Grantmakers for Effective Organizations
Since I was out of the office for part of July and checked out of social media (which I highly recommend!), the below list is in no way comprehensive. But it is what caught my eye in the world of social innovation in July (when I was paying attention). More than ever, please add what I missed in the comments below.
You can see the 10 Great Reads lists from past months here.
- In a highly provocative op-ed, Peter Buffett, son of Warren Buffett, wrote a pretty scathing rant against today’s philanthropy, calling it “conscience laundering — feeling better about accumulating more than any one person could possibly need to live on by sprinkling a little around as an act of charity.” Needless to say, much argument followed, including Howard Husock’s post arguing that Buffett is “far too pessimistic about what philanthropy, well-conceived, can accomplish.”
- Dan Cardinali, CEO of Communities in Schools and an emerging voice on the importance of measuring nonprofit outcomes, wrote a third piece in his series on redefining the nonprofit sector. This one explores the need for nonprofits to “hold ourselves accountable to objective measures and quantifiable outcomes.”
- And another nonprofit leader trying to shake things up, Bill Shore of Share Our Strength, offers the provocative “We Just Don’t Have the Money, and Other Fibs We Tell Ourselves“.
- Antony Bugg-Levine from the Nonprofit Finance Fund provides additional fodder to the conversation with his post “Navigating Tough Trade-offs in the Era of Scarcity.”
- Lucy Bernholz, philanthropy truth teller and future seer, offers three ways we can reinvent philanthropy in this great, short video brain dump.
- Kathleen Enright, CEO of Grantmakers for Effective Organizations, talks with Paul Carttar, former Director of the Social Innovation Fund, about what he learned there. It remains to be seen what impact the Social Innovation Fund will have, but as Paul says, government can and must play a role in social innovation, “The challenge for everybody — for government and for philanthropy — is to understand what each has to offer.”
- The New York Times uses Think Impact (which encourages entrepreneurship in third world communities) to provide an interesting case study of the dilemma of deciding whether to be a for-profit or nonprofit social change organization.
- Ever provocative, Phil Buchanan from the Center for Effective Philanthropy argues that the approach MBA programs take in teaching philanthropy “denies the reality that nonprofits and philanthropy work to address the problems that have defied markets…and, in many cases, are a result of market failure.”
- Writing on the Pioneers Post blog, Jeremy Nicholls takes issue with the word “impact” and encourages us to think about “value” instead.
- The National Committee on Responsive Philanthropy found that in 2011 American foundations increased unrestricted giving by 50% (from 16% of all grant dollars going to support general operating in 2010 to 24% in 2011). Now that’s an exciting trend!
Photo Credit: josue64
There is something pretty interesting going on in Illinois around nonprofit overhead costs. I have written many times (here and here for example) about how the distinction between “overhead” and “program” costs in the nonprofit sector is meaningless at best, and destructive at worst.
I’m really excited to see that the Donors Forum in Illinois is starting to host real conversations between nonprofits and philanthropists about the Real Costs (including administrative costs) necessary to create effective social change.
With the help of the Bridgespan Group, in March the Donors Forum brought nonprofits and philanthropists together for a one-day discussion about real costs in the nonprofit sector. They want funders to understand that it is not enough to fund only nonprofit programs. In order to create effective social change, nonprofits must also be able to fund the infrastructure, staffing, space, tools, and research costs of their work.
The image above is a graphic facilitation of the March session. The Donors Forum has also developed a great website with resources for nonprofits and philanthropists about real costs, including Ann Goggins Gregory and Don Howard’s seminal article in the 2009 Stanford Social Innovation Review “The Nonprofit Starvation Cycle,” reports and resources about nonprofit fiscal fitness, Grantmakers for Effective Organization’s study on how philanthropy is changing, and much more.
As part of their efforts, the Donors Forum has also put together this video that helps to explain, in very clear terms, the critical importance of funding ALL of a nonprofit’s costs:
I’m excited to see where this conversation goes and whether more nonprofits and philanthropists start having open, honest conversations about what it really takes to create lasting social change. I’m hoping to interview Valerie Lies, President and CEO of the Donors Forum, later this year about this initiative and where they hope to go from here. So stay tuned.
