A Case Study in Raising Money to Grow On

Last fall I wrote a blog post arguing that small nonprofits need access to philanthropic equity (money to build their organizations) just as much as larger, more sophisticated nonprofits do. My post was in response to George Overholser’s Social Velocity blog interview where he argued that philanthropic equity (or growth capital) campaigns, where a nonprofit is raising money to build the infrastructure of the organization, are not feasible for small nonprofits. George’s argument and my subsequent post set off a chain of events that led Social Velocity to work with Charlotte Chamber Music to plan and prepare for a philanthropic equity campaign. Over the course of the next several months I will give you an insider’s view of our work with CCM in order (I hope!) to prove my argument that philanthropic equity campaigns can and should be accessible to any nonprofit that has a vision for something bigger and the determination to put that vision to action. Today is the first post in this Raising Money to Grow On series.

In George Overholser’s September 2010 Social Velocity interview he argued that philanthropic equity campaigns just aren’t feasible for small nonprofits:

What about the small organizations that DO aspire to undergo a big transformation?…I believe that it is absolutely vital that we come up with a way to better capitalize these smaller organizations. Sadly, though, at this stage of capital market evolution, it is still quite expensive to prepare for a successful nonprofit equity campaign. Unless several million is being raised [the costs are] prohibitively high. This constrains us to campaigns of $5 million or more, which, in turn, constrains us to organizations that are already pretty large.

A Social Velocity blog reader, Elaine Spallone, Executive Director of Charlotte Chamber Music took issue with George’s argument and responded in the comments:

As the ED for a very small nonprofit (<$300K) I am greatly disheartened to essentially read “yes, we can cure the large guys, but for the rest of you -80% – well good luck! No answers for you yet.” WOW…Really is education and awareness for buyers to support the whole organization vs. its programs enough? (Although I agree wholeheartedly, a needed step.) I believe there has to be a way to “create compelling ‘asks’ for equity capital” that is less expensive. There has to be way to finance a small organization’s desire to meet the needs of the community, which could mean doubling their impact. We are asked to relearn, redo, change our practices to support (finance) the organization’s mission to change the world, but is no one considering the relearning, redoing or changing the expensive processes/methods so all nonprofits can benefit?

Since that is exactly why I launched Social Velocity, to help smaller nonprofits benefit from new ideas like philanthropic equity, Elaine and I began to talk about the challenges that Charlotte Chamber Music was facing.

Elaine felt that CCM was stuck. As a small, but beloved arts organization they had a great product, but they couldn’t get beyond the vicious cycle of never having enough money, never being able to expand their presence and impact. They had a solid board, and a great vision for the future, but lacked philanthropic equity to build the organization to achieve that vision. They had been talking to consultants about conducting a capital campaign to raise money for a permanent artistic director and a new or refurbished building. As Elaine recalls:

At first, we thought we had to launch a major campaign to raise funds for an Artistic Director- that was our major missing piece, and we seemed lost as to how to make that leap in securing significant funds. That is where we were stuck — for over a year.

But I counseled Elaine that they couldn’t get unstuck until they created a strategic direction and plan to get there that included the various infrastructure elements they needed to get to the next step. Again, Elaine recounts:

What Nell helped to clarify in the beginning is that investing in infrastructure will change our picture. It’s not just about one person [an artistic director]. We were a step ahead of ourselves. To get there, we needed to create the compelling plan for philanthropic equity…we were missing a huge step by not having a detailed plan for our future.

I suggested that they launch a philanthropic equity campaign, to raise money for an artistic director, fundraising infrastructure, technology, systems, all the things they needed to build a more effective, sustainable organization. But, before they think about a philanthropic equity campaign, they needed a compelling strategic direction and a plan for getting there. Because people don’t invest significant money in an idea, they invest in a coherent, compelling, executable, exciting, measurable plan for the future.

We put together a proposal for how Social Velocity could help Charlotte Chamber Music create

1. A compelling, investable strategic plan, and
2. A pitch and prospect strategy to raise the philanthropic equity needed to execute on that plan.

Elaine then went to her board and a few key major donors to make the case that in order to get out of the vicious starvation cycle, expand their impact, and become the top-tier arts organization they knew they could be, they had to invest in an organization-building process. A couple of key donors stepped up to make the investment to hire Social Velocity.

In the next post in this series, I’ll discuss how we went about creating a compelling, investable strategic plan and the pivotal moment when Charlotte Chamber Music realized that they had a tremendous opportunity to develop a new model for the 21st century arts organization.

