Taking Philanthropic Risks: An Interview with Chris Earthman

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:

1. 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.

2. 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.

Tags: Aragona Family Foundation, Austin Ventures, Chris Earthman, family foundations, foundation proposals, Fundraising, GIIRS, grantmaking, impact investing, Micron Technology Foundation, Mission-Related Investing, nonprofit capacity capital, nonprofit grantees, nonprofit mergers and acquisitions, Nonprofits, Philanthropy, social innovation, Sonen Capital, spend down foundation

10 Great Social Innovation Reads: May 2012

In the world of social innovation, May was most definitely about innovations in philanthropy and funding of social change. From social impact bond experiments, to hybrid foundations, to impact investing, to the Giving Pledge 2.0, there was much discussion and debate about how funders of social change should and are innovating. And that is very exciting because it is not enough for social entrepreneurs to push things forward, we desperately need new financial vehicles to fund those social change efforts.

Below are my ten picks of the best reads in social innovation in May, but as always, please add what I missed in the comments. If you want to see other things that caught my eye, follow me on Twitter, Facebook, LinkedIn or Pinterest. And if you want to read 10 Great Reads lists from past months, go here.

1. First up is social impact bonds (or pay for success bonds), a very exciting, new way to fund nonprofits that achieve improved social outcomes that result in public sector savings. McKinsey released a new report on the potential for social impact bonds in the US. And Minnesota is one of the first states to experiment with these bonds with a $10 million pilot.  Twin Cities Business magazine explores the idea and Kate Barr of Minnesota’s Nonprofit Assistance Fund gives an overview of the idea, resources and further conversation.




2. This month’s second annual meeting of those wealthy individuals who signed Bill Gates’ Giving Pledge (a public promise to give at least half of their wealth to charity in their lifetime) showed some real interest in impact investing, or using their money to make money while creating social change at the same time. Laura Tomasko argues why their interest in impact investing (both mission-related investments and program-related investments) is such an exciting opportunity. And Lucy Bernholz takes their interest in impact investing in another direction arguing that “this century’s great philanthropists should aim not just to match history’s great givers in their largess, but also in the creation of mechanisms and institutions that serve the future as well as their predecessors served the past.”




3. Finally, in a very exciting move, the Obama Administration has proposed an expansion to the rules about how foundations can use program-related investments (low or no interest loans to social change organizations) and some community foundations are already getting into the game.




4. And from the nonprofit side of the financial equation comes the Nonprofit Finance Fund’s effort to debunk the myths around endowments as a road to nonprofit financial sustainability.




5. Financial sustainability must always be on the mind of social change organizations, as this cautionary tale from the North Carolina YWCA that had to close its doors because of poor financial management and oversight demonstrates.




6. Has the drum beat against judging a nonprofit based on overhead costs gone mainstream? An op-ed in the LA Times argues that administrative costs are “no way to judge a charity.”




7. At the Social Earth blog Thien Nguyen-Trung cautions against an overemphasis on growth among social entrepreneurs and instead argues for “impact offtakers” or an exit strategy for social entrepreneurs to hand off their solution to government or another larger entity instead of trying to reach scale on their own.




8. And Patrick Lester seems to agree in his argument that it’s not enough to fund social change solutions: “Foundations and philanthropists need to step forward and fund not just innovation, but advocacy too–only then will our best ideas be taken to scale.”




9. There were several articles about exciting, innovative approaches to solving food problems. From a $125 million loan fund for healthy food outlets in California, to urban farming in Detroit, to a very successful nonprofit grocery store in Portland, Oregon.




10. In the Stanford Social Innovation Review Matthew Forti offers 6 things nonprofits should avoid in their theory of change (their argument for what they exist to accomplish).

Photo Credit: C. Frank Starmer

Tags: community foundations, Foundations, Giving Pledge, impact investing, Mission-Related Investing, nonprofit advocacy, nonprofit endowments, nonprofit growth, nonprofit outcomes, Nonprofits, pay for success bonds, program-related investments, scale, social entrepreneurs, social impact bonds, theory of change

The Politics of American Philanthropy

Every once in awhile an article comes along that is so honest and observant that it opens the door for a fundamental shift in thinking. Curtis White’s “The Philanthropic Complex” in the Spring 2012 Jacobin is such an article. White writes about how the politics behind American philanthropy compromise its ability to create real social change. His focus is the philanthropy that funds environmental organizations, but ultimately he makes a larger point about the limitations inherent in American philanthropy overall. I’m not sure I agree with everything White writes, but his unapologetic description of the politics of philanthropy is so raw that it is refreshing.

