Connecting Government & Philanthropy: An Interview with Rene Cabral-Daniels

In this month’s Social Velocity interview we are talking with Rene Cabral-Daniels, head of the Council on Foundations’ Public-Philanthropic Partnership Initiative that works to connect government and philanthropic resources in order to create bigger, better solutions to social problems. Rene has been a leader in both government and philanthropy, including roles as director of the Office of Health Policy and Planning for the Virginia Department of Health, and as vice president for grant programs at the Williamsburg Community Health Foundation.

You can read all of the interviews in our Social Velocity interview series here.

Nell: What are the goals of the Public-Philanthropic Partnership Initiative, what impact do you hope to have on social change efforts in this country?

Rene: The goals of the Public-Philanthropic Partnership Initiative (PPPI) are exciting ones as they reflect a growing desire by a number of entities within philanthropy to better collaborate their similar investments in social change with government to achieve enhanced impact and effectiveness. Philanthropy can, and should, be a key player alongside the public and private sectors to help the nation accelerate the pace of its response to emerging challenges. For philanthropies seeking information, context and guidance on partnering with government to advance the common good, the PPPI will facilitate the flow of information, ideas and opportunities between philanthropy and government and elevate promising practices and models so that partnership achievements transcend administrations. Essentially, the PPPI serves as a conduit between foundations and the federal government to substantially increase the quality and quantity of government-philanthropic collaborations. The PPPI has three major goals:

1. Catalog current opportunities and develop tools and resources to enable foundations, large and small, to successfully partner with government;
2. Generate timely analysis and commentary to increase awareness and understanding among the foundation community and government about all aspects of public-philanthropic partnerships and PPPI; and
3. Position the Council as an intermediary for public-philanthropic partnerships.

The PPPI’s potential for impact on social change efforts in this country is like no other. When one considers the overall goal of philanthropy to promote its investments and partnerships to enhance real change – new solutions to old, enduring problems then the PPPI’s emphasis on partnerships assures a longstanding, meaningful impact that coalesces the sector’s greatest resource- its intellectual capital. While the financial capital of some funders may be greater than others, every funder has significant intellectual capital in what works as well as what does not work in addressing a particular challenge. Thus, every funder has the capacity to effectuate meaningful change in the areas that they fund. The Council assures that the Public Philanthropic Partnerships are not and cannot be simply the domain of a few large foundations that partnered with one administration at one point in time. Thus, the PPP supports the desire of many foundations (of all sizes and missions) which choose to collaborate with public sector agencies in ways that enhance the delivery of common program missions.

Nell: Connecting foundations and government is a pretty new idea, why has the Council created this initiative and what is it about this particular time that seems right for something like this?

Rene: When I first came to the Council, I thought the PPPI was a new idea. However, after researching the history of philanthropy, it became clear to me that public-philanthropic partnerships have not only been around for a very long time but that there have been a number of successes that continue today such as the existence of public libraries, elimination of diseases such as yellow fever and the creation of the Head Start program. Another fascinating fact I learned while researching the history of philanthropy is that the foundation for public philanthropic relationships within the federal government was set under the Reagan administration. Reagan’s early activities as President was to urge the country to, “get the private sector in the driver’s seat so we can start using market incentives and philanthropy to find lasting solutions to community problems.” He highlighted the role of philanthropy by, among other actions, declaring the first National Philanthropy Day in 1986. Clearly, President Reagan recognized the leadership role of the philanthropic community within the private sector. He created the base for successful public-philanthropic partnerships that continue to this day. Recognition of philanthropy’s role did not end with his administration. Successive administrations have likewise partnered with philanthropy to solve intractable social problems. One great example is President Bush’s President’s Emergency Plan for AIDS Relief, also known as PEPFAR, which serves to help save the lives of those suffering from HIV/AIDS around the world. The current administration’s creation of the Office of Social Innovation and Civil Participation merely elevates the important role of philanthropy recognized by earlier administrations, by dedicating an office that exists to leverage as well as scale up public-philanthropic partnerships. Like the government, the Council’s history with public-philanthropic partnerships is about as old as the Council itself. Its recent creation of the PPPI capitalizes on government’s elevated interest in these partnerships, which is sure to transcend administrations.

