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

PRIs: Another Part of the Emerging Social Capital Market

Continuing the various discussions about the beginning signs and formations of a social capital market, I’d like to add PRIs (Program Related Investments) to the conversation.  In all of the concern about decreasing philanthropic giving because of the economy there has been little talk about these financial vehicles as a real opportunity for foundations, and a potential social capital tool.  A PRI is basically a loan made by a foundation to a nonprofit at a low/no interest rate. The loan is made out of a foundation’s normal 5% minimum payout requirement.  However, because it is a loan, the foundation eventually gets this money back to be regranted elsewhere.

I wrote a few months ago about how foundations could use PRIs in a new way to invest in increasing a nonprofit’s fundraising function (new development staff, new technology, training, collateral, infrastructure, etc).  The PRI investment would be paid off in a few years and the nonprofit would be left with an elevated revenue generating engine. So the foundation’s investment has a pretty impressive return: the principal plus interest is returned to the foundation and, in addition, the nonprofit that they were supporting is now able to generate annual operating revenue at a much elevated rate, bringing them that much closer to sustainability.

It seems to me that now is the perfect time to institute this new use of PRIs for several reasons:

• Foundations have decreased funds with which to invest, so the further they can stretch their money, the better
• Nonprofits need to be smarter and more strategic about raising money in an increasingly difficult economic climate, so investments to help them do that would be very helpful
• The nonprofit sector lacks access to capital for capacity or infrastructure projects like this, so these investments would expand that capital pool

I was encouraged to see that RSF Social Finance recently noted an increased interest among grantmakers in PRIs, especially given the financial market conditions.  In their eyes, PRIs are a real opportunity:

Now more than ever, PRI offers foundations a unique opportunity to respond to the challenge of using fewer resources to provide support to communities with greater needs. Organizations  that were already  promoting PRI as a means for foundations to support their missions are now upping the ante. “As we know, the turn of 2008 to 2009 caught many foundations by surprise,” says Dana Lanza, Executive Director of the Environmental Grantmakers Association. “Within the environmental grantmaking community, assets are down by an average of 30%-40% in many cases. We are noting that in this climate, PRI is garnering significant interest from our members as a means to continue to support innovative efforts while essentially ‘recycling’ funds. I expect this to become a critical form of grantmaking as we pull ourselves through this rough period over the next few years.” The PRI Makers Network, which provides a wealth of resources and data related to PRI, organized a call last month for funders to discuss the results of a recent member survey: PRI in Tough Economic Times.  The survey revealed what callers confirmed: while there are reasons to be cautious, there are even more reasons to seize the opportunities inherent in PRI. According to the survey summary, “last year, in many cases, PRIs constituted [foundations'] highest performing asset class – providing downside protection in the bear market.”

So RSF Social Finance is launching the RSF PRI Funds which allows family foundations to invest at least $250,000 into a pooled PRI fund.  RSF handles the terms and deal sourcing and invests the PRIs into organizations in three areas: food & agriculture, education & the arts, and ecological stewardship. As RSF Social Finance puts it: “Our pooled PRI model means that each foundation’s investment will work alongside other funds, re-invested into a portfolio of borrowers doing critical work on the ground. This approach maximizes the power of leveraged PRI impact while also mitigating risk.”

It’s an interesting idea.  I’d like to see more foundations using PRIs in innovative ways.  I think PRIs are an underused financial tool available to the social sector.  They could be used to help nonprofit organizations increase their capacity, their revenue generation function, their infrastructure and perhaps even help them scale.  It is just another piece of the social capital market that is yet to be developed.

Tags: Foundations, Nonprofits, PRIs, RSF Social Finance, social capital market

The Power of an Accounting Convergence

One of the most exciting things happening in recent years is a “convergence” of the three sectors:  government, business and nonprofit.  Some private businesses now include a social mission in their business model (a solar energy company); nonprofits are using business models to create sustainable organizations; the federal government is thinking about an office of social innovation.  The old, separate sectors are being swept aside by a new idea that each sector has something to offer and by combining the social focus of the nonprofit sector; the business acumen, wealth, and innovation of the private sector; and the tremendous resources of the public sector you have a palpable ability to solve the challenges we face.

