This is my most recent column from the Financial Times. It ties into some of the discussions we’ve been having recently:
Non-profits look to invest in themselves
By Sean Stannard-Stockton
Published: March 29, 2008
(Link to original article)
When you donate to a non-profit organization, you expect your money to be used to help the people the non-profit serves. You want your money to help a pre-schooler, a homeless person or someone with a disease. But what about the non-profit itself? Are donors interested in investing in the growth of a non-profit, so that it can develop a sustainable business model and serve more people over time? Clara Miller and George Overholser think so.
Miller founded Nonprofit Finance Fund in 1980 to lend money to non-profits so they could invest in more energy-efficient light fixtures and equipment. The resulting lower energy bills reduced costs and allowed the non-profits to repay the loan and end up with a permanently lowered cost structure.
The organization has grown a lot since then. A couple of years ago Overholser, a founding executive of consumer finance giant Capital One and a venture capitalist, joined Miller to launch NFF Capital Partners, which focuses on helping non-profits attract equity-like capital to fuel growth.
As a reader of the Financial Times, you might have invested in a small but growing for-profit company, understanding that your money would be used to grow the firm to a level where it achieved positive cash flow and was able to self-fund future growth. But as a donor, it is unlikely that you have made a similar investment in a non-profit. If VolunteerMatch is any indication, an equity-like investment in a growing non-profit may be in your future.
VolunteerMatch is the largest online volunteer opportunity network. The site allows non-profits to advertise their need for volunteers, individuals to find and register for volunteer opportunities and corporations to manage their corporate volunteer programs. In 2006, 16m hours of volunteer services were completed through VolunteerMatch. At an estimated value of $18 an hour, the organization facilitated nearly $300m in social value on an operating budget of $3.1m.
Some non-profit organizations may be content to rest, confident that they are furthering their mission to do good. But Greg Baldwin, president of VolunteerMatch, wants to more than double the social value of the volunteer hours being facilitated by his network. He needs $10m to make it happen.
Working with NFF Capital Partners, VolunteerMatch is floating a prospectus of the kind more frequently seen for venture capital backed for-profits. The $10m offering consists of 40 units at $250,000 each.
VolunteerMatch is adopting a new accounting methodology to distinguish “growth capital” from the “revenue” of everyday donations.
The accounting methodology, called Segue and developed by Overholser, strives to make a distinction between the money provided by non-profit “customers” and “investors”. For-profit accounting differentiates between money that comes from selling the company’s products or services and the money offered by investors. But in the non-profit world, a donation meant to support an organization’s existing infrastructure and one meant to help it grow are lumped together.
Investors in VolunteerMatch’s growth capital offering are promised that their money will go into a special sub-account and that its use will be tied directly to specific growth initiatives. It is VolunteerMatch’s goal that by 2012 it will be self-sustaining and generating an operating surplus that will be used to fund future growth.
Its prospectus lays out an operating model that expects certain levels of support from corporate partners (who pay to use VolunteerMatch for their corporate volunteer programs), non-profit agencies (who have free access to basic services, but pay for premium access), and reliable ongoing contributions from volunteers.
While Nonprofit Finance Fund is changing the way that non-profits think about fund-raising for growth, some foundations are busy re-imagining how philanthropists provide support. Last year, the Edna McConnell Clark Foundation of New York launched the $120m Growth Capital Aggregation Pilot, which will raise funds from co-investors. The funds will be used specifically to grow three select non-profits to scale.
The world of philanthropy is changing fast.
While yesterday’s donors were content to give to a non-profit based on an emotional appeal, today’s donors want to know their money is really going to have an impact.
The writer is a principal and director of tactical philanthropy at Ensemble Capital Management and author of the blog TacticalPhilanthropy.com.
Quite an amazing organization! I have also had the privilege of meeting Joy Anderson of Good Capital, which offers comparable services.
I would be very interested to know how a non-profit can design a plan that meets these standards: we are so used to annual operations plans and short-term proposals that it is hard to envision such a concept. Are they tied to social enterprise and earned income strategies that can make the organization self-sustaining?
Jeremy Gregg, Editor
The Raiser’s Razor
Sorry to pick you up on something again Sean, but your final sentence is very misleading (the rest of the post is very useful). “While yesterday?s donors were content to give to a non-profit based on an emotional appeal, today?s donors want to know their money is really going to have an impact.” Here you commit two leaps of logic that are common to “philanthrocapitalism”. The first is to assume that impact considerations are new, when in fact they have been around for fifty years or more – just not expressed in the ways you think are satisfactory. The second is to conflate impact with financial estimates of social value, when in fact these are only one of many measures that are available, and often not the most appropriate. These points are pretty obvious, unless you see the non-profit world through a for-profit lens. And that’s the ultimate leap of logic.
