Social Velocity » Gates Foundation

Socap Day 2: Unlocking the Nonprofit Capital Space

Nell Edgington — Thu, 07 Oct 2010 19:07:11 +0000

Day 2 of SoCap was by far my favorite. It started with an interesting keynote from Julie Sunderland of the Gates Foundation. She offered a perhaps more realistic, bordering on the pessimistic, view of the social capital market space. She said that Gates struggles to find entities that can absorb the size investments they want to make. They get excited about the idea of bringing together foundation, government and private dollars in stacked deals, but that the work is complicated and hard and they have yet to craft one of these deals simply because it is extremely difficult to determine the terms. All of this underlines what I’ve said in a previous post: in the nonprofit, philanthropic and government worlds there is still much work to be done to unlock capital.

The first session of the day for me was “Lessons of Behavioral Finance: Understanding and Overcoming Barriers to Impact Investing” with Hope Neighbor and her ground-breaking research, Money for Good, released earlier this year calculating a $120 billion pool of potential impact investing money that is sitting on the sidelines. Hope said that despite our desires to the contrary, people still very much think of their charitable giving as separate from their impact investing, “the reality is that people compartmentalize their money.” And only 3% of the population uses data to compare the organizations they give to.

My favorite session of the day, by far, was “Deep Dive Into the Evergreen Cooperative Initiative.” This session was exactly what I was hoping to see more of at SoCap this year. A group of leaders in Cleveland realized that the heart of their city was quickly deteriorating and no one was doing anything about it. They formed a coalition of the anchor institutions in Cleveland (Case Western Reserve University, Cleveland Clinic, etc), foundations, city leaders and others to create the Evergreen Cooperatives that brings career-track jobs and green, employee-owned businesses to the inner city, transforming a city that has lost 50% of its population in the last 50 years. Beyond the fascinating coalition, business model and results this project is achieving, lies its impressive financing. A combination of bonds, foundation grants, loans, HUD money and others launched this project and financed the 3 businesses they currently operate (a green laundry, an organic greenhouse, and a solar power company). According to Evergreen leaders, “Cleveland wants to be where the world is going, not where the world is.”

To scale this project to create 5,000 jobs (the area needs 46,000 jobs), which will be the impetus to truly transform the inner city economy, they are creating a CDFI and looking to use PRIs and MRIs. What excites me so much about this project is not the spirit of collaboration and tremendous results, but how they are bringing public, private and philanthropic money together in a truly innovative convergence. THIS is the kind of social capital market I’m talking about. Impact investing is great, but it is only ONE piece of the puzzle. I would love to see more examples like Evergreen at SoCap.

The last breakout session I attended for the day was “Nonprofit Analysis: Beyond Metrics,” which gave a great overview of the growing nonprofit evaluators market through the lens of rating one nonprofit, DC Central Kitchen. It was interesting to see how Charity Navigator, the most well-known nonprofit evaluator, has evolved from a system driven purely by IRS 990 form overhead ratios to a three-pronged review including transparency and impact evaluations.

The end of the session gave me serious pause, however, when a member of the audience asked whether any of the evaluators might use the GIIRS system coming out of the impact investing world to rate nonprofit impact. Ken Berger admitted he wasn’t familiar with GIIRS and Tim Ogden of GiveWell said he was skeptical of social return on investment (SROI) calculations in general. Again, my point that the philanthropic and impact investing worlds aren’t communicating and collaborating becomes apparent. Wouldn’t that be amazing if impact in both the philanthropic and impact investing worlds could be measured in a comparable way? That would be truly innovative!

So, although Day 2 of SoCap provided much more conversation and examples of how the philanthropic and government capital markets are evolving, there is still much work to be done to bring both capital fully into the social capital market. Perhaps at SoCap 2011?

Photo Credit: Markets for Good

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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Here Comes SoCap

Nell Edgington — Wed, 29 Sep 2010 17:18:18 +0000

So it’s my favorite time of year again, well at least in the world of social innovation. The Social Capital Markets Conference in San Francisco starts Monday. There are a lot of social innovation conferences, in fact you can read a great rundown on many of this Fall’s best. But SoCap is by far my favorite. It is the one place where the disparate array of people who are interested in how to get more money flowing to social impact come together for 3 days. There are nonprofit, for-profit and hybrid social entrepreneurs; philanthropists; social investors; government bureaucrats and anyone in between. It seems this conference more than any other is a microcosm of the convergence that is happening in the world of social innovation between the public, private and government sectors.

