I am out of town this week, so in my place I am offering you two interviews this month in my ongoing interview series.
First, as promised, is my video interview with Hope Neighbor, CEO of Hope Consulting and author of the Money for Good reports exposing a $15 billion opportunity to direct more private money to high performing nonprofits.
This is the first video interview I’ve done, and I am very grateful to Hope for being the guinea pig. You’ll notice that unfortunately there is no video of Hope, only her voice and a picture of her with her fiance. That’s because we couldn’t get her computer’s camera to cooperate (you’ve gotta love technology!). But the interview is still well worth a watch because Hope has really interesting insights about how donors approach giving and how we might be able to change some of that.
So take a look:
I’m really excited to announce that, as promised, I’m starting to move the Social Velocity Interview Series to video interviews, via Google Hangouts (for those interviewees who are willing). I launch next week with an interview, on the Social Velocity Google+ page, with Hope Neighbor, CEO of Hope Consulting and author of the Money for Good reports exposing an $15 billion opportunity to direct more private money to high performing nonprofits.
In 2010 and 2011 Hope, and her team of partners (like GuideStar and Charity Navigator) and funders (like The Gates Foundation and The Hewlett Foundation), conducted comprehensive studies of donor behavior, motivations, and preferences for charitable giving in order to understand how to effectively influence giving behaviors.
Money for Good I found that 90% of donors say how well a nonprofit performs is important, but only 30% of donors actively try to fund the highest performing nonprofits. So there is a disconnect.
In Money for Good II, Hope and her team set out to figure out what it would take to change donor behavior and direct more money to high performing nonprofits. What they found is that more information about performance and more “Consumer Reports” style reporting could encourage more donors to switch their giving to higher performing nonprofits.
This is all fascinating and helps inform the on-going question, “How do we funnel more money to social change?” Needless to say I have lots of questions for Hope.
Here is my list of questions for Hope, but I imagine since it’s a conversation the questions will evolve:
- With Money for Good you are hopeful that we can change donor behavior and shift more money to high performing nonprofits. But what will it take beyond providing more (and better information) to donors? How do we create incentives for donors to change?
- Money for Good estimates that $15 billion could shift to high performing nonprofits, but that is only 5% of the total private money flowing to nonprofits. And only 12% of all money flowing to the nonprofit sector comes from the private sector, so we are really only talking about shifting 0.6% of all the money in the sector to high performing nonprofits. Is that piece of the pie worth the kind of donor behavior change effort required? What about expanding the overall pie (only 2% of the annual Gross Domestic Product has historically gone to the nonprofit sector)? Is there any hope of growing the 2%?
- Where does impact investing fit in all of this? Typically only 5% of a foundation’s money is directed to social change efforts. What about the opportunity to encourage foundations to tap into their corpus and do more program-related and other mission-related investing?
- How do we ensure that more information means better information? What if low performing nonprofits simply start mimicking high performing reporting? How do we ensure that accurate performance evaluation is conducted and reported across the sector? And how do we fund that?
- What about the problem of donors misconstruing information? For example, if nonprofits provide more financial information, and donors still have a bias against overhead spending, could that just shift more money to nonprofits with lower overhead, not necessarily higher performance?
Watch for the interview on the Social Velocity Google+ page next week.
And stay tuned for more video interviews soon!
There were some really great articles and discussions in the social change space this past month. From new attempts to put philanthropy under the microscope, to analyses of Silicon Valley’s contributions to social change, to the difference between market innovations and social innovations, to Millennial giving, there was a lot to think about.
Below are my picks of the 10 best reads in the world of social innovation in September. But please add what I missed in the comments.
The 10 Great Reads lists from past months are here.
- Silicon Valley has been getting into the social change game, but some aren’t impressed with their contributions so far. David Henderson takes Silicon Valley to task for focusing their technology “innovations” only on broken nonprofit fundraising models (Google’s announcement in September of a new fundraising app, One Today, is an example of what he’s talking about). And Charles Kenny and Justin Sandefur seem equally unimpressed arguing that Silicon Valley’s view that technology can end global poverty is “wildly overoptimistic.”