Perhaps it had something to do with the SXSW Interactive conference last month, but March was all about using technology in interesting ways to further social change. From crowdfunding, to a new giving graph, to credit card donations to the homeless, to engaging people in the arts and beyond, people are experimenting with technology for social change in really exciting ways.
Below are my 10 favorite social innovation reads in March. But let me know in the comments what I missed. And if you want to see my expanded list, follow me on Twitter, Facebook, LinkedIn, Pinterest or ScoopIt.
You can see the 10 Great Reads lists from past months here.
- Crowdfunding is quickly becoming the hot new thing in the social change world. It remains to be seen if it is a game changer, but in the meantime take a look at some examples of how its being used here, here, and here. And while we’re talking about innovative use of technology to fundraise, Lucy Bernholz dissects some new efforts to donate to the homeless via a credit card.
- Writing on the ArtsFwd blog, Anna Prushinskaya describes how some innovative arts organizations have used social media to effectively engage audiences in new ways.
- I’m really excited about a new technology the Case Foundation is developing that will map your online search preferences to giving suggestions just like Google, Facebook and others currently use your search preferences to suggest products and services. (I’ll be interviewing the mastermind behind this, Will Grana, on the blog this summer).
- I love to see nonprofits using new media (like video and infographics) to tell their story. Beth Kanter offers some easy tips for creating infographics. And speaking of cool infographics, check out this one on why slacktivists are more active than you think.
- It seems “scale,” the social innovation buzzword of a few years back, is being redefined. Kathleen Enright, CEO of Grantmakers for Effective Organizations, describes a new report that expands the idea of scale and offers ways grantmakers can support it. And Ben Mangan, CEO of nonprofit EARN, spurs nonprofits and funders to move past “stifling incrementalism” and start working towards real scale.
- Dan Pallotta ruffled some feathers, as is his way, with his TED Talk this month The Way We Think About Charity is Dead Wrong, and there were several responses. But I thought the most thought-provoking was from a group of professors from Boston who suggest that Pallotta’s argument that nonprofit salaries are too low only reinforces the wealth inequality of the American economy.
- And on a related note, Dione Alexander, writing on the Mission and Money blog, explains increasing wealth inequality as a kind of bullying, noting “The social contract through which we assume shared responsibility for the community is broken.”
- And since we are on the topic, this video about wealth inequality in America blew my mind. If you want a quick and dirty view of where America’s money goes, take a look.
- As part of the ten year anniversary of the Stanford Social Innovation Review, Matthew Forti looks back at the past ten years of measuring nonprofit outcomes, the good, bad and the ugly.
- Writing in the Duke Chronicle, Trinity senior Elena Botella argues that deciding when a public service should be privatized should be based on evidence, as she says “Humans respond to a profit motive, but we also respond to altruism, community values, prestige and pride in our work.”
Photo Credit: mendhak
Sean is a visionary leading the charge to transform philanthropy. He is CEO of Tactical Philanthropy Advisors, a philanthropy advisory firm. He is also the author of the very popular Tactical Philanthropy blog and writes a monthly column for the Chronicle of Philanthropy. He is a member of the World Economic Forum’s Council on Philanthropy & Social Investing and his insights on philanthropy have been referenced in The New York Times, Wall Street Journal, Washington Post, and Financial Times.
Nell: At the first Social Capital Markets Conference (SoCap) in 2008 one of the keynoters said “we’re not here to talk about nonprofits.” We’ve come a long way from there to this year’s devoted track around philanthropic capital and the nonprofit space at SoCap. Where do you think the initial hesitance to connect philanthropic and impact investing came from? And how do we continue to integrate the two worlds?
Sean: I think that one of the segments of people who are attracted to impact investing are people who think philanthropy doesn’t work. While I view philanthropic and for-profit social capital to be part of a single continuum of capital, many people seem to feel that they are fundamentally different. Like most new ideas, early adopters often think it is a silver bullet that will “change everything”. Some early adopters of impact investing or other forms of for-profit social capital wrongly believe that impact investing will replace philanthropy. I think this is a fundamental misunderstanding. Continuing to integrate the two worlds will require helping the various points on the capital spectrum better understand each other. At the end of the day, capital shouldn’t be viewed through an ideological lens, but should simply be deployed based on what sort of capital fits the situation.
