Resetting the Capital Approach

There is concern lately about how much worse it is going to get for nonprofits because of Obama’s new budget proposal, which will limit the value of the tax break for wealthy donors, from 35% to 28%. Many nonprofits are even more worried than they were before about revenue, for example the nonprofit Executive Director whose comments to the Daily Dish caused a firestorm of replies:

A couple of our usual big donors have indicated we should be prepared for smaller donations this year, and possibly none in the next couple of years.  They are mentioning Obama’s tax plans and their need to save money now in anticipation of that.  A lot of my colleagues in the not-for-profit world are really scared right now, and we are not happy with Obama…Organizations are going to be killed under Obama’s plan…Frankly, this sucks.

All of this talk about a deepening poor revenue picture for nonprofits makes some, like Perla Ni, founding publisher of the Stanford Social Innovation Review, think there will be a shift in how nonprofits raise money.  Perla wrote recently that nonprofits should shift their appeals away from metrics and towards emotion:

During these difficult economic times, when all of us know someone who has or is at risk of losing their job, it’s much easier for us to relate to the appeals to our conscience and our heart. That’s not to say that there is no room for “expert” evaluations and quantitative metrics. It’s about degree and balance of the heart and the head.

Seriously?  We’re going to squander this opportunity that the crisis in our financial system affords and go back to the tin-cup mentality of nonprofit revenue generation?  I completely disagree with this notion.  Nonprofits may think that appealing to emotion is the way to go, but that will only set them back.  To me, it is akin to Marty Linsky’s recent piece about hunkering down versus resetting in these difficult times.  As Linsky puts it, we have two choices and the “hunkering down” option looks like:

Stephanie Strom’s piece in the Times on Friday of last week showering sympathy on the well-intentioned charities going belly up, rather than seeing this moment as an opportunity to rethink their priorities, eliminate duplication, introduce good management practices, and get rid of programs and people who are not performing well.

Whereas resetting is about understanding how systems are changing and that we have to adapt to the longterm.  We must embrace the change and move with it:

Here’s what Reset might look like…(1) Funding risk-takers, creators, and inventors, small and large, in manufacturing, financial services, nonprofits, and even academia…(2) targeting…spending and investing now for the long term, like…supporting new faces and burgeoning success stories in education, people and ideas to help rescue the current school-age generation…

Focusing on emotion and heart-strings in order to try to keep a fledgling nonprofit operating might be appealing, but it is a hunkering down mentality. These times call for a complete resetting of how we do things.  Nonprofit fundraisers and Executive Directors don’t have the luxury of “appeal[ing] to our conscience and our heart.”

Nonprofit leaders and board members often tell me that XYZ nonprofit is easier to fundraise for because their cause is an “easier sell,” for example children and puppies.  I don’t think that a particular cause is inherently easier to sell because it has more of a pull on heartstrings. Rather, those organizations that can demonstrate, yes through metrics and outcomes, that they are positively impacting and reversing a disequilibrium will have much more success at appealing to donors.

But also, and more importantly, organizations that demonstrate their impact are better positioned to attract new kinds of revenue which this financial crisis will create.  I truly believe that the “resetting” that is occuring in our financial markets will create an opportunity and demand for more social impact capital, which is money that used to be channeled purely towards financial profit, but now is looking for a more complex blending of profit and social impact.  I don’t mean just social enterprises, I’m talking about a complete restructuring of capital markets that allows philanthropists, venture capitalists, angel investors, foundations, wealthy individuals, traditional nonprofit donors to be more innovative with their capital and invest in organizations that are proving social impact, again through metrics and outcomes, and are willing to understand, address and appeal to those who want to see more (social returns) done with their money.

By going back to the heart strings and the tin cup, social impact organizations miss out on the great opportunity that lies in this capital market restructuring and the greater resources that will follow.