A Revolution in Nonprofit Finance: An Interview with Clara Miller

Last month we kicked off a new, monthly Social Velocity blog interview series where I interview leading thinkers and doers in the social innovation space. Our inaugural interview was with Kevin Jones co-founder of both Good Capital, one of the first venture capital funds that invests in social enterprises, and the Social Capital Markets Conference (SoCap) which marks its third year with the upcoming October event.

This month’s Social Velocity interview is with Clara Miller, President, CEO and founder of the Nonprofit Finance Fund, a national leader in nonprofit, philanthropic and social enterprise finance. Directly and with others, NFF has leveraged $1 billion of capital investment into nonprofits, and  provided over $200 million in direct loans. Clara Miller was named among The NonProfit Times “Power and Influence Top 50″ four years in a row and is a board member of GuideStar and Grantmakers for Effective Organizations.

Nell: You and the Nonprofit Finance Fund have initiated this idea of equity capital for nonprofits, or money to “build” organizations rather than the tradition funding to “buy” services. Do you think the idea of equity capital for nonprofits is catching on?

Clara: First of all, I should say that many people have contributed to the idea of a nonprofit version of equity over the years.  My NFF colleague George Overholser has been a field leader.  He focuses almost exclusively on the version we call “growth” capital, which is used to rapidly build organizations, changing what they do through major investment undertaken around a single set of metrics, business plan, and ideally, with all funders acting in concert.

And yes, I do think the broader notion of “equity”—and for that matter, the importance of the balance sheet in its entirety—is catching on, especially among major foundations, capital campaign veterans and those familiar with these concepts in the for-profit world.  The broader concepts of “building” organizations and “buying” services, and how financial roles differ, are resonating strongly with both organizations and funders.  We have a foundation partner that has simply put the question, “is this a “buy” grant or a “build” grant?” on the program officers’ intake checklist.

Nell: How do traditional nonprofit capital campaigns, which are predominantly focused on raising money for new buildings, fit into all of this?

Clara: We think these “growth capital” and “equity” principles comprise an ideal way to think about (and operate) a successful capital campaign.  Our early work in the 1980s (when we were Nonprofit Facilities Fund, and exclusively financed  “community facilities” with loans) revealed that a rash of problems would almost invariably follow capital campaigns for facilities: cash crises, burnout, funder fatigue, “night of the living dead” program operations, the need to lease excess space at below-cost rent…you get the idea.  It was a real eye opener. We learned a lot about the need for truly unrestricted “growth capital,” in addition to funds focused (and often restricted) to build and fit out the facility.  Among the NFF-documented  lessons: that facilities projects typically need 3 to 4 times the bricks and mortar cost for working capital to cover program and administrative growth needs; that the building frequently changed the business model radically, but planning never covered the whole enterprise; and that putting large amounts of cash into an illiquid asset while expanding operations was problematic on a number of levels.  Also, many of these building projects came with opportunity costs: organizations weren’t investing in new technology, upgrading skill sets, or replenishing cash reserves.

Beyond facilities projects, capital campaigns frequently focus on other (typically illiquid) parts of the balance sheet: building an endowment, or on the acquisition of, for example, a program asset (such as a painting or piece of medical equipment). Thinking holistically about improving or acquiring illiquid assets, via a campaign for growth capital, can better the situation.

Nell: The for-profit sector currently enjoys a broader and deeper array of financial vehicles than does the nonprofit sector (seed funding, angel investors, growth capital, stacked deals, etc.) do you anticipate that the capital market for nonprofit organizations will become more robust and what will it take for that to happen?

Clara: I’ll push back a little and say that the vast majority of both nonprofits and for-profits (that are small, with less than $200K in revenue) have approximately the same level of access to similar financing vehicles: sweat equity, seed/angel funders/investors (friends and family, the first foundation grants, etc.), credit card debt, bank loans, retained earnings, etc.   Then there is “growth capital” or “capital grants,” which a very small proportion can access in either sector.  And while large for-profits are much, much larger than large nonprofits, large nonprofits have reliable access to some highly sophisticated funding and financing vehicles that for-profits don’t (and vice versa).  Some very large nonprofits have access to for-profit subsidiary ventures and investments—and some are highly sophisticated (universities investing in development of intellectual property and associated products, CDFIs with venture funds, public media with development and sales of program assets, and others).  And on the debt side, much of nonprofits’ “capital market” is for-profit-run (bank debt, investments, tax-exempt bonds, etc.)

The most important barrier to enterprise scale (for either sector) is not so much lack of access to capital as it is a scalable, focused business model with reliable net revenue.  Once you have those—or evidence that they are possible—capital will flow.

