The Power of Capacity Capital

• OVERCOMING THE BIAS AGAINST ORGANIZATION BUILDING
• WHAT IS CAPACITY CAPITAL?
• USES OF CAPACITY CAPITAL
• CAPITAL CAMPAIGN VS. CAPACITY CAPITAL CAMPAIGN
• THE RETURN ON INVESTMENT OF CAPACITY CAPITAL
• CASE STUDIES
• VEHICLES FOR CAPACITY CAPITAL
• THE STEPS TO RAISING CAPACITY CAPITAL
• HOW FOUNDATIONS CAN MOVE ORGANIZATION BUILDING FORWARD
• GETTING STARTED

Overcoming The Bias Against Organization Building

It’s a scenario that happens far too often in the nonprofit sector. Recently, I met with a nonprofit Development Director who has had a really hard time convincing her Executive Director and board to let her spend money on a donor database and new fundraising materials. Yet, at the same time the Development Director is expected to raise millions of dollars in revenue. That sounds completely crazy, doesn’t it? How can someone reach ambitious goals without the capacity capital – the fundamental building blocks necessary to get there?

But in the nonprofit world this scenario is often the rule rather than the exception. Infrastructure, capacity, fundraising, marketing, and operation dollars are somehow bad, not necessary, or dismissed.

It amazes me how much the donor, government, and even sometimes nonprofit leadership bias against nonprofit organization building holds the sector back. It seems like such a simple thing: in order to get more results you need to devote time, energy and resources to organization building. In order to find the resources required to deliver programs, you need to invest in exceptional staff to generate revenue. In order to track program results, you need a system that includes technology and staff. In order to have a fantastically talented staff, you need a human resources function that takes the time to recruit, vet, and train great candidates. A nonprofit cannot exist on direct program dollars alone.

There must be a recognition in the nonprofit sector, and among the philanthropy that funds it, that nonprofits need money to support not only their direct services, but also the infrastructure of the organization. Nonprofits will only get better at creating social change if they have a strong and effective organization behind their work.

In Fall 2009, the Stanford Social Innovation Review published a seminal article by Bridgespan Group’s Ann Goggins Gregory and Don Howard titled “The Nonprofit Starvation Cycle.” It was an enormous breath of fresh air. Gregory and Howard studied nonprofit organizations’ continual drive to do more and more with less and less and found that those organizations that invest in organization building are far more effective at creating social change:

Organizations that build robust infrastructure—which includes sturdy information technology systems, financial systems, skills training, fundraising processes, and other essential overhead—are more likely to succeed than those that do not.

Gregory and Howard uncovered three reasons for this inability to build strong organizations in the nonprofit world:

• Funders have unrealistic expectations about how much it costs to run a nonprofit
• Nonprofits need to conform to these unrealistic expectations in order to receive funding
• Nonprofits underreport infrastructure expenditures on tax forms and in fundraising materials

The end result is a vicious circle where few fund or spend money on infrastructure:

This underspending and underreporting in turn perpetuates funders’ unrealistic expectations. Over time, funders expect grantees to do more and more with less and less—a cycle that slowly starves nonprofits.

The solution, Gregory and Howard argue, is to begin at the source of this vicious cycle: the funders. They argue if funders can be educated about the true costs and infrastructure necessary to build organizations to solve social problems, then we can break out of this destructive cycle.

I strongly agree with that. It is difficult for nonprofits to turn to the hand that feeds them and tell them that they need more in order to do more. But such conversations are absolutely critical if we are to get beyond the starvation cycle.

However, funders aren’t the sole impediment. Gregory and Howard argue that nonprofits play a part in this dysfunctional view of capacity, and there are a number of things that they can do to turn things around. Nonprofit leaders should:

• Analyze their real overhead costs and infrastructure needs
• Educate their boards about these real needs
• Encourage their board to take responsibility for encouraging funders (often board members’ friends and colleagues) to be realistic about what is required to make the nonprofit highly functioning

I think that funders are much more receptive to these organization-building conversations than we might think.

My work at Social Velocity is all about organization building, and I encourage nonprofit leaders to tell their board members and their closest donors what they really need to succeed. I have found that those donors who really believe in an organization will understand when a compelling case for capacity capital is put before them.

The nonprofit sector must stop playing games, stop underreporting infrastructure costs, stop telling funders its okay to ask nonprofits to do more with less, stop telling the public that direct program costs are better than indirect program costs, stop telling boards of directors that its okay to ignore infrastructure needs. It is a difficult conversation, there is no doubt, but what is the alternative?

