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

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

Tags: builders instead of buyers, community foundations, Council of Foundation Public Philanthropy Partnership, Evergreen Cooperatives, Evergreen Lodge, GIIRS, Julie Sunderland, Mission Related Investments, MRIs, New Profit, philanthropic capital, PRIs, program-related investments, Sean Stannard-Stockton, SoCap, Social Capital Markets conference, Social Innovation Fund, Venture Philanthropy Partners

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.

Tags: Blueprint Research and Design, Development, Foundation Center, Fundraising, John D. and Catherine T. MacArthur Foundation, KDK Harman Foundation, Lucy Bernholz, nonprofit, PRIs, program-related investments, What Capital When