One area where I think convergence could be particularly powerful is in accounting practices.  I’ve talked before about the ideas of adding equity to the nonprofit balance sheet, nonprofits raising growth capital like businesses can, and moving nonprofits towards the for-profit understanding of necessary and justified costs.

All of these ideas demonstrate how currently the nonprofit sector is put at a disadvantage by not having access to powerful financial tools that the for-profit sector is well versed in:  growth capital, justified costs, equity.  On the flip side, nonprofits are also hindered by strings and restrictions on the money they do receive.  Take government grants for example.  There was a fascinating New York Times Op-Ed this week by two University of Texas at Austin accounting professors arguing that banks receiving TARP money should be held to the same requirements that nonprofits are when they receive federal aid.  They argue that TARP banks should be required to practice “fund accounting,” where a separate set of books is kept for funds given to a specific project or activity, just as nonprofits are.

Any nonprofit accountant, executive director or development director will tell you that fund accounting can be a nightmare.  Indeed as the professors point out:

Executives of banks that have received TARP cash have said that it is too hard to account separately for how they spend their federal dollars. Money is fungible, they argue, and therefore they cannot readily distinguish between outlays of their own resources and those provided by the government. But that’s the type of doublespeak that would get the head of a town’s homeless shelter thrown in jail. If bankers are unable to segregate cash by source and specifically account for expenditures, why are they in charge of banks in the first place?

The underlying assumption of nonprofit fund accounting is that nonprofits can’t be trusted to effectively and honestly use the money they have been given.  The banks that have received TARP money have already demonstrated their inability to use the money as it was intended, so fund accounting going forward might be the answer.

But what the op-ed unintentionally demonstrates is how crazy the strictures we put on nonprofits are.  Why is the assumption that for-profit businesses can be trusted to spend government money correctly, but nonprofits cannot?  Does it stem from an assumption that nonprofits tend not to know what they are doing when it comes to the business side of things?  Or is it an assumption that nonprofit work must have more safeguards in place?

What ends up happening is that we are weakening the financial position, and thus the productivity, of a key sector.  We are limiting the tools at their disposal and making those resources we do give them cumbersome and costly to use.

What underlies this mistrust of the nonprofit sector?  And how do we change these rules and structures so that nonprofits are given the capital, without the strings, that will allow them to successfully address issues?  We need to move towards a convergence of accounting practices whereby nonprofits are given more of the tools the for-profit sector enjoys and the for-profit sector is called to account in a more meaningful way for the resources they receive.

Tags: accounting, Convergence, fund accounting, Nonprofits, TARP

Thoughts on Social Innovation

The United Way Capital Area recently asked to interview me about social innovation for their blog.  It was a lot of fun, and they asked great questions.  You can check out the interview here.  Or read the text of it below.

Q: Your bio says you’ve been in the social sector for over 13 years. Tell us what things were like for you when you first got involved with the non-profit world. How were they different from today’s imperative to develop entrepreneurial models in the non-profit sector?

A: I don’t know that things were fundamentally all that different when I got started.  Nonprofits have always been entrepreneurial, if you think about it.  They are created because someone sees a disequilibrium, or “market opportunity” (inadequate schools, poor housing, lack of cultural arts) so they create an organization, with great risk and few resources, to fix that disequilibrium.  This is not so different from a business entrepreneur, aside from the social motive versus profit motive.

I think what has changed over the past decade or so is a convergence among the public, private and nonprofit sectors.  A decade or so ago the three sectors remained relatively separate.  A nonprofit might receive corporate philanthropic dollars or federal dollars, or government might contract with a nonprofit to provide public services, but the three sectors stayed separate and had their own unique characteristics.  Now you see a merging of the three sectors into what some call a “fourth sector.”  Some private businesses now include a social mission in their business model (a solar energy company), nonprofits are using business models to create sustainable organizations, the federal government is thinking about an office of social innovation.  The old, separate sectors are being swept aside by a new idea that each sector has something to offer and by borrowing the best from each we can move towards solving the mounting problems we face.
Q: What is an example of a fundraising lesson you’ve learned during your career that helped you make KLRU’s transformation so successful–either a mistake made, or a surprising success you were able to apply again?

