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raising growth capital

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

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In the Trenches Raising Growth Capital: An Interview with Anna Land

In this month’s Social Velocity interview we are talking with Anna Land, founder of Heart House, a nonprofit after-school program for low-income children with some pretty impressive results and big plans for growth.

Anna and her board are looking to expand Heart House to 5 Texas cities and increase the number of kids served by almost 20 times in the next 10 years. She is currently shopping her growth plan around to philanthropists. Anna has some interesting insights about raising nonprofit growth capital, particularly from philanthropists who have never heard of the concept.  Full disclosure: Social Velocity helped Anna put together her growth capital pitch to prospective funders last year.

You can read our past Social Velocity interviews here.

Nell: You started Heart House several years ago and had great success in Austin and Dallas, serving 500 children each year. What made you suddenly think about going statewide and growing the program to 9,000 children by 2020?

Anna: The leadership has been thinking about this since 2004 when we were at our 4 year mark and felt that we had some compelling, consistent data that indicated that we were on to something, and perhaps should begin working on replicating and scaling to serve more children.

In 2005 I was selected for the Community Sabbatical Research Leave Program, created and administered by the Humanities Institute at The University of Texas, which provided time, resources and faculty advisors in order to study effective growth strategies of successful nonprofits.  I was fortunate to be paired with the perfect mentor, Dr. Sarah Jane Rehnborg of the LBJ School of Public Affairs. We interviewed 10 regional and national organizations at both the headquarters and local levels to discover best practices and essential infrastructure elements.

Next, the staff of Heart House articulated our core values, our vision for the future, and a set of minimum quality standards.  We also began the ever-expanding work of codifying our model.  We plan to complete our “Heart House in a Box” in time for our 3 new centers scheduled to open in 2011.  We also created the Gateway database which allows us to track weekly data across multiple sites.  The Webber Family Foundation, the Michael and Susan Dell Foundation, and the KLE Foundation funded this early capacity work.

Next, in 2008, the KDK-Harman Foundation convened four organizations to develop their growth plans in a peer group environment.  It was fabulous to work alongside Maile Broccoli-Hickey from English at Work, Melanie Moore from Badgerdog Publishing, and Kathrin Brewer from Austin Partners in Education.

And that’s the point in time where I met you, Nell.  The KDK-Harman Foundation paired Heart House with Social Velocity, and you worked with me to turn our growth plan into a growth pitch.  My mentor, Gregg Burt, serial entrepreneur and CEO, agreed to chair the statewide expansion initiative.

Nell: You are currently out raising growth capital, which is a pretty foreign concept to most philanthropists. How are you faring? Is the concept gaining some traction?

Anna: It’s certainly true that growth capital is still a new concept in Central Texas but I’m hearing more and more these days about the need for this investment – that’s encouraging to me.  I think this evolution is thanks to influence from two sectors:  1)  emerging philanthropic funding models from the East and West coasts, and 2) the vibrant VC community in Austin.

In his Stanford Social Innovation Review article, “Money to Grow On,” William Foster suggests that grantmakers follow the approach of venture capitalists when making investments: high performing organizations with proven success should be rewarded with funds needed for ramp-up and to achieve long-term social change.  It may feel that Central Texas is slow to embrace this philosophy, but when I consider the relatively young age of Central Texas foundations, operating with little or no staff, we have some true thought leaders who are actually evolving rapidly in “foundation time.”

So, how are we faring?  Pretty good – we have 40% of the investment needed to get us to the point where the model no longer needs outside investment to support expansion efforts.   We believe we can fill the gap with a small group of investors.

Nell: What do you do to overcome discouragement when you meet with potential funders who don’t understand what you are trying to do? How do you motivate yourself to continue to go out there day after day to raise growth capital?

Anna: I believe that this growth is meant to be.  I believe there are plenty of funds available for Heart House to serve 18x+ more children.  I believe our expansion is a vision and a promise that God has put in our hearts.  And I believe that we can achieve what we can conceive.

The visualization I keep front of mind is that of walking across a vast ocean.  When I and my team walk forward with confidence, the stones rise up in front of us to form the next steps of the bridge.  When we stop walking due to fear, the stones stop rising.  Efforts to monkey around with the walk too far ahead of us also are unsuccessful.  We have a clear sense of direction and purpose, but we do not have to control every element and form the path takes because we know that it will all work out the way it is supposed to.

Doing our part is an important part of this philosophy.  We must remain abundance-minded, we must work hard every day to keep the trust of the donors and the families we serve, and we have to inspire and influence all that we come in contact with.

Naturally, as a human, I have days where I am discouraged, tired or fearful, but when I stay in abundance, finding this capital becomes a combination of a hunt and a matchmaking game.  When a donor says no, I mentally thank them for being one more no that puts me one step closer on the path to the perfect donor.  And when I feel particularly sorry for myself, I reread the biography of someone like Elizabeth I or John Adams.  What do I have to fear compared to the challenges they faced?   I am lucky to be able to do this fun and engaging work alongside such talented and inspiring cohorts.

Nell: What do you think holds other nonprofits with a great model back from undertaking dramatic growth?

Anna: Fear is the biggest growth inhibitor.  If it has been determined that growth is a sound strategy, but the leadership does not want to undertake that growth, I would say that that leadership believes that the risks of growth– real or perceived – outweigh the reward.  The larger your vision, the larger your exposure to failure – sometimes very public failure.  An organization has to be ready for grand success as well as some skinned knees.

Other growth inhibitors can be broadly categorized as lack of financial capital or human capital.  Specific to the Heart House model we have:

  • Lack of available space that meets our minimum clubhouse location standards
  • Lack of efficient and scalable infrastructure — To date, Heart House has put 85% of its policies, procedures, and practices into our “Heart House in a Box” implementation kit.  However, we still must refine and tighten the remaining infrastructure elements by end of 2011.
  • Lack of funding specifically for growth groundwork, quality control, and other central services, often thought of as “overhead” by philanthropic funders (but not business funders)

Nell: What does it take to prepare an organization for growth? What are the elements required to scale?

Anna:

  • Leadership with vision, accountability and integrity
  • Commitment to and resources devoted to maintaining the highest quality across the organization
  • Repeatable processes and procedures
  • Efficient and scalable infrastructure that supports dramatic growth
  • Broad, diverse and sustainable funds for growth
  • Recognizable and influential brand presence

Nell: How do you balance the day-to-day running of your nonprofit with your other full time job of planning, raising money for and executing growth?

Anna: I tried that for a while, and it was unmanageable.  We now have city leaders (known locally as executive directors) that report to me directly, and manage the day-to-day operations and fundraising, while I and a small staff plan, raise money for, and execute on the critical elements listed above.

Nell: What needs to change in the nonprofit sector and in the philanthropy that funds it in order for more growth of successful solutions to happen?

Anna: Putting in place the strategy, infrastructure, funding, and, above all else, the leadership required successfully scale organizations.  Why is the investment in growth seen as “overhead” for nonprofits, but a no-brainer for for-profit companies?   As Nancy Roob and Jeffrey Bradach point out in their article, “Scaling What Works”, the effect of this bias is “an organizational form of chronic fatigue syndrome that burns out nonprofit leaders and compromises their ability to address social problems…There is no more powerful way to address many of society’s most important challenges than to harness what we now know works and make sure those solutions reach those who need them.”

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