We all know how a starvation cycle ends.

The nonprofit sector, and the philanthropy that funds it, must overcome the bias against building strong, effective organizations. And capacity capital is just the tool to help do that.

This e-book will demonstrate how.

What is Capacity Capital?

There is a fairly new concept in the nonprofit world that has the power to completely transform the sector by releasing it from the “starvation cycle” and making nonprofits more effective and sustainable at creating social change. “Capacity capital” (or “philanthropic equity”) is just a fancy term for the money so many nonprofit organizations desperately need.

Capacity capital is a one-time infusion of significant money that can be used to strengthen or grow a nonprofit organization. It can be money that grows a successful program to other clients, other cities, other regions. Or it can be money that strengthens the organization and makes it more sustainable.

But before you can understand capacity capital properly, you must understand a critical distinction about money. There are two kinds of money:

• Revenue is the day-to-day money required to run programs.
  For a homeless shelter, revenue buys meals, beds, sheets, job training programs and staff time.
• Capital is the one-time infusion of money that builds or grows an organization.
  For a homeless shelter, capital purchases a better system for gathering data on clients, a donor database, the first year or two of a Development Director.

This distinction between revenue and capital is one that the Nonprofit Finance Fund first suggested five years ago. George Overholser, formerly of the Nonprofit Finance Fund, is the pioneer of this critical distinction in the nonprofit sector between money to BUY services (revenue) and money to BUILD organizations (capital).

Let’s take fundraising infrastructure for example.

Most nonprofit organizations lack sufficient infrastructure to have a robust fundraising function. They don’t have enough money to hire experienced fundraisers, buy efficient and effective technology to track donors, create compelling messaging and collateral, train their board in fundraising, and so on. But with dollars to invest in staff, technology, planning and expertise, the organization could transform their fundraising function into one that raises many more times the amount of money they currently do.

In late 2011, the Nonprofit Finance Fund (NFF) released a report demonstrating that nonprofits that raise capacity capital increased services to their communities by almost four times and increased organizational revenue by 170%.

And other entities that provide capacity capital to nonprofits (like New Profit and Venture Philanthropy Partners) have seen similar growth for the nonprofits in which they invest. That’s powerful evidence that capacity capital investments can dramatically increase the impact of a nonprofit.

While the nonprofits that are funded by NFF, New Profit and Venture Philanthropy Partners tend to be very large organizations with multi-million dollar budgets, the concept of capacity capital can and should apply to smaller nonprofits too.

Let’s explore how capacity capital can be used to strengthen a nonprofit and make it better able to create effective, lasting social change.

Uses of Capacity Capital

As mentioned earlier, capacity capital is NOT the day-to-day operating money nonprofits are accustomed to raising and employing. Rather, capacity capital is money to build a stronger, more sustainable organization. Capacity capital is a one- time infusion of significant money to fundamentally and positively change the functioning of the organization.

But because this is such a new concept for the nonprofit sector, it can sometimes be difficult for board and staffs to envision how capacity capital could be used.

A nonprofit could use capacity capital in many ways. Here are some examples to get you thinking:

To plan and execute a program evaluation

The ability to prove program results can often seem like the holy grail in the nonprofit sector. Funders often want to see proven results, but they aren’t willing to pay for this “non-program” expense. But a well-executed evaluation study could dramatically improve an organization’s ability not only to deliver a better program, but also to garner external support from funders, key decision-makers, and policy leaders. And because an evaluation study is often an expensive one-time expense it could be a perfect use for capacity capital.

To plan and launch an earned income stream

For a nonprofit that has an opportunity to create unrestricted revenue stream by selling a product or service, a business plan and the money to launch that business is absolutely critical. Without that “startup capital” a great idea will just disappear into the ether. Capacity capital could help such a nonprofit take something they’ve always thought was a great opportunity and turn it into a successful business that yields them unrestricted, sustainable revenue for years to come.

To create a financing plan

Many nonprofits don’t have the expertise or time to put together an overall strategy for financing their organization. With capacity capital to hire outside expertise, a nonprofit could put together and execute a financing plan that creates a long-term, sustainable financial future for the organization.

