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

Foundations’ Role in a Tough Economy

What should foundations do in an economy that has seen their assets fall by almost 30% but also has created enormous need among the nonprofits they fund and the people those nonprofits serve?  Charitable foundations are required by law to distribute (to grantees and foundation administrative expenses) at least 5% of a rolling average of their endowment each year.  They can do more, but not less.  In times like these when their return is not even close to 5%, it can be difficult to think about giving more than 5%.  Many foundations are determined to preserve the corpus of the foundation in perpetuity.  However, there is a debate raging among philanthropists, nonprofits, advisors and thought leaders about how foundations should respond in these difficult times.

First, here is how foundations are responding:

• The Foundation Center has created an interactive map detailing where and how foundations are giving in response to the economic crisis.
• Philantopic is keeping a running post of statements from foundations on how they will respond to the economic crisis.

Then, here is how people think they should be responding.  Here are just a few examples:

• Paul Brest, head of the Hewlett Foundation, wrote a blog post about the difficult position foundations are in, and he encourages them to “ensure that the best organizations — those that are delivering real outcomes — weather the storm. We’re not going to be able to salvage them from the bottom of the sea after the storm is over.”  He also warns of the importance of investing now in issues that need our immediate attention: “dollars spent today to address issues like global warming can do more good than dollars spent in ten years, when mitigating climate change will certainly be much more expensive if it is even possible.”
• Todd Cohen, editor of Philanthropy Journal, wrote a stinging post in the Stanford Social Innovation Review Opinion Blog against foundations that are prioritizing preserving their corpus above giving back to the community: “Instead of pitching fits about the plunge in value of the endowments they count on to perpetuate their power, foundations should be digging deeper and paying out more to begin to give back what they and their donors have received from taxpayers in the form of tax breaks and tax-exempt benefits.”
• Sasha Dichter, Director of Business Development for the Acumen Fund (a venture philanthropy fund working to end global poverty), wrote a piece about how the Weingert Foundation’s announcement that they were going to now support operating costs for nonprofits demonstrates how out of whack the funding apparatus for nonprofits has gotten: “The result…is that we end up with scores of nonprofits twisting themselves into knots to manage a series of too-small, too-specific “program” grants, with individual donors asked to pick up the difference between what’s funded and what’s needed to deliver on the non-profit’s mission (weren’t the foundation supposed to be the trailblazers in this equation?).”

This is a worthwhile debate and absolutely critical to the social sector going to the next level and creating solutions to the many problems that face our country and our world.  But it is not just about foundations.  They are only part (and a very small part) of the resource engine that drives the social sector.  The entire way in which the social sector is capitalized needs to change.  We need to put a financial priority on the solutions that the social sector is coming up with.  Those solutions need to be scaled and made sustainable. And adequate capital (from all sources) is the only way to do that.

Tags: Economy, Foundations

Why Not Austin?

Social innovation is gaining a lot of momentum along the two coasts of the country. San Francisco, Seattle, Boston, D.C., New York are just a few places where these new ideas are taking hold. The Bay Area alone seems to be a hotbed of social investing, venture philanthropy, social enterprise, etc. The Social Capital Markets Conference earlier this month in San Francisco brought together leaders in the social investing, philanthropy, nonprofit, social enterprise space to talk about how to create a social capital market (a market for capital employed towards solving social problems). You can read a roundup of different blogs on the conference here and see video of various sessions here.

At the same time, foundations in the Bay Area, New York, Boston understand this growing movement and are providing growth capital and other incentives to help social entrepreneurs find and solve the root causes of problems.

These cities are witnessing an exciting blend of talent, money, great ideas, energy, initiative and enthusiasm that is resulting in some new ways to tackle the many problems facing our country today.

I’d like to see that similar energy and enthusiasm here in Austin and in the Southwest region of our country. Austin is the 3rd largest venture capital city in the country. I would argue that being a venture capital center makes Austin a ripe candidate for social innovation. San Francisco and Seattle (venture capital cities #1 and #2) have embraced social innovation and are home to several venture philanthropy funds, capacity and growth capital-focused foundations, social entrepreneurs, social investment funds, and social enterprises. Over the last ten to fifteen years these communities have fostered a new way of thinking about and blending the for-profit, non-profit and government sectors in order to find solutions to complex social problems.

I see the same opportunity for Austin. We have a wealthy, talented entrepreneurial sector, a diverse nonprofit sector, and complex social problems. If we can embrace social innovation here we can not only solve our own problems, but also, and more importantly, we can add to the national conversation.  We need to come together with new ideas that tackle our problems at the root.  The problems of the economy, education, healthcare, poverty are too large for any single entity or sector to solve. These times call for bigger solutions. Social innovation provides those solutions.

Tags: Austin, Foundations, Social Entrepreneurship, social innovation, Social Investing, Venture Philanthropy

A Better Way to Fundraise

A topic on many nonprofit Executive Director’s minds these days is how to find more money.  With foundation and individual donors poised to decrease their giving, governments strapped for cash, and corporate earnings, and thus their philanthropic giving programs, falling, it is difficult to figure out how to make fundraising programs already in place continue to meet their goals.

But there is a solution.  Strategic fundraising, or comprehensive revenue-generating activities that are based in strategy, can find dramatic results, even in a tough economy.