But that said, we’re talking about a couple of “market wide” dysfunctions.  The first is that despite highly resourceful managers, sophisticated board members and billions of dollars of revenue and capital funds, there is no tradition of “enterprise finance” in the sector.  “Pretty bad ‘best practices’” designed to make nonprofits more efficient and fiscally prudent cost the sector dearly.  Confusion about the direct funding of programs (it’s not possible, most of the time you need to fund an enterprise to deliver programs) means capital is mixed up with revenue, growth with regular operations, and “build” grants with “buy” grants (and a variety of hybrids!).  This wreaks financial havoc in growing organizations. Missions—along with the public—suffer.

The second problem is that there’s no really reliable signaling mechanism for organizations to fold their tents, pass their programs to another organization, and go out of business.  In the for-profit world, that would be financial failure; in our world, that’s not so straightforward: so we hang in there, meaning resources that might go to a stronger program remain tied up.  It also means that the biggest and richest players have (and, largely, keep) the vast lion’s share of resources (even more pronounced than in the for-profit world).

Finally, there is a problem with access to charitable revenue.  Promising, mid-sized organizations—especially those serving low-income people (and therefore lacking access to the traditional source of capital in the sector, individual donors) have a difficult time building the operation they need to grow.  Foundations are the logical path here, and having foundations embrace “enterprise friendly” practices—including growth capital and build-buy understanding—can go a long way toward changing that dynamic.  Establishing a field-wide understanding of basic enterprise finance principles will help insure that growth capital campaigns become true innovation with long-term staying power, rather than a short-term novelty.

Nell: Growth capital for nonprofits is mostly only available to larger nonprofits that have the capacity to prove the results of their model. Do you think growth capital will increasingly become available to the bottom 80% of nonprofits (those with a budget less than $1 million), and how and when do you see that happening?

Clara: Our goal is not that all organizations of every size and business model have access to growth capital and pursue aggressive growth goals ASAP.  That’s neither possible nor desirable in either the for-profit or the nonprofit worlds.   In both sectors, some business models may not be scalable, and that’s ok—in fact, it’s good.  Nobody wants their favorite neighborhood clam shack or Italian restaurant to go public or become a Pizza Hut.  Diversity is good; and most people like things about both large and small enterprises. This is true in any sector, where economies of scale and preservation of quality are frequently subject to the laws of diminishing returns.  Growth capital is not for everyone, and it is only one tool in the enterprise tool box.

The more important revolution is to make broadly accessible the tools and principles of enterprise finance—with a clear understanding of the realities of the commercial proposition of the sector (i.e., there’s a reason we have a nonprofit sector). There are well-managed and poorly managed (and capitalized) enterprises of all sizes and tax statuses, and there are scalable and non-scalable ones as well.  Most critical on the scaling front is that our sector embraces and deploys the broad set of principles that make enterprises of any size or shape effective in reliably achieving great results.  Trouble arises when a specific social benefit or innovation is so compelling that we all want the maximum number of people to benefit from it: Our failure to use the principles of growth capital and proper scaling techniques to assure results while growth proceeds is (and has been) tragic for the social sector, and a change in practice can help.

Nell: How do you think the Social Innovation Fund will change the capital landscape for nonprofits?

Clara: I think the SIF already has raised the profile of the ideas around growth capital and scaling discussed here.  And it certainly has the attention of a group of large foundations, a significant number of whom are applying as intermediaries.  I think it took courage for them to apply, and courage for the SIF to get developed. At the beginning there will be some fits and starts, and government procurement can be dicey (especially when it’s trying to be capital rather than revenue), and foundations are trying to make it work in this way for the first time.  That said, it’s very exciting for us to see “growth capital,” which is the core concept, being given a whirl by both the White House and the Foundation world.

Nell: Venture philanthropy funds (that provide growth capital to nonprofits) and social venture capital funds (that provide capital to double bottom-line businesses) currently don’t interact very much in the marketplace. Do you see an opportunity for greater integration of nonprofit and for profit social investing? And if so, what will it take to get there?

Clara: I think there is increasingly frequent interaction between for-profit and non-profit business models (and entrepreneurs) on the conceptual level, and that’s being translated into some compelling platform-agnostic enterprise structures to accomplish social ends in many sectors—health care, research, arts and culture, media, housing—are all examples.  And interactions may not be best between two enterprises that are both at the “venture” or “start up” stage.  A start-up nonprofit may want to partner with a fully-scaled for-profits (and this is common), while a fully-scaled nonprofit may want to create (or house) a venture for-profit to help reach certain social goals.