Photo Credit: naitokz

Tags: build vs. buy, building nonprofit capacity, Charlotte Chamber Music, funding for arts organizations, fundraising for capacity, fundraising for growth, George Overholser, nonprofit growth capital, nonprofit starvation cycle, philanthropic equity, raising growth capital, Social Velocity blog interview, strategic planning for nonprofits

Financing Not Fundraising: Explore New Types of Money

In part 7 of our ongoing blog series, Financing Not Fundraising, we are discussing finding and employing new types of money in the financial mix of your nonprofit.

If you are new to this series, our Financing Not Fundraising blog series argues that fundraising in the nonprofit sector is broken.  In fact, traditional fundraising is holding the sector back by keeping nonprofits in the starvation cycle of trying to do more and more with less and less. The nonprofit sector needs a financing strategy, not a fundraising one.  That means that nonprofits have to break out of the narrow view that traditional FUNDRAISING (individual donor appeals, events, foundation grants) will completely fund all of their activities.  Instead, nonprofits must work to create a broader approach to securing the overall FINANCING necessary to create social change. You can read the entire series here.

Many nonprofit leaders are worn out by finding money to create social impact because their view of potential money options is too narrow. Nonprofits no longer have to rely solely on fundraising to finance the impact they want to create. There are several new financial tools available, and hopefully more will continue to be developed so that eventually nonprofits will gain access to a similar breadth and depth of financial tools that for-profit entrepreneurs enjoy.

Below are some of the new financial tools available to nonprofits. As a nonprofit leader you should explore these options and determine whether any of them could be integrated into your organization’s financing plan:

• Growth Capital. The nonprofit equivalent to equity in the for-profit world is “philanthropic equity” or “growth capital.” It is essentially money that builds the organization so that it can deliver significantly more services. It can support things like infrastructure, staffing, technology, systems. If the solution that your nonprofit provides could significantly expand to more people, your organization could benefit from a plan for growth. And in order to finance that growth, you will need growth capital.




• Capacity Capital. Also a form of equity, capacity capital enables a nonprofit to strengthen their organization in order to achieve more impact. In this case the capital pays for technology, staffing, infrastructure that allows the nonprofit to achieve more, more sustainably. The most obvious case is when a nonprofit raises money to invest in their revenue function (donor database, qualified development staff, materials, etc) which sets them on a road towards financial sustainability, ultimately allowing them to achieve more social impact.




• Loans. Nonprofits have been shy about loans because they are so unsure of future cash flows that loans can be too risky. However, program-related investments (PRIs), a fairly underused tool that foundations possess, are essentially loans to nonprofits at low or no interest rates that can be forgiven at the end of the loan period. This ability to forgive and the lower interest rate makes PRIs a real opportunity for nonprofits. But since few foundations employ PRIs, it is up to nonprofits to encourage their foundation donors to explore this potential.




• Social Impact Bonds. In President Obama’s proposed 2012 budget he has included a fairly radical idea imported from the United Kingdom: social impact bonds. The idea is that government agencies can issue bonds which are bought by private investors. The money raised would be used to finance projects with social impact goals.  The investors would be repaid, or even make a profit, if the projects achieve certain outcomes agreed to in advance, for example getting kids into college, reducing the high school drop out rate or decreasing teen pregnancies. This is still a very new idea, and it remains to be seen if it will actually become a reality in America, but the precedent is there. It could even happen on the local government level. A city could raise a bond to fund the work of local nonprofits, which would be tied to specific outcomes.

These financial tools are new and with innovation comes risk. Not all of these vehicles will work for all nonprofits. But the idea is that the nonprofit sector needs alternative financing options. These options are just a start. My hope is that there will continue to be financial innovations in the nonprofit sector. And it is up to the nonprofits themselves to educate, cajole, inspire and encourage their donors, government leaders, lenders and others to employ some of these new tools to finance their work.

If you’ve heard about or used additional new nonprofit financing tools, I’d love to hear about it in the comments.

If you want to learn more about how to apply the concepts of Financing Not Fundraising to your nonprofit, check out our Financing Not Fundraising Webinar Series.

To download the 27-page Financing Not Fundraising e-book, click here.

Tags: capacity capital, financing not fundraising, growth capital, new approaches to raising money, nonprofit fundraising, philanthropic equity, PRIs, program-related investments, social impact bonds

Unlocking Philanthropic Capital: An Interview with Sean Stannard-Stockton

In this month’s Social Velocity blog interview, we are talking with Sean Stannard-Stockton, one of my favorite people in the social innovation world.