While both the federal government and the Council have had a long history with public philanthropic partnerships, there is another important reason why the Council has created this initiative at this time. The PPPI furthers the Council’s goal to promote philanthropy in an important way. The PPPI leverages the Council’s promotion in a range of activities that fall into its four priority categories – connecting, convening, communicating, and building capacity. The Council’s strengths in these four areas are simply unparalleled within the philanthropic sector. As a connector, the Council brings together foundations and government agencies seeking partnerships that can enhance their common goals. The Council’s convening abilities allow it to bring different audiences together to learn from one another about topics essential to ensure strong and productive partnerships. As a communicator, the Council provides timely information to members, government agencies, and colleague organizations on existing or future partnerships, effective practices, emerging opportunities and available PPP resources. Finally, the Council enhances the capacity of philanthropy to participate in public-philanthropic partnerships both by utilizing the Council’s expertise and by aggregating the expertise of its members and colleague organizations. Thus, the PPPI provides a wonderful platform for the Council accomplish its overall goal to promote philanthropy.

Nell: How do you define successful public/philanthropic partnerships? What does that look like?

Rene: My answer may sound circular but I think a successful public/philanthropic partnership is one whereby a shared vision of success that was clearly considered, articulated and memorialized by both the government and philanthropic partners becomes a reality. In essence, both parties have to define success for themselves at the onset of the partnership. There simply is no magic formula for successful public/philanthropic partnerships as the definition of success is as variable as the number and types of partnership possibilities. To respond further to your question, I would like to highlight an excellent document from Grantcraft which funders might want to consider when contemplating potential public/philanthropic partnership engagement. It is called Working with Government and offers a host of important considerations funders should address when contemplating partnerships with government. Funders that decide to engage in public-philanthropic partnerships should then consider the Council on Foundations’ Public-Philanthropic Partnership Initiative website. This website offers a wealth of information about public philanthropic partnerships and highlights the Council’s engagement in a range of activities that fall into its four priority categories – connecting, convening, communicating, and building capacity.

Nell: Do you see philanthropists increasingly wanting to collaborate among themselves and with other funders, both government and private sector funders? If so, why?

Rene: While I have no quantitative data that can demonstrate a trend or an acceleration of interest in partnerships, it is clear from a number of sources such as conference session suggestions, affinity group and member inquiries as well as webinar participation that the desire to collaborate is very strong within the philanthropic sector. I suspect one very important reason is that the downturn in the economy has encouraged funders to reconsider the many benefits of collaboration in their efforts to scale up projects while possessing fewer resources. Funders are likely realizing that their collaborative efforts are not only enhancing their economic resources, but their human and intellectual resources as well. The questions the Council receives from its members regarding collaboration make it clear that they have realized that just as there are different types of partnerships, there are many types of collaborations and that certain types of funders are better than others when considering specific types of collaboration. For example, a collaborative effort that requires the entities to act quickly to solve a challenge where time is of the essence may not be the best fit for government. However, the government might be an ideal entity with which to collaborate if the activity involves addressing a long-term community health problem, such as child obesity.

Nell: Government has a tendency to get dismissed in social change efforts, particularly in recent years with the social innovation movement because government can be viewed as bureaucratic and slow to change.  Do you think government can be more nimble and adaptive to this new energy around social change efforts?

