Clara Miller is the CEO of Nonprofit Finance Fund. On Wednesday, I’ll be releasing a podcast interview I recorded with her a couple weeks ago. Yesterday she sat on a panel with Nancy Roob, president of The Edna McConnell Clark Foundation to discuss “Linking Money to Mission: Structuring Your Grants to Promote Grantee Performance”.
This was my favorite session so far. Clara challenged the notion that nonprofits need to “scale”, get bigger, to be most effective. She pointed out that since nonprofits, by definition, lose money on every “sale” they can’t make up the losses by doing more volume. Instead, in order to get larger, they have to grow both their core business as well as their subsidy business, the fundraising that they do in order to continue an unprofitable business.
Her point, and the message of Nancy Roob, was to discuss how grantmakers can support nonprofits by supplying the growth capital they need to scale. I took away a more general message about which kind of nonprofits philanthropists should even attempt to help grow. Clara mentioned a paper written my her colleague George Overholser, Building is Not Buying:
Building an enterprise is fundamentally different than buying services from that enterprise. And yet, standard nonprofit accounting sheds no light on the building vs. buying distinction. George Overholser believes that this missing distinction is a major reason why a market for nonprofit growth capital has failed to materialize. The good news is that the system can be fixed more easily than one might expect.
When thinking about the difference between a great nonprofit that should simply be funded and one that should be given growth capital, Clara suggested we consider a neighborhood diner that served an incredibly good breakfast menu. Should it scale up? How many national chains serve an incredibly good breakfast menu? Not many, quality is difficult to scale. In this case, the customer should be content eating at the diner (funding its annual needs), but not provide growth capital to open new locations.
I’ve asked for a copy of the presentation to be emailed to me. If I get it, I’ll post some of the relevant slides. The last page of the presentation was four simple tips for grantmakers on how to structure grants. If you’ve been reading GiveWell, none of them will be a surprise, his advocacy of ignoring overhead cost ratios and making unrestricted grants mirrored Clara’s suggestions exactly.