A: When I started at KLRU in 2005 there was a tremendous lack of fundraising infrastructure (technology, staffing, planning), and we needed a significant financial investment to build that infrastructure.  But my experience had been that funders weren’t interested in supporting infrastructure.  However, my boss several years earlier at the Oregon Children’s Foundation, who was an expert fundraiser, always said that if you can clearly articulate the impact that an investment can make you can convince someone to invest.

Armed with that idea, I created a compelling case for investing in a complete transformation of KLRU’s fundraising function, along with a demonstration of the return on investment an investor would get.  This plan to revamp KLRU’s fundraising function (everything from new database software, website, staff, messaging, collateral) was ambitious and expensive for donors who were not used to supporting infrastructure. But because the case was so compelling (their investment would allow KLRU to become more self-sustaining, generate more revenue, spend more time on programming, and spend less money over the long term) we easily secured the money needed.  People always talk about the importance of relationships in fundraising.  Relationships are definitely important, however, I would say that even more important is a compelling, articulate ask that demonstrates impact and social return on investment.  Donors want to make a difference.  If you can clearly demonstrate how they will make a significant difference, not in your organization, but in the broader community through your organization, you will gain their investment.

Q: In your recent article, “Social Innovation Provides Hope in the Uncertainty”, you mention an approach that entails “uncovering the root causes of the social problem and addressing those head on with new ideas and models, instead of attempting to ameliorate the symptoms of a social problem”–tell us why such an approach is so important, especially right here and now in Central Texas?

A: Because the problems that we as a city, region and nation face are so large and so complex and the resources available to address them are becoming scarcer.  We have to be smarter about how we solve problems; we no longer have the luxury of just addressing the symptoms.  That’s not to say that every nonprofit organization must solve problems.  There are some problems that unfortunately will probably never be solved completely, for example hunger and homelessness.  But, there are many problems where the conversation can change from “How do we serve more people in need?” to “How do we change the system so the need no longer exists?”  I don’t suppose to have the answers to the problems facing our region, but what I am arguing is that we examine the issues we are working on and ask hard questions about the root cause of the problems and how we could creatively find solutions.  Again, not every problem has a solution, but every problem deserves a critical analysis of the systems and structures feeding it and whether those could be changed.  It is sometimes a difficult conversation to have because root cause work involves changing long-held beliefs or entrenched systems, but the end result could be more lives saved in the long run.  And I would argue that in some cases investing in solutions, or changed systems, is a far better long-term investment than simply continuing to provide services.

Q: How do you see the non-profit landscape in Central Texas changing or evolving in 2009?

A: The economy will most certainly play a role. It will be harder to find resources, and so organizations will have to get smarter, more efficient and more strategic about fundraising, and that means making an investment up front in planning, messaging, strategy, technology.  These don’t have to be large investments, but it can’t just be business as usual.  Difficult times call for better strategy.  I think nonprofits will have to become more social media and Internet savvy.  There are cheaper, better ways to raise money, but you’ve got to be willing to take a risk and make an initial investment.  It takes money to make money in the nonprofit world just as in the business world.

I also think there will be larger conversations among the nonprofit and philanthropic communities about our level of investment in the nonprofit sector.  Clara Miller, CEO of the Nonprofit Finance Fund, wrote an interesting piece recently about how the nonprofit sector has been sorely undercapitalized for years and is near the breaking point.  She argues that we can no longer allow this critical sector to scrape by with band-aid infrastructure.  I think there will be a growing realization that we have to invest in the infrastructure and capacity of this sector. We can’t just buy programs, we have to build the organizations that we are relying on to provide our social safety net and solve the many problems facing us.  And that means nonprofits have to ask for and funders have to invest in technology, top talent, strategic planning.  We can’t bootstrap our critical services any more.  If we want our nonprofit sector to survive and thrive and continue to solve problems, we have to make adequate investment there.

Q: What is your take on the importance of collaboration, between government, private and social sector organizations to provide socially innovative solutions?