Sean is a visionary leading the charge to transform philanthropy. He is CEO of Tactical Philanthropy Advisors, a philanthropy advisory firm. He is also the author of the very popular Tactical Philanthropy blog and writes a monthly column for the Chronicle of Philanthropy. He is a member of the World Economic Forum’s Council on Philanthropy & Social Investing and his insights on philanthropy have been referenced in The New York Times, Wall Street Journal, Washington Post, and Financial Times.

You can read our past interviews with Clara Miller, Kevin Jones, Lucy Bernholz, Paul Tarini, George Overholser.

Nell: At the first Social Capital Markets Conference (SoCap) in 2008 one of the keynoters said “we’re not here to talk about nonprofits.” We’ve come a long way from there to this year’s devoted track around philanthropic capital and the nonprofit space at SoCap. Where do you think the initial hesitance to connect philanthropic and impact investing came from? And how do we continue to integrate the two worlds?

Sean: I think that one of the segments of people who are attracted to impact investing are people who think philanthropy doesn’t work. While I view philanthropic and for-profit social capital to be part of a single continuum of capital, many people seem to feel that they are fundamentally different. Like most new ideas, early adopters often think it is a silver bullet that will “change everything”. Some early adopters of impact investing or other forms of for-profit social capital wrongly believe that impact investing will replace philanthropy. I think this is a fundamental misunderstanding. Continuing to integrate the two worlds will require helping the various points on the capital spectrum better understand each other. At the end of the day, capital shouldn’t be viewed through an ideological lens, but should simply be deployed based on what sort of capital fits the situation.

Nell: The SoCap session on nonprofit rating systems like Charity Navigator and GiveWell demonstrated that there is still quite a divide between GIIRS (the impact investing rating system) and nonprofit rating systems. What is your sense of this? Do you think there is potential to somehow combine GIIRS (or something else) and nonprofit rating systems so that there is one comparable impact measurement system?

Sean: I would guess that any truly effective impact measurement system should be functional across both for-profit and nonprofit activity. A good impact assessment system wouldn’t care about the tax status of the entity producing results, it would just care about the results and the cost of obtaining them. That being said, I think evaluating a nonprofit organization is really quite different from evaluating a for-profit organization. So even if we have a unified impact assessment framework some day, I would guess that organizational assessment will utilize different systems and approaches for nonprofit and for-profit organizations.

Nell: How would you like to see the conversation about connecting philanthropy and impact investing evolve at SoCap11? What are your hopes for next year’s conference?

Sean: I’d like to work to profile more examples of ways that for-profit and philanthropic capital worked together to produce social impact. Our session on Evergreen Lodge at this year’s conference looked precisely at this question, but I’d like to see more examples. I’d also like to see examples of ways philanthropic entities have used for-profit investments or subsidiaries well or for-profits have effectively used philanthropic activities to drive profit and social results. However, one of the most important goals is simply getting the different players into the same room and getting them to come to understand each other better. While Kevin Jones and I had a good time talking about the Social Capital Markets as a meeting ground for the Barbarians and Byzantine, in reality none of us are barbarians.

Nell: Beyond SoCap where do you think the important conversations about unlocking philanthropic and government capital for social impact are happening?

Sean: This is an interesting question. SoCap is special because it is one of the only (the only?) conference that is specifically about capital for social impact without regard for sector. But versions of this conversation are happening around Grantmakers for Effective Organizations, The Social Innovation Fund, online and in a different sort of way at the PopTech conference.

Nell: At the last general session of SoCap Woody Tasch of the Slow Money movement said he doesn’t think mission-related investing will ever be adopted by the majority of foundations. What are your thoughts on that?

Sean: Social Responsible Investing, the practice of screening out stocks of tobacco companies, defense contractors and the like from investment portfolios, is not practiced by a majority of investors. Yet, SRI is very mainstream and has significantly altered the behavior of publicly traded companies. Today, SRI mutual funds are one of the fastest growing areas in money management. So I don’t think that the majority of funders have to adopt mission related investing for the concept to be deemed a success. It should be noted that SRI took a good 20 years or so to go mainstream. So it could be some time before mission related investing is considering mainstream.

Nell: And more broadly, what do you think it will take to change how philanthropists (both foundations and individual donors) use money to support social impact? How do we make more donors builders instead of just buyers?