- And speaking of social change and business, Daniel Goldberg makes a very interesting (and helpful) distinction between “market innovations” (“an opportunity for profit that also happens to help people…and [is] effective precisely because [it] so cleverly ride[s] the market wave”) and “social innovations” (which “produce value by filling gaps left by the market…a business opportunity in the classic sense, but a systematic market failure that required a social purpose to address”). Much of impact investing, he argues, falls into the first camp, whereas social impact bonds fall into the second.
- It is crazy (and terrifying) how the wealth of America is increasingly concentrated in a small group of people at the top. The rate at which it is happening is mind blowing. The 400 richest Americans are worth $2 trillion, which is a $300 billion increase from last year and double what it was a decade ago. And in 2012 the top 10% of earners brought home more than 50% of the total U.S. income, which is the highest level ever recorded. Kind of depressing, isn’t it?
- But there is hope. Clara Miller, formerly head of the Nonprofit Finance Fund and now head of the F.B. Heron Foundation, is one of the leading visionaries in the social finance space. Her recent article is a must read and explains the dangers of nonprofit growth without adequate capital and what funders can do to prevent it.
- Paul T. Hogan, VP of the John R. Oishei Foundation, argues that funders should focus on building nonprofit organizations: “The development of the nonprofit organization provides plenty of factors to evaluate and many outcomes to strive for. It can also satisfy the funder’s obligation to effectively steward resources insofar as an organization is being helped to last for the long term and have a much greater chance of effectively achieving its, and therefore the funders’, goals.” Oh, if only more foundation leaders thought that way!
- Pablo Eisenberg writes a fairly vehement rant against philanthropy for being an increasingly closed loop. He argues that their insularity “keeps philanthropy from solving serious problems” and that we need “foundations and big donors to realize they don’t have all the answers. Nonprofits should have a greater role in driving the agenda.”
- September saw the annual Social Capital Markets Conference and one of the interesting things to come out of it was a new Community Capital Symposium that immediately preceded SoCap this year. CoCap brought non-accredited investors (with a net worth below $1 million) and social entrepreneurs together to talk about community-focused investing. It’s an interesting financial innovation to watch.
- Over the month of September, GrantCraft, a project of the Foundation Center, ran a 4-episode podcast series talking about and with Millennial philanthropists as a complement to the Johnson Center NextGen Donor Report about Millennial giving that came out earlier this year. Fascinating stuff.
- And then on the tactical side, HubSpot offers some great insight on What Millennials Really Want From Your Nonprofit’s Website.
- I always love urban food innovations, perhaps it’s because they are addressing several social problems at the same time (urban decay, obesity, economic decline, environmental degradation). And so I was interested to see that urban rooftop farming is a new trend.
Photo Credit: UWW ResNet
In today’s Social Velocity interview, I’m talking with Ted Levinson. Ted is the Director of Lending at RSF Social Finance, a San Francisco-based financial services non-profit dedicated to transforming the way the world works with money. Levinson manages RSF’s flagship $75 million Social Investment Fund which provides debt capital to US and Canadian social enterprises.
You can read past interviews in the Social Innovation Interview Series here.
Nell: RSF Social Finance is really the leader in the social finance market, you’ve been doing this long before anyone started talking about a “social capital marketplace.” Given that long history, how do you view the current state of the social capital market? Are we where we need to be to funnel enough and the right kinds of capital to social change efforts? And if not, how do we get there?
Ted: RSF has a twenty-nine year operating history, but it’s still early days for the field of social finance. The industry is at the same stage of development as natural food stores were thirty years ago – we’re established, we’re growing, we’re doing good work, and yet we’re still considered a fringe movement. I believe we are on the cusp of mainstream acceptance which will mean a much broader audience of impact investors (especially young people and unaccredited investors) and far greater demand for social capital from the growing number of social enterprises that are just now becoming investment-ready.
There’s been a shift in society’s view of natural food stores – we’ve overcome our fear of the bulk bins and now all grocery stores look more like natural food stores. I expect the same thing to happen with our conventional financial institutions which are just now beginning to pay attention to social finance.