Rene: This question is best answered by providing some legal history. When President Roosevelt expanded the number of federal agencies in the early 1930s Congress became concerned that an important political doctrine of the Constitution requiring separation of powers between the three branches of government was becoming obfuscated. Our system of government has a system of checks and balances to assure one branch of government does not have too much power. One important concern with the federal agencies is that they had legislative, judicial and executive responsibilities without public input. Because of this concern, Congress passed the Administrative Procedure Act in 1946. It has been called “a bill of rights for the hundreds of thousands of Americans whose affairs are controlled or regulated” by federal government agencies. The APA requires agencies to keep the public currently informed of their structure, procedures and rules and provides for public participation in the rule making process. More recent examples of other laws that assure public participation in government decisions include the Federal Advisory Committee Act, which makes public all administrative procedures and hearings and the Government in the Sunshine Act, which makes agency meetings public.

While the need to assure the citizenry has adequate input into agency decisions is an important tenet of the American government, it also challenges the ability of government to act quickly. The private sector is not saddled with this important, yet burdensome responsibility. While the government may never be as nimble as the private sector in executing social change activities, its many resources can still be adaptive to new social change efforts. I think the more strategic funders will harness as well as leverage those resources in addressing social change challenges. Examples of some of these resources are as follows:

1. The government has a tremendous amount of relevant, longitudinal socio-economic data that are often underutilized because government lacks the ability to make these data user-friendly. Collaborative efforts between government and others to improve the utility of this rich resource can inform social change movement efforts going forward.
2. Another important resource that government possesses is the breadth of its workforce. Excluding postal workers, the federal government will employ 2.11 million people in 2011. To build on Justice Holmes’ analogy of a “marketplace of ideas”, the federal workforce offers a “supermarket” of ideas. This expansive knowledge base translates into a plethora of professional expertise that can be tapped to address the complexity of social challenges. The ability to harness the interest and energy of large numbers of people toward a particular goal is another related benefit.
3. Finally, the government’s history in addressing or attempting to address social change challenges might help to identify the circumstances under which some social change efforts have been successful, as well as the conditions which have frustrated past efforts.

So, I guess in a nutshell I would suggest those engaged in social change efforts acknowledge that while government strives to act quickly, it does not have the luxury of forsaking timely public notice and participation of its efforts. Also, because many social challenges are protracted, their resolution may require significant time. In social change efforts, government should not be relegated to a role whereby it is expected to act quickly but rather one whereby its many resources are appropriately tailored to inform the quick action of its partners.

Nell: Where do you think collaboration between government and philanthropy will be 10 years from now? What do you hope the future looks like?

Rene: In my opinion, the collaboration between government and philanthropy will be much more intricate than what we are seeing today and therefore the resultant successes that emanate from that collaboration will be more sophisticated. I think that the lines that separate the two will become a bit blurred as they build upon the successes of current public-philanthropic partnerships and learn to have realistic expectations of one another. In particular, I anticipate seeing a greater number of matching grants and cooperative agreements, sponsorships and co-sponsorships and the staff sharing.

Tags: Council on Foundations, Foundations, government philanthropic collaboration, Philanthropy, Public-Philanthropic Partnership Initiative, Rene Cabral-Daniels, social change, social innovation

Making Donors Organization Builders

The “starvation cycle” of nonprofit organizations doing more and more with less and less has to end.  But how can nonprofit organizations break out of this cycle when donors won’t fund nonprofit capacity?

The news last week that the Boston Foundation will shift the majority of their competitive grants to unrestricted operating support, which in reality means capacity building, is fantastic.  The Boston Foundation is one of the few foundations that understands that strengthening nonprofit organizations, through money to support technology, infrastructure, fundraising, top talent, management expertise, strategic planning, evaluation, research and development, is absolutely key to making social change possible.

But the Boston Foundation is just one in a sea of foundations and individual philanthropists who have yet to understand the importance of money to build nonprofit organizations.

But perhaps there is hope.  Social Velocity has helped many nonprofits convince foundations and individual donors, who previously may have only provided direct service funding, to become organization builders.

I have discussed before Social Velocity’s work to help Heart House, an after-school program for at-risk kids in Austin and Dallas, strengthen their plan to grow statewide and create a pitch for growth capital.  Heart House could not pay for this planning work through their operating budget, so they went to a foundation that was already supporting their program and asked them to invest in this growth planning.  When the foundation understood that a small investment in organization building would help this organization that they love improve the lives of even more children, they were happy to invest.