Sean: Today, I think that very few people in the social sector really understand what “philanthropic equity” is and how capital differs from revenue. Nonprofit accounting does not acknowledge that capital even exists in the sector. Nonprofits can only book cash coming into their business as revenue or a loan. There’s no official way to account for equity-like capital. So I think that there needs to be a pretty major education effort to get the whole sector very clear on how fundamentally different it is for a funder/donor to “invest” philanthropic equity in a nonprofit vs paying a nonprofit revenue to execute programs. Personally, I don’t think much progress will be made until nonprofit accounting changes. Until that happens, it doesn’t matter much what we call “growth capital”, it is all just revenue to the nonprofit.

Tags: builders vs. buyers, Charity Navigator, Chronicle of Philanthropy, GIIRS, GiveWell, Grantmakers for Effective Organizations, impact investing, Mission-Related Investing, nonprofit accounting, nonprofit growth capital, philanthropic capital, philanthropic equity, Sean Stannard-Stockton, SoCap, Social Innovation Fund, social responsible investing, Tactical Philanthropy, Woody Tasch

Tools to Build Smaller Nonprofits

I started Social Velocity because I saw a real hole in the nonprofit sector. Small and medium nonprofits working on social change lacked access to expertise and resources to strengthen and grow their solutions. The Teach for Americas of the world were building impressive organizations and replicating their solution far and wide. But they were doing so with the help of venture philanthropy funds, national consulting firms and broad and deep networks of experts and money. They were the lucky ones.

But there are some equally impressive solutions housed in much smaller, less resourced nonprofit organizations that aren’t really seeing the light of day.  Because these organizations don’t know how to put a growth plan together, figure out how to finance the impact they want to have, or create a compelling ask for money to build, their solutions are not reaching as far as they could.

Social Velocity exists to help those small and medium-size nonprofits who want to be entrepreneurial, who want to grow their programs, who want to get their board engaged and invested, who want to raise money to build their organization, who want to break out of the starvation cycle. I’m very passionate (and opinionated) about the fact that the bottom 80% of nonprofits need help to become stronger, better, more effective and sustainable at creating social impact.

So in order to reach more nonprofits, Social Velocity has a growth plan ourselves. And that growth plan involves creating tools, trainings, e-books, guides, worksheets, templates and other things that nonprofits can download in order to start thinking and doing things differently.

We’ve already made our whitepapers available for download, and our blog often has tips and tools to get started, but we want to do more. Some of our initial ideas for tools include:

• A sample pitch for growth capital
• An earned income analysis worksheet
• A step-by-step tip sheet to get your board fundraising
• A revenue plan outline
• An exercise to understand your nonprofit’s place in the external market
• Sample language to start messaging around impact
• Questions to guide your case for support creation
• An investment range chart to break down a growth capital fundraising goal

But I want your input. How can we help you take social innovation ideas and put them into action? What kinds of tools would help you go from wanting to grow your programs to starting to put the plan in place?  What guides would allow you to move from being intrigued by the idea of philanthropic equity to putting together your own fundraising campaign to raise money to hire more staff, buy more computers, etc.?  What’s holding you back from being able to do things differently and move out of the starvation cycle?

Let me know what tools you’d like to see, either below in the comments, or on our Facebook site. Thanks for your help!

Tags: building nonprofit capacity, nonprofit board fundraising, nonprofit growth capital, nonprofit growth plan, nonprofit starvation cycle, philanthropic equity, Teach for America, tools to strengthen nonprofits

Here Comes SoCap

So it’s my favorite time of year again, well at least in the world of social innovation. The Social Capital Markets Conference in San Francisco starts Monday. There are a lot of social innovation conferences, in fact you can read a great rundown on many of this Fall’s best. But SoCap is by far my favorite. It is the one place where the disparate array of people who are interested in how to get more money flowing to social impact come together for 3 days. There are nonprofit, for-profit and hybrid social entrepreneurs; philanthropists; social investors; government bureaucrats and anyone in between. It seems this conference more than any other is a microcosm of the convergence that is happening in the world of social innovation between the public, private and government sectors.

I’ll be honest, the first two years of the conference were a little heavy on the for-profit social entrepreneurship side, leaving somewhat behind government and nonprofit. There were sessions and speakers from those worlds, to be sure, but the emphasis of the conference in the beginning was how to get money flowing more readily to double bottom-line businesses (for-profit businesses that are making money AND creating a social impact).