What the field really needs is to expand the financial products available to social enterprises and address some of the existing gaps. Frustrated social entrepreneurs may disagree, but I think the angel capital and large-scale venture capital spaces are meeting the needs of for-profits. Incubators, business plan competitions and seed funds are providing modest amounts of funding to emerging non-profits and for-profits. RSF and some of our friends including Nonprofit Finance Fund, Calvert and New Resource Bank are addressing the middle market market.
The big voids in social finance include:
- True “risk capital” for non-profit social enterprises. We need more foundations willing to place bets on high-potential organizations.
- Bigger finance players or (better yet) a more robust consortium of social finance organizations that can band together to meet the $5 million + needs of high growth social enterprises such as Evergreen Lodge, Playworks and other organizations that are reaching scale.
I believe the field will get there but we’re playing “catch-up” now and social entrepreneurs are an impatient bunch.
Nell: RSF does something pretty revolutionary in that you combine philanthropic giving with impact investing, whereas these two sides of the social capital marketplace have not yet really found a way to work together in any large scale or significant way. Why do you think that is? And what needs to change in order to encourage foundations and impact investors to work more closely together?
Ted: We call our approach of combining debt and philanthropic dollars “integrated capital,” and we think it’s going to have a profound effect on impact investors, philanthropists and the social enterprises it serves.
Most non-profit social enterprises rely on a combination of earned revenue and gift money. There’s no reason why a single transaction can’t bridge these two forms of capital. With integrated capital we can leverage philanthropic grants or loan guarantees to push high-impact loan prospects from the “just barely declined” category into the “approved” category. In fact, even some for-profit social enterprises are eligible for this. Our loan to EcoScraps – a fast-growing, national, composting business was made possible by a foundation that shared in some of RSF’s risk.
Integrated capital is possible because RSF works with individuals and foundations that have overcome the prevailing view that how you invest your money and how you give are distinct activities. We’re also fortunate to work with an enlightened bunch of people who recognize that philanthropic support for social enterprises isn’t a crutch or a sign of a failed enterprise.
Our work at RSF is driven by a belief that money ought to serve the highest intentions of the human spirit. Conscientiously investing money, giving money and spending money can all further this goal.
Nell: What do you make of the emerging social impact bond movement? Is this a social finance vehicle that you think will work?
Ted: I’m deeply hopeful and deeply skeptical of the future of social impact bonds. I’m hopeful because our government is notoriously risk-adverse and slow to adopt new ways of improving education, reducing recidivism, or curbing our runaway health care costs. I think spending money on early interventions could go a long ways towards improving these fields societal challenges, but paying now to save in the future is at loggerheads with the short-term view which prevails in politics. Social impact bonds are a clever way to push the risk on to investors who are willing to take a longer view for the potential of a big upside.
I’m also a fan because social impact bonds are an alternative to the financial engineering which brought us collateralized debt obligations. They demonstrate that Wall Street doesn’t have a monopoly on financial innovation.
That being said, I’m skeptical that this market can ever reach a stage where transactions costs can drop enough to make it economically viable. Bringing together the multiple parties that are required for such a transaction (the government, the investor, the non-profit, a monitoring entity, a social finance organization, an attorney and possibly a foundation) just seems unaffordable to me.
Nell: What sets the nonprofits and social enterprises you invest in apart? What characteristics do you look for in the investments you make?
Ted: All of our borrowers fall into one or more of three focus areas – sustainable food systems, the environment and education & the arts. These borrowers all have capable, committed management who recognize that financial sustainability is a prerequisite for lasting change. Our best borrowers have strong communities supporting them whether it is donors, customers or suppliers.
Evaluating these stakeholders is a key component of our underwriting process at RSF.
Our experience demonstrates that performance improves when social enterprises engage all of their stakeholders. RSF’s long-standing support of fair trade is an example of this commitment. We also regularly expect borrowers to solicit their community members to join RSF’s investor community as a precondition to approval. We take community seriously at RSF!
Our borrowers are all addressing major social or environmental problems such as a lack of adequate housing for developmentally disabled adults (Foundation for the Challenged), inefficiencies in the wind industry (FrontierPro) and poverty and environmental degradation from rice farming (Lotus Foods.) As social enterprises, they’re primary activities are DIRECTLY making the world a better place. We believe our borrowers have the potential to scale their organizations and make a real dent in these problems, or become a model for others to do the same.