Another example is Social Velocity’s client, English at Work, a nonprofit that teaches ESL classes to the employees of restaurants and hotels.  English at Work is a subsidized social enterprise where the hotels and restaurants pay them a fee to run these classes.  The nonprofit is demonstrating great results and has real potential to replicate the model.  First, however, they need to strengthen their overall revenue function to position them for growth, which is where Social Velocity came in.

But again, English at Work didn’t have the operating revenue to pay for that outside expertise. So they approached a foundation in their fold and made the case for how a strengthened revenue function would put English at Work in a position to start planning for replication. And that replication would mean that their results-achieving model could provide more people with stronger English language skills.  Stronger English language skills mean better, higher paying jobs, less stress on the social safety net and a stronger, healthier community.  And what English at Work helped their donor understand is that to get to that positive outcome, English at Work as an organization has to be more effective.  They have to learn how to create a stronger, more sustainable revenue function that can support a larger organization over the long term.  And figuring that out costs money.

Nonprofit organizations need to start approaching the donors and board members who are already supporting their programs and make the case, in an articulate, reasoned, but passionate way that for more results, they have to invest in organization building.  And they need those closest to the organization to make those investments.  It is a process of educating those nearest and dearest to the organization about the power of a stronger internal organization.  It’s a new conversation, but an important, and potentially game-changing, one.

Tags: Boston Foundation, capacity, English at Work, Foundations, Heart House, nonprofit, organization-building, Philanthropy, Social Velocity, starvation cycle

Foundations Can Lead the Charge Toward a New Philanthropy

The news in the philanthropy world this week is not good.  It seems that our fears about the effect of the economic downturn on philanthropy are being confirmed in spades.  The Ford Foundation and Robert Wood Johnson Foundations, two of the largest in the country, are both reducing their staffs by 30%+ and making other cuts in expenses in order to maintain previous years’ giving levels.  The report on 2008 charitable giving released by Giving USA last week shows the largest percentage decline on record, although as Sean Stannard-Stockton of the Tactical Philanthropy blog wisely points  out:

Charitable giving behaved more or less as it normally does when the economy sours. This is, by most measures, the worst recession in a very long time and so we’re seeing charitable giving get hit. But it is only declining in line with the way it normally behaves. Things are tough, but there was no apocalypse.

Still, the news is troubling.

Although foundation giving makes up only 13% of the charitable giving pie, their reaction to an economic crisis can have a dramatic impact on charitable giving overall.  Foundations are in some ways viewed as the philanthropic experts and can set trends that can transform the impact of philanthropy. Take the Gates Foundation for example.  Last year they received $10.4 million in unsolicited donations simply because other philanthropists think that Gates is a philanthropic leader.

So now is the time for foundations to lead the way towards more effective philanthropy–philanthropy that builds and scales organizations rather than buys services, as Michael Selzer, writer, educator, nonprofit leader and PhilanTopic contributor, points out in his recent post.  Michael argues that the economic crisis provides a natural impetus to foundations to become builders of organizations rather than buyers of services, and in fact he poses a provocative question:

A growing number of foundations are beginning to think of themselves as “builders” rather than “buyers”…buyers award grants with an eye to achieving specific programmatic outcomes, while builders, always mindful of outcomes, seek to help grantees strengthen their organizational capacity so as to achieve greater impact in the future. To the extent that “buying” is limited to a relatively short-term transaction rather than a longer-term interest in the organizational well-being of the grantee, it is not an especially productive activity. Which leads me to ask: What foundation would want to be a buyer rather than a builder in today’s environment?

Michael goes on to somewhat equate “building” funds with general operating support, pointing out that only 20% of all grants go to operating, whereas 50% of all grants go to specific programs or projects.  He offers a list of ways for foundations to increase their “builder” funding while still supporting specific programs. His list includes giving grantees the latitude to adequately account for indirect costs, expediting grant approval processes, expanding grant periods to more than a year, and sharing responsibility with grantees for securing remaining program costs if the foundation is only funding part of the program. Michael calls these “extraordinary measures” for “building the capacity of the nonprofit sector for the long haul.”

