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Connecting Philanthropic Grants and Investments: An Interview with Geeta Goel

Geeta_Goel_croppedI’m out of the office this week, so in my place I am offering you two interviews this month. Tuesday was my video interview with Hope Neighbor.

And today I’m talking with Geeta Goel, Director of Mission Investing at Michael & Susan Dell Foundation. In addition to traditional philanthropy, Michael & Susan Dell Foundation makes program-related investments across its India-based microfinance, health and education initiatives, and its US-based education initiatives. Prior to the Michael & Susan Dell Foundation, Geeta spent more than 12 years with the Corporate Finance Group of PricewaterhouseCoopers in India, advising large Indian and multinational clients on joint ventures, mergers and acquisitions, business plans, and valuations.

You can read past interviews in the Social Innovation Interview Series here.


Nell: Why has Michael & Susan Dell Foundation decided to put an emphasis on program-related investments (PRIs)? How exactly does that particular financial vehicle further your mission?

Geeta: Our mission is to transform the lives of children living in urban poverty through better health and education. There are 2.4 billion people living below the World Bank’s poverty line of $2 a day, and more than 160 million children are suffering from malnutrition. To tackle those numbers and address deep-rooted complex problems, we need solutions that are both scalable and sustainable. And for that we need to tap into different and larger sources of funds – government and private. Program Related Investments (PRIs) are just one of several financial tools we use to further our mission.

The foundation has always sought to concentrate its limited philanthropic dollars to achieve direct, measurable, replicable and lasting systemic change. Early on we realized the power of markets as one lever for creating a more inclusive society. Free markets definitely increase access where it’s most needed. They can also help raise the bar for quality in terms of what customers expect and what they will pay for.

A great example is the microfinance sector in India. Today there are more than 30 million microfinance clients in India. These clients are accessing some $4 billion in credit to invest in income-generating assets such as trading businesses, tea/food stalls and livestock. We played a catalytic role in the Indian microfinance sector by influencing a market shift from rural to urban environments. Beginning in 2006 and continuing through 2009, we provided seed funding to some eight urban-focused MFIs. The success of these institutions helped prove that microfinance is a sustainable, scalable and investible asset class. There are now more than 25 MFIs active in urban India.

This scale has been achieved only because microfinance offers a market-based, sustainable solution that attracted private capital.

Nell: What methods do you use to find projects that make sense for a PRI, rather than a traditional philanthropic, investment?

Geeta: I love your question. It places things in perspective and in the correct sequence.

Our approach has been to first identify projects that can help achieve our desired mission (fighting urban poverty in order to improve children’s lifetime outcomes), and then decide an appropriate funding structure. This is in contrast to other organizations that have de-linked grants and investments; their grant strategy is distinct from their PRI strategy.

We view grants and investments, including PRIs, as part of the same toolset. When we are selecting any projects to fund, the main criteria are the level of their social impact, scale and sustainability. On sustainability, we ask a variety of questions pertaining to the project. Is there a strong business model, and has the product/service been tested? Can it generate revenue and remain true to the original intent? Will other funders—government, investors, and grant-makers, step in to help establish sustainability and scale? Are there adequate quality safeguards or do they need to be created?

The structure of our support is a complex decision emerging from these deliberations. The funding structure can be in the form of a grant, loan, equity or a combination. For instance we made an equity investment in Janalakshmi Financial Services when it was a start-up microfinance institution. We also offered grant support to their non-profit arm Jana Urban Foundation to conduct a detailed analysis of their client base. This helped Janalakshmi Financial Services to better understand the financial needs of their customers and offer additional products tailored to those needs, thus strengthening the company.

An example of a straight PRI is our support for Waterlife, a for profit company offering clean drinking water to low income customers in rural areas, to test the market in urban areas through a concessional investment structure. The goal of the project was to help Waterlife develop and scale an urban business model that would replicate its rural success, given the different challenges within an urban setting.

Nell: Only 1% of U.S. foundations make PRIs. What do you think holds other foundations back from experimenting with mission-related investing?

Geeta: You’re right. Our legal counsel often find themselves in an odd spot at foundation conferences, as we are in a minority group that does PRIs, and an even smaller minority that does direct PRI equity investments internationally. I can’t speak on behalf of other foundations, but based on my discussions over the last few years, I’ve witnessed that investing in market-based solutions is unfamiliar territory for most foundations. They are pushed outside their comfort zone.