White begins by laying out the fundamental power imbalance between nonprofits seeking funding and the foundations that offer that funding. That imbalance is so dysfunctional that nonprofits cannot get enough and the right type of money that they really need to effectively solve social problems:

One of the most maddening experiences for those who seek the support of private philanthropy is the…difficulty of knowing why the foundation makes the decisions it makes…The closest thing to an answer you’re likely to hear is something like this: “The staff met with some Board members last night to discuss your proposal, and we’re very interested in it.  But we don’t think that you have the capacity [a useful bit of jargon that means essentially that the organization should give up on what it thought it was going to do] to achieve these goals.  So what we’d suggest is that you define a smaller project that will allow you to test your abilities [read: allow you to do something that you have little interest in but that will suck up valuable staff time like a Hoover].  Meanwhile, we’d like to meet with your Board in six months and see where you are.” And on you go one year at a time. But cheer up, you’ve made your budget for the year!

Part of this dysfunction, White believes, stems from the lack of wide-spread mission-related investing among foundations. Foundations in America are required to distribute 5% of their funds each year to nonprofit organizations. And the remaining 95% is invested to make as much profit as possible. In recent years the idea of “mission-related investing,” where a foundation actually invests that 95% in companies that align with the mission of the foundation, has been gaining favor. But the vast majority of foundations still don’t align their 5% with the 95%, or their “mission” with their “investments.” This strategic disconnect results in situations like the one the Gates Foundation faced last year:

The Los Angeles Times concluded a long investigation into the investment practices of foundations by revealing that the Gates Foundation funded a polio vaccination clinic in Ebocha, Nigeria, in the shadow of a giant petroleum processing plant in which the Gates Foundation was invested…This is prima facie evidence of a deep moral conflict not just at Gates but in all of private philanthropy.  The simple fact is that most boards actually don’t know if their investments and their missions align.

White ultimately argues that because the wealth of philanthropy is built on privilege it is impossible for that wealth to bring about social change because that change might undermine the underlying power structure that created the wealth in the first place, “The great paradox of environmental philanthropy is this: How do institutions founded on property, wealth, and privilege…seek to address the root source of environmental destruction if that source is essentially the unbridled use of property, wealth, and privilege?”

White’s is a shocking, provocative, and controversial piece. And he probably takes his argument too far. American philanthropy has contributed to much positive social change over the centuries.

But what if White’s article helped to start an honest conversation about the need for more money to make real change, unbridled by politics and self-preservation? What if it helped encourage things like:

• Foundations unleashing billions more dollars to social change efforts by broadly employing mission-related investing.
• More philanthropists making larger, longer and more organization-building grants that actually make their grantees more effective and self-sufficient, instead of encouraging year-by-year dependence.
• Foundations getting out of the way of the organizations working on the ground to solve social problems by fully funding requests for the amount, type and use of money.
• More foundations becoming spend down foundations, where they have a plan for spending down their assets and eventually closing when they have achieved their social change goals.
• Nonprofits getting braver, bolder and more honest with their foundation funders about exactly what they need from them.

That’s my hope.

Photo Credit: Robert Minor, St. Louis Post-Dispatch (1908)

Tags: American philanthropy, Bill and Melinda Gates Foundation, foundation grants, Foundations, impact investing, Mission-Related Investing, nonprofit fundraising, Nonprofits, Philanthropy

Sparking Social Change Movements

Scott Goodson’s new book, Uprising: How to Build a Brand – And Change the World – by Sparking Cultural Movements, has an ambitious goal that eventually falls flat. Goodson provides an excellent analysis of the new movements sweeping the globe and how social change organizations can learn from them. However, when he tries to connect that reality to corporate brand building, the book becomes more about exploiting social movements for profit, rather than for social good.