To hire a seasoned Development Director

Many nonprofit organizations can only afford to pay the bare minimum for a Development Director, which means that they are often forced to hire someone with little experience who, they hope, will learn on the job. If instead they had enough funding to pay a market rate salary for a seasoned fundraiser, they could hit the ground running, increasing the likelihood of fundraising success. But remember that capacity capital is a one-time infusion of money. So the nonprofit would need to create a capacity capital plan and pitch that secures the salary of the Development Director for 1-2 years, not forever. The idea is that once the Development Director has a year or two to learn the organization and its donors, they will be bringing in not only their own salary, but also many times that amount in new revenue.

To purchase a new donor database

A key element to success in individual donor fundraising is an organization’s ability to capture and use data about donors and prospects. Organizations that know their donors are many times more likely to retain and upgrade them. A good donor database makes this effort much more successful. Capacity capital can make the one-time, expensive purchase of such a database a reality.

To improve program service delivery

An organization may have a plan for improving how they deliver their program to clients but lack a key element to make it a reality. Perhaps a piece of technology, a new system, or external management expertise would dramatically improve the effectiveness of the program and/or allow more people to be served. Capacity capital can make that new technology or external management expertise a reality.

To expand online communication efforts

As direct mail appeals (a nonprofit fundraiser’s traditional standby) continue to become less and less effective, nonprofits need to move into the online world. Capacity capital for technology upgrades, staff, and training can help an organization make this big leap and result in higher long-term revenue and lower expenses over time.

To launch a major gifts campaign

The vast majority of private funding in the nonprofit sector comes from individuals (80+%), so to stay competitive, nonprofits need to move into the world of major gift solicitation. But that takes expertise, staff, marketing materials and other infrastructure elements. With an effective major donor plan, capacity capital can help an organization get the right elements in place to make this new revenue line a reality.

These are just a few examples of how capacity capital could help nonprofits strengthen their organizations and ultimately increase their ability to change lives and communities.

Capital Campaign vs. Capacity Capital Campaign

Traditionally when we talk about “capital” in the nonprofit sector we think of the ubiquitous bricks and mortar capital campaign. But a capacity capital campaign is much more effective at achieving social impact than a traditional bricks and mortar capital campaign.

There are many perceived benefits to a bricks and mortar capital campaign. It can be a vehicle for asking for bigger gifts, a way to raise awareness from the broader community, and a method for energizing the board and giving them something to do.

But there are often huge downsides to these capital campaigns. Often the cherished new building has much higher ongoing maintenance costs that were not factored into the campaign. A capital campaign can also cannibalize regular annual donors. And most detrimental, a new building often does not increase the nonprofit’s ability to deliver on their mission and create social change. Does an in-school mentoring program really need a big, new headquarters? Do the costs for a nicer, larger office space result in more children being mentored or mentored more effectively?

What if instead of raising millions of dollars for a new building, a nonprofit raised money, through a capacity capital campaign, for the things they really need to create more social change:

• New technology
• New online fundraising software
• A new donor database
• A financial model assessment and annual financing plan
• Highly skilled and experienced development staff
• A program evaluation study
• A more effective program-delivery system
• Management coaching
• Growth planning

If those organization-building elements were in place, a nonprofit could start:

1. More effectively delivering the program
2. Growing the program to serve more people
3. Creating a more sustainable financial model
4. Analyzing and reporting on the results of the program in order to strengthen the program and raise more support for it

A bricks and mortar capital campaign depletes a nonprofit through cannibalized donors, a distraction from mission, and increased on-going maintenance costs. In contrast, a capacity capital campaign actually strengthens the organization and allows it to achieve more social change, more effectively.

Before your organization decides to embark on a traditional capital campaign, take a big step back and ask your staff and board some hard questions:

• What are we hoping to gain from this capital campaign?
• Will this new building contribute to an increase in outputs (services) or outcomes (changes to our clients’ lives)?
• Are there other items we need more than a new building in order to effectively do our work?

Nonprofits need to stop raising millions of dollars on physical monuments and instead start raising dollars for the capacity improvements that will actually help them create more social change.

That would be revolutionary.

The Return on Investment of Capacity Capital

Absolutely key to raising capacity capital is an understanding of Return on Investment. Nonprofit staffs, boards and donors need to understand and embrace this fundamental concept.

Nonprofit leaders often exist in such a world of scarcity that they don’t recognize that an investment today can have a huge payoff down the road. And not recognizing the value of a return on investment, particularly when it comes to the strength of a nonprofit’s organization, can keep the nonprofit in starvation mode.