On the “deal” level, I think there’s a reason to maintain a bright line between the nonprofit and for-profit tax status.  I favor crisply defined hybrids (of which there are a variety) over mushiness (we’re a for-profit but we are good people doing socially beneficial work) because they are more likely to stand the test of time and skepticism, and since ownership and tax structures have bright-line legal and moral duties attached to them.

Tags: CDFIs, Clara Miller, equity capital for nonprofits, George Overholser, Good Capital, Grantmakers for Effective Organizations, growth capital, GuideStar, Kevin Jones, nonprofit capital campaign, Nonprofit Finance Fund, NonProfit Times, Social Capital Markets conference, Social Innovation Fund, White House

The Future of Financing Impact: An Interview with Kevin Jones

I am launching a new regular interview series on the Social Velocity blog that will feature discussions with the leading thinkers and doers in the social innovation space. I will talk with philanthropists, social investors, social entrepreneurs (from the nonprofit and for-profit side) and others leading the way in this new space. What they all have in common is that they are doing really exciting,  interesting, provocative, challenging things that are pushing the social innovation movement forward.  We will discuss what they are contributing to the space, what excites them, what concerns them, what we should be thinking about, and what’s next.

Our inaugural interview is with Kevin Jones. Kevin is a visionary in the social investing and social entrepreneurship arenas having launched two important entities in the field. He co-founded both Good Capital, one of the first venture capital funds that invests in social enterprises, and the Social Capital Markets Conference (SoCap) which marks its third year with the upcoming October event. He is also part of the team launching the first US node of The Hub, a network of more than a dozen work spaces for social entrepreneurs in cities across the world from Cairo to London.

Nell: This is the third year of the Social Capital Markets conference. You have said that the first year defined the social enterprise landscape and the second year validated the space, so what are you hoping that this year accomplishes?

Kevin: We want to find out what the next thing is that this community, this movement, this asset class should do, the next big obstacles to overcome, the place where we could put our efforts to make the biggest difference. Now that people are taking us seriously there is a need to understand how we fit into the landscape and how impact investing can leverage its, uh, impact by partnering with nonprofits, foundations and public sources of funding.

Nell: There are an increasing number of conferences in the social innovation/social entrepreneurship space. How is SoCap different? What is the value add of this conference?

Kevin: SoCap brings together more people from a broader perspective and approach to the intersection of money and meaning than any other conference. It’s the place your most likely to run into people you don’t know but should know. Cross pollination and expanding the dialogue while keeping the conversation focused on making a difference in an increasingly intelligent, and increasingly collaborative way is what SoCap10 is about.

Nell: It’s true that SoCap brings together an amazing group of thought leaders, social entrepreneurs and social investors for 3 days in San Francisco, but what happens after the conference ends? What changes to the social enterprise/social investing space have you seen as a result of the past two SoCaps?

Kevin: I’ve seen startups get funding. I’ve seen people from the corporate world get jobs in social enterprise, I’ve seen funds raise multiple millions to achieve scalable social impact. I’ve seen deep and lasting partnerships form between people making a difference. I’ve seen the market fragment and pieces of SoCap pop up in either regional approaches or specific vertical markets, from community activists to nonprofit funders, to technology conferences about money. The market at the intersection of money and meaning is a meme, an idea that I see growing and finding a home within a lot of other groups’ frame of reference.

Nell: This year you have made a deliberate effort to include nonprofits and philanthropy in the conference with the new Tactical Philanthropy track, as opposed to a greater focus in past years on the for-profit side of social entrepreneurship and social investing. Why the shift and what are you hoping comes out of this widening of the net?

Kevin: Well, nonprofits and philanthropy are a big part of the market of money and meaning, now that’s been established as a real place, this intersection of money and meaning. You could even say the new for-profit impact investors have crashed a party long established by philanthropy. It was past time to acknowledge that, and by bringing in Sean Stannard-Stockton [CEO of Tactical Philanthropy], we’ve got an expert and convener with far deeper knowledge than I have in the area to lead the way. SoCap10 is a lot about translation as people learn to work together across boundaries and frames of reference to build a bigger social capital market than either philanthropy or for-profit impact investing could do on their own. And of course, we also have a much bigger public sector funding participation than we have before. Some of the practical thought leaders are joining us to think and talk about what the next thing to do is.

Nell: How has the social enterprise space changed in the last three years and where do you see it going?

Kevin: It’s bigger. People are taking it seriously. We are starting to see some of its limitations, and some of the areas where it needs to grow. It used to be the cutting edge, out there doing this new thing. Now it’s the leading edge, connected to other groups and partners. I think I see the old hero myth dying out and people recognizing that we need enterprises that go beyond the heroic visionary founders, that deal with necessary founder transition issues to grow organizations with scalable impact. Or maybe that last part is wishful thinking.