This year’s conference promises to open wide the doors of the social capital market. For starters, SoCap organizers have developed 6 “tracks” that each focus on a particular area of the social capital market. The track that interests me the most, of course, is the one focusing on nonprofit/philanthropy. Sean Stannard-Stockton of Tactical Philanthropy has put together a nice track with cutting-edge topics in the world of making money work better in the nonprofit sector:

• Decriminalizing Fundraising
• Scaling Social Impact
• Individual Donors Practicing Unconstrained Philanthropy
• The Lessons of Behavioral Finance
• When to Invest and When to Give
• Nonprofit Analysis: Beyond Metrics

In addition there are several other tracks that hold great appeal: Impact Investing, New Money, Metrics and System Thinking and so on. And then there are some fabulous speakers including Jacqueline Novogratz from Acumen Fund, Matt Flannery from Kiva, speakers from the Gates Foundation and Root Capital and many others. Add to that the side sessions, pitch events and more, and my head starts to spin. Three days is just not enough.

I’ll be blogging from the conference as I did last year (you can read my blogs from SoCap09 here, here and here).

What I love so much about SoCap is that it really challenges this burgeoning community/movement/space to do more, to ask harder questions, to push the momentum forward. You come out of a session with many more questions than you had going in. But also, so much more energy to break out of the normal way of thinking and envision a different path forward. Because at its essence, SoCap is about creating something completely new. It’s about creating a space where money and social impact meet and create a synergy that can, we hope, change the world. The old rules and constraints don’t apply. This conference and all the people attending it, in person or via social media networks, are writing the new rule book. And that’s exciting, challenging, exhausting and exhilarating all at the same time.

If you are attending SoCap too, let me know. See you there!

Tags: Acumen Fund, Convergence, Gates Foundation, Jacqueline Novogratz, Kiva, Matt Flannery, philanthropic equity, Root Capital, Sean Stannard-Stockton, SoCap10, Social Capital Markets conference, Social Entrepreneurship, social innovation, social investors, Tactical Philanthropy

The Power of Philanthropic Equity

Philanthropic equity, or “growth capital”, is just a fancy way to say money that nonprofits desperately need. The idea behind philanthropic equity is that nonprofits are only allowed to raise money for programs, when what they really need to make their programs bigger and better is money to build a stronger organization. These dollars that build a stronger organization (technology, systems, non-program staff, etc) are called philanthropic equity. It’s a new concept for the sector and one that the Nonprofit Finance Fund has helped to pioneer. It’s also a concept that we’ve been talking about on this blog recently here, here and here.  Today NFF released a report on how their work to help nonprofits raise philanthropic equity has affected those nonprofits. The results are pretty impressive.

NFF has helped nonprofits like Year Up, Donors Choose and Volunteer Match raise philanthropic equity investments, totaling $312 million since 2006. The report analyzes the role of philanthropic equity in the nonprofit sector based on these engagements – detailing results-to-date, the characteristics that have helped spur success, and challenges that remain in building a nonprofit growth capital marketplace. The initial results are promising: NFF found that  philanthropic equity has, on average, more than tripled program delivery, and doubled revenue for nonprofit organizations that have conducted comprehensive campaigns (and some results were even greater.) Some specific results include:

• Annual program delivery has grown on average by a factor of 3.1x, with a compound annual growth rate of 57%.
• Annual business model revenue for these nine organizations has grown on average by a factor of 2.0x, with a compound annual growth rate of 36%. In aggregate, business model revenues have expanded by $30 million compared to pre-campaign baselines
• Three of the portfolio members – GlobalGiving, Ashoka’s Changemakers, and VisionSpring – accomplished five-fold growth in their program areas.

Why does all of this matter? Because if nonprofits can demonstrate that philanthropic equity can dramatically increase their ability to create social change, then more donors will be willing to make those extremely necessary kinds of investments. And if more philanthropic equity investments are made in the nonprofit sector, the sector will become stronger and better able to create social change. Philanthropic equity is such an important concept because it could dramatically shift the sector from one that lives hand to mouth, to one that grows increasingly sophisticated and capable of solving our greatest social problems.

If you are a nonprofit leader, encourage your board and donors to read the report. The results clearly make the case for philanthropic equity. And once nonprofits and their donors are convinced about the power of philanthropic equity, the sky’s the limit.