One of the ways I consult with nonprofits is coaching a development director or executive director about how to increase money flowing to the organization. I show them how to get board members to bring money in the door, identify new donors, craft a compelling message, launch new revenue streams, develop an overall financing plan.

This work to strengthen the financial engine of a nonprofit could have a huge future payout:

• Board members no longer sit on their hands, but actively recruit new donors to the organization.
• New donors are acquired through a thoughtful, strategic major donor campaign.
• A compelling case for investment convinces foundations and major donors to invest at higher levels and for longer periods.
• A new earned income stream brings in unrestricted revenue.
• An effective financing plan puts scarce resources to their highest and best use.

If you think in terms of the return an investment in management coaching to strengthen the financial engine of a nonprofit it’s a no-brainer.

A nonprofit struggling to find enough money has two options:

1. Continue to struggle day-to-day for the foreseeable future, or
2. Make an investment today in order to dramatically increase funding and sustainability tomorrow

Let’s do the math.

If a nonprofit with a budget of $1 million were to spend, say $10,000 on hands-on coaching to develop a financing plan, create a compelling case for investment, get their board engaged in fundraising, and launch a major donor campaign those elements could translate into well over $250,000 of new money annually for the nonprofit.

Here’s how:

• A financing plan clarifies and marshals resources so staff and board know exactly where the money flows and who will do what to make it happen. The very act of creating and monitoring a financing plan could increase funding by 10%, or $100,000.
• A case for investment, when done well, becomes the backbone of any and all money-raising efforts. It can be integrated into your website, your social media efforts, your donor letters, your presentations. Telling a concise, compelling story makes donors sit up and take notice and adds perhaps another 5% increase, or $50,000.
• If your entire board starts (in their own unique ways) to bring more money in the door, that could increase your bottom line as well. If each member of a 15- person board starts to increase their own giving and/or the giving of those in their network by $1,000 each, that’s another $15,000.
• A major donor campaign charts a logical, strategic way for you to identify and acquire new donors. Getting strategic about how you find and recruit those donors will ensure much greater success, perhaps a 10% increase, or $100,000.

So with very conservative estimates the original $10,000 investment in management coaching translates to $250,000+ in new money every year thereafter. In other words, $10,000 could bring you an additional $2.5 million over a ten-year period.

That’s an enormous return on investment.

If you make a smart investment in improving the financial engine of your nonprofit, that investment will pay off many times over, creating a more secure financial future for your organization. That’s a huge return on investment.

Case Studies

As Gregory and Howard pointed out in their “Nonprofit Starvation Cycle” article mentioned above, funders often stand in the way of nonprofits being able to build strong organizations. It is up to nonprofits to educate their donors and turn them into organization builders.

Social Velocity has helped many nonprofits convince their foundation and individual donors, who previously may have only provided program funding, to become organization builders. Essentially the argument is that this specific, one-time capacity capital investment will help the nonprofit do much more of the work they do so well.

Let me give you some examples.

ACE: A Community for Education, an early literacy program bringing kindergarten – second grade students to grade level in reading by third grade, had a great program demonstrating amazing results. However there were many more students and schools who needed the program.
ACE needed:

• A strategic plan to dramatically grow the program
• A diversified and strengthened financial model
• Management coaching to prepare staff leadership for growth

ACE could not pay for this planning and management help through their operating budget, so they went to a few foundations that were already supporting their program and asked them to invest in this organization building work. When the foundations understood that an investment in organization building would help this organization that they love improve the lives of even more children, they were happy to provide capacity capital.

With that capacity capital, ACE hired Social Velocity to create a multi-year strategic plan for growth, diversify and grow their funding sources resulting in a more sustainable financial model, and coach the management team to lead the growth of the program.

ACE is now well on their way to dramatically growing individual, foundation and school district support for the program and tripling the number of students they serve.

Capacity capital can also grow the financial engine of a nonprofit.

Long before I launched Social Velocity I was the head of development and marketing at KLRU, Austin’s PBS television station. While there, I created a plan to completely revamp KLRU’s fundraising function and raised $350,000 in capacity capital from six donors to implement that plan. The plan included a new donor database, new online fundraising software, staff training, and market research on our donors.

After three years of implementing this plan with the capacity capital we had raised, we grew KLRU’s annual operating revenue by $1.6 million and the number of donors by 36%.