Nell: What do you hope the social enterprise landscape looks like when SoCap 2015 rolls around?

Kevin: I do hope we have grown beyond the heroic visionary entrepreneur as our model. I hope the cutting edge, change making, risk taking aspects of the movement meets asset class are still intact while it becomes more tightly coupled to public sector and philanthropic efforts to make a difference. I hope it has found a room for the crowdsourced capital, like more lending platforms, in new areas like fair trade, and beyond microfinance. I hope there is a deeper linking between efforts to eradicate poverty in the U.S. and internationally, market growth while preserving the upstart innovation nature of what makes social enterprise a great positive force for disruptive innovation.

Tags: Good Capital, Kevin Jones, Sean Stannard-Stockton, SoCap, Social Capital Markets conference, Social Entrepreneurship, social investors, Tactical Philanthropy, The Hub

The Social Capital Markets Conference 3.0

I just registered for this year’s Social Capital Markets Conference held in San Francisco in October. It is my favorite conference in the social innovation space for a number of reasons, and I think this year’s conference (the third) may just be even better.

The Social Capital Markets Conference brings together social entrepreneurs (both for-profit and nonprofit, although the latter have gotten less airtime in past years) and those who invest, or would like to, in them.  Last year it really felt as if the conference and the incredibly talented and visionary people attending it were at the beginning of something pretty amazing, new ways of providing sufficient capital to social solutions.

This year promises to go much broader and deeper exploring the financial tools and vehicles that social entrepreneurs need and how we create them. For starters, Sean Stannard-Stockton of Tactical Philanthropy is addressing the conference’s tendency in past years to downplay nonprofits and philanthropy at the conference by leading a new “Tactical Philanthropy Track” that will, as Sean has said:

Bring more donors and nonprofits to the “social capital markets table.” To that end, we’re building a series of panel sessions that examine the way in which philanthropy is an integrated part of the social capital markets, not a separate activity. Our sessions will give donors, nonprofits, investors and for-profits the opportunity to examine together the role that philanthropy plays in social capital markets.

Secondly, representatives from the Bill and Melinda Gates Foundation will be at the conference to discuss their decision to put $400 million behind their new Program Related Investments program, which I’ve discussed before as a watershed for the social capital market. The SoCap conference website explains what the Gates session will do:

Gates foundation will discuss the foundation’s PRI initiative including the rationale for charitable investment, the value of investment partners to leverage expertise and capital, and the foundation’s hopes for philanthropy in the social capital market. Remarks will be followed by a deep dive into their experience putting this PRI approach to work with Root Capital.

The Gates Foundation decision to put 1% of their capital into a fund to provide risk capital to social entrepreneurs has the potential to encourage other foundations to similarly experiment with new tools for investing in social entrepreneurs, which ultimately means more dollars in the social capital market.

It’s exciting to see what started three years ago as a small conference of less than 600 (a number achieved only at the last minute by a deluge of laid off investment bankers from the financial collapse) becoming arguably the most important conference in the social innovation space. I hope to see you there!

Tags: nonprofit, Philanthropy, Social Capital Markets conference, social entrepreneur, Social Investing, Tactical Philanthropy

Nonprofits and the Emerging Social Capital Market

Last week’s Social Capital Markets Conference was an amazing experience.  You really felt as though you were at the beginning of something pretty innovative.

The financial market collapse of the last year has given the emerging social capital markets, where social impact and money converge, a voice and credibility.  Indeed some social investments, like those in the microfinance arena, have actually far outperformed the financial returns of the traditional capital markets in the past year.

Will it last?  And will money begin to flow more readily to organizations and projects that promise a social return?  Will, as some at SoCap forecasted (or perhaps hoped), impact investing become a significant part of a normal investor portfolio in the next five years? Will social impact become a necessary and prevalent part of the traditional capital marketplace? Who knows.   This whole space is evolving, and it is much too soon to understand how it will all play out.

One thing, however, that was lacking in last week’s conversations, and is worth a larger discussion, is how nonprofits, those organizations that have been creating “social impact” since before it was cool, fit into this emerging market. As I mentioned in earlier post, attendees to the session I moderated, “Growth Capital for Nonprofit Social Entrepreneurs,” appeared hungry for information, tools, advice, insight about how their organizations could play in this emerging space.

If you think of the overall market as a continuum with traditional charities on one end and traditional businesses on the other, the social capital marketplace, then, is everything in between.  It most certainly includes social businesses–businesses that not only make a profit, but also contribute some sort of social impact (like wind farms or organic groceries).  And there are emerging investment vehicles that can provide investors a financial return (sometimes equivalent to a traditional market rate return) in addition to a social impact return.