Photo Credit: Mr. T in DC

Tags: Ashoka's Changemakers, Donors Choose, GlobalGiving, Nonprofit Finance Fund, nonprofit growth capital, philanthropic equity, VisionSpring, Volunteer Match, Year Up

A Radical Spin on Capital Campaigns: An Interview with George Overholser, Part 2

As promised, today we are bringing you Part 2 of our interview with George Overholser from the Nonprofit Finance Fund. You can read Part 1 here.

Nell: You have argued before that to transform the nonprofit capital market we need a few capital deals at the top of nonprofit market. How do you think the bottom 80% of nonprofits (those with budgets under $1M) fit into a transformed nonprofit capital market?

George: I absolutely believe that the nonprofit capital market needs to extend everywhere, not to just the high profile “darlings” that seem to get all of the attention, but also the millions (!) of smaller nonprofits that truly make up the lion’s share of our vital nonprofit sector.

So why focus first on multi-million dollar growth plans? This is an excellent question!

One part of my response comes in the form of a reminder. Remember: MONEY AND CAPITAL ARE NOT THE SAME THING. Every nonprofit needs money to operate. But quite appropriately, only a small percentage of nonprofit organizations actually aspire to undergo major growth, or any of the other disruptive transformations that are inextricably linked to a capital investment. Very few for-profit companies with revenues of $1 million or less are interested in taking on equity. Nor should they! Small is beautiful! They are the bedrock of our economy. The same goes for our smaller nonprofits.

Still, what about the small organizations that DO aspire to undergo a big transformation, perhaps to double their ongoing impact, for example? Why not focus on them?

Well, I believe that it is absolutely vital that we come up with a way to better capitalize these smaller organizations. Sadly, though, at this stage of capital market evolution, it is still quite expensive to prepare for a successful nonprofit equity campaign. Unless several million is being raised, the hundred thousand or more dollars of required planning, documentation, due diligence, marketing, reporting and campaign management expense is prohibitively high. This constrains us to campaigns of $5 million or more, which, in turn, constrains us to organizations that are already pretty large.

In some ways, we shouldn’t be surprised. There are hundreds of professional fundraising consulting firms that assist with traditional capital campaigns, involving billions of dollars each year. But they, too, are unable to justify their fees unless the campaigns involve a lot more money than most “small” nonprofits are prepared to take on.

I hope that some day there will be a less expensive way to create compelling “asks” for equity capital, but that day has not yet arrived.

As a field, we are still in the very early days of showing how (learning how!) philanthropic equity can help organizations thrive. As such, it seems prudent to focus initially on the limited number of comparatively high-profile organizations that seem best prepared to implement their social impact growth plans. This has led equity funders to partner, at least initially, mostly with organizations that have already shown they can scale. To date, NFF has worked on 16 transactions, involving $310 million of new philanthropic equity raised. Every one of those 16 organizations went into their campaigns armed with track records that showed, compellingly, that they already know how to grow, and are now prepared to accelerate. So far, in just two or three years, the group that we track closely has more than tripled its level of program execution, while also more than doubling the long-term business models that will sustain the execution once the equity runs out. If results like these can be kept up, I expect it will help to attract more and more equity-like funders that serve an ever-broadening range of high-performing nonprofit organizations.

Nell: You have argued in the past that the reason a nonprofit market for growth capital has not materialized is because nonprofit accounting does not allow for a distinction between money to build the organization (investments) and money to maintain services (revenue). But beyond the accounting issues there is also a fundamental lack of understanding about finance in the sector. What do you think will change that?

George: I envision an evolution where funders become more and more specialized. Most funders, I envision, will migrate towards playing the role of BUYER. They will be the real connoisseurs that search among providers to learn what works best. Then, without seeking to change those providers, they will fund the providers to do what they do so well. Collectively, the buyers will be an important part of the field’s overall portrait of sustainability. I would include government as being among the most important buyer-type funders, but so, too, would be the many philanthropic funders who seek the most effective existing ways to achieve social impact with their money.

I would expect a smaller number of funders to focus on playing the role of BUILDER — they are financiers, really, or banks. These financial specialists will play a niche role. Because nonprofits can only take on a limited amount of equity, the BUILDER funders will actually have to compete against each other to “win” the right to invest in the most promising nonprofit firms. And the way they will win in this competition is by offering not just money, but also very sound financial know-how, to the organizations they partner with.

