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

What the Changing Government Means for Social Innovation

What does the historic election of Barack Obama yesterday mean for the social sector?  It may be too early to tell, but we can get a sense from his policy platforms and interviews.  Both McCain and Obama spoke about social entrepreneurship during the campaign and supported new ideas like a social innovation fund and national service.  It was exciting to see these new ideas taking hold in mainstream politics and the mainstream media.

So, on the day after such an historic election, let’s speculate on what this changing of the guard might mean for social innovation.

First, Obama is a big proponent of national service. He wants to get every citizen involved in serving their country and has said, “As President, I will ask for the active citizenship of Americans of all ages and walks of life.”  His ideas for expanding national service, include:

• Growth of current national service programs like AmeriCorps and the Peace Corps.
• $4,000 tax credits to college students in exchange for 100 hours of community service.
• Expanded programs for engaging retirees in community service.
• 50 hours of required community service from middle and high school students each year.
• Expansion of YouthBuild, which helps at-risk kids complete high school while building affordable housing in their communities.
• Allocation of 25% of college work study funds to community service projects.

He is also interested in creating incentives for social innovation.  As he said in Time Magazine , “We need to invest in grass-roots ideas, because the ‘next great innovation’ usually doesn’t come from government.”  He wants to:

• Create a Social Investment Fund Network to use federal seed money coupled with private investor capital to spur ideas that solve social problems.
• Create a new agency within the Corporation for National and Community Service to increase the capacity and effectiveness of the nonprofit sector.

Indeed, McCain and Obama were already working on some of these ideas when they co-sponsored the Serve America Act this past September.  The bill would create more AmeriCorps-like volunteer bodies to focus on the country’s most pressing problems (education, environment, etc.).  It would also create a commission to explore how government, nonprofits and the private sector can work more closely and effectively together.  And most interesting, it would create venture capital funds for the nonprofit sector to stimulate social innovation.  The bill is in committee right now and who knows where it will go from there, but since it mirrors much of Obama’s platform on service and the social sector, when he becomes president perhaps it will have a better chance of passing.

The service aspects of his platform are interesting and exciting, to be sure.  But what really excites me is the idea of a Social Innovation Fund that couples government and private money to seed solutions in the social sector.  I don’t know that we have ever lacked ideas for solving our social problems, but the real hurdle has been capital.  The social sector is sorely undercapitalized.  There are amazing programs out there nationally and here locally in Austin and the Southwest region.  But they are only able to grow incrementally because they lack the growth capital that is available in the for-profit side.  Any entrepreneur will tell you that it takes money to make money.  The same is true in the social sector:  it takes money to create real, lasting, sustainable change.  But nonprofits cannot create that change through incremental donations.  We need social venture funds with significant capital that can be smartly invested in programs that work.  Those investments ($100K+ over 3-5 years) will allow these programs to grow to scale, have broad and deep impact and really start to solve some of the toughest problems facing our country today.

Can you imagine the impact if an Austin nonprofit that is changing outcomes could scale their program?  Take a program like College Forward.  They could apply for and receive significant growth capital from such a fund.  They could take their program, which keeps students from dropping out of high school and moves them on to college, and expand it throughout Texas, throughout the country.  Instead of providing opportunities and futures to just 900 kids, as they do now, they could reach 9,000 or 90,000 kids.  They could transform a state, a region, a country, a generation.  That’s powerful.  And growth capital is how they would do it.

It will be interesting to see what a change at the top means and whether it will trickle down to the social sector nationally and here in the Southwest.  I’ll be watching closely.

Tags: Barack Obama, College Forward, Funding, innovation, John McCain, Nonprofits, Serve America Act

Ways to Raise Money in a Recession

It’s a topic that’s on every nonprofit Executive Director, board, and staff member’s mind these days.  How can we possibly raise money when the economy is in such turmoil?  Well, there are ways.  Here are 10 to get you started:

1. Harness Your Board.  Your board of directors ideally is a group of people who are committed to and invested in your organization.  They also, we hope, bring to the table relationships and connections that could help your organization.  Tap into that.  Educate them on what your organization needs and brainstorm with them about who they know and how they can help.  Ask those who have the capacity to give at greater levels to do so.  Now is not the time to be shy.  Be strategic about what your board can do to help and then ask them to do it.
2. Take Good Care of Your Donors. Make sure you keep, and even upgrade, the donors you already have.  Thank them for every gift they make in 24-48 hours with a thoughtful, results-focused letter demonstrating real appreciation and connecting them back to the mission and work of your organization.  Reconnect with those donors who made a gift 3-6 months ago thanking them again and asking them why they invested and what you can do to continue to invest them.  Begin renewing donors who gave 9-12 months ago.  Customize your renewal as much as possible.  Donors like to know that the organizations they give to know them, their interests and why they give.  Gather and use that knowledge to reinvest (and even upgrade) your donors.
3. Plan.  If your organization doesn’t have a strategic plan and a development plan, create them.  You raise money by being strategic, first about what your organization is and does, and second about how you are going to create sustainable revenue streams.  People give to organizations and causes that they care about, and they give even more money to organizations that are smart about what they are doing and how they are doing it.  A good strategic plan is an invaluable tool around which a fundraiser can build investment.  And a good development plan gives a fundraiser a step-by-step way to generate revenue.
4. Reallocate Resources.  As a nonprofit organization you have limited resources (money, staff, technology, time) with which to raise money.  You want to make sure that the effort you put into fundraising has the highest return on investment.  Are you sure that the event that just raised you $30,000 was the best use of your staff time and effort?  Calculate the direct and indirect costs of that event and determine the real net income you generated.  Are there better, more effective ways to raise more money for less cost and effort?  Take a hard look at how you are raising money and reallocate your limited resources to fundraising efforts that will net more money.
5. Use the Internet.  Move some of your communications with donors and prospects online.  You’ll save money and have a better chance of getting more and bigger gifts.  I’m not just talking about your direct mail letters, but also event invitations, surveys, newsletters, online communities, blogs, etc.  Send email invitations for your events.  Survey your donors about how best to communicate with them or what they think of your organization.  Launch a blog that gives donors and prospects a behind-the-scenes view of your organization and its work.  Harness online technology to more effectively personalize your communication with your donors for a much lower cost.  They will become more interested in your work and more invested in the organization.
6. Build Your Infrastructure.  Because you have limited resources it is important that you spend your money on the very best infrastructure you can afford.  Don’t skimp on your donor database or online email marketing software.  There are many options out there, do your research and make sure you are purchasing something that will decrease staff time while increasing productivity.  When you are hiring staff make sure you are getting the best and the brightest.  Spend the time crafting a thoughtful job description and position posting, create resume review criteria and interview questions that will uncover candidates skills, experience, working style, and past results.  A top notch Development Director can completely turn a fundraising operation around.  Take your time and find the best person for the job.
7. Keep Learning.  Don’t cut professional development and best practices research during these difficult times.  Now is the time to learn from others, get a fresh perspective, find a mentor for your fundraiser.  By getting out and hearing what others have done, how to improve skills, how to do things differently and more effectively they will continue to grow revenue and the sustainability of your organization.
8. Strengthen Your Case.  Money is raised around a case for support.  It can be tempting when times are tough and budgets are shrinking to fall back on a fundraising message based on need.  “We need to raise $50,000.”  But the best way to raise money is to clearly and articulately connect donors with what you are doing to impact the community.  Your case for support makes this connection.  If you don’t have a case for support write one.  If you have one, revisit it and make sure that it is compelling, clear, concise, inspiring.  Once it is, use it throughout all of your collateral and fundraising materials, letters, emails, etc.  You want to invest donors in the change you are creating.  Fundraise around that and you will see increased investment.
9. Clone Your Best Donors.  When you are struggling to find new donors, go back to the source.  Dig into your database to find out the characteristics (demographics and psychographics) of your best (most years of giving, biggest dollar, greatest upgrade) donors.  Then survey them (formally or informally) to find out why they give, what messages resonate with them, what they read, where they get their information and so on.  You want to understand how they tick so that you can find others like them.
10. Diversify Your Funds.  When one revenue stream (or several) are down, you want to be able to draw on other streams.  Are there other revenue streams you could launch or strengthen?  If you’ve never gotten foundation dollars, do some research on foundations that give to organizations in your program area.  What about corporate money, do you have a program or event that a corporation might like to sponsor because it hits their target audience?  Have you looked at earned income?  Do you have an asset that might be saleable?  How is your individual donor base?  Do you have on-going annual givers? If not, could you launch an annual fund program?  There are many ways to raise money and always potential for new avenues.  Explore whether some of these make sense for your organization.

These times are tough, but there are solutions.  It’s simply a matter of taking a step back and being strategic about finding new answers.

Tags: earned income, Fundraising, individual donors, nonprofit board of directors, Nonprofits, nonprofits and recession

Raising Money in the Downturn

I attended the Greenlights for Nonprofit Success Town Hall Meeting today about the economic downturn and what it means for Austin’s nonprofit community.  It was very interesting.

Economist John Hockenyos gave a great overview of where we are currently with the financial markets and what the implications for the nonprofit sector are.  Basically, he said our economy has been dealt a significant blow, and the good news is that we’re still standing, but the bad news is it’s going to be rough for the next 18 months or so.  James Landrum of Comerica Bank talked about the importance of communicating with your financial institutions during this time and exploring your options.  Jackie Mata of the KDK-Harman Foundation gave a great explanation of how the downturn in the markets might affect foundations’ ability to maintain their giving level over the next couple of years. However, the good news is that her informal survey of Central Texas foundations found that the majority are planning to maintain their dollars or even increase them over the next year, regardless of the market downturn.  Finally, PeopleFund executive director Margo Weisz talked about creative ways of tapping into your donor base and further engaging and investing them.  She gave a great example of how she has brought together a small group of funders and potential funders who have an expertise in a new financial vehicle they want to introduce.  By getting this group engaged and invested in a new project, she hopes to get them financially invested as well.