But the social capital market must also include new financial vehicles for nonprofit organizations. In order to effectively provide the public goods that for profit businesses (both traditional and social businesses) can’t or won’t provide, nonprofit organizations require seed funding, growth capital, capacity capital, loans, equity, grants, operating revenue and so on.

Although there was some discussion of these financial needs, the nonprofit side of the social capital market discussion was not as prevalent last week. And indeed some at the conference, including conference co-f0under, Kevin Jones, refer to nonprofits as “our cousins” in this space.  Indeed, the keynoter at the first SoCap conference  last year encouraged the audience to “set aside” nonprofit organizations because they were not what that conference was about.  And I have had a few conversations with leaders in the social business space who have told me: “Innovation will never come from the nonprofit side.  It must come from the social business side.”

But nonprofit organizations are very much part of this conversation and this emerging market. Social impact is not a new thing.  As much as those of us assembled at SoCap last week would like to believe that we are pioneers in all things, we are not.   Many of the financial vehicles emerging in this new space are exciting and new.  But creating social impact through entrepreneurial efforts is not new.

Nonprofit organizations have been around for a long time.  And their reason for being has always been to create some sort of public good that was not addressed by the market.  That is not to say that it has been done right.  Many would agree that the nonprofit sector and the philanthropy that funds it are dysfunctional, even broken.  And I think most of us would agree the government sector is fairly broken as well.

But we cannot discount and dismiss either sector.  In the true spirit of the social innovation space, we must recycle and reuse the nonprofit and government sectors, just as we are refashioning the private sector.  We must reconfigure the assets of all three sectors to turn them into more effective, more productive, higher functioning sectors that can work with, not separate from, each other to create solutions.

What does that look like?  It means that venture philanthropy funds are sharing investor prospects with social venture funds and vice versa.  It means that investors interested in a social return have portfolios that include not only social businesses, but also nonprofit deals.  It means that foundations are investing in both for profit and nonprofit social impact organizations.  It means that the SoCap conference list of attendees and speakers come equally  from all three sectors (public, private, nonprofit).  It means that the majority of nonprofit organizations that have an interest in and capacity for growth have access to growth capital and management expertise to scale.  It means that a nonprofit that is solving social problems is just as sexy and gets just as many resources, respect and mind-share as a social business that is doing the same. It means that those working on changing laws to help social entrepreneurs look at both for profit and nonprofit structures, incentives and restrictions.

The creation of the social capital market is a bold, chaotic, possibly insane, but potentially game-changing endeavor that has the power to completely rework how money flows through the market to shape society. Let’s not get bogged down in dichotomies and factions, rather let’s take a bigger picture view of the essence of what we are attempting to do.  And that is to completely reconfigure, and create a productive convergence among, the three sectors. Now that would be innovative.

Tags: capacity capital, government, growth capital, investors, nonprofit, Philanthropy, SoCap, social business, Social Capital Markets conference, social entrepreneur, social return

Organizing the Chaos

At the beginning of anything there is chaos, so it is with the creation of the social capital marketplace.  Day 2 of SoCap was about understanding and starting to discuss the chaos that is emerging in this marketplace.  As Antony Bugg-Levine from the Rockefeller Foundation said in the plenary about creating infrastructure for this new market, there are a lot of or’s right now, but we would like to make them and’s.  He meant that there are opposing ways of thinking about and doing things in this emerging market, but we would like to be at a place where we don’t have to choose, where we can have both, instead of just one of the options. Some of the or’s he mentioned are:

• Knowing vs. believing
• Measuring vs. doing
• Mission vs. scale
• Story vs. substance
• Metaphor vs. methodology

And I would add to that:

• Nonprofit vs. for profit
• Financial investing vs. philanthropy
• Venture philanthropy vs. Social investing
• Government vs. private money

And the list goes on.  The social capital market is emerging from a binary system of financial investment on one side and philanthropic donations on the other.  Mission and money never mixed.  That either-or, however, is becoming an and.  So too, are so many other distinctions.  It used to be that a nonprofit organization was about social impact and a for profit was about profit.  Now it’s both. And so on.

But what we are talking about is a radical shift in so many areas.  It can be overwhelming and chaotic.

But in order for this market to survive we need to organize it.  And that list is long:

• We need to create metrics for determining social impact
• We have to create various financial vehicles for the various projects and organizations out there trying to survive
• We have to change the rules and laws to make them more accepting of these new entities
• We need to figure out what business models make sense and can thrive
• We have to determine how and when to scale great ideas
• We need to drive down the high transaction and search costs in the field
• We, as entrepreneurs who dislike the bureaucracy of government, have to engage on a policy level to make change
• We have to effectively market and communicate the benefits of social investing in order to broaden the reach of the market beyond the few who have tried it

The list goes on and will take time.