Nell: The SoCap session on nonprofit rating systems like Charity Navigator and GiveWell demonstrated that there is still quite a divide between GIIRS (the impact investing rating system) and nonprofit rating systems. What is your sense of this? Do you think there is potential to somehow combine GIIRS (or something else) and nonprofit rating systems so that there is one comparable impact measurement system?
Sean: I would guess that any truly effective impact measurement system should be functional across both for-profit and nonprofit activity. A good impact assessment system wouldn’t care about the tax status of the entity producing results, it would just care about the results and the cost of obtaining them. That being said, I think evaluating a nonprofit organization is really quite different from evaluating a for-profit organization. So even if we have a unified impact assessment framework some day, I would guess that organizational assessment will utilize different systems and approaches for nonprofit and for-profit organizations.
Nell: How would you like to see the conversation about connecting philanthropy and impact investing evolve at SoCap11? What are your hopes for next year’s conference?
Sean: I’d like to work to profile more examples of ways that for-profit and philanthropic capital worked together to produce social impact. Our session on Evergreen Lodge at this year’s conference looked precisely at this question, but I’d like to see more examples. I’d also like to see examples of ways philanthropic entities have used for-profit investments or subsidiaries well or for-profits have effectively used philanthropic activities to drive profit and social results. However, one of the most important goals is simply getting the different players into the same room and getting them to come to understand each other better. While Kevin Jones and I had a good time talking about the Social Capital Markets as a meeting ground for the Barbarians and Byzantine, in reality none of us are barbarians.
Nell: Beyond SoCap where do you think the important conversations about unlocking philanthropic and government capital for social impact are happening?
Sean: This is an interesting question. SoCap is special because it is one of the only (the only?) conference that is specifically about capital for social impact without regard for sector. But versions of this conversation are happening around Grantmakers for Effective Organizations, The Social Innovation Fund, online and in a different sort of way at the PopTech conference.
Nell: At the last general session of SoCap Woody Tasch of the Slow Money movement said he doesn’t think mission-related investing will ever be adopted by the majority of foundations. What are your thoughts on that?
Sean: Social Responsible Investing, the practice of screening out stocks of tobacco companies, defense contractors and the like from investment portfolios, is not practiced by a majority of investors. Yet, SRI is very mainstream and has significantly altered the behavior of publicly traded companies. Today, SRI mutual funds are one of the fastest growing areas in money management. So I don’t think that the majority of funders have to adopt mission related investing for the concept to be deemed a success. It should be noted that SRI took a good 20 years or so to go mainstream. So it could be some time before mission related investing is considering mainstream.
Nell: And more broadly, what do you think it will take to change how philanthropists (both foundations and individual donors) use money to support social impact? How do we make more donors builders instead of just buyers?
Sean: Today, I think that very few people in the social sector really understand what “philanthropic equity” is and how capital differs from revenue. Nonprofit accounting does not acknowledge that capital even exists in the sector. Nonprofits can only book cash coming into their business as revenue or a loan. There’s no official way to account for equity-like capital. So I think that there needs to be a pretty major education effort to get the whole sector very clear on how fundamentally different it is for a funder/donor to “invest” philanthropic equity in a nonprofit vs paying a nonprofit revenue to execute programs. Personally, I don’t think much progress will be made until nonprofit accounting changes. Until that happens, it doesn’t matter much what we call “growth capital”, it is all just revenue to the nonprofit.
Last month we kicked off a new, monthly Social Velocity blog interview series where I interview leading thinkers and doers in the social innovation space. Our inaugural interview was with Kevin Jones co-founder of both Good Capital, one of the first venture capital funds that invests in social enterprises, and the Social Capital Markets Conference (SoCap) which marks its third year with the upcoming October event.
This month’s Social Velocity interview is with Clara Miller, President, CEO and founder of the Nonprofit Finance Fund, a national leader in nonprofit, philanthropic and social enterprise finance. Directly and with others, NFF has leveraged $1 billion of capital investment into nonprofits, and provided over $200 million in direct loans. Clara Miller was named among The NonProfit Times “Power and Influence Top 50″ four years in a row and is a board member of GuideStar and Grantmakers for Effective Organizations.
Nell: You and the Nonprofit Finance Fund have initiated this idea of equity capital for nonprofits, or money to “build” organizations rather than the tradition funding to “buy” services. Do you think the idea of equity capital for nonprofits is catching on?