With all of that additional revenue, KLRU was able to provide more programming and services to our community. So the social return on investment for those capacity capital funders looked like this:

For KLRU’s capacity capital donors, there was an enormous pay off. They ultimately helped KLRU become more sustainable and provide many times more programs and services. It was a huge win for KLRU and their capacity capital investors.

Vehicles for Capacity Capital

But making capacity capital a reality in the nonprofit sector is a two-way street. Funders also must recognize and embrace this new funding tool. And nonprofit leaders must help their funders get there.

Nonprofit organizations need to start approaching the donors and board members who are already supporting their programs and make the case in a compelling way that in order to achieve more results, they have to invest in organization building. And they need those closest to the organization to make those investments. It is a process of educating those nearest and dearest to the organization about the power of a stronger organization.

It’s a new conversation, but an important, and potentially game-changing, one.

As part of that education process, nonprofits need to explain some new financial tools that their donors can employ to provide capacity capital.

Major Gifts with a Twist

Traditionally, a major gift from a foundation or individual goes to the program expenses of the organization. The donor is BUYING more program services with their major gift.

But with capacity capital you want these major donors to BUILD your nonprofit organization. That means that you need to educate your donors about how a new kind of investment, a capacity capital investment, will actually help your organization provide even more change to the community. Because if you have a stronger, more effective, sustainable organization you can provide more services, more efficiently, for a longer period of time.

In essence a capacity capital investment will help your donor (and your community) see much more of the change you are already producing.

PRIs

PRIs (or program-related investments) are an under-used tool that foundations could use to provide capacity capital to create more sustainable nonprofit financial models.

PRIs are loans that foundations make to nonprofits at low, or no interest. At the end of the loan period (typically 3-7 years) the loan is repaid, or forgiven. PRIs are usually used for building projects or land purchases. But they could also be used to increase the financial model of a nonprofit organization, through increased financial knowledge, fundraising planning, new revenue-generating staff, or the launch of an earned income stream. A PRI could provide a capacity capital investment that sets the nonprofit on a path toward more a diversified, more sustainable financial model.

There are tremendous benefits to using PRI’s for capacity capital projects. First, the benefits for the foundation are:

• An increased ability to meet past levels of giving, despite any losses they might have in the market, because the loaned money will eventually come back to them.
• More proactive nonprofit grantees that are encouraged to create capacity building plans to result in more sustainable financial models. PRIs used in this way increase the likelihood that a foundation’s grantees a) won’t have to come back to them year after year for ongoing support and b) will become more sustainable and thus achieve greater social change.
• The ability to stretch their capacity-building dollars further. Because PRI money eventually comes back, a foundation can increase their level of impact by helping more nonprofits improve their capacity than they could with grants alone.
• More accountability among nonprofit recipients because of the expectation of repayment.

And second, the benefits for the nonprofit are:

• A more diversified and sustainable financial model.
• Increased revenue-generating knowledge and experience.
• Increased ability to work towards social change.

Although PRIs used in this new way seems, at least to me, to be an obvious win-win, very few foundations are employing PRIs. PRIs are used (according to the Foundation Center) by only a few hundred of the thousands of foundations in the country.

So it is up to nonprofits themselves to educate their funders on the power of organization building and the various vehicles they can use to provide capacity capital.

The Steps to Raising Capacity Capital

Once convinced of the power of capacity capital, how does a nonprofit organization find money to build their organization?

Here are the steps:

Gather Champions

Identify a few staff and board members who believe as strongly as you do in the desire for some sort of change to your organization and the need to get there.

Create a Plan for Change

Together create a plan for change, for example: stronger financial footing for the organization, expanded programs, a more effective board. Once you have a clear sense of where the organization is and what you want to change put together a detailed roadmap for making change happen.

Create a Budget

Develop a budget for the real costs of the real capacity you need to make this plan for change a reality. Don’t sugar coat it or skimp on costs. What will it really take?

Break the Budget into Ask Amounts

Split the overall cost for these capacity elements into reasonable ask amounts given the relative ability of your donors.

An investment range chart, like the one below with a goal of raising $100,000 in capacity capital, helps you break a large goal into donor pieces.

You want your lead gift to be 10-20% of the overall goal with reasonable levels below that. A rule of thumb is that it takes 4 asks to get 1 yes, so you should calculate the number of prospects you would need at each level. You will see at the lower levels that the prospect-to-donor ratio diminishes to 3-to-1 and 2-to-1. This is because although some prospects at the higher level will say no to that level, they may say yes to lower levels.