I’ll be honest, the first two years of the conference were a little heavy on the for-profit social entrepreneurship side, leaving somewhat behind government and nonprofit. There were sessions and speakers from those worlds, to be sure, but the emphasis of the conference in the beginning was how to get money flowing more readily to double bottom-line businesses (for-profit businesses that are making money AND creating a social impact).

This year’s conference promises to open wide the doors of the social capital market. For starters, SoCap organizers have developed 6 “tracks” that each focus on a particular area of the social capital market. The track that interests me the most, of course, is the one focusing on nonprofit/philanthropy. Sean Stannard-Stockton of Tactical Philanthropy has put together a nice track with cutting-edge topics in the world of making money work better in the nonprofit sector:

Decriminalizing Fundraising
Scaling Social Impact
Individual Donors Practicing Unconstrained Philanthropy
The Lessons of Behavioral Finance
When to Invest and When to Give
Nonprofit Analysis: Beyond Metrics

In addition there are several other tracks that hold great appeal: Impact Investing, New Money, Metrics and System Thinking and so on. And then there are some fabulous speakers including Jacqueline Novogratz from Acumen Fund, Matt Flannery from Kiva, speakers from the Gates Foundation and Root Capital and many others. Add to that the side sessions, pitch events and more, and my head starts to spin. Three days is just not enough.

I’ll be blogging from the conference as I did last year (you can read my blogs from SoCap09 here, here and here).

What I love so much about SoCap is that it really challenges this burgeoning community/movement/space to do more, to ask harder questions, to push the momentum forward. You come out of a session with many more questions than you had going in. But also, so much more energy to break out of the normal way of thinking and envision a different path forward. Because at its essence, SoCap is about creating something completely new. It’s about creating a space where money and social impact meet and create a synergy that can, we hope, change the world. The old rules and constraints don’t apply. This conference and all the people attending it, in person or via social media networks, are writing the new rule book. And that’s exciting, challenging, exhausting and exhilarating all at the same time.

If you are attending SoCap too, let me know. See you there!

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Can Slow Money Launch an Austin Social Capital Market?

Nell Edgington — Mon, 22 Mar 2010 17:08:11 +0000

As I have written before, despite being the 3rd largest venture capital city in the country, Austin is slow to climb on the emerging social capital market bandwagon. Tremendous wealth and entrepreneurial expertise exist here, but there isn’t a lot of energy around creating a continuum of capital for social entrepreneurs. Perhaps that is about to change.

Slow Money is a national movement aimed at increasing the availability of risk capital to sustainable food-related social entrepreneurs. Austin recently established an affiliate of the movement here, Slow Money Austin, and their kick-off event is next month. Scott Collier, who has written on this blog before about mission-related investing and has been active in Austin’s venture capital community for years, is helping to lead this effort. I interviewed him about Slow Money Austin and what they hope to accomplish. Even if you don’t live in Austin, I think it is interesting to watch how one of America’s top 50 cities is responding to the increasing demand for a capital market for social entrepreneurs.

Nell: What is Slow Money Austin?

Scott: Slow Money Austin is a Central Texas affiliate of the national Slow Money Alliance focused on increasing the availability of risk capital to support the growth of sustainable food enterprises.

Nell: Why do you think Slow Money is a fit for Austin at this particular point in time?

Scott: Austin is one of several locations around the country where there is significant and growing interest in local food sources, organic farming that is better for people and planet, and sustainable food businesses that can provide much needed jobs and natural food alternatives. Slow Money is important to these businesses as they cannot grow to serve the increasing demand unless they have access to capital, especially patient risk capital that invests in partnership with food system entrepreneurs.

Nell: As part of a national movement, how will Slow Money Austin differ from other Slow Money organizations around the country?

Scott: Oh, I imagine we will find ways to make our Slow Money activities weirder than others. But seriously, Austin has such a national reputation for a healthy, entrepreneurial and well-educated population that I think it is obvious we should be national leaders in this process. Maybe it is because we are home to Whole Foods, the best entrepreneurial success story in the health food industry, or maybe it is because Austinites value community, health and a connection to nature like few other places in the country, but whatever the reason, this could be the start of a major new investment and entrepreneurship sector for Austin.

Nell: Your kick-off is in April, what do you hope to get out of this event?