Clara: First of all, I should say that many people have contributed to the idea of a nonprofit version of equity over the years. My NFF colleague George Overholser has been a field leader. He focuses almost exclusively on the version we call “growth” capital, which is used to rapidly build organizations, changing what they do through major investment undertaken around a single set of metrics, business plan, and ideally, with all funders acting in concert.
And yes, I do think the broader notion of “equity”—and for that matter, the importance of the balance sheet in its entirety—is catching on, especially among major foundations, capital campaign veterans and those familiar with these concepts in the for-profit world. The broader concepts of “building” organizations and “buying” services, and how financial roles differ, are resonating strongly with both organizations and funders. We have a foundation partner that has simply put the question, “is this a “buy” grant or a “build” grant?” on the program officers’ intake checklist.
Nell: How do traditional nonprofit capital campaigns, which are predominantly focused on raising money for new buildings, fit into all of this?
Clara: We think these “growth capital” and “equity” principles comprise an ideal way to think about (and operate) a successful capital campaign. Our early work in the 1980s (when we were Nonprofit Facilities Fund, and exclusively financed “community facilities” with loans) revealed that a rash of problems would almost invariably follow capital campaigns for facilities: cash crises, burnout, funder fatigue, “night of the living dead” program operations, the need to lease excess space at below-cost rent…you get the idea. It was a real eye opener. We learned a lot about the need for truly unrestricted “growth capital,” in addition to funds focused (and often restricted) to build and fit out the facility. Among the NFF-documented lessons: that facilities projects typically need 3 to 4 times the bricks and mortar cost for working capital to cover program and administrative growth needs; that the building frequently changed the business model radically, but planning never covered the whole enterprise; and that putting large amounts of cash into an illiquid asset while expanding operations was problematic on a number of levels. Also, many of these building projects came with opportunity costs: organizations weren’t investing in new technology, upgrading skill sets, or replenishing cash reserves.
Beyond facilities projects, capital campaigns frequently focus on other (typically illiquid) parts of the balance sheet: building an endowment, or on the acquisition of, for example, a program asset (such as a painting or piece of medical equipment). Thinking holistically about improving or acquiring illiquid assets, via a campaign for growth capital, can better the situation.
Nell: The for-profit sector currently enjoys a broader and deeper array of financial vehicles than does the nonprofit sector (seed funding, angel investors, growth capital, stacked deals, etc.) do you anticipate that the capital market for nonprofit organizations will become more robust and what will it take for that to happen?
Clara: I’ll push back a little and say that the vast majority of both nonprofits and for-profits (that are small, with less than $200K in revenue) have approximately the same level of access to similar financing vehicles: sweat equity, seed/angel funders/investors (friends and family, the first foundation grants, etc.), credit card debt, bank loans, retained earnings, etc. Then there is “growth capital” or “capital grants,” which a very small proportion can access in either sector. And while large for-profits are much, much larger than large nonprofits, large nonprofits have reliable access to some highly sophisticated funding and financing vehicles that for-profits don’t (and vice versa). Some very large nonprofits have access to for-profit subsidiary ventures and investments—and some are highly sophisticated (universities investing in development of intellectual property and associated products, CDFIs with venture funds, public media with development and sales of program assets, and others). And on the debt side, much of nonprofits’ “capital market” is for-profit-run (bank debt, investments, tax-exempt bonds, etc.)
The most important barrier to enterprise scale (for either sector) is not so much lack of access to capital as it is a scalable, focused business model with reliable net revenue. Once you have those—or evidence that they are possible—capital will flow.
But that said, we’re talking about a couple of “market wide” dysfunctions. The first is that despite highly resourceful managers, sophisticated board members and billions of dollars of revenue and capital funds, there is no tradition of “enterprise finance” in the sector. “Pretty bad ‘best practices’” designed to make nonprofits more efficient and fiscally prudent cost the sector dearly. Confusion about the direct funding of programs (it’s not possible, most of the time you need to fund an enterprise to deliver programs) means capital is mixed up with revenue, growth with regular operations, and “build” grants with “buy” grants (and a variety of hybrids!). This wreaks financial havoc in growing organizations. Missions—along with the public—suffer.