Moreover, PRIs are more complex to design and structure than grants. We’re really looking at a culture shift in terms of staffing. PRIs require financial and investment skills that traditional grant teams might not necessarily possess.

Another possible reason is that for many philanthropists making a profit is viewed negatively. Anything that is grant based or in the non-profit space is seen as delivering a positive impact. Anything that is in the market-space is viewed as uncontrollable and exploitative. Lastly, I think it’s the risk of failure that holds back many foundations. Not only are PRIs more risky, their success or failure is transparent and easy to measure in more objective terms. At the foundation, we have seen the ways that PRIs and markets can support social progress. By setting up guardrails and standards, we have managed to contain the inherent risks of PRIs.

Nell: It seems like there is an enormous opportunity to connect impact investors and philanthropists, but that really hasn’t happened yet. How do we better pool philanthropic and impact investment capital for more social change?

Geeta: Traditionally, development efforts and markets have been viewed as two parallel tracks that are unlikely to converge. This has resulted in limited interaction between philanthropists (focusing on non-profits) and impact investors (focusing on for profits).

However, as we move towards recognizing that markets can bridge some of the existing inequalities in access and outreach, there is a definite need for increased connections between philanthropists and impact investors. A few organizations are now consciously working towards this end, especially the ones that are championing a sector based approach to creating and catalyzing markets, like FSG, Monitor Inclusive Markets, and Mission Investors Exchange.

And with impact investments set to reach between $400 billion to $1 trillion over the next decade (JP Morgan Global Research) there should definitely be greater collaboration between the two worlds. This needs to begin with defining “common ground” amongst the two stakeholders.

Today, we do not have an agreed definition of impact and how to measure it. This is a good starting point. Once we have this common terminology and performance assessment framework, appropriate forums and a structured approach to sector level change will go a long way in increased collaboration amongst donors and impact investors.

Nell: Michael & Susan Dell Foundation is obviously at the forefront of program-related investing, but what about other innovative financial vehicles? What is the foundation’s view on philanthropic equity investments (investing in growing or strengthening nonprofit solutions)? Is there promise in those kinds of investments?

Geeta: As I said earlier, we are very focused on our mission and the guiding principles of impact, scale and sustainability. We are open to adopting different tools and approaches that help advance the mission. Right now we are focusing our energies on traditional grants and PRIs.

Philanthropic equity investment is a fairly new concept that definitely holds promise. They are a one-time grant to nonprofits that help strengthen the capacity of the organizations and make them more sustainable. We do not rule out such investments. For the foundation, the key factors to evaluate the option of philanthropic equity are measurable and comparable outcomes and in-built mechanisms for quality and cost efficiencies. In non-profits, these are difficult metrics to achieve, but not impossible, especially as the development world ups the ante on measurement, transparency, and pay for success. We believe that strong governance, transparent reporting and incentives for achieving greater impact at lower costs will go a long way in building the field for philanthropic equity investments.

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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 applying the concepts of Financing Not Fundraising to your nonprofit, check out our Financing Not Fundraising Webinar Series, or download the 27-page Financing Not Fundraising e-book.

Photo Credit: Jon Sullivan

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Financing Not Fundraising: Find Money for Building Capacity

Part 6 of our ongoing blog series, Financing Not Fundraising, demonstrates the critical importance of money for building nonprofit capacity and describes how to find it.

There must be a recognition in the nonprofit sector, and among the philanthropy that funds it, that nonprofits need money to support not only their direct services, but also the infrastructure (technology, systems, evaluation, training, fundraising) of the organization. Nonprofits will only get better at creating social change if they have a strong and effective organization behind their work.

In case you’re new to this series, our Financing Not Fundraising blog series seeks to address the reality 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.

George Overholser, from the Nonprofit Finance Fund, is the pioneer of this critical distinction in the nonprofit sector between money to BUY services and money to BUILD organizations.  The idea is simple. There are two types of dollars in the nonprofit sector. Those that BUY nonprofit direct services (dollars for more beds for the homeless, more hours of ESL instruction) and those that BUILD a stronger nonprofit organization (dollars for technology, systems, fundraising staff, etc).