Scott: The main objective is to get the Austin investment and entrepreneurial communities talking about the local and sustainable food sector in a serious way. The food industry, at over $600 billion, is a big part of the U.S. economy and it has a huge impact on hot-button issues like healthcare costs, carbon footprint and environmental health. With Slow Money, we want to awaken entrepreneurs and their funding sources to the great opportunity we have to use the power of free enterprise to tackle these major issues of our time.

Nell: What happens after the event? Where does Slow Money Austin go from there?

Scott: Great question. We are hoping to awaken some regional leaders to the opportunity with this event and after the event we would like to see ongoing events and investment activities proliferate that continue to build sustainable food enterprises. I like to draw a parallel to the efforts 20 years ago to bring attention to the opportunities for Austin entrepreneurs and investors to build technology businesses. As Texas struggled to come out of a dismal recession, thought leaders in this region launched the Austin Technology Incubator, The Capital Network, the Austin Technology Council and held events and venture conferences, all of which allowed Austin to claim a solid portion of the growth in the then-emerging tech sector. Cities all over the U.S. are still coming to Austin asking how we managed to pull that off. Well, hopefully this event will trigger some similar thinking as regional leaders see opportunity to create sustainable economic welfare in a large and growing sector: the sustainable foods market where margins and growth rates are high, but market penetration, at only about 3 percent, leaves tremendous room for further growth.

Nell: I’m fascinated by the funding piece of this. Is one of your goals to create a fund for sustainable food-related entrepreneurs in Austin? And if so, how does that fund work, how big is it, how are investments made, what do the investments look like?

Scott: I would again point to the example of 20 years ago and say it is not about creating a single fund to answer the opportunity. Instead, it is about creating a continuum of angel and fund investors and a support network of legal and other services that can support ventures ranging from dozens of small farms that want to bootstrap healthy lifestyle businesses all the way to scalable production, processing or distribution companies that can produce strong returns and substantial social benefits. What the funding for these business should look like varies from simple equity or unsecured debt investments of tens of thousands of dollars to larger amounts coming from investment firms managing tens of millions. Considering the scale of the opportunity across the country, it is not hard to see dozens of funds emerge managing amount of $10 million to hundreds of millions. This is pretty much what has happened in the Cleantech sector, which 10 years ago was hardly a sector at all and now accounts for about a fourth of the $20 billion in venture capital that is invested in a year’s time. Of course I think there is room in Austin for a couple of funds especially focused on Texas, and I would hope that some of the existing venture and private equity firms would allocate some attention to the sector.

Nell: How do you think such a fund or funds will fit into Austin’s current “emerging” social capital market?

Scott: That raises a very important distinction that will be made in Slow Money activities. The book that Woody Tasch wrote, called Inquiries into the Nature of Slow Money, addresses this in a more comprehensive way, but in a nutshell, Slow Money investors will mostly be investors that are seeking a financial return as well as a social impact. This raises the potential for the sustainable food sector to be a major target for philanthropists and private foundations as they launch Program Related or Mission Related Investment practices deploying funds to generate not only a financial return but also a positive impact to human health, environmental and animal well-being, and employment opportunities. A dramatic example of such fresh investment thinking is the Gates Foundation’s recent move to deploy $400 million into such impact investments. While this represents just 1% of Gates Foundation corpus, imagine the impact that could result if the other $500 billion or so of foundation capital in America invested with similar expectations. We would see the deployment of $5 billion of investment capital seeking positive social impact and a financial return of capital, thus creating a sustainable, perpetual virtuous cycle.

Nell: Besides you, who is behind bringing Slow Money to Austin?

Scott: We have great underwriting sponsors in Whole Foods Market, a global leader in the healthy and sustainable food sector, and Barr Mansion, one of the country’s first USDA Certified Organic events facilities, where we will be holding an investor-focused local food dinner April 22nd. And of course we have great partners in the Sustainable Food Center and the City of Austin, who will host the Showcase event on the 21st in our own LEED Gold-certified City Hall. We have great support from Austin Ventures, The RGK Center for Philanthropy and Community Service, Greenling, Dai Due Austin, and too many others to name here. And of course we will have Woody Tasch representing the national Slow Money Alliance in attendance to kick things off. It should be an interesting discussion, and an amazing dinner! Sign up at www.slowmoneyaustin.org.

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A Watershed for the Social Capital Market?

