Bringing Small Nonprofits to Scale

English at Work could be a poster child for social innovation in the nonprofit sector. An Echoing Green fellow, founder Maile Broccoli-Hickey is a social entrepreneur, but like most of them, she doesn’t even know it. Her tireless work to build an organization that can effectively and efficiently transform the English language skills of hotel and restaurant workers is a model to other nonprofits who have a great solution, but lack the capacity and strategy to grow it.

Maile started English at Work in 2004 when she was a waitress in an Austin, Texas restaurant. She realized that her co-workers needed customized English language instruction to ensure their and their employers’ success. Why not bring customized English classes to the workplace in a focused and systematic way? These courses, paid for largely by restaurant and hotel owners who see the value in having a more fluent workforce, get dramatic results. English at Work creates greater proficiency and fluency gains in a shorter amount than their closest ESL instruction rivals. The program works so well because it is a win-win. Students become more fluent and successful at work, paving the way for promotions and a way out of poverty. Employers get more productive, loyal and customer-service oriented employees.

But like most nonprofit organizations hit hard by the recession, a year ago English at Work was struggling to make ends meet. Although employers paid for the classes, those fees didn’t cover all organization costs. The additional necessary revenue came from individual donations and foundation grants, both hit hard by the recession. At the same time Maile knew that the program had the potential to transform the lives of so many more people. Despite financial troubles, she had big visions for growth.

With funding from a couple of key donors who understood the value of investing in infrastructure, capacity and planning, Maile enlisted Social Velocity to determine what was holding the organization back and to create a comprehensive revenue plan to get the organization on firm financial footing. Over the first two months of the engagement we interviewed board and staff members and reviewed all organization policies, by-laws, finances, collateral, plans and documents. We then created a detailed analysis of each area of the organization (strategy, program, finances, marketing, staffing, board, etc.) with recommendations in each area for how the organization could be more effective. Once completed, we worked closely with Maile over the next 3 months to create a detailed plan for increasing how money flowed to the organization from individuals, foundations, corporations and earned revenue. Finally, we trained English at Work staff and board on raising money.

Now that English at Work is on much firmer financial ground, they are ready to plan for growth, and so we are in the midst of creating a strategic plan for significant growth of the program. The hope is to take this great solution and bring it to scale.

English at Work is a great example of the many little-known nonprofit organizations that toil away under the radar. They may have a fabulous model for creating real change, but lack the infrastructure, capacity and strategy to grow their impact to scale. Although the Social Innovation Fund and other venture philanthropy funds that exist to bring solutions to scale are great, no ecosystem exists for the smaller nonprofits that may have equally important solutions. But there is a way. By combining a few key donors who understand the bigger picture, a smart strategy for growth and sustainability, and a determination to execute effectively, even the smallest nonprofits with a great solution and a vision for growth can get there.

Photo Credit: English at Work

Tags: Echoing Green, English at Work, Maile Broccoli-Hickey, nonprofit capacity building, nonprofit growth strategy, Social Innovation Fund, venture philanthropy funds

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

We Need an Ecosystem for The Bottom 80%

In response to my post last week on the Change.org blog about the Social Innovation Fund, Sean Stannard-Stockton, of the Tactical Philanthropy blog, wrote a comment that really got me thinking.

My post argued that the $50 million federal Social Innovation Fund is only one small piece of the capital the nonprofit sector needs. The fund will help the top nonprofit organizations, but will not remedy the lack of capital available to the smaller, less sophisticated nonprofits that make up the majority (80%) of the sector. Sean rightly pointed out that like the business sector, the vast majority of nonprofits are small, and as we have done with businesses, we need to create different expectations for different kinds of nonprofits.  I would take Sean’s comments even further and argue that we actually need to create a similar ecosystem of funding and expertise for the nonprofit sector, as we have done for businesses.

Sean writes:

One thing I think that people need to keep in mind when they point to how many nonprofits are small is that the same is true in business. While good revenue numbers are hard to find, did you know that 73% of for-profits have less than 10 employees and 54% have less than 4 employees? It seems to me that as a field we need to do a better job of segmenting the nonprofit market and having very different expectations for nonprofits which are “small businesses” vs those that are “public companies.”

Sean makes a critical point. The vast nonprofit sector is often lumped together as one. When in reality, the sector is incredibly diverse. And although over the past 10 years there have been some innovative strides made in providing capital, expertise, and other resources to the top 20% of the nonprofit sector (such as venture philanthropy funds like New Profit and Venture Philanthropy Partners and management expertise from consulting companies like Monitor and Bridgespan) the fact remains that the “bottom” 80% of the nonprofit sector is still very much alone.