A nonprofit that wants to get out of the vicious fundraising cycle needs to make a commitment to building their organization and finding, and convincing, donors to fund that building effort.

Let’s take fundraising infrastructure for example. Most nonprofit organizations lack sufficient infrastructure to bring enough money in the door.  They don’t have enough money to hire experienced fundraisers, buy efficient and effective technology to track donors, create compelling messaging and collateral, train their board in fundraising, and so on.  But with dollars to invest in staff, technology, planning and expertise, the organization could transform their fundraising function into one that raises many more times the amount of money that they currently do.

So how does a nonprofit organization find money to build their organization? Here are the steps:

  1. Create a Plan. Develop a road map for the future that includes a budget for the real costs of the real infrastructure and capacity you need to get there.

  2. Determine the Ask. Split the overall cost for these infrastructure elements into reasonable ask amounts given the relative capacity of your donors.

  3. Create the Pitch. Create a compelling capacity funding pitch that connects these infrastructure elements to an increase in your ability to create impact in the community.  A more seasoned development director means that you can raise more money, more effectively, more quickly. With that additional revenue, your services can reach more people.

  4. Analyze your Donors. Look for the individuals, foundations, and corporations who love what your organization does, have the ability to give at the ask levels you determined in #2, and could be made to understand the argument that money to build can allow your organization to do so much more.

  5. Explore Alternative Funding. Find new ways to fund capacity building. For example, PRIs, or program-related investments, (essentially loans to nonprofits) could be used to build fundraising  infrastructure because once a nonprofit’s capacity to raise money has been increased, the loan could be paid back out of the additional revenue. Explore creative options like this with funders.

  6. Make the Ask. Present your plan and pitch to the donors you have identified and educate them about the critical importance of capacity capital.

Money to build nonprofit organizations isn’t just lying around. Indeed, most donors claim that they aren’t interested in funding anything beyond direct services. But with a compelling argument for how money to build an organization can result in much greater impact, many more donors can become builders.

If you want to learn more about applying the concepts of Financing Not Fundraising to your nonprofit, check out our Financing Not Fundraising Webinar Series, or download the 27-page Financing Not Fundraising e-book.

Photo Credit: y_katsuuu

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My Wish List for SoCap 2011

Despite my frustration in an earlier post about this year’s Social Capital Markets Conference inability to fully integrate philanthropic and government capital into the discussion, I was reminded by a friend that we have actually come a long way in three short years. A keynoter at the first SoCap conference in 2008 noted that “we aren’t here to talk about nonprofits.” The fact is that just two years later not only were nonprofits and their philanthropic and government funders present in large numbers at the conference, but they had their own track. It was a huge step forward to have a devoted track focusing on the philanthropic capital market with Sean Stannard-Stockton at its head this year. The track brought some great work to light and started some important conversations.

In the spirit of continuing and expanding that conversation, here are the conversations/sessions I’d like to see at SoCap 2011:

  • More case studies like the Evergreen Cooperatives in Cleveland and the Evergreen Lodge in Yosemite (not related) that demonstrate innovative collaborations of capital across the philanthropic, government and private sectors
  • A working session that looks to compare/combine the nonprofit rating systems and GIIRS (Global Impact Investing Rating System)
  • Case studies of nonprofits who have crafted a growth or capacity capital campaign to unlock philanthropic capital for scale and change
  • A discussion about venture philanthropy. New Profit, Venture Philanthropy Partners and others pioneered the nonprofit capital space. Where are they now, what have they learned, and what are they doing to revamp the venture philanthropy model?
  • An update on the Social Innovation Fund (SIF), what they’ve learned, what the government’s plans are to revamp and scale it.
  • Beyond SIF, examples of what local, state and federal governments are doing to partner with philanthropists to expand capital for social entrepreneurs. Council of Foundation’s Public/Philanthropic Partnership is a place to start.
  • Stacked deals involving philanthropic and private capital are very tricky to create, as Julie Sunderland and others have argued, but what can we do or develop to make this less difficult? What sorts of terms are people playing around with? What’s working and what isn’t and how can we evolve this?
  • Donor-Advised Funds hold tremendous opportunity to unlock philanthropic capital, but are underused currently. What can we do to unlock that potential?
  • Where do community foundations fit into all of this? Often the nexus of a city’s philanthropic activity, they have been slow to climb aboard the social capital market train.  How can we unlock this potential capital for social impact?
  • Discussions about how we educate philanthropists about the need for capacity and growth capital in the nonprofit world. How do we make more philanthropists builders instead of buyers?
  • How do we get more foundations to use Program Related Investments and Mission Related Investments?