Find Prospects

Analyze your donors, board members, friends, volunteers and others within your nonprofit’s network to find individuals, foundations, and corporations who love what your organization does and could be made to understand the argument that money to build can allow your organization to do so much more.

These people should possess three key criteria that make them likely prospects to fund your organization-building effort:

1. Connection: They are already close to the organization, whether as a current donor, volunteer, board member or friend. They know the organization well.
2. Concern: They strongly believe in the organization and the work it is doing and want to see the organization do more and better.
3. Capacity: They have the capacity to make a one-time investment at a level within your investment range chart (above).

Create the Pitch

Create a compelling pitch that connects the organization-building elements you need to an increase in your ability to create change in the community. For example, a more seasoned development director means that you can raise more money, more effectively and more quickly. With that additional revenue, your services can expand to reach more people.

Your capacity capital pitch must have at least these six pieces:

• The Opportunity
  What problem exists in the community that your organization is trying to solve?
• Plan
  What is your organization-building plan? What are the elements required? Why will this plan, if executed, allow you to better address the Opportunity above?
• Team
  Why do you think your staff is uniquely positioned to effectively execute on this plan?
• Budget
  What is your capacity capital budget? How much capital do you need, over what time frame and for what elements?
• Ask
  How much capacity capital could this particular investor provide?
• Projected Social Return On Investment
  Most importantly, what is your projection and quantification for how this capacity capital and plan will help you create more social change?

Secure Investments

Once you have your prospect list and pitch in hand, go out and start meeting with prospects to convince them to make capacity capital investments in your organization.

Demonstrate the Social Return On Investment

Since this is a new type of funding, you must treat your investors differently than traditional program funders. You promised them a social return on investment, so you must demonstrate what their capacity capital did. How has your organization changed for the better? How can you quantify an increase in productivity, sustainable revenue, and/or program impact?

Money to build nonprofit organizations isn’t just lying around. Indeed, most donors claim that they aren’t interested in funding anything beyond direct services. But with a compelling argument for how money to build an organization can result in much greater impact, many more donors can become builders.

I’ve helped many nonprofits successfully raise and employ capacity capital. It is tremendously exciting to watch a nonprofit organization that had for years been stuck in the starvation cycle of never having enough money to do enough, finally break free with a plan and the investment to make significant changes to their organization’s sustainability and effectiveness.

Nonprofits must break free from the idea that they just have to struggle along with dwindling resources, continuing to squeeze another drop out of a completely dry rock. If you have a core group of people who love your work and want to see you do more, you possess the key to building your organization.

How Foundations Can Move Organization Building Forward

I began this e-book arguing that we must get over the bias against nonprofit organization building. Part of the burden in getting there rests on the shoulders of nonprofit leaders. But some of the burden also lies firmly with foundations.

Foundations are uniquely positioned to provide capacity capital to nonprofit organizations, for several reasons:

• Foundations typically make short (1-3 year) grants to nonprofits. Since capacity capital is a one-time investment it would fit their giving preferences.
• Foundation funding makes up only 2% of all the private money flowing to the nonprofit sector. It is a tiny piece of the funding pie, which is even more reason for philanthropists to use their money as a lever to much greater impact. As evidenced earlier in this e-book, capacity capital can dramatically increase a nonprofit’s ability to create social change. So a capacity capital investment could provide a huge return to the investor.
• Foundation funding, unlike individual funding, often follows a rigorous due diligence process and seeks a high social return on investment. Both elements are a natural fit for capacity capital, which requires a strategic and well-executed capacity building plan. These two pieces increase the likelihood of a high social return on investment.

A national conversation is beginning to form around the need for nonprofit organization building. GuideStar, Charity Navigator and BBB Wise Giving Alliance recently wrote an Open Letter to the Donors of America asking donors to stop focusing on nonprofit overhead expenses.

At the same time, the Donors Forum in Illinois is hosting a series of discussions about getting donors to understand the real costs of running nonprofits.

It is exciting to see nonprofits and funders start having real discussions about how donors can better support the sector.

Absolutely key to all of this is for funders to recognize that nonprofits have real capacity needs, and they cannot grow real social solutions if those capacity needs are not recognized and addressed.

Philanthropists must take some critical steps to build the capacity of the nonprofit sector:

Create Financially Sustainable Nonprofits

The majority of nonprofits lack a sustainable financial engine that strategically and effectively supports their mission. Grantmakers could provide nonprofits the runway necessary to find the right financial model for their organizations.