There is such diversity at SoCap and that diversity is representative of the social capital markets themselves.  As one participant put it “We are 1,000 outliers.”  There are bankers, college students, nonprofit execs, philanthropists, VCs all brought together by a single desire to make money work better for the world. But that tremendous diversity can create dichotomies, distance, tension.

For example, the session I moderated yesterday on Growth Capital for Nonprofit Social Entrepreneurs. I feared that because the nonprofit side of the market had been under-represented at last year’s conference that there may not be much interest in the topic.  To my surprise, the room was absolutely full, with probably close to 80 people in attendance. And there was a palpable sense of hunger for information among the group about where nonprofits, who have been doing mission work for years, fit into this new market.

But day 3 of SoCap is about to start, so I will leave all of that for a later post.

Tags: Antony Bugg-Levine, nonprofit, Philanthropy, SoCap, Social Capital Markets conference, social entrepreneurs, social impact, Social Investing

The Beginning of a Movement

You really get the sense here at the edge of the San Francisco Bay at Fort Mason Center that you are at the beginning of something amazing.  There are 1,000 of us here at the second annual Social Capital Markets Conference (SoCap), and there are some amazing people, many of whom have been toiling away for the last decade or so trying to convince investors, funders, donors, organizations, governments that there is no longer a binary system of philanthropic money and investment money.  There is a third way where money can have a social and a financial return, and there are countless ways to do that.

Day One was amazing.  The opening plenary had Sonal Shah, the new head of the White House Office of Social Innovation speaking and then joining a panel of experts on government’s role in the emerging social capital markets.  Much of the discussion centered around the $50 million Social Innovation Fund recently approved by Congress, but really that’s such a small part of the potential for collaboration with government in this new movement.  The takeaway from the session for me was that because this is such a new movement, no one has a playbook, and it is really up to us, all of us, to chart this new territory and define and describe how we want government to be involved.  And government really must be involved because they have tremendous resources and the problems we are all attempting to solve cannot be solved without that 800-pound gorilla.  Exactly what the right role for government in all of this is, is still very much to be determined.  But I’m hopeful that we may have some clearer answers on that when SoCap10 roles around.

For the only Session block of the day I chose Sean Stannard-Stockton’s Donor Advised Funds session.  This was an eye-opener for me in terms of the power and opportunity that donor advised funds hold, on several fronts.  First, the minimum investment requirements to start a donor advised fund is declining.  You used to require $250K to start one, now minimums are as low as $25k, which means that these tools are now open to young, emerging philanthropists, which is very exciting since they might be the ones who are more willing to take some risks and innovate with their money.  Secondly, because the tax event happens when the initial donation into the fund is made, donor advised funds can act like a “third pocket” separate from the straight philanthropic pocket of money and the financial returns only pocket of money.  Kim Wright-Violich from Schwab Charitable described all sorts of exciting things that they are able to do with the aggregated sum of their donor advised funds.  They can guarantee microfinance institutions, be the guarantor on a loan that a nonprofit organization would otherwise not qualify for, make investments in social businesses, and so on.  Schwab and the other funds represented at the session are obviously on the cutting-edge of the use of donor advised funds. But imagine the impact if the donor advised funds at the community foundations that exist in most parts of this country took even a little bit of their money and started using it to make social or mission-related investments, make loans to nonprofits, experiment with microfinance, and on and on.  How much capital would that free up in new ways for the social capital markets?  It really boggles the mind and is an incredibly exciting opportunity.

Finally, the highlight of my day was the Plenary Session moderated by Matthew Bishop from the Economist and author of PhilanthroCaptialism, which gave an overview of the spectrum of the social capital market today.  And that spectrum ran from nonprofit venture philanthropy funds like Kim Smith from New Schools Venture Funds to Root Capital, a nonprofit social investment fund that provides capital to small farmers in developing countries, to a social venture fund, to a social investment fund that provides market rate return along with its social impact, finally to Jed Emerson of Uhuru, a hedge fund that donates part of its profit.  It was fascinating to hear about the various types of social capital that is occurring out there and where these pioneers see the hurdles and the trends.  Some top level comments from panelists that really made me think:

• We are performing 2 tasks simultaneously: using old financial tools in new ways, while creating new tools. We need to do more of the latter.
• We have worked to solve the governance issues on the for-profit side, but we have also known that governance was a huge problem in the nonprofit side for a long time, but have yet to do anything to change it.
• The social capital market is a big tent, we need to stop taking nonprofit/for profit sides and arguging about which ways is right and start sharing deals and complementing each others skills/expertise.
• We need to organize the space that is emerging between the previously binary markets (philanthropic and financial) that have evolved fairly efficiently, but separately.
• In the financial collapse, social investments far outperformed traditional investments, yet the majority of people went right back to the old binary system. We are all responsible for demonstrating that social investment is a better way and getting others on board.