Lots of accomplished BUYERS, a smaller number of accomplished BUILDERS. I sometimes explain this line of thinking by describing what happens when you go into a flower shop – suppose you want them to send flowers to your mom in Florida. Clearly, the vast majority of money that flows into this flower shop is money in exchange for flowers (BUYER-type money). Only a very small percentage of the money that flows into the flower shop comes in the form of capital – a bank loan, perhaps, or, in the early days, an initial equity stake. Thus, the vast majority of check-writers are interested in FLOWERS and the benefits that flowers bring. Only a very small minority of check-writers are interested in BALANCE SHEETS and the other technical details of finance.

I am hopeful that nonprofit equity accounting will allow funders to be better at self-selecting into their chosen areas of expertise. Most will need to be BUYERS of program execution. A smaller number of funders will emerge as the financially-oriented BUILDERS that are needed to provide philanthropic equity and growth stewardship.

Nell: Do you think there is something to be gained by having the bottom 80% of nonprofit organizations better financed, more knowledgeable about finance and with more access to patient capital? What needs to happen to get there?

George: This may sound strange, but I believe that the key to helping most nonprofits to thrive has more to do with improving our BUYING behaviors than to do with finding more capital. To me, the problem is not so much that the bottom 80% lacks access to the capital they would need to maintain healthy balance sheets. Rather, they find themselves chronically saying “yes” to funding arrangements that cause them to deplete these capital reserves. The capital can be raised — but the unhealthy buyer relationships cause the capital to evaporate.

It’s hard to place blame for this phenomenon. Taken one at a time, most of the grants that an organization relies upon make a lot of sense. But, collectively, when multiple funders converge upon an organization with differing theories of change, or expectations that someone else will pay for overhead, or a hunger for customized reporting, special tweaks to the program, and long conversations about small checks, organizations can’t help but burn through whatever small cushions of capital they may have squirreled away.

We need to raise consciousness among BUYERS that whole enterprises — not just programs — should be kept in mind when they make their grants.

Tags: George Overholser, nonprofit builder vs buyer, nonprofit capital campaign, nonprofit capital market, nonprofit finance, Nonprofit Finance Fund, philanthropic equity

A Radical Spin on Capital Campaigns: An Interview with George Overholser, Part 1

In this month’s Social Velocity blog interview, we are talking with George Overholser, Founder and Managing Director of NFF Capital Partners, a division of the Nonprofit Finance Fund. George is a recognized leader in the field of capitalizing high-performing nonprofit organizations. Since its launch in 2006, NFF Capital Partners has served as advisor on transactions involving over $250 million of charitable investment.

We had such a great conversation with George that we have broken it into two parts. Part 1 is below and Part 2 will be posted next week.

You can also read our past interviews with Clara Miller, Kevin Jones, Lucy Bernholz and Paul Tarini.

Nell: George, you have a pretty radical idea for getting nonprofits out of the hand-to-mouth starvation fundraising cycle, which you describe as expanding a traditional capital campaign so that the entire balance sheet of a healthy organization gets funded, not just buildings and endowments. How does a nonprofit break out of the mindset that they can only raise large amounts of money for a tangible building or endowment?

George: Ha! Please don’t tell my mom that I’m a radical! In truth, the concept of “Philanthropic Equity” may feel a bit radical, but really it is just an extension of tried and true nonprofit capital campaign techniques that have been with us for generations. Every year, billions of dollars are raised (often tens of millions at a time) to support capital campaigns for permanent, tangible things like buildings and endowments. Philanthropic equity suggests there is a third permanent, tangible thing that lends itself well to a capital campaign: not a building, not an endowment, but a business plan and management team that, if well-capitalized, will build an enduring and effective nonprofit organization.

This isn’t about just money. It’s about capital. And what makes capital different from all of the other money that flows into an organization? Precisely put, capital is all about turning a one-time infusion of money into benefits that recur over and over again. An endowment gets raised once and then provides subsidy every year, forever! Constructing a new building costs $5 million, once. But it wouldn’t be a good capital investment unless the building went on to house effective programs for years and years to come.

And so, the key shift in mindset is for an organization to envision very crisply how it intends to sustain ongoing program execution, once the equity has run out. It needs to paint a “portrait of sustainability” around which the philanthropic equity is raised.

But there’s a catch! The portrait cannot simply involve repeating equity capital campaigns over and over again. That would be cheating! Equity funders, who seek “perpetuities of impact”, would catch on pretty quick.

For example, imagine an internet-based nonprofit that plans to be sustained entirely by its online fundraising pitches. When originally launched, the organization has not yet built its web site, and so the online sustainability model is not ready to work. This is where philanthropic equity comes in. Philanthropic equity (from OFF-line funders) pays the bills while the site is first being built. It also subsidizes the organization in the early years of operation, before a critical mass of online donors has been established.