I disagree.  Nothing in his list seems extraordinary to me.  The economic crisis and the resulting effects on philanthropy and the nonprofit sector does call for extraordinary measures, a resetting of both realms: the nonprofits and the philanthropists who fund them.  And because foundations lead the charge in the philanthropic realm they have an obligation to take a hard look at how they do things and try some truly extraordinary measures.  A list of truly extraordinary measures that foundations could take includes:

• Increasing the use of program-related investments (PRIs) to include capacity building projects like upgraded nonprofit fundraising functions.
• Exploring mission-related investing, investing part of a foundation’s corpus in social businesses that meet the foundation’s mission, to a much larger extent as a way to expand the reach and impact of the foundation.
• Increasing the percentage of capacity building and unrestricted grants that the foundation makes. Instead of 20%, let’s bump that number up to 40%.
• Exploring becoming a spend-down foundation that doesn’t exist in perpetuity, but rather spends their corpus in order to have a larger impact on social problems in this generation.
• Increasing growth capital investments–large ($500K+), 3-5 year investments that pay for the infrastructure required for a proven nonprofit to scale.
• Reducing the strings and reporting requirements placed on nonprofit grantees.
• Decreasing the push towards funding of new programs and investing more money and time in the infrastructure of proven programs that could grow to serve more people.

That’s not to say that there aren’t foundations out there that are doing these things.  There absolutely are, but they are in the minority. Foundations as a group could help transform philanthropy by becoming builders more often than buyers. These are challenging, demanding, restructuring times.  They call for bold, risky, extraordinary action.  Foundations can lead that charge.

Tags: Ford Foundation, Foundations, Gates Foundation, Giving USA, growth capital, Mission-Related Investing, Nonprofits, Philanthropy, PRIs, Robert Wood Johnson Foundation

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

PRIs: Another Part of the Emerging Social Capital Market

Continuing the various discussions about the beginning signs and formations of a social capital market, I’d like to add PRIs (Program Related Investments) to the conversation.  In all of the concern about decreasing philanthropic giving because of the economy there has been little talk about these financial vehicles as a real opportunity for foundations, and a potential social capital tool.  A PRI is basically a loan made by a foundation to a nonprofit at a low/no interest rate. The loan is made out of a foundation’s normal 5% minimum payout requirement.  However, because it is a loan, the foundation eventually gets this money back to be regranted elsewhere.

I wrote a few months ago about how foundations could use PRIs in a new way to invest in increasing a nonprofit’s fundraising function (new development staff, new technology, training, collateral, infrastructure, etc).  The PRI investment would be paid off in a few years and the nonprofit would be left with an elevated revenue generating engine. So the foundation’s investment has a pretty impressive return: the principal plus interest is returned to the foundation and, in addition, the nonprofit that they were supporting is now able to generate annual operating revenue at a much elevated rate, bringing them that much closer to sustainability.

It seems to me that now is the perfect time to institute this new use of PRIs for several reasons:

• Foundations have decreased funds with which to invest, so the further they can stretch their money, the better
• Nonprofits need to be smarter and more strategic about raising money in an increasingly difficult economic climate, so investments to help them do that would be very helpful
• The nonprofit sector lacks access to capital for capacity or infrastructure projects like this, so these investments would expand that capital pool

I was encouraged to see that RSF Social Finance recently noted an increased interest among grantmakers in PRIs, especially given the financial market conditions.  In their eyes, PRIs are a real opportunity:

Now more than ever, PRI offers foundations a unique opportunity to respond to the challenge of using fewer resources to provide support to communities with greater needs. Organizations  that were already  promoting PRI as a means for foundations to support their missions are now upping the ante. “As we know, the turn of 2008 to 2009 caught many foundations by surprise,” says Dana Lanza, Executive Director of the Environmental Grantmakers Association. “Within the environmental grantmaking community, assets are down by an average of 30%-40% in many cases. We are noting that in this climate, PRI is garnering significant interest from our members as a means to continue to support innovative efforts while essentially ‘recycling’ funds. I expect this to become a critical form of grantmaking as we pull ourselves through this rough period over the next few years.” The PRI Makers Network, which provides a wealth of resources and data related to PRI, organized a call last month for funders to discuss the results of a recent member survey: PRI in Tough Economic Times.  The survey revealed what callers confirmed: while there are reasons to be cautious, there are even more reasons to seize the opportunities inherent in PRI. According to the survey summary, “last year, in many cases, PRIs constituted [foundations'] highest performing asset class – providing downside protection in the bear market.”

So RSF Social Finance is launching the RSF PRI Funds which allows family foundations to invest at least $250,000 into a pooled PRI fund.  RSF handles the terms and deal sourcing and invests the PRIs into organizations in three areas: food & agriculture, education & the arts, and ecological stewardship. As RSF Social Finance puts it: “Our pooled PRI model means that each foundation’s investment will work alongside other funds, re-invested into a portfolio of borrowers doing critical work on the ground. This approach maximizes the power of leveraged PRI impact while also mitigating risk.”

It’s an interesting idea.  I’d like to see more foundations using PRIs in innovative ways.  I think PRIs are an underused financial tool available to the social sector.  They could be used to help nonprofit organizations increase their capacity, their revenue generation function, their infrastructure and perhaps even help them scale.  It is just another piece of the social capital market that is yet to be developed.

Tags: Foundations, Nonprofits, PRIs, RSF Social Finance, social capital market

Resetting the Capital Approach

There is concern lately about how much worse it is going to get for nonprofits because of Obama’s new budget proposal, which will limit the value of the tax break for wealthy donors, from 35% to 28%. Many nonprofits are even more worried than they were before about revenue, for example the nonprofit Executive Director whose comments to the Daily Dish caused a firestorm of replies:

A couple of our usual big donors have indicated we should be prepared for smaller donations this year, and possibly none in the next couple of years.  They are mentioning Obama’s tax plans and their need to save money now in anticipation of that.  A lot of my colleagues in the not-for-profit world are really scared right now, and we are not happy with Obama…Organizations are going to be killed under Obama’s plan…Frankly, this sucks.

All of this talk about a deepening poor revenue picture for nonprofits makes some, like Perla Ni, founding publisher of the Stanford Social Innovation Review, think there will be a shift in how nonprofits raise money.  Perla wrote recently that nonprofits should shift their appeals away from metrics and towards emotion:

During these difficult economic times, when all of us know someone who has or is at risk of losing their job, it’s much easier for us to relate to the appeals to our conscience and our heart. That’s not to say that there is no room for “expert” evaluations and quantitative metrics. It’s about degree and balance of the heart and the head.

Seriously?  We’re going to squander this opportunity that the crisis in our financial system affords and go back to the tin-cup mentality of nonprofit revenue generation?  I completely disagree with this notion.  Nonprofits may think that appealing to emotion is the way to go, but that will only set them back.  To me, it is akin to Marty Linsky’s recent piece about hunkering down versus resetting in these difficult times.  As Linsky puts it, we have two choices and the “hunkering down” option looks like:

Stephanie Strom’s piece in the Times on Friday of last week showering sympathy on the well-intentioned charities going belly up, rather than seeing this moment as an opportunity to rethink their priorities, eliminate duplication, introduce good management practices, and get rid of programs and people who are not performing well.