The first half of Goodson’s book is eye-opening. He describes what he calls “our current movement mania.” The Egyptian uprising, Occupy Wall Street, Etsy, the Tea Party, the Pepsi Refresh Project are all examples of movements. He argues that we are seeing an explosion of movements because of a confluence of trends:

The Internet, and particular the rise of social media, has made it easy to find and connect with like-minded souls. And that same technology makes it possible for a group, once formed, to organize, plan and take action.

Goodson examines countless examples of movements sparked by individuals, nonprofits and companies.

The bulk of Goodson’s case studies are what I would call “social entrepreneurs.” Some of these are for-profit (like TOMS Shoes), many are nonprofit (like KaBoom!, FIRST, and DoSomething), and many are not really legal entities at all (like the Occupy movements).  All of these examples are fascinating when understood through Goodson’s “movement” lens. He helps us understand how these movements form, how they build momentum and find direction and how they’ve resulted in some serious change. In particular his discussion of “the swarm effect” is fascinating. He explains how these social movements behave like a swarm of insects:

A swarm moves in one direction as a group, and although it has no leader, it is capable of changing directions quickly to avoid a threat or pursue an opportunity…the group is able to share information instantly, based on tiny individual interactions…that allow members to guide each other as to what to do next…This combination of being adept at picking up on cues all around and being able to share that information quickly enables the swarm to be highly productive and move with great purpose and momentum.

But I wish the book could have ended there.

In the second half of the book, Goodson equates these social entrepreneurial movements to corporate re-branding efforts. The movements launched by companies which he profiles feel contrived. He points to Frito Lay, Pepsi and Jim Bean whiskey as great examples of companies that built their brand by sparking a movement.  Frito Lay launched the “True North” movement for their health-conscious snack food line targeting baby boomers. I don’t quite understand how this dressed up ad campaign is a social movement.

What if instead Frito Lay recognized the growing epidemic of obesity and revamped their business model to create and market ONLY healthy snacks? It would be far more interesting to encourage companies that are interested in tapping into social movement “mania” to start by authentically re-evaluating their business model and then working to bake social good into it. Instead Goodson seems to be suggesting that corporate brands try to hijack a growing interest in social good for their own profit. To connect exciting, game-changing social entrepreneurial movements to things like Microsoft dropping copies of Office Accounting software via parachute just doesn’t compute (interestingly Microsoft has since discontinued the Office Accounting product).

But what I take from this book is that we are living in a new reality. Social media, a growing restlessness with the world as we know it, a struggling economy, and a passion for social change that defines Generation Y, have combined to make movements a powerful new trend. It is no longer the purview of the nonprofit or government sectors to create social change. Anyone sitting in front of their computer can tap into a latent dissatisfaction, get people talking, and spark a game-changing movement. Nonprofits, government and business alike should take note.

Tags: DoSomething, Etsy, FIRST, Generation Y, KaBoom!, Nonprofits, Occupy Wall Street, Pepsi Refresh Project, Scott Goodson, social change, Social Entrepreneurship, social movements, tin cup

Losing the Charity Mindset

Along with the burgeoning social entrepreneurship movement comes a bit of hubris that social entrepreneurs know better how to create social change than do the nonprofits that have been working toward social change for years.  Some social entrepreneurs argue that nonprofits are too set in their ways to embrace a new way of creating solutions.  I tend to disagree.  We can’t, nor should we, discount and dismiss an entire sector of people and organizations that have been working on social problems for centuries.  However, I do think that there are some things that nonprofits can learn from social entrepreneurs.  One of those is how to lose the charity mindset.

Nonprofits are sometimes referred to as “charities,” and it is a real misnomer.  But beyond semantics, the word, and more importantly the mindset, does a real disservice to organizations working toward change  A charity mindset is when an organization, its board, its funders or others promoting its work have a narrow view that the organization is benevolent, but not critical, to the world at large.  The charity mindset assumes that a nonprofit starts from the position of need, inadequacy, and burden, rather than a position of opportunity, strength, and effectiveness.  The charity mindset differs from a social entrepreneur mindset in a number of ways:

• Symptoms vs. Solutions: A charity, by its very definition, exists to provide aid to the needy, not to solve the underlying cause of the need.  This is not to say that every nonprofit can work toward solving an underlying problem; there will always be organizations that exist simply to provide basic needs (food, shelter, safety, etc.).  But I wonder if too many nonprofit organizations view their work as residing in the “charity” camp, instead of working, as social entrepreneurs do, to understand the cause of the need and how how they may be able to attack and solve it.