Once these changes (a new site, a critical mass) have been accomplished, the organization becomes self-sustaining, and — this is key — the site doesn’t need to raise any more philanthropic equity. In this way, a one-time infusion of $5 million in OFF-line philanthropic equity can give rise to $10 million per year of recurring ONLINE revenues that keep the program thriving year after year.

Nell: Why has this idea not caught on throughout the nonprofit sector? And how do we reach that tipping point?

George: Clara Miller is right: “Accounting is destiny!” And I believe that a change in nonprofit accounting practices would be our most effective way to move towards the next nonprofit capital market tipping point. These need not be official changes to GAAP (the federal standards), although that would be GREAT! As we’ve seen with our 16 philanthropic equity clients, an awful lot can be accomplished simply by adjusting the way today’s standard accounting rules are used to track equity.

Until recently, there was simply no way to distinguish nonprofit “equity” as being different from all the other types of money that flow into a nonprofit organization. There was no way to keep tabs on (a) who is and is not an equity investor, (b) how much equity has been consumed by the organization so far, or (c) whether or not the organization continues to take on more equity, in which case it has not yet achieved its chosen “portrait of sustainability”.

In recent years, we and others have begun to learn that equity accounting actually CAN be applied to nonprofits. Unlike for-profit accounting, it doesn’t track who has first dibs on the distribution of profits — after all, this is philanthropy, and there is no financial return to be had. But it DOES track whether or not the organization has achieved its chosen portrait of sustainability. It DOES answer the question of how much equity has been consumed so far. And, like any good naming opportunity, it DOES document who deserves the financial credit for having built an enduring institution.

Why does this matter?

This isn’t just window dressing, or simply a gimmick for creating more pseudo naming opportunities. Most of all, it is about changing incentives, and, therefore, it is about changing behaviors among key funders. That’s because clear accounting allows equity stakeholders to stay keenly focused, in a measurable way, on protecting the nonprofit’s FUTURE ability to have ongoing impact. (Just as someone who paid for a building is keenly focused on knowing it won’t be crumbling to pieces any time soon!)

Equity accounting also places the equity stakeholders into a single pool. It helps to point out that equity investors act in concert with one another, at the enterprise level, to comprise the nonprofit’s capital structure.

Thus, equity stakeholders (if you are lucky enough to have them!) provide a vital counterbalance to all of the other stakeholders, most of whom act alone (not in concert with others), most of whom seek nearer term results than the equity stakeholders, and most of whom need not contemplate the long-term consequences that their near-term desires may imply.

Please don’t get me wrong! These non-equity stakeholders (I often call them BUYERS) are the lifeblood of any sustainability plan. As BUYERS, who seek to exchange their hard-earned dollars for effective program execution, it is right and good that they demand certain accountabilities. Otherwise, our sector would not be performance-driven:

• I am asking you to turn my money into effective program execution, and I would prefer you to have low overhead.
• Please tell me how many tutoring sessions will happen as a result of my grant — the more the better!
• Please customize your program to address the particular needs and communities that my foundation has charged me to serve.
• I don’t need you to tell me about your other funders. Just write a report about my grant and what it accomplished. Again, the more you can accomplish during the grant period, the better!

But for an organization to thrive, it needs a counterbalance to the BUYERS. Equity stakeholders, (when they exist!), provide this counterbalance because they measure success in terms of how much impact the organization makes over the long run. Their presence—and their money—make it POSSIBLE for the organization to push back against unhealthy funding relationships… until healthy and enduring ones can be found. They ask questions like:

• How do we avoid accepting underfunded program grants?
• How do we resist the temptation to add too many new program features?
• What can we invest in today that will make us more compelling in the future, even if it bloats our overhead for a while?
• Can we really afford to keep a sub-par person in this key management role?
• How can we grow more quickly (without imperiling the long-term health of the organization)?
• When we look at the organization holistically, taking all of the funder relationships, program designs, infrastructure, balance sheet — you name it! — into account, does it feel like it will thrive and endure?
• If we write a bigger equity check, will that make it easier for the management team to resist distractions in the critical early days? Will they be more likely to build an enduring institution?

Stay tuned for Part 2 of our interview with George next week.

Tags: George Overholser, NFF Capital Partners, nonprofit accounting, nonprofit capital campaign, nonprofit equity, Nonprofit Finance Fund, philanthropic equity