Strategic fundraising always starts with a plan.  In order to raise more money, you need a game plan to get there.  Many nonprofit organizations don’t have a comprehensive fundraising plan that details exactly what the goals are and how and when they will be met.  A fundraising plan should have 3 to 5 broad goals. For example:

1. Raise $XX from philanthropic sources
2. Raise $XX from earned-income or fee for service sources
3. Create or refine the infrastructure (technology, staffing, marketing, etc.) to meet these goals

With your goals determined you can then delineate the various deliverables, people responsible and timeline that will get you to each goal.  Such a plan drives your strategy for the entire year and tells you where to allocate resources most effectively.

Speaking of resources, strategic fundraising also necessitates that you look at each fundraising activity and determine its return on investment.  What does it cost to put on your annual fundraising gala? Not only the direct costs (food, decorations, etc.) but also the financial value of the staff time that goes into it.  When you factor all costs in, how much do you really raise?  Are there better ways to spend staff time that could raise more money?  For example, a major gifts campaign has the highest return on investment of any philanthropic fundraising activity.

You also want to look at your entire revenue picture and the sources of each piece.  If you are heavily dependent on one or two revenue sources (government funding, foundation grants) you could be hit harder when that source changes.  Diversifying your revenue strategically, for example launching an annual fund campaign to increase individual investments, looking at corporate sponsorship opportunities, getting your board of directors to invest time and money in fundraising, can strengthen your organization and cushion you from difficult periods.

And as you diversify revenue you want to look beyond typical philanthropic sources.  Earned revenue, fee-for-service, social enterprise, are all different names for the same thing:  selling a product or service to generate unrestricted income. Nonprofits have found success in generating revenue by selling something.  Museums (entrance fees) and schools (tuition) have been doing this for a long time, but other nonprofits are moving into the arena as well.  Job training nonprofits use their workforce to staff a restaurant, bakery, ice cream store.  Public broadcasting stations sell their television and radio programs on CDs and DVDs.  The list goes on.  Nonprofits have assets that they can turn into saleable products or services.  And the unrestricted revenue that successful earned income businesses generate can get them further along the path to financial sustainability.

There is an answer to a down economy.  It means thinking strategically, exploring new opportunities and being open to change.

Tags: Economy, Foundations, Fundraising, Nonprofits, Social Enterprise

A Crazy Idea?

While everyone is thinking and worrying about the economic crisis and the potential detrimental effects on the nonprofit sector, an idea occurs to me.  With the continuing volatility in the stock market and a dark economic forecast at least for the next few months, perhaps the next year, foundations and individuals won’t make money on their investments in the market.  What if a foundation took say $100,000 from their corpus and made a program-related investment (PRI) in a nonprofit hoping to build their capacity to raise unrestricted dollars.  A PRI is basically a loan to a nonprofit at low interest rates.

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.

We did something like this at KLRU, however it wasn’t with PRIs, but with donor investments, which in a market like this might be harder to come by.  With investments from a handful of donors totaling $350K we completely revamped our fundraising function and increased annual revenue by $1.6 million, a 40% increase.  That’s a pretty amazing ROI.  And donors loved it.

If you applied this idea to PRIs, donors could help nonprofits increase their capacity and sustainability, while the donor protects his corpus in a down market.

Just a thought.

Tags: Foundations, Funding, PRIs

Maybe Things Won’t Be So Bad After All

The Foundation Center just released a pretty encouraging report analyzing the trends in foundation giving during economic downturns.

The data (since they started tracking it in 1975) shows that in past recessions, foundation giving was only marginally affected, if at all.  Because foundations tend to determine their payout amounts based on a 2-5 year rolling average, the effects of one or two bad years are lessened.  Also, in past recessions some foundations went into their corpus to make good on pledges made before the downturn hit.  That’s not to say that if we go into a deeper economic downturn that things won’t be different, but it is encouraging to see that history (at least brief history) tells us that things aren’t as bad as they seem.

This also parallels nicely with the Council on Foundations open letter to their membership, earlier this week, urging them to step up to the plate during this economic crisis and not hide behind lower earnings.  Indeed, going into the corpus to support programs, or even, as some innovative foundations are starting to do,  to fund for-profit/social mission businesses (social enterprises), are some of the creative ways that foundations could continue to support the social sector during these difficult times.

Thanks to Sean Stannard-Stockton’s Tactical Philanthropy blog for pointing out the report.

Tags: Economy, Foundations, Philanthropy, Social Enterprise

Signs of a Movement

Things are definitely happening.  While our country is struggling to address the largest financial crisis since the Great Depression, to elect a new President, and so on, new ideas in the social sector are building momentum.  Here are just a few examples from the past week of a growing movement:

• The SoCap 2008 (Social Capital Markets) Conference held in San Francisco this week and sponsored by Good Capital saw its registrations double after the financial collapse.  Sessions yesterday were beyond standing room only.  The conference brings together people interested in changing the world through sustainable business (businesses with a social mission). Perhaps some of the talent and resources from the failure of investment banks will be channeled into social return on investment.  It seems people are hungry for a new way.
• New Orleans continues to be a mecca for social innovation.  The Idea Village, a nonprofit working to envigorate the city’s entrepreneurial engine, just announced a $100,000 business idea competition.  The idea has to help retain and engage 25-34 year olds in New Orleans.
• The Council on Foundations wrote an open letter to their 2,000 member foundations asking them to step up during these difficult economic times and help the nonprofits in their communities.  Rather than hide behind the turmoil and their shrinking endowments, foundations should “continue to serve the common good in these uncommon times.”  It remains to be seen what will come out of this call and their members response to it, but the fact that the largest association of foundations in the country realizes the enormity of the situation and wants to react in a new way is encouraging.

Tags: Foundations, New Orleans, Social Enterprise, social innovation