The bottomline for me after this first day of listening to these intelligent, brave, entrepreneurial leaders in this emerging market is that although the field has grown in a year (for example last year SoCap had 600 attendees, this year it has 1,000) people who understand and work to enlarge the social capital market space are few and far between.  We are on the edge of a massive change to our financial markets and how we understood, and separated, our money.  But change takes time and it takes work to convince those who are comfortable with the old way of doing things, as Machiavelli wrote:

There is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things.  For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order.

Change means risk, and people, for the most part, are risk averse. So let’s not get caught up in the excitement and the hype and think that the social capital market is massive.  There is still much work to do, but there always is at beginnings.

Tags: New Schools Venture Fund, Root Capital, Schwab Charitable, Sean Stannard-Stockton, SoCap, Social Capital Markets conference, Sonal Shah, Uhuru

Making Change the New Norm

It occurred to me in two conversations I had this morning that small change can create large change, but how exactly does that happen?

My first conversation was a phone call with George Overholser, from the Nonprofit Finance Fund and a leading thinker around new kinds of capital for nonprofit organizations.  I was getting some background from him on the whole movement to make growth capital (money necessary to build organizations rather than simply buy services) a reality for nonprofit organizations in preparation for my session later this week at the Social Capital Markets conference.

At the Nonprofit Finance Fund they have launched several exciting programs to help nonprofits secure the money necessary to scale great programs, such as the SEGUE program that takes the traditional nonprofit capital campaign approach and turns it on its head raising money not for a building, but rather for the patient capital required to pay the bills while a nonprofit figures out how to grow and make sustainable their business model.

My big question to George, however, was: How do we get these great new ideas, like patient capital (which is normal and accepted in the for profit world) prevalent and accepted in the nonprofit and philanthropic worlds?  The number of nonprofits and donors currently participating in growth capital deals is very small.

George’s response was that these new ideas don’t have to be widely accepted or embraced.  The end game is not to get all of the “mom and pop” nonprofits and donors to embrace these concepts.  Rather, he looks forward to the day when there are ten $20 million growth capital deals out in the marketplace, that that alone will create tremendous change.  He gave the example of Teach for America.  If they can grow their successful program throughout the country, there would be tremendous change in the education landscape as a result .  The end goal is to secure capital for a select few nonprofits that are uniquely poised to grow. He compared it to Apple, which is a company that makes billions of dollars, but has grown to that stage with only a few tens of millions, say $50 million, in growth capital. And Apple has transformed not only its industry, but really, how we all communicate, interact with data and live. That’s a pretty impressive impact for a $50 million investment in growth capital.  He argues that the same is possible in the nonprofit world.  We could have a handful of nonprofit growth capital deals and transform not only the nonprofit sector, but some enormous social problems.

An interesting hypothesis, but I don’t know if I buy it.  Which brings me to my second conversation of the morning, with Sean Stannard-Stockton of the Tactical Philanthropy blog.  Sean has been known for the past three years as a leading-edge thinker about how to make philanthropy more effective at delivering social impact.  He announced this morning that he is launching a new philanthropic advisory fund called Tactical Philanthropy Advisors.  The firm will advise high-net worth philanthropists (accounts of $1 million or more) on “the social impact of their financial investments, and work with their investment advisors to align their financial portfolios with their philanthropic goals.”

They are seeking to elevate philanthropic advising to the respect, time and resources that overall financial advising has enjoyed.  In this new firm, philanthropic advising is no longer an add-on service that a wealth management company offers its clients.  And their fee structure has them paid by a percentage of the overall portfolio an investor holds with them.  So, in essence, they are paid as a traditional financial advisor is paid, based on the performance of the overall portfolio, but in this case the portfolio return is a social, not a financial one.  They are also interesting because they are a for-profit company, with a social purpose and are applying to become a B Corp.  So the firm is and of itself a social business; they are social entrepreneurs charting this new landscape along with the rest of us.

You only need to read a few entries in Sean’s 3-year old Tactical Philanthropy blog to understand how this new firm could revolutionize how the philanthropic sector, and thus the nonprofit sector, operates.  Sean understands and believes in philanthropic equity, mission-related investing, scaling nonprofits, organization-building, and so on.  He understands these new ideas that George and others promote and could be a critical partner in helping philanthropists understand how to use their money more effectively to drive change in a sector that is undercapitalized and dysfunctional.