For example, we were one of the first lenders to Revolution Foods when they were operating out of a defunct fast food restaurant in Alameda, CA. Today they deliver over 200,000 healthy meals a day to public school children.
Similarly, we think DC Central Kitchen’s model of combining culinary training for adults with barriers to employment with a robust meals business (they deliver 5,000 meals a day to schools and homeless shelters) is a winning approach that can be replicated throughout the country.
Nell: Some have argued that nonprofit leaders lack a level of sophistication when it comes to financial strategy and use of financial tools. Obviously you find nonprofits and social enterprises that are able to effectively employ sophisticated financial vehicles, so how do you respond to that argument?
Ted: Rather than argue I prefer to let the results of our borrowers speak for themselves. DePaul Industries, for example, is a $30 million non-profit that employs over a thousand disabled Oregonians. The Portland Business Journal ranked them one of the most admired companies in the state and they did this all with 98% earned revenue. Network for Good processes over $150 million of online donations every year while Digital Divide Data has a decade of year over year revenue growth in the field of impact outsourcing.
I see no lack of financial sophistication in the non-profit sector. I do, however, see a lack of risk-taking, which can sometimes be misinterpreted as unsophistication when compared with the for-profit world. It’s a shame this mentality is so pervasive because of the importance and urgency of the work that so many non-profits do. Many icons of industry have biographies filled with risky expansion, leverage, false starts and failures. We need to de-stigmatize failure in the non-profit sector and adopt that same boldness which has led to so many of the biggest successes in the commercial world.
It becomes increasingly obvious to me the longer I am in this space that philanthropy must change just as much, if not more, than nonprofits. And perhaps change is on the horizon, particularly with some key debates happening in the philanthropic world lately.
The biggest of which this month was the showdown between Bill Schambra and Paul Brest (among others) about whether philanthropy should be “strategic.” Add to that the on-going discussion Peter Buffett started last month about philanthropy as “conscience laundering,” and the growing drum beat against the nonprofit overhead ratio, and August was a mind-opening (I hope) month in the world of social innovation.
Below is my list of the 10 best reads in the world of social innovation in August. But please add to the list in the comments.
As always, the 10 Great Reads lists from past months are here.
- First up, Crystal Hayling offers some great advice for new philanthropists, but I would say her advice translates to experienced philanthropists as well. If we want to get better at solving social problems, we have to raise the bar on philanthropy.
- The big debate this month was about how “strategic” philanthropy should be, whether the best philanthropy comes from a community or scientific approach. Bill Schambra, from the Hudson Institute, and Hewlett folk Paul Brest and Larry Kramer went back and forth and back, and of course others chimed in. For me, the most thoughtful response was from Scott Walter. It was an interesting debate, but I think at the end of the day they are saying roughly the same thing, with which I heartily agree, philanthropy has to get better at actually solving problems.
- As I mentioned last month, Peter Buffett wrote a highly provocative rant against philanthropy in July. And this month the debate raged on with some very interesting counterpoints from nonprofit leader Dan Cardinali here and from Nandita Batheja on the Idealist blog here. Buffett’s piece is certainly doing what any good writing should, provoking people to question their assumptions and think in new ways, even if they don’t fully agree.
- Adding to his growing opus, Bill Shore again argues that nonprofits must get bolder in their social change goals. This time Darell Hammond from KaBOOM! and Amy Celep from Community Wealth Partners join in. But Phil Buchanan at the Center for Effective Philathropy doesn’t heartily agree.
- More and more data points to the fact that women are becoming a major philanthropic force. It will be interesting to see how they change the face of philanthropy as we know it.
- It’s always important to get a different perspective, and Brian Mittendorf at the Counting Charity blog provides a really interesting counterpoint analysis to recent concerns about the Clinton Foundation’s financial management.
- I have to admit it, I LOVE a good contrarian, and Arik Hesseldahl is one this month with his great post suggesting that there may be too much hype around Big Data (the idea that the enormous amount of data now available could yield tremendous improvements to the world as we know it). Although he is talking about Big Data’s promise for business and government, there is an equal amount of hype around what Big Data can do to solve social problems. As with everything, there is no magic bullet, so we would do well to understand Big Data’s limitations.