Whereas resetting is about understanding how systems are changing and that we have to adapt to the longterm.  We must embrace the change and move with it:

Here’s what Reset might look like…(1) Funding risk-takers, creators, and inventors, small and large, in manufacturing, financial services, nonprofits, and even academia…(2) targeting…spending and investing now for the long term, like…supporting new faces and burgeoning success stories in education, people and ideas to help rescue the current school-age generation…

Focusing on emotion and heart-strings in order to try to keep a fledgling nonprofit operating might be appealing, but it is a hunkering down mentality. These times call for a complete resetting of how we do things.  Nonprofit fundraisers and Executive Directors don’t have the luxury of “appeal[ing] to our conscience and our heart.”

Nonprofit leaders and board members often tell me that XYZ nonprofit is easier to fundraise for because their cause is an “easier sell,” for example children and puppies.  I don’t think that a particular cause is inherently easier to sell because it has more of a pull on heartstrings. Rather, those organizations that can demonstrate, yes through metrics and outcomes, that they are positively impacting and reversing a disequilibrium will have much more success at appealing to donors.

But also, and more importantly, organizations that demonstrate their impact are better positioned to attract new kinds of revenue which this financial crisis will create.  I truly believe that the “resetting” that is occuring in our financial markets will create an opportunity and demand for more social impact capital, which is money that used to be channeled purely towards financial profit, but now is looking for a more complex blending of profit and social impact.  I don’t mean just social enterprises, I’m talking about a complete restructuring of capital markets that allows philanthropists, venture capitalists, angel investors, foundations, wealthy individuals, traditional nonprofit donors to be more innovative with their capital and invest in organizations that are proving social impact, again through metrics and outcomes, and are willing to understand, address and appeal to those who want to see more (social returns) done with their money.

By going back to the heart strings and the tin cup, social impact organizations miss out on the great opportunity that lies in this capital market restructuring and the greater resources that will follow.

Tags: angel investors, Foundations, nonprofit, Obama, Philanthropy, social capital, Social Enterprise, tin cup, venture capital

A Strategic Path Out

Although most nonprofit fundraisers are feeling as pessimistic as ever about their prospects for raising money in 2009, all hope is not lost.  There is good news to be found:

• The majority of corporations and corporate foundations expect their giving in 2009 to stay level or grow, according to a new study by LBG Research Institute.
• The LBG Research Institute is projecting that any decrease in overall corporate giving will be less than the 12.1% decline in the 2001 recession.
• 80% of corporate givers say their giving this year will be more strategic and more closely tied to their corporate goals.
• The most recent research on high-net worth individual giving from Indiana University’s Center on Philanthropy found that the main objective for the biggest individual gifts in 2007 was to provide general support and make a long-term investment in the organization.
• Also according to the Center on Philanthropy study, individual giving reflects the values and goals of the giver.

It appears, then, that fundraisers must redouble their efforts to make a clear connection between the impact their organizations are having and a donor’s values and goals.  As I discussed in a previous post, the ask cannot be about an organization’s need.  It has to be about empowering a donor, through your organization, to make a positive impact in an area of the community that meets their values.  This is a critical distinction.

So fundraisers can make an opportunity out of a difficult fundraising climate by being smarter and more strategic, but at the same time philanthropists need to change as well.  There has been a lot of talk about how foundations should be responding during this difficult time.  I did an earlier post on that topic here.  There are a couple of interesting ideas floating around.  One, that foundations be required to bump their payout requirement from 5% to 10%.  Martin Kearns makes this argument in a recent post:

Today without raising taxes, or impacting our deficits, the new administration could stimulate a massive amount of activity by forcing the hands of these foundations. Many…foundations are already spending down. They are stepping up to help in this economic crisis well above the minimum IRS allocation. However, for those that wish to sit out (and sit on assets) at such a time when our society and the nonprofit sector need them so much seems unacceptable. A small change in a regulatory rule affecting so few and benefiting so many seems in order…this forced move would inject real horsepower into nonprofit organizations at a time when they could create the most change.