A: Absolutely critical, and I would go even further to say that the three sectors are not just collaborating, but actually converging, which, as I mentioned earlier, is a really exciting and powerful development.  The three sectors have been collaborating for years.  What is happening, and where I think the tremendous opportunity lies, is in the convergence of the sectors.  By combining the social focus of the nonprofit sector; the business acumen, wealth, and innovation of the private sector; and the tremendous resources of the public sector you have a palpable ability to solve the challenges we face.  Take the idea of a federal social innovation fund that is being discussed among the Obama administration and social entrepreneurs.  The idea is that the federal government and private investors would pool a significant amount of money that would be invested in social entrepreneurs, along with management assistance similar to what a venture capital fund provides its investments.  This social innovation fund would combine the wealth and resources of the government and private sectors to provide adequate growth capital to nonprofits and social businesses.  That’s a pretty exciting idea.

We all know that Austin has such an entrepreneurial, innovative private sector, a committed nonprofit sector and a strong government sector.  We are ripe for social innovation and for a convergence of the sectors.  Other cities similar to Austin, such as Portland, Denver, San Francisco, Seattle, Boston, are heavily involved in social innovation, with venture philanthropy funds, blooming social enterprises, and investors in social businesses.  Although Austin has some activity, it is nothing like these other cities.  Our city has a tremendous opportunity to benefit from this convergence and face the future with a new economy that combines social and financial profit.  I’d love to see that happen here.

Q: Thank you for your time, is there anything else you would like to add?

A: Although I know people are wary and uncertain in this economic climate, I would argue that this is also a time of tremendous opportunity. We all know that the nonprofit sector has been sorely undercapitalized for years, if not decades.  We can’t go on like that.  We also know that our problems (poverty, inadequate schools, depleted natural resources) are getting worse, not better.  Because of this mounting pressure I see lawmakers, philanthropists, nonprofit leaders, CEOs and others standing up and saying enough is enough.  We can’t go on like this.  Something has got to change.  The entire financial system of the nonprofit sector has got to change.  We need to invest in infrastructure, we need to create strong, sustainable nonprofit organizations, we need all three sectors to work together, we need to address root causes, and we need to look to others for innovative models.  I am very confident that out of this pain and uncertainty our social sector will emerge stronger, better resourced and better equipped to solve the problems we face.  Because, in essence, there isn’t another option.

Tags: Central Texas, Convergence, Nonprofits, root causes, Social Entrepreneurship, social innovation, United Way Capital Area

Overcoming the Anti-Overhead Mindset

As I described in previous posts here, here and here, one of the ways in which the nonprofit sector is broken is that it is undercapitalized.  It is not able to generate an adequate amount of capital in order to scale and solve the problems it seeks to address.

This undercapitalization comes not from a lack of program-related fundraising, funds that go directly to the services being created, but rather from a lack of infrastructure or administrative capital.  The distinction is between funds raised to BUY services versus funds raised to BUILD organizations.  The latter is very hard to come by in our current state.  Donors and foundations tend to shy away from funding “administrative” or “overhead” costs.  And many nonprofit rating systems reward nonprofits that keep their administrative and fundraising costs as low as possible.  The end goal seems to be nonprofit organizations who plow 100% of their revenue into their programs, with no infrastructure (staffing, fundraising, technology, buildings, accounting, planning, training, professional development) to make the programs successful.

Paul Brest, president of The William and Flora Hewlett Foundation, recently wrote an attack on the notion that administrative costs in the nonprofit sector are somehow unnecessary or unworthy.  As he points out, the end goal of any organization (profit or nonprofit) is to optimize costs, not minimize them.  Costs are appropriate and necessary when they increase an organization’s ability to achieve its mission, or, in other words, provide a net increase to the impact the organization is creating.  Costs in and of themselves are not bad.  Rather, those costs that contribute to an organization being more effective and reaching more people are actually very good.  He argues that in the for profit sector the idea of necessary and justified costs is well understood and that the same principles should be applied to the nonprofit sector:

To use an example from the business sector, assume that a widget manufacturer’s only mission is to make a profit for its owners. Then, an additional administrative expense of 1¢ is justified if it is likely to produce an additional 2¢ of profit. The underlying idea is not different for nonprofits. Their missions are to achieve particular social, environmental, educational, religious, health, etc. goals. And an incremental expense is justified to the extent it has the potential to increase the organization’s net social value.