Nell Edgington — Fri, 05 Mar 2010 16:28:00 +0000

One of the sessions of the RISE Social Entrepreneurship track was a panel of investors who fund social entrepreneurs (both nonprofit and for-profit). One of the panelists was Scott Collier, Managing Director of Triton Ventures. Scott has been a venture capital investor since 1991, serves on the board of the Entrepreneurs Foundation of Central Texas, and is working to engage Austin’s funding community in social innovation. In the RISE panel Scott was on, a conversation began around mission-related investing, the missed opportunity currently facing foundations, and how a new move by the Gates Foundation may be opening up a whole new pool of funds to social entrepreneurs. I asked him to write a post on this. It follows here.

I was recently fortunate to be on a RISE panel with a great mix of entrepreneurs and venture investors turned philanthropists, private foundation founders and social investors, all talking about investment in social enterprises. The discussion emphasized the grant-making functions of the foundations represented on the panel and the exciting ventures that these grants were supporting. However, as often happens, there was no discussion about the potential for social impact investing by the investment functions of these organizations if they were to allocate a portion of their investment capital to activities that could produce both a financial return and a social impact.

I mentioned that this seemed to be a missed opportunity since the investment function of U.S. foundations manages about $550 billion whereas the grant-making function manages a much smaller amount: about $45 billion a year. This would seem to imply that small program-related or mission-related investment allocations out of the $550 billion under management could represent much greater impact investing potential than would similar allocations of grant funds. I also mentioned a cautionary tale as revealed in an LA Times article in 2007, where it was pointed out that the Gates Foundation, the world’s largest private foundation, was investing for a financial return in companies whose business practices were causing harm to individuals that were at the same time receiving benefits from NGOs supported by Gates Foundation grant funding. Given that investment dollars comprise such a much larger sum, such returns-only investment practices could be undermining the value of grants, resulting in questionable net positive impact if viewed holistically.

What I failed to add to this conundrum is that the Gates Foundation has now recognized the opportunity to be a thought leader in making social enterprise investments out of their investment capital. Below is an excerpt from the Gates Foundation website explaining features of their pilot $400 million PRI initiative.

Q. What is the [Gates] foundation’s new approach to Program-Related Investments?
A. We are working with a range of partners to use Program-Related Investments (PRIs) to deepen the impact of our work. We believe that investments are the right instruments to use in situations in which our program strategies are best served by partnering with revenue-generating enterprises, such as NGOs, financial institutions or companies. These entities may not be able to access investment capital from the private markets because the markets or entities that serve the poor may be perceived as too risky or costly to serve, or investors don’t have good information to assess the opportunities. By providing investment capital directly or by reducing risk to investors, we can help our partners access the capital they need to grow and demonstrate to the market that financially viable opportunities exist that serve the needs of poor or otherwise disadvantaged persons. We know we can’t solve all problems with these types of investments – grant-making remains critical for those sectors that can never generate revenues or be addressed by market forces.

We have established a pilot program with an envelope of $400 million to invest in a range of investment opportunities. The capital for PRI investments or guarantees will be provided by this special $400M pool which will be managed by the CFO’s office of the foundation. Out of this pool, we will invest in PRIs that directly and meaningfully contribute to the achievement of the foundation’s charitable purposes.

Q. What types of investments will the foundation do?
A. We will evaluate a full range of investment opportunities that could include:

Debt investments such as loans to NGOs, financial institutions or companies;

Equity investments such as investments in venture capital funds or (less commonly) purchases of shares in companies;

Guaranty investments such as bond back-stops, credit guarantees, or insurance.

Any PRI opportunity must closely align with our program strategies, from increasing financing for agricultural smallholders in Africa, to supporting charter school facilities expansion, to increasing investment in global health technologies.

I spoke with a colleague who is close to Gates Foundation CFO Alex Friedman, who launched this PRI program, and he told me that a key part of the pilot launch was to organize a new group whose financial returns would not impact the performance objectives of the office of the CIO. This was intended to free the new PRI group to focus more on social return than on financial return.

It is certainly exciting news that this $400 million, representing roughly 1% of the Gates Foundation’s capital under management, is now available for both financial and social return when invested in partnership with social entrepreneurs. However, what may be even more exciting is that the intention of the move is to encourage other private foundations to do likewise and for Gates to thus be a catalyst for multiples of the $400 million to show up in the market as risk capital for social enterprises. Could this be the beginning of large pools of capital available for direct impact investing, social venture funds and private equity funds, and the creation of a true continuum of capital availability in what is today a very nascent social capital market?

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Let’s Take a Step Back in the Outcomes Debate

Nell Edgington — Thu, 21 Jan 2010 18:24:54 +0000

There is a growing discussion among social impact organizations and those who fund them about how to measure impact. It is indeed a very slippery endeavor.

