The general framework of how money flows in the nonprofit sector is focused on the assumption that nonprofits need to chase donations. This is also how the business sector works; companies chase revenue.
But investing is different. Investors often are the ones chasing the best investment opportunities. It is simply an issue of supply and demand. While there are lots of companies and nonprofits who want to sell things to consumers or raise money from donors, there are a limited set of really good investment opportunities. This fact is frankly recognized in the financial markets where investors are constantly searching for great investment opportunities and then competing with other investors to secure a piece of the deal.
It seems to me that we are on the verge of an inflection point in philanthropy where the supply of philanthropic dollars is increasing just as it becomes more widely recognized that nonprofits are not all equal in their ability to achieve results and platforms are being developed to showcase the select group of nonprofits which offer potentially outstanding philanthropic investment opportunities.
If the social investing framework flips the direction of the “chase” from money to philanthropic opportunities, the landscape of philanthropy will look quite different. I first wrote about this concept in a 2008 Financial Times column where I discussed what philanthropy might look like in the year 2033. I suggested that “investment ready” nonprofits would likely list themselves on some sort of “exchange”:
The business of giving money away is particularly different for large private foundations and smaller “impact-oriented” foundations. Instead of expecting non-profits to solicit them for grants, these foundations’ “impact committees” and “program analysts” spend their days looking for and researching potential grantees. Given the considerable information disclosure required by the exchanges, much of the information required for grantee research is available online. Third-party evaluation firms provide regular reports on listed non-profits and these reports are a valuable input for the foundations.
While the cost to non-profits of conforming to the exchanges’ information disclosure requirements is steep, once listed they find grant dollars come looking for them rather than the other way round. Exchange-listed non-profits tend to have small fund-raising groups that focus on “donor relations”.
We can see some of these themes playing out at the Social Impact Exchange conference being held in New York this week.
In a recent post title “Money Chasing Ideas” Lucy Bernholz reflected on how many social entrepreneurs find it easier to raise for-profit funding than philanthropic capital:
“…the reason it was easier for the entrepreneurs to pitch VCs instead of foundations was simple – the commercial funders were there. They were at the meetings, mixing it up with entrepreneurs, inviting pitches, taking meetings on sidewalks, etc. The foundation executives – much harder to find.
This has nothing to do with social impact, social returns, or appropriate business models to produce social and financial returns. It has to do with who is out looking for ideas to support and who is waiting for the ideas to find them.”
There will always be a need for fundraisers to seek out donors to solicit donations from just as there will always be a need for sales people to find customers. There will also always be a need for unproven nonprofits to desperately seek growth capital funding just as early stage companies try to get in front of angel investors and venture capitalists.
But I think smart funders who want to invest in the growth of outstanding nonprofit organizations are going to need to restructure their process so that the thrust of their work revolves around proactively locating great philanthropic opportunities rather than passively wading through grant applications.