Two-phase capacity capital funding could do this.

Phase one would be a capacity capital planning grant to analyze a nonprofit’s current money-raising activities and come up with a plan for transforming those into a sustainable financial model.

Phase two would be a capacity capital grant to make the investments necessary (staffing, technology, systems) to improve the nonprofit’s financial model. The end result would be that a nonprofit with a great solution to offer suddenly has the ability to grow the solution in a sustainable way.

Fund Management Expertise

Nonprofit leaders often come to their positions with a passion for the cause and specific program-related expertise, but a lack of critical management experience.

As a result, nonprofit leaders often:

• Exist in a reactive, as opposed to strategic mode
• Are challenged by financial decision-making
• Struggle with poor board engagement
• Have limited external partnerships
• Can’t articulate their value proposition, and
• Lack strategic filters to guide decisions about the future.

Management coaching can provide desperately needed strategic perspective, problem solving and expertise that can supplement and ultimately build the management abilities of a program expert who would otherwise struggle to bring a great solution to scale.

Management coaching is often a given in the for-profit world, but is only starting to be explored in the nonprofit realm, even though it holds tremendous potential for the sector.

If more funders provided management coaching dollars to support a stronger, more effective organization, more nonprofit leaders could grow their solutions.

Seek Real Conversations with Nonprofits

But these two hurdles will never be cleared if the communication impasse between grantors and grantees is not addressed. There is an often unspoken catch-22 in the nonprofit sector where nonprofit leaders are not comfortable asking funders for what

they really need, while funders lack enough on-the-ground experience to recognize and address nonprofit challenges.

This lack of honest, open conversation holds the sector back from producing effective funding partnerships and prevents grantors and grantees from marshaling resources to their highest and best use. There need to be more conversations like the Donors Forum, hosted by intermediaries, where nonprofit leaders and philanthropists can come together to talk openly about what the sector really needs and how to build stronger, more effective organizations together.

Form Funder Collectives Around Capacity Capital

Capacity capital investments do not have to be made alone. Funders often co-invest in programs that work, so why not encourage funders to co-invest in capacity building projects?

When a group of funders comes together to support the direct services of a nonprofit they love, they should eventually take a step back together and ask whether that great nonprofit could also use some organization building support. While capacity capital investments can seem risky when a foundation goes it alone, a group of likeminded foundations willing to co-invest in a capacity building plan can diminish that risk.

It is up to foundations, which understand capacity capital’s power to transform the growth and effectiveness of a nonprofit organization, to spread the word.

We suddenly have a real opportunity to address the obstacles standing in the way of more social change. But to get there, donors and nonprofits have to recognize and openly address what holds the sector back. More effective philanthropy stems from more productive partnerships between philanthropic and nonprofit leaders and a willingness to remedy together the hurdles in the way.

Getting Started

It’s incredibly exciting to think about the implications of capacity capital for the entire nonprofit sector. If a nonprofit that provides a solution to a social problem was no longer impeded by a lack of capacity, it could be revolutionary.

We’d no longer see great programs wither on the vine. The best and the brightest ideas could spread wherever they were needed. All it takes is the right kind of money, invested in the right place at the right time, and the solution can take off.

If you are interested in exploring using capacity capital with your nonprofit or at your foundation, here are some ways you can get started:

• If you want to read case studies of other nonprofits that employed capacity capital to achieve financial sustainability or grow their impact, go to the Clients page of our website.
• If you are interested in discussing how Social Velocity might help your nonprofit or your grantees increase their financial sustainability and grow their programs, send an email to [email protected] to schedule a free consultation.
• Consider bringing Nell Edgington to speak to your board, staff, or donor group about the power of capacity capital.
• Check out the other Social Velocity e-books, guides and tools at the Tools page of our website, like the Launch a Capacity Capital Campaign Step-by- Step Guide.

I hope you found this e-book helpful. As always, I welcome your feedback or questions about any Social Velocity tool. Please email [email protected] with questions, comments or feedback.

Good luck!

This e-book was designed to help you think about transforming your nonprofit. If you want a customized approach, or need help engaging more board, staff and donors in the change process, call (512) 694-7235 or email [email protected] to schedule a free consultation with Nell Edgington.

Social Velocity is a management consulting firm that helps nonprofits become more strategic, sustainable, and above all, more effective at creating social change.