SoCap10 did a great job of starting the conversation, now I’d like to see that conversation move to the tactical. Let’s create new structures, incentives, partnerships, tools to unlock philanthropic and government capital for social impact.

What do you want to see at SoCap11? Add to the list in the comments.

Photo Credit: paratiger

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Socap Day 2: Unlocking the Nonprofit Capital Space

Day 2 of SoCap was by far my favorite. It started with an interesting keynote from Julie Sunderland of the Gates Foundation. She offered a perhaps more realistic, bordering on the pessimistic, view of the social capital market space. She said that Gates struggles to find entities that can absorb the size investments they want to make. They get excited about the idea of bringing together foundation, government and private dollars in stacked deals, but that the work is complicated and hard and they have yet to craft one of these deals simply because it is extremely difficult to determine the terms. All of this underlines what I’ve said in a previous post: in the nonprofit, philanthropic and government worlds there is still much work to be done to unlock capital.

The first session of the day for me was “Lessons of Behavioral Finance: Understanding and Overcoming Barriers to Impact Investing” with Hope Neighbor and her ground-breaking research, Money for Good, released earlier this year calculating a $120 billion pool of potential impact investing money that is sitting on the sidelines. Hope said that despite our desires to the contrary, people still very much think of their charitable giving as separate from their impact investing, “the reality is that people compartmentalize their money.” And only 3% of the population uses data to compare the organizations they give to.

My favorite session of the day, by far, was “Deep Dive Into the Evergreen Cooperative Initiative.” This session was exactly what I was hoping to see more of at SoCap this year. A group of leaders in Cleveland realized that the heart of their city was quickly deteriorating and no one was doing anything about it. They formed a coalition of the anchor institutions in Cleveland (Case Western Reserve University, Cleveland Clinic, etc), foundations, city leaders and others to create the Evergreen Cooperatives that brings career-track jobs and green, employee-owned businesses to the inner city, transforming a city that has lost 50% of its population in the last 50 years. Beyond the fascinating coalition, business model and results this project is achieving, lies its impressive financing. A combination of bonds, foundation grants, loans, HUD money and others launched this project and financed the 3 businesses they currently operate (a green laundry, an organic greenhouse, and a solar power company).  According to Evergreen leaders, “Cleveland wants to be where the world is going, not where the world is.”

To scale this project to create 5,000 jobs (the area needs 46,000 jobs), which will be the impetus to truly transform the inner city economy, they are creating a CDFI and looking to use PRIs and MRIs. What excites me so much about this project is not the spirit of collaboration and tremendous results, but how they are bringing public, private and philanthropic money together in a truly innovative convergence. THIS is the kind of social capital market I’m talking about. Impact investing is great, but it is only ONE piece of the puzzle. I would love to see more examples like Evergreen at SoCap.

The last breakout session I attended for the day was “Nonprofit Analysis: Beyond Metrics,” which gave a great overview of the growing nonprofit evaluators market through the lens of rating one nonprofit, DC Central Kitchen. It was interesting to see how Charity Navigator, the most well-known nonprofit evaluator, has evolved from a system driven purely by IRS 990 form overhead ratios to a three-pronged review including transparency and impact evaluations.

The end of the session gave me serious pause, however, when a member of the audience asked whether any of the evaluators might use the GIIRS system coming out of the impact investing world to rate nonprofit impact. Ken Berger admitted he wasn’t familiar with GIIRS and Tim Ogden of GiveWell said he was skeptical of social return on investment (SROI) calculations in general. Again, my point that the philanthropic and impact investing worlds aren’t communicating and collaborating becomes apparent. Wouldn’t that be amazing if impact in both the philanthropic and impact investing worlds could be measured in a comparable way? That would be truly innovative!

So, although Day 2 of SoCap provided much more conversation and examples of how the philanthropic and government capital markets are evolving, there is still much work to be done to bring both capital fully into the social capital market. Perhaps at SoCap 2011?

Photo Credit: Markets for Good

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A Watershed for the Social Capital Market?