And Nathaniel Whittemore, in his Social Entrepreneurship blog, had some great ideas for the Gates Foundation, arguably the largest and most influential foundation.  Nathaniel would like to see three things from Gates, which if adopted, could really set the tone for a much more strategic philanthropic sector:

1. Create a social investment fund of $150 million to invest in social enterprises.
2. Focus on education policy to scale solutions.  Move away from simply funding charter schools and invest in policy reform that will take the lessons learned into wide scale approaches to education reform.
3. Create an innovative bottom-up program measurement approach that collects data from those to be impacted by the program.

If the Gates Foundation took on even one of these new approaches it could have tremendous ripple effects through the foundation community and within philanthropy as a whole.

Just as fundraisers need to become more strategic, philanthropists do as well.  We have fewer resources and more complex problems.  Thoughtful, strategic approaches are the only answer.

Tags: Foundations, Fundraising, Gates Foundation, Indiana University Center on Philanthropy, LBG Research Institute

Overcoming the Anti-Overhead Mindset

As I described in previous posts here, here and here, one of the ways in which the nonprofit sector is broken is that it is undercapitalized.  It is not able to generate an adequate amount of capital in order to scale and solve the problems it seeks to address.

This undercapitalization comes not from a lack of program-related fundraising, funds that go directly to the services being created, but rather from a lack of infrastructure or administrative capital.  The distinction is between funds raised to BUY services versus funds raised to BUILD organizations.  The latter is very hard to come by in our current state.  Donors and foundations tend to shy away from funding “administrative” or “overhead” costs.  And many nonprofit rating systems reward nonprofits that keep their administrative and fundraising costs as low as possible.  The end goal seems to be nonprofit organizations who plow 100% of their revenue into their programs, with no infrastructure (staffing, fundraising, technology, buildings, accounting, planning, training, professional development) to make the programs successful.

Paul Brest, president of The William and Flora Hewlett Foundation, recently wrote an attack on the notion that administrative costs in the nonprofit sector are somehow unnecessary or unworthy.  As he points out, the end goal of any organization (profit or nonprofit) is to optimize costs, not minimize them.  Costs are appropriate and necessary when they increase an organization’s ability to achieve its mission, or, in other words, provide a net increase to the impact the organization is creating.  Costs in and of themselves are not bad.  Rather, those costs that contribute to an organization being more effective and reaching more people are actually very good.  He argues that in the for profit sector the idea of necessary and justified costs is well understood and that the same principles should be applied to the nonprofit sector:

To use an example from the business sector, assume that a widget manufacturer’s only mission is to make a profit for its owners. Then, an additional administrative expense of 1¢ is justified if it is likely to produce an additional 2¢ of profit. The underlying idea is not different for nonprofits. Their missions are to achieve particular social, environmental, educational, religious, health, etc. goals. And an incremental expense is justified to the extent it has the potential to increase the organization’s net social value.

It is a simple concept, but one that nonprofits and the philanthropists who fund them are only beginning to discuss.  The assumption that nonprofits have to be as cheap as possible, no matter the other “costs” (inefficiency, fewer people served, diminished impact), is outdated. It is a holdover from a time when the nonprofit sector was referred to as “charity,” and philanthropy as “benevolence.”  It was our duty to ameliorate the symptoms of social problems (feed the hungry, clothe the needy, provide shelter to the homeless).  But now we are all realizing that that isn’t enough.  We have to resolve the underlying issues that are causing these problems and that requires whole systems and infrastructure to change.  And for that kind of change to happen it requires well-thought out plans, technology, top talent, clear understanding and management of our financial resources, and significant capital.

I believe this discussion is all part of a growing sophistication in the sector.  Nonprofit leaders are no longer content to scrape by with hopelessly inadequate resources, and philanthropists are beginning to realize that the very principles that created their own wealth need to be applied to the sector which they are trying to support.

I’m glad to see that these conversations are beginning and that people like Paul Brest are leading them.  But the discussions need to move beyond the blogs and journals and into the boardrooms of the nonprofits, foundations, and businesses that are working to solve the very issues the social sector was set up to address.

Tags: capital, Foundations, Hewlett Foundation, Nonprofits, overhead, Paul Brest, philanthropists