- There is much work to be done bringing the “old” world of philanthropy together with the “new” world of impact investing, so I love to see the two at work together, like Nonprofit Finance Fund’s new project helping the Maine Community Foundation launch an impact investing program.
- And then there was something completely different. If we are to ensure that the next generation cares as much, if not more, about fixing social issues, we must raise compassionate children, which gets harder to do in an increasingly segmented society. Perla Ni offers 5 ways to Raise a Compassionate Child In the Age of Entitlement.
- And lest we forget why we do this social change work, April Greene from Idealist reminds us.
Photo credit: ouzo-portokali
There is a lot of talk lately about how the world is changing thanks to the Millennials, the demographic force of people born between 1981 and 2000 who promise to fundamentally change the world as we know it.
But what I continue to wonder is whether Millennials will fundamentally shift how money flows to social change.
Here are the shifts I wonder if Millennials will help us make:
More Social Change Money
Will a significantly greater amount of money begin flowing to organizations that are working on positive social change? For the past four decades only about 2% of the U.S. Gross Domestic Product has gone to philanthropy. That’s a pretty big trend to buck. Millennials stand to enjoy the largest wealth transfer in America history. Will more of that money flow to philanthropy? Will Millennials be able to move the needle on the 2% and find ways to funnel more money to social change?
More Money Flowing to Proven Impact
Will more money start flowing to organizations that can prove that they have created social change? Traditionally, philanthropy has not been terribly strategic, following emotion rather than data. However, new research claims that Millennial donors are more focused on impact than their predecessors (see the Millennial Impact Report, The Next Generation of American Giving report, and the NextGen Donors report) and are more committed to seeing their money flow to organizations that can prove they are actually accomplishing social change. (Although some argue that Millennials will actually not give any differently than their predecessors did.) So once Millennials become the philanthropic force everyone predicts will they actually invest that money differently?
More Financial Vehicles for Social Change
Will more financial vehicles become available for social change efforts? As Millennials start to control the wealth in this country, will they use new tools like impact investing to funnel more money, beyond just philanthropy, to social change efforts? Will they be able to connect impact investors and philanthropists and their respective pools of money? Will Millennials’ demonstrated interest in social change translate into new ways to fund that social change?
More Delivery Vehicles for Social Change
Millennials, so far, tend to be more entrepreneurial than their predecessors. And at the same time there are more organizational structures, beyond the traditional nonprofit organization, for making social change happen, from B Corps to Lc3s to for-profit social businesses, to social intrapreneurship. But it remains to be seen whether these new structures, and others yet to come, will stand the test of time. And whether Millennials can transform traditional nonprofits to be more entrepreneurial too.
There certainly can be hype around the promise of a generation. But I’m excited to see what the Millennials bring to the world of social change.
Photo Credit: Next Generation of American Giving Report
Note: I was asked by UnSectored, a community platform for rethinking social change, to write a post as part of their month-long conversation leading up to the William James Foundation’s Annual Gathering about how we sustain social enterprise. Below is that post. It originally appeared on the UnSectored blog where you can see the other posts in the conversation.
There is an awful lot of hype around the social entrepreneurship movement. Don’t get me wrong, I’m excited about the growing focus and energy around social change. But I think we need to take a step back and recognize that nonprofits have been working on social change for a really long time.
Often nonprofits get less airtime in the social innovation movement than their for-profit, social change counterparts. Perhaps that’s because the for-profit form of social change is new, so it seems more interesting, sexier, apt to create more change. And, of course, the idea that business can be reworked to address public goods is incredibly compelling.
But among the glorified world of social entrepreneurship, some are beginning to question the hype. Like Liam Black (“Letter to a Young Social Entrepreneur”) and Daniel Ben-Horin (“Between the Quick Exit and the Long Sojurn”)
Real social change is hard, long, exhausting work. As Daniel Ben-Horin says “This ‘making a difference’ stuff can be a real grind, as it turns out.”
And amid the hype around social entrepreneurship there is a tendency to dismiss those who were working on the long haul of social change before it was cool: the nonprofit sector.