It is a simple concept, but one that nonprofits and the philanthropists who fund them are only beginning to discuss.  The assumption that nonprofits have to be as cheap as possible, no matter the other “costs” (inefficiency, fewer people served, diminished impact), is outdated. It is a holdover from a time when the nonprofit sector was referred to as “charity,” and philanthropy as “benevolence.”  It was our duty to ameliorate the symptoms of social problems (feed the hungry, clothe the needy, provide shelter to the homeless).  But now we are all realizing that that isn’t enough.  We have to resolve the underlying issues that are causing these problems and that requires whole systems and infrastructure to change.  And for that kind of change to happen it requires well-thought out plans, technology, top talent, clear understanding and management of our financial resources, and significant capital.

I believe this discussion is all part of a growing sophistication in the sector.  Nonprofit leaders are no longer content to scrape by with hopelessly inadequate resources, and philanthropists are beginning to realize that the very principles that created their own wealth need to be applied to the sector which they are trying to support.

I’m glad to see that these conversations are beginning and that people like Paul Brest are leading them.  But the discussions need to move beyond the blogs and journals and into the boardrooms of the nonprofits, foundations, and businesses that are working to solve the very issues the social sector was set up to address.

Tags: capital, Foundations, Hewlett Foundation, Nonprofits, overhead, Paul Brest, philanthropists

Where Does Central Texas Philanthropy Go From Here?

I just spent the morning attending the Austin Community Foundation-sponsored gathering of philanthropists and executive directors from the Central Texas region, “21st Century Philanthropy in Central Texas.”  It was an overview of the trends in philanthropy and demographics facing our region.  There were various speakers and panelists including philanthropists, corporate and nonprofit leaders, health care professionals, and wealth managers.  There were several interesting things that came out of the discussions and presentations.  Here are just a few:

The Needs in our Community are Growing:

• 25% of the tremendous increase in the American children under 5 population over the past 6 years has happened in Texas.
• Texas’ population will move from 53% white and 32% Hispanic in 2000 to 59% Hispanic and 24% white by 2040.
• The vast majority of the 20% growth in US school enrollment over the past 20 years is from English as a Second Language student populations.
• The percent of the AISD population in poverty has grown in the last 6 years from 48% to 62%.
• Our supply of physicians, especially specialists, to meet our growing and aging population’s needs is sorely behind.
• Our un- and under-insured populations are growing dramatically.

But perhaps more troubling is that capital for the social sector is lagging behind the obvious growing need.

• Travis county has the lowest health care district tax rate in Texas, and one of the lowest in the country.
• While federal funding for nonprofits is projected to decrease by $21.5 billion between 2005 and 2010, private giving is only projected to grow by $600 million in the same time period.

While the organizations competing for this capital has increased dramatically:

• The number of nonprofits registered in the US has grown more than 7 times (300K to 2.2M organizations) in the last 25 years.

It was really encouraging to see funders come together to look at the trends and start to think about what they can do.  Unfortunately, there wasn’t time at the end for a broad discussion of where we go from here.  But I’m hopeful that the morning has encouraged thinking about how we grow the capital necessary to meet our changing population’s needs.

Austin is an incredibly wealthy community.  Not just in terms of finances, but also in terms of entrepreneurial savvy.  We are a smart, adaptable community.  I think the time is right for us to look at big, new solutions like growth capital, social investing, venture philanthropy, social entrepreneurship to solve these great challenges before us.  It can no longer be business as usual in the social or philanthropic sectors.  The challenges before us are too daunting.

To paraphrase one of the panelists today, we are at the crossroads of a political, economic and cultural watershed.  In the past, our country has created big, bold solutions to similar adversity and achieved great success.  We need to do so again.  We need big, bold solutions to the many challenges we face.  The time is right for social innovation.

Tags: Nonprofits, Philanthropy