There were many implications for the nonprofit sector, chief among them for me, and what I strongly believe, is that you can’t stop investing in your organization even if the economy is bleak.  Yes, you need to tighten expenses, yes raises might have to be lower or nonexistent, and yes open positions may have to stay open for awhile, but don’t cut back on your revenue-generating activities.  In fact, there is a great short article in the Stanford Social Innovation Review that makes the very same point, “Warren Buffett’s Fundraising Advice,” which argues that we need to use Warren Buffett’s approach to investing in our fundraising activity.  Now is the time to strengthen our relationships with our closest donors, get to know them and their interests, make our case for support even more strongly.  In fact, recessions can sometimes be very good for  business.  There is less competition, fewer distractions and the businesses that survive come out leaner and meaner on the other side.

Always the optimist, I really believe that the downturn can hold great opportunity for the social sector.  Not just for fundraisers, but for organizations and the sector overall.  I’ve written about this here and here.

Out of adversity comes innovation.  These are exciting times.

Tags: Fundraising, Nonprofits

A Better Way to Fundraise

A topic on many nonprofit Executive Director’s minds these days is how to find more money.  With foundation and individual donors poised to decrease their giving, governments strapped for cash, and corporate earnings, and thus their philanthropic giving programs, falling, it is difficult to figure out how to make fundraising programs already in place continue to meet their goals.

But there is a solution.  Strategic fundraising, or comprehensive revenue-generating activities that are based in strategy, can find dramatic results, even in a tough economy.

Strategic fundraising always starts with a plan.  In order to raise more money, you need a game plan to get there.  Many nonprofit organizations don’t have a comprehensive fundraising plan that details exactly what the goals are and how and when they will be met.  A fundraising plan should have 3 to 5 broad goals. For example:

1. Raise $XX from philanthropic sources
2. Raise $XX from earned-income or fee for service sources
3. Create or refine the infrastructure (technology, staffing, marketing, etc.) to meet these goals

With your goals determined you can then delineate the various deliverables, people responsible and timeline that will get you to each goal.  Such a plan drives your strategy for the entire year and tells you where to allocate resources most effectively.

Speaking of resources, strategic fundraising also necessitates that you look at each fundraising activity and determine its return on investment.  What does it cost to put on your annual fundraising gala? Not only the direct costs (food, decorations, etc.) but also the financial value of the staff time that goes into it.  When you factor all costs in, how much do you really raise?  Are there better ways to spend staff time that could raise more money?  For example, a major gifts campaign has the highest return on investment of any philanthropic fundraising activity.

You also want to look at your entire revenue picture and the sources of each piece.  If you are heavily dependent on one or two revenue sources (government funding, foundation grants) you could be hit harder when that source changes.  Diversifying your revenue strategically, for example launching an annual fund campaign to increase individual investments, looking at corporate sponsorship opportunities, getting your board of directors to invest time and money in fundraising, can strengthen your organization and cushion you from difficult periods.

And as you diversify revenue you want to look beyond typical philanthropic sources.  Earned revenue, fee-for-service, social enterprise, are all different names for the same thing:  selling a product or service to generate unrestricted income. Nonprofits have found success in generating revenue by selling something.  Museums (entrance fees) and schools (tuition) have been doing this for a long time, but other nonprofits are moving into the arena as well.  Job training nonprofits use their workforce to staff a restaurant, bakery, ice cream store.  Public broadcasting stations sell their television and radio programs on CDs and DVDs.  The list goes on.  Nonprofits have assets that they can turn into saleable products or services.  And the unrestricted revenue that successful earned income businesses generate can get them further along the path to financial sustainability.

There is an answer to a down economy.  It means thinking strategically, exploring new opportunities and being open to change.

Tags: Economy, Foundations, Fundraising, Nonprofits, Social Enterprise

Discussing the Downturn

My last few posts have focused on the downturn in the economy and how it already is, or soon might, affect the social sector.  It seems to be a topic on everyone’s mind.

I wrote an article that was just published today in Texas Nonprofits online magazine, entitled, “Social Innovation Provides Hope in the Uncertainty,” that explores how new models like social entrepreneurship, social enterprise and strategic fundraising could actually be very helpful, especially in times like these.

Also, Greenlights for Nonprofit Success, Austin’s nonprofit management center, is hosting a panel and discussion on October 30th to talk about how the economy may affect the sector and what can be done.  It should be very interesting; I plan to attend.

Tags: Economy, Fundraising, Nonprofits, Social Enterprise, Social Entrepreneurship