However, Sean and his firm will probably only work with a small group of the countless philanthropists out there, so again, what change does this signify?  And how do we bring along other philanthropists who cannot or will not be touched by Tactical Philanthropy Advisors?

It all comes down to the single question: How does change happen?

I would argue that it is not enough to have single examples in the largest nonprofits or among the largest philanthropists.  The Nonprofit Finance Fund, Teach for America, Sea Change Capital, Tactical Philanthropy Advisors and all the other cutting-edge thinkers and examples of how we can do things better are great and absolutely necessary.  Without innovation we have nothing.

But let’s not forget stage two, whenever it may come, that involves making these great examples the norm.  The day when all, or most, nonprofits understand and have access to the power of patient capital and capacity capital, when all or most philanthropists understand the power of investments rather than gifts and how to truly support social change. Ten deals are great, but they are just a start.  True change must be systemic, must be ingrained, must become the norm.  It can’t exist just on the East and West coasts.  It can’t just be in the understanding and practice of the largest, most resourced organizations. That’s why I started Social Velocity; I wanted to bring these cutting-edge ideas and practices to places, organizations and philanthropists that weren’t in the top 10, but were still instrumental to creating social change.  To really be transformative, these new ideas have to become common practice. As David Bornstein has put it:

An important social change frequently begins with a single entrepreneurial author: one obsessive individual who sees a problem and envisions a new solution, who takes the initiative to act on that vision, who gathers resources and builds organizations to protect and market that vision, who provides the energy and sustained focus to overcome the inevitable resistance, and who- decade after decade- keeps improving, strengthening, and broadening that vision until what was once a marginal idea has become a new norm.

I applaud people like Sean and George and the countless others who are working to change mindsets, organizations, systems and structures.  Let’s build on the innovation they have started and make those powerful ideas and examples the new norm.

Tags: B Corp, David Bornstein, George Overholser, growth capital, nonprofit, Nonprofit Finance Fund, Philanthropy, Sean Stannard-Stockton, SEGUE program, Social Capital Markets conference, Tactical Philanthropy, Teach for America

Capital for Social Entrepreneurs

I have written before about the importance of creating a social capital market in order to truly make social innovation possible.  A social capital market provides the same depth and breadth of financial vehicles to social entrepreneurs (both nonprofit and for profit) that traditional businesses enjoy.  This means that financial vehicles such as debt, growth capital, seed funding, equity deals and so on would be in ready supply to those organization’s whose business model includes a social impact component.  The upcoming Social Capital Markets Conference (the second annual this September in San Francisco) is a step in the right direction by bringing philanthropists, social investors, social entrepreneurs and others together to talk about how we bring such a market to fruition.

But there are many other examples of entities that are already out there experimenting with new financial vehicles.  Investor’s Circle is one of these.  Investors’ Circle is a network of over 200 angel investors, professional venture capitalists, foundations, family offices and others who are using private capital to promote the transition to a sustainable economy. It is the largest and oldest network of early-stage investors dedicated to funding mission-driven companies. Since 1992, Investors’ Circle has facilitated the flow of over $130 million into 200 for-profit companies and small funds addressing social and environmental issues. Investors’ Circle members have been behind Zip Car, TerraCycle, United Villages, and Verdant Power among others.

Investor’s Circle is an exciting example of what a social capital market begins to look like.  The capital investments that these investors make are different than traditional angel or VC investments.  For these investors, the social impact is critical, so they are willing to be patient about the financial return in order to make sure that it comes with social return.  As one of their investees, Jere Kolstad, CEO and President of Montana Renewables, has said:

IC Members are…investors who share our vision for more sustainable industry, and who express their commitment with patient, long-term investments.  It’s about more than money for this group—they want you to succeed financially, but not at the cost of forfeiting your social and environmental values.

Investors’ Circle is currently doing a Call for Applicants for its Fall Conference and Venture Fair to be held November 15th – 17th, 2009 in Washington, DC.  If you are an early or expansion-stage companies whose business addresses significant social or environmental issues and are in need of capital submit an application by July 31st. Companies that are selected to present to the investors receive:

• Pre-event coaching on your presentation from IC investors
• The opportunity to present to 150 angel and institutional investors interested in socially-responsible deals
• Extensive formal networking opportunities with investors

It’s a pretty great opportunity.  And a great model for bringing more capital into the social innovation space.  I’d love to see more groups like them, especially in the Southwest.

Tags: Investors Circle, Montana Renewables, Social Capital Markets conference, social entrepreneurs, TerraCycle, United Villages, Verdant Power, Zip Car