds, and the fundamental shifts occurring in both, are becoming a topic of broader discussion and understanding. First, the Wall Street Journal, in a great display of how the changing landscape of philanthropy has finally hit the consciousness of mainstream media, devoted an entire section this week to improving philanthropy, with the editor’s note: “If there ever was a time to get smarter about philanthropy, this is it. The question is: How?”  And the lead article “What’s Wrong With Charitable Giving and How to Fix It” is noteworthy in its examination of philanthropy, even if its proposed solutions are a bit weak.

And second, the James Irvine Foundation and the Fieldstone Alliance just released a report, “Convergence: How Five Trends Will Reshape the Social Sector,” conducted by La Piana Consulting that details an emerging restructured nonprofit sector. They argue that the nonprofits that will succeed in this changing sector are those that:

  • Share leadership across generations, cultural perspectives and styles
  • Use technology strategically to engage wider audiences to advance their mission
  • Understand and harness new networks, collaborations and partners, both individuals and organizations
  • Become skilled at tapping into a larger pools of individuals who want to volunteer in meaningful, skill-specific and diverse ways
  • Understand the convergence of the nonprofit and private sectors and embrace new opportunities there

The point of the report is that the status quo is no longer an option.  Those nonprofits that recognize and embrace change will survive and thrive: “In this changing environment, transformation is not optional. The future will demand a collective rethinking of what it means to be an organization, how individuals define their work and how best to both compete and partner across many permeable boundaries.”

This is akin to the “resetting” of the nonprofit sector discussed before.  This is not a blip; things are changing in very fundamental ways and the WSJ and others are recognizing that.  And nonprofits must recognize, understand, and embrace those changes.

I am glad that the WSJ thinks philanthropy such an important topic that they have devoted an entire section to analyzing what could make it better.  And I applaud the Convergence report for pointing out what’s changing and what it will take to survive amid these changes.

But I’d like to see this all go even further. Now is the time for nonprofit organizations to overcome their inherent risk aversion. Experiment with new funding models; try social media and other new technologies; analyze and refine your impact; get rid of low ROI fundraising activities; shake up your board; ask hard questions; encourage dissenting opinions and open discussion; let go of the status quo and embrace the opportunity of change.

And on the philanthropy side, I would like to see more risk taking, harder questions, more discussion.  Ask the nonprofits you fund what they really need to succeed; invest in organizations, not just programs; combine strategy and passion in your giving; make gifts based on results, not marketing; leverage your giving with other philanthropists; make investments, not just donations.

Fundamental shifts are occurring in how we approach social problems, how we communicate, how we build support, how we access resources. Those solutions that are bold, courageous and open to change will ultimately survive.


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Tuesday, November 10th, 2009 Foundations, Innovators, Nonprofits, Philanthropy 2 Comments

A PRI Experiment in Austin Pushes the Social Capital Market Forward

I am so excited I can hardly contain myself.  There is something pretty amazing going on in the world of philanthropy in Austin, Texas.   I have been talking for awhile about how PRIs (Program Related Investments) could be used by foundations in new ways to build the revenue sustainability of a nonprofit organization.

Just to recap, PRIs are loans that foundations make to nonprofits at low, or no interest.  At the end of the loan period (typically 2-3 years) the loan is repaid, or forgiven.  PRIs are usually used for capital projects or land purchases, among other things.  But they could also be used to increase the revenue-generating capacity of a nonprofit organization, through improved fundraising function or launch of an earned income enterprise.  The current economic climate seems like the perfect opportunity for this new use of PRIs when foundations are trying to hold on to their dwindling corpus while maintaining their past level of community support.

As I wrote in an earlier post here’s how it could work:

What if a foundation, or a wealthy individual, loaned a nonprofit $100K+ for a 2-3 year term.  Then, the nonprofit could use that capital to invest in their fundraising infrastructure in order to diversify and be more strategic in raising unrestricted dollars.  They could hire a seasoned Development Director, purchase a new donor database, upgrade their website and email marketing efforts, launch a major gifts campaign, train their board, and so on.  The idea is that all of these investments would pay for themselves in 2 or 3 years, at which time the nonprofit could pay back the individual or the foundation.

Well, the KDK Harman Foundation, an Austin foundation started by Janet Harman, who has been on the cutting-edge of Austin philanthropy before, just launched a PRI program to do just this.  According to their website:

KDK-Harman Foundation is seeking proposals from current grantees for Program-Related Investments (PRI) for its August and November board meetings…to (1) develop or expand their social enterprise efforts; or (2) expand their development and fundraising team. Although PRIs are used primarily for real estate loans for affordable housing or community facilities, the KDK-Harman Foundation will utilize PRIs to support loans to established, financially strong nonprofit organizations within the Foundation’s program areas to help grantees expand their scope of services and/or to become more sustainable. Specifically, the Foundation is seeking ways in which grantees could embrace social enterprise as a means to financial stability. Through a loan from KDK-Harman, the grantee could develop or expand its revenue generating operations and within three years repay the loan. Another example is to enhance the development team whereby the Foundation loans funds to hire additional fundraising staff. Within three years, the loan can be repaid through the additional funds raised. Over time, the organization should be much more financially secure with either a financially successful revenue stream or a larger development team.

I love it.  KDK Harman is doing two things with this new program.  First, they are increasing their ability to meet past levels of giving, despite any losses they might have met in the market, because the loaned money will eventually come back to them.  And second, they are encouraging nonprofit organizations to be proactive in creating revenue streams that will make them more sustainable.  Did I mention I was excited about this?

PRIs are used by other foundations (although according to the Foundation Center only a few hundred of the thousands of grantmaking foundations in the country use them), but I haven’t seen PRIs used in exactly this way before.  If you know of other examples of PRI programs elsewhere in the country that are used to increase a nonprofit’s revenue-generating ability, let me know.  But in the meantime, I’m so impressed with KDK-Harman. They are seizing the opportunity of challenging times to create a more sustainable nonprofit sector.


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