One of the sessions of the RISE Social Entrepreneurship track was a panel of investors who fund social entrepreneurs (both nonprofit and for-profit).  One of the panelists was Scott Collier, Managing Director of Triton Ventures.  Scott has been a venture capital investor since 1991, serves on the board of the Entrepreneurs Foundation of Central Texas, and is working to engage Austin’s funding community in social innovation.  In the RISE panel Scott was on, a conversation began around mission-related investing, the missed opportunity currently facing foundations, and how a new move by the Gates Foundation may be opening up a whole new pool of funds to social entrepreneurs.  I asked him to write a post on this. It follows here.

I was recently fortunate to be on a RISE panel with a great mix of entrepreneurs and venture investors turned philanthropists, private foundation founders and social investors, all talking about investment in social enterprises.  The discussion emphasized the grant-making functions of the foundations represented on the panel and the exciting ventures that these grants were supporting. However, as often happens, there was no discussion about the potential for social impact investing by the investment functions of these organizations if they were to allocate a portion of their investment capital to activities that could produce both a financial return and a social impact.

I mentioned that this seemed to be a missed opportunity since the investment function of U.S. foundations manages about $550 billion whereas the grant-making function manages a much smaller amount: about $45 billion a year.  This would seem to imply that small program-related or mission-related investment allocations out of the $550 billion under management could represent much greater impact investing potential than would similar allocations of grant funds.  I also mentioned a cautionary tale as revealed in an LA Times article in 2007, where it was pointed out that the Gates Foundation, the world’s largest private foundation, was investing for a financial return in companies whose business practices were causing harm to individuals that were at the same time receiving benefits from NGOs supported by Gates Foundation grant funding.  Given that investment dollars comprise such a much larger sum, such returns-only investment practices could be undermining the value of grants, resulting in questionable net positive impact if viewed holistically.

What I failed to add to this conundrum is that the Gates Foundation has now recognized the opportunity to be a thought leader in making social enterprise investments out of their investment capital.  Below is an excerpt from the Gates Foundation website explaining features of their pilot $400 million PRI initiative.

Q. What is the [Gates] foundation’s new approach to Program-Related Investments?
A. We are working with a range of partners to use Program-Related Investments (PRIs) to deepen the impact of our work. We believe that investments are the right instruments to use in situations in which our program strategies are best served by partnering with revenue-generating enterprises, such as NGOs, financial institutions or companies. These entities may not be able to access investment capital from the private markets because the markets or entities that serve the poor may be perceived as too risky or costly to serve, or investors don’t have good information to assess the opportunities. By providing investment capital directly or by reducing risk to investors, we can help our partners access the capital they need to grow and demonstrate to the market that financially viable opportunities exist that serve the needs of poor or otherwise disadvantaged persons.  We know we can’t solve all problems with these types of investments – grant-making remains critical for those sectors that can never generate revenues or be addressed by market forces.

We have established a pilot program with an envelope of $400 million to invest in a range of investment opportunities. The capital for PRI investments or guarantees will be provided by this special $400M pool which will be managed by the CFO’s office of the foundation. Out of this pool, we will invest in PRIs that directly and meaningfully contribute to the achievement of the foundation’s charitable purposes.

Q. What types of investments will the foundation do?
A. We will evaluate a full range of investment opportunities that could include:

  • Debt investments such as loans to NGOs, financial institutions or companies;
  • Equity investments such as investments in venture capital funds or (less commonly) purchases of shares in companies;
  • Guaranty investments such as bond back-stops, credit guarantees, or insurance.
  • Any PRI opportunity must closely align with our program strategies, from increasing financing for agricultural smallholders in Africa, to supporting charter school facilities expansion, to increasing investment in global health technologies.

I spoke with a colleague who is close to Gates Foundation CFO Alex Friedman, who launched this PRI program, and he told me that a key part of the pilot launch was to organize a new group whose financial returns would not impact the performance objectives of the office of the CIO.  This was intended to free the new PRI group to focus more on social return than on financial return.

It is certainly exciting news that this $400 million, representing roughly 1% of the Gates Foundation’s capital under management, is now available for both financial and social return when invested in partnership with social entrepreneurs.  However, what may be even more exciting is that the intention of the move is to encourage other private foundations to do likewise and for Gates to thus be a catalyst for multiples of the $400 million to show up in the market as risk capital for social enterprises.  Could this be the beginning of large pools of capital available for direct impact investing, social venture funds and private equity funds, and the creation of a true continuum of capital availability in what is today a very nascent social capital market?