The current hype around for-profit social entrepreneurship sometimes reminds me of the dot.com bubble, or the sub-prime mortgage speculation. We have to be careful of the hubris that accompanies new trends.
The nonprofit sector is an enormous part of our economy and has a long history of working towards social change. If we were to cast it aside completely, we’d lose the tremendous resources (money, people, mind-share) that are being invested in that sector every day. Without its oldest component, the broader movement to solve social problems is doomed. So instead of tossing it aside, let’s remake it, re-envision, restructure and reinvent it.
What does that mean? It means that the best and the brightest in the social innovation field need to figure out how to innovate in the nonprofit as well as for-profit sector. It means that the emerging social capital market creating financial vehicles for budding social businesses should also support social entrepreneurs in the nonprofit space. It means philanthropists should share investor prospects with impact investors, and vice-versa.
What’s more, innovation requires that investors interested in a social return own portfolios that include not only social businesses, but also nonprofit deals. Many more foundations should explore mission-related investing so that their money can go to both nonprofit and for-profit social change efforts. Nonprofits interested in growth should have access to capital and management expertise to scale. And a nonprofit that’s solving social problems should get just as many resources, respect and mind-share as a social business that’s doing the same.
In essence, we need an “unsectored” approach to social change.
Which means a shift in attitudes, laws, accounting standards so that social entrepreneurs are not restricted by outdated structures and incentives.
There’s no magic bullet for social change. But by focusing all of our energy on only one piece of the social innovation puzzle, we run the risk of less change — or none at all.
Photo Credit: unsectored.net
In this month’s Social Velocity blog interview, we’re talking with Chris Earthman, Executive Director for the Aragona Family Foundation. For the last 8 years Chris has also worked for Austin Ventures, the largest venture capital firm in the Southwestern US. Chris has over 15 years of experience at the intersection of nonprofit and for-profit enterprises, including helping to establish the Micron Technology Foundation (NYSE: MU), the corporate social responsibility vehicle for the largest private employer in Idaho.
You can read past interviews in our Social Innovation Interview Series here.
Nell: As head of a regional family foundation, how do you and your board view some of the innovations happening in the social sector like impact investing, social entrepreneurship, etc.?
Chris: I find it refreshing that innovation is happening in our sector, though I’m a little surprised at the slow rate of uptake among funders. The family foundation I currently run is a spend-down foundation, and that’s a decision our trustees made consciously in order to see the fruits of social investments now vs. spending significantly less in order to maintain a corpus indefinitely. There is ample discussion out there among funders, but (and I’m as guilty as anyone) very rarely much action to back it up. We’re trying to selectively dip our toe into the water in terms of funding social innovations, infrastructure, ecosystem improving organizations, selective M&A activity among our grantees and discussing the idea of mission-related investing.
Nell: Speaking of mission-related investing (where a foundation invests part of their corpus into for-profit social enterprises that give both a social and financial return to the foundation), it’s a pretty radical concept for most foundations. What do you think it would take for the idea of mission-related investing to take off for smaller foundations across the country?
Chris: Let me preface my comments with the fact that we are a spend-down foundation and therefore have not made a meaningful investment allocation to mission-related investing, so I’m by no means an expert here. However, I think there need to be more visible intermediaries and investment products targeting the social impact market. We’ve seen some great progress over the last few years with groups like Sonen Capital, but it’s still a very nascent industry. One of the biggest barriers we’ve come across is the difficulty in quantifying the social return in a format that is comprehensible to trustees. That is starting to change with ratings intermediaries like GIIRS, but recognition and uptake are essentially non-existent among most of the foundations that I interact with. I know that you and many others have opined on the progress here, but it’s still not something that is on many regional/ smaller Foundation’s radars. It may take a few forward thinking Foundation trustees to step up and take a chance to show others that it’s ok to think outside of the endowment model mindset.
Nell: Much of your non-Foundation time is spent working for a venture capital firm where the idea of Mergers and Acquisitions is second nature; however this is a fairly uncommon concept in the nonprofit world. Do we want to see more of it in the nonprofit sector and if so, how do we make that happen?