The second problem is that there’s no really reliable signaling mechanism for organizations to fold their tents, pass their programs to another organization, and go out of business. In the for-profit world, that would be financial failure; in our world, that’s not so straightforward: so we hang in there, meaning resources that might go to a stronger program remain tied up. It also means that the biggest and richest players have (and, largely, keep) the vast lion’s share of resources (even more pronounced than in the for-profit world).
Finally, there is a problem with access to charitable revenue. Promising, mid-sized organizations—especially those serving low-income people (and therefore lacking access to the traditional source of capital in the sector, individual donors) have a difficult time building the operation they need to grow. Foundations are the logical path here, and having foundations embrace “enterprise friendly” practices—including growth capital and build-buy understanding—can go a long way toward changing that dynamic. Establishing a field-wide understanding of basic enterprise finance principles will help insure that growth capital campaigns become true innovation with long-term staying power, rather than a short-term novelty.
Nell: Growth capital for nonprofits is mostly only available to larger nonprofits that have the capacity to prove the results of their model. Do you think growth capital will increasingly become available to the bottom 80% of nonprofits (those with a budget less than $1 million), and how and when do you see that happening?
Clara: Our goal is not that all organizations of every size and business model have access to growth capital and pursue aggressive growth goals ASAP. That’s neither possible nor desirable in either the for-profit or the nonprofit worlds. In both sectors, some business models may not be scalable, and that’s ok—in fact, it’s good. Nobody wants their favorite neighborhood clam shack or Italian restaurant to go public or become a Pizza Hut. Diversity is good; and most people like things about both large and small enterprises. This is true in any sector, where economies of scale and preservation of quality are frequently subject to the laws of diminishing returns. Growth capital is not for everyone, and it is only one tool in the enterprise tool box.
The more important revolution is to make broadly accessible the tools and principles of enterprise finance—with a clear understanding of the realities of the commercial proposition of the sector (i.e., there’s a reason we have a nonprofit sector). There are well-managed and poorly managed (and capitalized) enterprises of all sizes and tax statuses, and there are scalable and non-scalable ones as well. Most critical on the scaling front is that our sector embraces and deploys the broad set of principles that make enterprises of any size or shape effective in reliably achieving great results. Trouble arises when a specific social benefit or innovation is so compelling that we all want the maximum number of people to benefit from it: Our failure to use the principles of growth capital and proper scaling techniques to assure results while growth proceeds is (and has been) tragic for the social sector, and a change in practice can help.
Nell: How do you think the Social Innovation Fund will change the capital landscape for nonprofits?
Clara: I think the SIF already has raised the profile of the ideas around growth capital and scaling discussed here. And it certainly has the attention of a group of large foundations, a significant number of whom are applying as intermediaries. I think it took courage for them to apply, and courage for the SIF to get developed. At the beginning there will be some fits and starts, and government procurement can be dicey (especially when it’s trying to be capital rather than revenue), and foundations are trying to make it work in this way for the first time. That said, it’s very exciting for us to see “growth capital,” which is the core concept, being given a whirl by both the White House and the Foundation world.
Nell: Venture philanthropy funds (that provide growth capital to nonprofits) and social venture capital funds (that provide capital to double bottom-line businesses) currently don’t interact very much in the marketplace. Do you see an opportunity for greater integration of nonprofit and for profit social investing? And if so, what will it take to get there?
Clara: I think there is increasingly frequent interaction between for-profit and non-profit business models (and entrepreneurs) on the conceptual level, and that’s being translated into some compelling platform-agnostic enterprise structures to accomplish social ends in many sectors—health care, research, arts and culture, media, housing—are all examples. And interactions may not be best between two enterprises that are both at the “venture” or “start up” stage. A start-up nonprofit may want to partner with a fully-scaled for-profits (and this is common), while a fully-scaled nonprofit may want to create (or house) a venture for-profit to help reach certain social goals.
On the “deal” level, I think there’s a reason to maintain a bright line between the nonprofit and for-profit tax status. I favor crisply defined hybrids (of which there are a variety) over mushiness (we’re a for-profit but we are good people doing socially beneficial work) because they are more likely to stand the test of time and skepticism, and since ownership and tax structures have bright-line legal and moral duties attached to them.
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