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Can PRIs Support Fundraising and Capacity Building?

Lucy Bernholz is hosting a great conversation on her Blueprint Research and Design website called “What Capital When?” As part of their work with the John D. and Catherine T. MacArthur Foundation in their Digital Media & Learning initiative, Blueprint is hosting this online conversation around the theories and strategies of program-related and mission investing to advance knowledge and research in the field. They asked that I do a guest post on using PRIs (program related investments) to improve the fundraising effectiveness of nonprofit organizations. Below is that post. You can also read the post on their What Capital When site here, and you can read the whole series here.

I think there is a tremendous opportunity that most foundations and nonprofits are missing.  PRIs (program-related investments) are an under-used tool that could provide much needed capital for nonprofits to transform how they finance social impact.

PRIs are loans that foundations make to nonprofits at low, or no interest.  At the end of the loan period (typically 3-7 years) the loan is repaid, or forgiven.  PRIs are usually used for capital projects or land purchases in the nonprofit world.  But they could also be used to increase the fundraising capacity of a nonprofit organization, through increased fundraising knowledge, planning, tools and staffing.  The current economic climate seems like the perfect opportunity for this new use of PRIs when foundations are trying to hold on to their dwindling corpus while maintaining their past level of community support.

A nonprofit could use a PRI to improve their fundraising infrastructure in several ways:

  • Create a strategic development plan. Many nonprofits don’t have the expertise or time to put together a strategy for how they will bring money in the door.  With funding to hire an outside consultant to put together such a plan, the nonprofit would have a much better chance of increasing their fundraising revenue.
  • Get fundraising training for their staff and board. If a nonprofit staff and board have the tools and expertise for successfully raising money, they will be more likely to do so.
  • Hire a seasoned Development Director. Many nonprofit organizations can only afford to pay the bare minimum for a Development Director, which means that they are often forced to hire someone with little experience who must learn on the job.  If instead they had enough funding to pay a market rate salary for a seasoned fundraiser, they could hit the ground running, increasing the likelihood of fundraising success.
  • Purchase a new donor database. A key element to success in individual donor fundraising is an organization’s ability to capture and use data about donors and prospects.  A good donor database makes this effort easier and more successful.
  • Upgrade their website, email marketing, social media efforts. As direct mail appeals (a nonprofit fundraiser’s traditional standby) continues to become less and less effective, nonprofits need to move effectively into the online world.  Funds for technology upgrades and staff could help them do this.
  • Launch a major gifts campaign. The vast majority of private funding in the nonprofit sector comes from individuals (80+%), so to stay competitive nonprofits need to move into the world of major gift solicitation.  But that takes expertise, staff, collateral and other infrastructure elements.

These are just a few examples of how nonprofits could make investments to strengthen their fundraising efforts. But currently it is difficult to find funding to support things like this.

But a PRI could provide an initial investment that sets the nonprofit on a path toward more diversified, more sustainable fundraising for the social impact they are working to create.

There are tremendous benefits to a PRI program like this.  First, for the foundation:

  • Increases their ability to meet past levels of giving, despite any losses they might have found in the market, because the loaned money will eventually come back to them.
  • Encourages their nonprofit grantees to be proactive in creating fundraising streams that will make them more sustainable.  Thus, increasing the likelihood that their nonprofit grantees a) won’t have to come back to them year after year for ongoing support and b) will become more sustainable and thus achieve greater social impact.
  • Stretches their capacity-building dollars further. Because PRI money eventually comes back to the foundation, they can increase their level of impact by helping more nonprofits improve their capacity than they could with grants alone.
  • Increases the level of accountability among nonprofit recipients because of the expectation of repayment.

And second, for the nonprofit:

  • More diversified and sustainable fundraising streams.
  • Increased fundraising knowledge and experience.
  • Increased ability to work towards social impact.

Although PRIs used in this new way seems, at least to me, to be an obvious win-win, very few foundations are doing it.  PRIs in general are used (according to the Foundation Center) by only a few hundred of the thousands of grantmaking foundations in the country.  And I know of only one example of a foundation using a PRI to upgrade the fundraisng capacity of a nonprofit (the KDK Harman Foundation in Austin just launched a program like this last Fall, but does not yet have any participants).