Mario Marino, Chairman of Venture Philanthropy Partners (a venture philanthropy fund in Washington D.C. that makes growth capital investments in nonprofits) has been encouraging nonprofits to measure outcomes for years. Indeed one of the fundamental characteristics of venture philanthropy is a reliance on metrics and outcomes for investment to happen. He recently wrote a post arguing that he is “increasingly worried that the vast majority of funders and nonprofits are achieving, at best, marginal benefit from their efforts to implement outcomes thinking.” He argues that in an zealous pursuit of metrics we have left common sense and “softer” impact behind and encouraged nonprofits to move away from the impact they were working towards.

To add further confusion to the outcome measurement discussion, the Gates Foundation’s Melinda Tuan studied 8 approaches to measuring cost vs. social impact, or the value that nonprofit organizations create versus the cost of their activities. The results of the study were disheartening; none of the approaches they studied was a magic bullet, all had significant drawbacks, which led them to conclude: “Integrated cost approaches to measuring and/or estimating social value are still in the nascent stages of development due to the lack of maturity in the field of social program evaluation.”

And there are other camps working towards outcome measurement, like those debating about whether randomized control trials (a research methodology where a random group of program participants is tracked and compared to a random group of cohorts who did not participate in the program) are feasible for nonprofits. And on the social business side, the GIIN (Global Impact Investing Network) is developing standards for measuring and communicating the social impact of investments known as The Impact Reporting and Investment Standards (IRIS). And that’s just a start.

This whole social impact measurement endeavor is incredibly important because if we can figure out a way to measure which social change efforts work, and which don’t, we can allocate resources accordingly and, in theory, get closer to solutions to social problems.

But I think we need to first take a step back. As is so often the case in efforts to build nonprofit capacity, effectiveness and infrastructure (including, in this case, the ability of nonprofits to evaluate their work) the focus is on the largest, most resourced nonprofit organizations. Let’s remember that more than 80% of nonprofit organizations have budgets under $1 million (see the Nonprofit Almanac). Budgets that small leave very little room for funds to support randomized control trials or other kinds of outcome measurements.

But an even bigger roadblock is the fact that many nonprofit organizations have not articulated their theory of change, or their logic model. Many nonprofit organizations are doing good work, but they don’t necessarily have an articulated strategy around that good work. A logic model helps an organization understand and articulate how they believe that they translate resources (inputs) into social impact, or change in a community. This understanding allows the organization to better articulate (to potential funders, volunteers, supporters, partners), and create strategy around, their work. A potential logic model for an English as a Second Language after-school program could be as follows:

One of the first steps Social Velocity undertakes with clients who want to increase organization capacity, sustainability, revenue, growth, or really any kind of progress, is to create a logic model with the organization. The majority of nonprofits that I encounter don’t have an articulated logic model or theory of change. It may seem like an academic exercise, but I would argue that it is absolutely critical to just about anything a nonprofit does. In order to understand their place in the community, the value that their work adds, how additional inputs (like funding) can increase impact, and their strategy for delivering services, they need to articulate this process.

But the larger debate about outcome measurement ignores the fact that the majority of nonprofit organizations have not completed step 1 in outcome measurement: articulating a strategy for using resources to create outcomes. Once this is articulated, we can talk about how to measure whether that strategy is actually coming to fruition.

Related posts:

Sparking a Movement Toward Outcomes: An Interview with Mario Morino

A Step-by-Step Guide to Creating a Nonprofit Revenue Plan

The Balance of Heart and Head

Foundations Can Lead the Charge Toward a New Philanthropy

Nell Edgington — Tue, 16 Jun 2009 17:14:31 +0000

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.

Related posts:

Foundations’ Role in a Tough Economy

Next Generation of High Engagagement Philanthropy: An Interview with Carol Thompson Cole

Resetting Philanthropy

A Call for Mission Related Investing

Nell Edgington — Mon, 11 May 2009 15:18:54 +0000

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

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

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

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

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

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

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

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

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

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

No related posts.

A Strategic Path Out

Nell Edgington — Mon, 09 Feb 2009 18:17:03 +0000

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:

Create a social investment fund of $150 million to invest in social enterprises.
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.
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.

Related posts:

A Strategic Approach to Generating Revenue

Maybe Things Won’t Be So Bad After All

Raising Money to Grow On: Putting the Strategic Plan in Place