This is one of the reasons I started Social Velocity. I saw a real hole in the marketplace in terms of capital and management expertise to the bottom 80% of the nonprofit market. A $500,000 nonprofit organization can’t engage a Monitor or Bridgespan group, and a venture philanthropy fund wouldn’t be interested in scaling them since no one will fund evaluation to prove their results.  These organizations are stuck within the vicious starvation cycle and cannot get out.

We need to do a better job, as Sean says, of segmenting the nonprofit sector and creating appropriate expectations for those different segments, but we need to go much further. We have to create an ecosystem of expertise and funding for the smaller, less sophisticated segments of the sector, which includes:

• Educating smaller, less sophisticated philanthropists that creating solutions requires funding for less sexy things like capacity, organization building, evaluation
• Providing significant capacity capital to build out revenue functions, attract and retain top talent, articulate a value add, message effectively
• Supplying growth capital to nonprofits who have a great solution and the desire to scale
• Creating realistic and cost-effective evaluation tools so that smaller organizations can prove their impact along with the big guys
• Securing management expertise to help smaller nonprofits create strategic and growth plans, articulate their impact and value add to potential investors, develop comprehensive financial strategies, etc.

I think it’s fabulous that there is a growing understanding that nonprofits can’t do it alone anymore. And I’m so pleased to see new funding vehicles like the Social Innovation Fund that are helping to take social innovation to the next level. But let’s not forget that there are many other innovative nonprofit organizations that will never catch the eye of the Social Innovation Fund, or their funding and consulting counterparts.

Over the past 200+ years America has established a fairly advanced ecosystem that supports (albeit not perfectly) the growth and success of entrepreneurs at every stage of the game.  We are starting to recognize the need for a similar ecosystem in the nonprofit sector.  But there is still much work to be done. Let’s not forget the smaller, less sophisticated nonprofits that may have tremendous solutions to contribute, but who just can’t get past the many hurdles in their way.

Tags: Bridgespan, growth capital, Monitor, New Profit, nonprofit, nonprofit starvation cycle, philanthropists, Sean Stannard-Stockton, Social Innovation Fund, Social Velocity, Tactical Philanthropy, Venture Philanthropy Partners

Will the Social Innovation Fund Really Change the Nonprofit Market?

Last week a new head of the federal Social Innovation Fund, the $50 million public/private fund to scale innovative nonprofits that came out of the Serve America Act, was named. Paul Carttar brings a wealth of experience and knowledge having worked at New Profit, the first venture philanthropy fund, and Bridgespan and Monitor consulting groups, the largest and most sophisticated consulting firms to large nonprofits. He knows how to scale proven nonprofit models.

But we need to be cautious about how much the Social Innovation Fund can do to transform the nonprofit capital market. While it will provide mezzanine funding to the best nonprofits, there are still some glaring holes in the capital available to the rest of the nonprofit sector. You can read my post “Will the Social Innovation Fund Really Change the Nonprofit Market?” at the Change.org blog.

Tags: Bridgespan, Monitor, New Profit, Paul Carttar, Serve America Act, Social Innovation Fund

Social Impact Finance

It’s a new year and a new decade, and both hold tremendous promise for creating real social change.  And key to significant social change is a fundamental restructuring of how we finance that change.  I think (hope) that in the next decade we will see the emergence of a new Social Impact Finance.  And I imagine it will look something like this:

• Social Impact Funds Become Commonplace. Experiments like the Federal Social Innovation Fund (which combines government and private money to fund the growth of proven nonprofit models), Village Capital Fund (seed funding for social entrepreneurs, determined by social entrepreneurs), social investment funds like Good Capital, and venture philanthropy funds like New Profit and SeaChange Capital Partners are expanded and become commonplace.  Seed and growth funding for nonprofit, for-profit, and hybrid social impact organizations becomes more readily available and accepted.




• Foundations Get Risky. Foundations deny their risk-aversion heritage and provide risk capital for social innovation, whether through their customary 5% cap for nonprofit donations, or social investments from their corpus, or by foregoing dreams of perpetuity and giving all their money away on a big bet or two.  See Nathaniel Whittemore’s great post on this.