So what is holding foundations back from launching a PRI program like this?  A number of things:

  1. Nonprofits lack the expertise to put a plan together and pitch it to foundations. This is where Social Velocity comes in to help nonprofits create a plan to upgrade their revenue function and pitch that plan to foundations and other funders.
  2. Most foundations  have an aversion to capacity building funding and prefer that their money go to direct program service.  However, as more nonprofits can demonstrate to funders that capacity building actually results in even more impact, this aversion can be alleviated.
  3. Foundations lack awareness of or experience with PRIs.  However, this is changing, especially in the last year when the poor economy has made foundations increasingly interested in finding alternative ways to maintain community investment levels.
  4. Foundations that are experienced with PRIs are not aware of using them to improve a nonprofit’s fundraising function.

So there is a disconnect.  But I am optimistic that as nonprofits learn to put a plan together to upgrade their fundraising function and articulate to funders how PRI’s could finance it, more examples of this new use of PRIs will surface.

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A PRI Experiment in Austin Pushes the Social Capital Market Forward

I am so excited I can hardly contain myself.  There is something pretty amazing going on in the world of philanthropy in Austin, Texas.   I have been talking for awhile about how PRIs (Program Related Investments) could be used by foundations in new ways to build the revenue sustainability of a nonprofit organization.

Just to recap, PRIs are loans that foundations make to nonprofits at low, or no interest.  At the end of the loan period (typically 2-3 years) the loan is repaid, or forgiven.  PRIs are usually used for capital projects or land purchases, among other things.  But they could also be used to increase the revenue-generating capacity of a nonprofit organization, through improved fundraising function or launch of an earned income enterprise.  The current economic climate seems like the perfect opportunity for this new use of PRIs when foundations are trying to hold on to their dwindling corpus while maintaining their past level of community support.

As I wrote in an earlier post here’s how it could work:

What if a foundation, or a wealthy individual, loaned a nonprofit $100K+ for a 2-3 year term.  Then, the nonprofit could use that capital to invest in their fundraising infrastructure in order to diversify and be more strategic in raising unrestricted dollars.  They could hire a seasoned Development Director, purchase a new donor database, upgrade their website and email marketing efforts, launch a major gifts campaign, train their board, and so on.  The idea is that all of these investments would pay for themselves in 2 or 3 years, at which time the nonprofit could pay back the individual or the foundation.

Well, the KDK Harman Foundation, an Austin foundation started by Janet Harman, who has been on the cutting-edge of Austin philanthropy before, just launched a PRI program to do just this.  According to their website:

KDK-Harman Foundation is seeking proposals from current grantees for Program-Related Investments (PRI) for its August and November board meetings…to (1) develop or expand their social enterprise efforts; or (2) expand their development and fundraising team. Although PRIs are used primarily for real estate loans for affordable housing or community facilities, the KDK-Harman Foundation will utilize PRIs to support loans to established, financially strong nonprofit organizations within the Foundation’s program areas to help grantees expand their scope of services and/or to become more sustainable. Specifically, the Foundation is seeking ways in which grantees could embrace social enterprise as a means to financial stability. Through a loan from KDK-Harman, the grantee could develop or expand its revenue generating operations and within three years repay the loan. Another example is to enhance the development team whereby the Foundation loans funds to hire additional fundraising staff. Within three years, the loan can be repaid through the additional funds raised. Over time, the organization should be much more financially secure with either a financially successful revenue stream or a larger development team.

I love it.  KDK Harman is doing two things with this new program.  First, they are increasing their ability to meet past levels of giving, despite any losses they might have met in the market, because the loaned money will eventually come back to them.  And second, they are encouraging nonprofit organizations to be proactive in creating revenue streams that will make them more sustainable.  Did I mention I was excited about this?

PRIs are used by other foundations (although according to the Foundation Center only a few hundred of the thousands of grantmaking foundations in the country use them), but I haven’t seen PRIs used in exactly this way before.  If you know of other examples of PRI programs elsewhere in the country that are used to increase a nonprofit’s revenue-generating ability, let me know.  But in the meantime, I’m so impressed with KDK-Harman. They are seizing the opportunity of challenging times to create a more sustainable nonprofit sector.

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