Chris: Given the fragmentation of the nonprofit ecosystem across the country and the large proportion of small organizations , I think there is certainly an opportunity for more instances of Mergers and Acquisitions (M&A), particularly in cases where organizations need to grow above the $500K/ yr threshold. However, my experience is that TRUE collaboration—the accretive kind where you can quantify cost savings and/or program growth and ultimately better outcomes/ social change—is very rare in the nonprofit world simply because there are few external catalysts to get the discussion started and ultimately finished.
We’ve funded a few different M&A efforts over the last couple of years and my takeaway is that the M’s work much better than the A’s. I hate to keep pointing the finger back at myself and fellow funders, but there is a certain level of risk aversion where we’d rather ensure a successful purchase of additional direct services vs. really giving organizations what they need to grow. I’ve seen too many truly innovative nonprofits unable to successfully scale past the $300-500K/yr revenue threshold because of the required organizational capital required to make that pivot.
But I’m by no means idealistic here. While M&As sound sexy, there are many times where poor execution, interpersonal dynamics, Board conflicts, bad timing, or any number of external factors out of your control result in an outcome that may actually harm the organizations seeking to gain efficiencies through scale and collaboration. There are integration costs, donor overlap, brand/ identity battles, etc. that always take much more time, effort, and money before you see any of the accretive results that initially drove the decision to bring the organizations together. The same goes for the appetite of funders to backstop Executive Director salaries and/or fund transaction costs related to a merger discussion. In my opinion, lack of funder appetite is probably one of the biggest barriers to more M&A in our sector.
Nell: As a rule foundations are less interested in making capital investments in nonprofit organizations (funding things like infrastructure, systems, technology, evaluation). Why do you think that is and what can help move philanthropists to understand the need for capacity capital?
Chris: I think there are two reasons:
- The idea of “expressive philanthropy” is fairly well ingrained and many folks start out their philanthropy work wanting to “put their stamp” on a particular cause or portfolio of organizations. The challenge is that many foundations knee jerk into a risk-averse grants process that may or may not fit with their place in the ecosystem. Part of this is based on the endowment model of funding, which more often than not results in a formal, tedious grant application process. This may not be the best way to identify and screen potential grantees!
Let me acknowledge that I spent the first few years of my career as a grant writer, so I completely understand the time and effort that go into these proposals. This experience informs (or biases) my “anti-process” grantmaking strategy wherein we prefer to put the “search cost” onus on myself as a funder and try to respect the time and effort of the ever lean development dollars being spent by grant seeking organizations. It may sound like an arrogant “don’t call us, we’ll call you” approach to grantmaking, but I’ve found that making the grant process donor-centric vs. grantee centric allows the system to operate more efficiently.
- While philanthropic dollars should be fungible, the ability to restrict funds creates a tiered system of revenue for grantees. It always strikes me as a little odd that funders get so hung up about funding direct services vs. infrastructure and overhead and restrict their funding to such a degree. Ask any VC how their portfolio companies use their investments and you’ll find more often than not it pays for the critical growth functions like Sales and Marketing. You can’t grow without infrastructure, and unfortunately our current giving culture is much less amenable to that. I’d even go so far as to say the framework/ process that most funders use to select their grantees are, by their very nature, skewed towards less risk and greater restriction. Therein lies one of the structural problems in our industry. Even something as simple as separating the motivation of our giving (“we really like your yy program initiative…”) from the structure of our giving (“…so here’s an unrestricted grant to spend where you feel it is most needed”) makes a huge difference for the lives of our grantees. It also shows the Executive Director that you value their ability as a manager to make decisions from the inside.
Nell: How do we get funders to get take more risk with their investments and be willing to fund things that have a higher risk, like growth capital, mergers, research & development, but could result in huge social payoff?
Chris: Similar to my earlier comments about impact investing and grant processes, I think funders need to see more celebrated instances of both success AND failure. Another solution is using less restrictive grant processes that are a better fit with the size and scope of your particular foundation. The fact that you can restrict grants does not automatically mean that you should. Until we embrace the idea that its ok to take a risk with our funding (and have a process that embraces this), even if it doesn’t turn out the way we planned, we’ll be much closer to creating an environment ripe for some of the larger social change that motivates our philanthropic giving in the first place.
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