• Individual Donors Become a Powerhouse. Technology finds a way to harness the power of individual donors toward significant social change. Currently, individual donations make up the vast majority of funding entering the nonprofit sector, yet their gifts are fragmented. With the potential of a new nonprofit rating system on the horizon, and social media’s growing ability to gather and marshal individual participants, there could be a pivotal shift in how individual donations flow to the nonprofit sector, and how significant those individual donations become to nonprofits creating demonstrable social impact.




• Nonprofits Understand the Power of Finance. Nonprofit organizations understand and become successful at financing their overall operations, instead of fundraising for them.  And they begin to think bigger about their work, the overall outcomes they are trying to achieve and how finance fits into that (The GiveWell blog did a great series on the “Room for More Funding Question.”)

The end result of these and other changes will be, I hope, that “Social Impact” and “Finance” are no longer separate terms that have no bearing on each other, but instead inextricably linked concepts that create a better world.

Tags: GiveWell, Good Capital, Nathaniel Whittemore, New Profit, SeaChange Capital Partners, Social Innovation Fund, Village Capital Fund

The Significance of the Social Innovation Fund

While many were starting their 4th of July vacations last week (me included) President Obama had a remarkable event at the White House.  He invited a very impressive list of nonprofit leaders, philanthropists, social entrepreneurs, and thought leaders to launch his “Community Solutions Agenda.”  Key to this agenda are the White House Office of Social Innovation and the Social Innovation Fund.

Sean Stannard-Stockton of the Tactical Philanthropy blog gives an excellent description of exactly what the Social Innovation Fund will do.  Essentially the Social Innovation Fund is a $50 million federal government fund (assuming Congress actually appropriates the money) that will be granted, via the Corporation for National Service, to “grantmaking institutions” to then regrant (and match the regrant 1 to 1) to nonprofit organizations.

The nonprofits that receive the regranted funds are required to:

• Match the grants 1 to 1  through state, local, or private sources (thus resulting in an overall 2 to 1 match of federal dollars)
• Grow proven programs, or support new programs, in low-income communities
• Demonstrate that they can sustain the program at the end of the grant period
• Use performance metrics to evaluate and improve the program
• Contribute the resulting knowledge to their field

In addition, the grantmakers that receive the Social Innovation funds must provide technical assistance to their grantees.  And the Corporation will 1)provide technical assistance to both the grantmakers and the nonprofits receiving the regranted funds and 2) create a clearinghouse for best practices from the funded projects.

There has been much debate (here and  here for a start) about whether the Social Innovation Fund will have a positive, negative, or any effect on the nonprofit sector and its ability to find and grow solutions.  The most pessimistic of these is Jeff Trexler, professor of Social Entrepreneurship at Pace University, who writes:

At its core, the [Social Innovation Fund] follows a model that’s all too familiar from comparative administrative law–a government program that gives money to subgrantees who in turn give money to other subgrantees, managed through the relentless documentation of how stated program goals were met.  For example, Russia moved to precisely this model recently, channeling social funds through grantmaking intermediaries, and USAID has been doing it for years.

True, the mechanisms of the Fund are probably not that innovative.  And the relatively small size of it ($50 million compared to the hundreds of billions of dollars of federal funding that annually goes into the nonprofit sector) is not very impressive.  But what is interesting and exciting is that the largest nonprofit funder (the federal government) is turning a page.

As Bob Ottenhoff points out on the Guidestar blog, the federal government is by far the largest funder to the nonprofit sector, providing over 29% of its funding, compared to the 12% that comes from charitable giving, which we spend most of our time talking about.  If the federal government could take an interest in innovation in the nonprofit sector (when was the last time that that many nonprofits and philanthropists were assembled together at the White House?), try and succeed at some new funding vehicles, take a lead role (or, really, any role) in the creation of a social capital market to seed and scale social innovation, THAT would be tremendous.

The Social Innovation Fund, in and of itself, is maybe not that impressive. But what is impressive is that the federal government has recognized social innovation as a force for change, is willing to take a risk (albeit small) in this new realm and may be willing to use this test case as R&D for a future, much larger, more innovative stab at getting itself pointing in a new, more helpful direction.  If we are truly going to scale social solutions then the largest funder of those solutions has to be on board. So let’s see what happens when the federal government dips its toe into the waters of social innovation.

Tags: Corporation for National Service, federal government, Jeff Trexler, nonprofit, President Obama, Sean Stannard-Stockton, social entrepreneurs, Social Innovation Fund, White House Office of Social Innovation