• Fundraising: A fundraiser in the charity mindset apologizes for the burden of asking someone for money, but a social entrepreneur offers investment opportunities to prospects.  Wendy Kopp from Teach for America went around evangelizing the Teach for America story and sought investors who wanted to get in on the ground level of an incredible opportunity to change the American public education system.




• Investment in Infrastructure: Charities spend every last penny on the program and leave little money for building the organization.  Social entrepreneurs understand that it takes organizations, infrastructure, systems, and talent to effectively execute on a solution to a social problem.




• Respect: Charities may be beloved by their supporters, but they may not garner a lot of respect from them.  Social entrepreneurs behave as equal partners with funders in creating solutions, and, as such, they command and receive real respect from investors, volunteers, partners and others.




• True Costs:  Charities like to claim that as much money as possible goes to direct services, but social entrepreneurs recognize the true costs of their endeavors and are open and honest with funders about those costs.  In fact they demand that funders understand and support those true costs.

I think the old adage is true, people will treat you the way you ask to be treated.  If a nonprofit acts like a charity, people will treat it like one.  Nonprofits need to stand up and demand to be treated as critical, equal partners in creating solutions.

Tags: charity, Fundraising, Nonprofits, Social Entrepreneurship, Teach for America, Wendy Kopp

Determining Best Use of Resources for Sustainable Social Impact

There is a very useful and widely used matrix in the business world called the “BCG Matrix” that helps a company analyze their product lines to determine which to further invest in, which to liquidate, which to expand, etc.  This is where the term “cash cow,” a product whose positive cash flows pay for the other products of a company, comes from.  Each product line is placed in the matrix, which measures the relative position of the product line in the market (low to high market share) against the rate of growth of the business (low to high).  Depending on where the product line falls along those two matrices, you can determine what strategy to take with the product (invest further, liquidate, etc.).

Back in the early 1980s Robert Gruber and Mary Mohr (“Strategic Management for Multiprogram Nonprofit Organizations”) adapted this matrix for nonprofits to enable them to plot their programs according to social and financial returns.  This allowed a nonprofit organization to take a hard look at their programs to determine a strategy for each.

I would argue that the tool could be used by social entrepreneurs (both for profit and nonprofit) to analyze their programs/activities/products/services to see which are worth investing and growing, which are worth sustaining, which should be divested from, etc.  The matrix looks like this:

A social entrepreneur could plot their activities in the matrix according to each activity’s social impact (low to high) and financial return (low to high).  So, let’s take a fictitious K-12 education nonprofit that has four main activities:

1. An after-school program during the school year for low-income kids
2. A summer camp for a broad cross section of kids on a sliding scale fee
3. A book store for the general public
4. A backpack program where donations from local stores are gathered, assembled and given to children in the program.

The after-school program for at-risk kids has a high social impact (their results are great) but it is very expensive to the organization.  This would be a “Worthwhile” program in the matrix.  The summer school is “Beneficial” because they make some money off of it, and it has social impact.  The book store would be a “Sustaining” program because it provides them a high financial return, but little social impact.  Finally, the backpack program, which provides each child a couple of notebooks and some pens and pencils, has little social impact and no financial return, is a “Detrimental” program.

Once each program is plotted on the matrix, the organization can make some difficult decisions.  The strategy, according to the matrix, would be to “carefully nurture” the after-school program, “cautiously expand” the summer school program, “sustain” the book store, and “cut” the backpack program.

However, there are always shades of gray, and any good tool needs to allow for that. Perhaps the summer school program provides some social impact, but not enough because it is a 50-50 mix of at-risk and low-risk kids.  So an expansion of that model might detract from the overall social impact of the organization.  The organization might want to grow the social impact side of the program (enroll more at-risk kids) while growing the book store revenues or increasing the price for low-risk kids to subsidize that growth.  The point is that by analyzing each program/activity/product/service of a social enterprise the organization can make strategic decisions about growth, maintenance, pruning and ultimately where best to funnel limited resources in order to create sustainable social impact.

Tags: BCG Matrix, Mary Mohr, Nonprofits, Robert Gruber, social entrepreneurs

Foundations Can Lead the Charge Toward a New Philanthropy

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

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

Still, the news is troubling.

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

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

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

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

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

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

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

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

A Strategic Approach to Generating Revenue

The one common frustration shared by the various organizations I work with is money.  How do we get more of it, how do we use it more effectively, how do we generate it more easily, how do we make it sustainable?  My answer to all of these questions is to take a more strategic approach.

I’ve written before about how revenue in the nonprofit sector is often thought about separately from mission and core competency.  It is sometimes (more often than not) viewed as the step child of the true work of an organization.  Money is the stressful, dirty, tireless work that takes an organization away from what they should be doing.

However, if an organization can fully integrate money into their overall organization, it can become a powerful resource which can help the organization do more in a more sustainable way.  But how does an organization get there?

The first step is a comprehensive, easy to implement strategic plan.  When working with organizations, I employ an 8-step process for creating a strategic plan that takes away the mystery and ineffeciency present in many strategic planning processes.

But what does strategic planning have to do with fundraising?  Absolutely everything.  Without a clear vision and direction for an organization–a clear path forward–what donor wants to invest?  No one wants to throw money at a problem.  People want to understand what they are buying, or investing in.  What is the end goal? How are you going to get there?  How do you know this is the right approach?  Even the smallest donor will give more over a longer period of time if they can understand how what they are giving fits into a larger picture and will result in some significant change in their community.  So an overall organizational strategy will reap tremendous financial rewards.

But any effective strategic plan must have an integrated financial plan.  What are the resources at your disposal (staff, technology, buildings, materials, programs), how much will they cost and how will you generate the money to pay for them?  You cannot have a realistic strategic plan without a corresponding financial plan. The financial plan lays out the revenue and expenses over the period of the strategic plan.  What is it going to cost to get to your goals (expenses) and how will you pay for them (revenue)? Going back to the critical importance of aligning your mission, resources and core competencies, you must weigh your expenses against your realistic ability to raise that amount of money.  Can you really raise enough money, given where you are right now, to meet all the goals of your strategic plan?  If not, then one of two things has to change. The first option is to limit the goals of your plan to make them more affordable.  The second option is to increase your revenue engine to meet the cost of these goals.  Therefore the strategic plan and financial plan have to be created in conjunction with each other.  It is a back and forth process where one plan feeds and is altered by the other.

Once you have a realistic financial goal, you need to create the annual revenue plan to get there.  Notice I didn’t say “fundraising plan.”  Nonprofit organizations need to elevate how they think about the money required to reach their organizational goals.  Fundraising, raising money from private sources (individuals, foundations, corporations), is just one part of the revenue options available to nonprofits.  Other options include: earned income (selling a product or service), government grants, fee for service, corporate sponsorships, debt, growth capital, and so on.  By using the term “revenue plan,” as opposed to “fundraising plan,” a nonprofit begins to explore other revenue opportunities.  That is not to say that every nonprofit should explore every revenue opportunity.  Nonprofit organizations do, however, need to expand their options.

Just like a strategic plan, a revenue plan should have 3-5 broad goals.  So, perhaps you break your revenue types into 3-5 buckets.  Then create the road map for hitting those revenue targets in each area.  What infrastructure needs to be in place, what campaigns will you take on, how will you go about bringing that money in the door, who is responsible for each activity, what is the timeline?  And you begin to craft a comprehensive revenue plan.  It can seem like an overwhelming process, but if you are strategic and systematic about it, you can break an overwhelming goal down into manageable chunks and pretty soon you are raising more money that you thought possible.  I did this at KLRU, increasing annual operating revenue by $1.6 million.  And I’m helping several of my clients create and implement similiar revenue plans.

There is a way, even in the midst of a recession, to generate the money necessary to achieve your goals.  But it requires an integrated, strategic approach.

Tags: financial plan, Fundraising, KLRU, Nonprofits, revenue, strategic plan