Clearly, impact considerations are not new. But I would argue that we are in the very early stages of philanthropy thinking about impact in a strategic or effective way. As Gary Walker of Public/Private Ventures recently pointed out, attempts to measure impact have mostly been unsuccessful and I would argue that is because philanthropy has been thinking about impact in scientific terms rather than human terms.
Also, note that much of my thinking is focused on individual donors, not institutional donors. The concept of the Second Great Wave and the services my firm Ensemble Capital provide, both focus on the role of the individual donor. The readers of the Financial Times also fit into this context. For the individual donor, I would argue that impact considerations are absolutely new.
On your second point, I agree with you. I do not think that social value can be best measured using financial metrics. As readers of this blog know, I’ve never advocated for distilling impact down to a single metric and certainly not to measure it using dollars. The social value as financial dollars metric that appears in my article comes from the VolunteerMatch prospectus. While volunteer labor hours are an area that intuitively makes sense to measure in dollar terms, I would suggest that the the number significantly understates the full value of VolunteerMatch. What about the value of promoting a sense of civic duty to Americans? What about increasing personal contacts between those that have the surplus that allows for volunteering and those that do not? What about value that would be achieved in terms of individual happiness if Americans volunteered more?
I’m not yet sure I understand what “philanthrocapitalism” really refers to. I have the sense though, that it is a derisive term for someone who thinks money is the only item of true value and bring this thinking to philanthropy. Personally, I believe that money is a store of time/energy/intelligence that can be used to further what really matters to the holders of that money. Whether that be social good or conspicuous consumption. But money in itself is not a measure of anything other than potential.
Hi Sean, I’m glad to see we are getting somewhere, beyond the hype that characterizes much of this debate, but I don’t agree that “for individual donors…impact considerations are absolutely new.” Which individual donors are these? Not the ones I’ve been interacting with for the last thirty years, that’s for sure. I think most people have always factored an appreciation of “impact” into their giving, even if they also pay attention to loyalty, identity and familiarity in the causes they support. As far as I’m concerned, that’s very healthy, since it builds precisely the social and political qualities you list in the third paragraph of your comment. But if these kinds of impact are so important, why do so few of the websites you cite in your articles do justice to their measurement? Sure it’s difficult, but it’s not impossible, and there’s a whole literature out there on civil society, social change and international development that points the way in the right direction.
On your final point, I admit that “philanthrocapitalism” is an ugly term, but large-scale and rising inequality is an ugly reality that denies most of the world’s population the opportunity to exercise the “potential” you refer to. Shouldn’t a goal of the “second great wave of philanthropy” be to change that reality in fundamental ways?
The vast majority of individual donors who think that nonprofits are ineffective at their very core, the ones that see giving as something you do as a social obligation, to reduce guilt or who see the very action of giving as “doing good” rather than the giving simply being the opportunity to support an effort that does good.
If in fact, many individual donors gave much thought to impact, we would have long ago seen a large number of mainstream books and resources targeting these individuals. Those resources exist for the institutional philanthropy set, but not for individuals.
The reason the websites I cite, nor the many others I’ve pointed to in the past, do not do a very good job of communicating these issues is because we are still in the early stages of hashing out what all of this means. Even institutional philanthropy has a terribly difficult time communicating about what they.
If you view philanthropy’s core purpose as redistributing wealth, than I can see how you might assume the second great wave should be about fixing inequality. But that view of philanthropy is fundamentally flawed in my mind because it takes as a given that the for-profit system must unequally distribute wealth and the best we can do is hope philanthropy can redistribute that wealth.
I think philanthropy has a far higher calling then cleaning up after for-profit markets. I don’t claim to have any great insights into the degree to which our economic system is unjust or ways to cure those ills. But while I applaud those philanthropists who choose income distribution as their mission, I do not see philanthropy’s core purpose as an effort to fix capitalism. To believe so sets philanthropy up as nothing more than a supporter of flawed for-profit systems and seems to me to be a far more dangerous form of “philanthrocapitalism” than to believe that philanthropy’s goals should be about improving the life of those around us.
Before we move on, I want to circle back to your comment that I made the philanthrocapitalist error of “conflating impact with financial estimates of social value”. I did respond to that point in my last comment and I’m interested in your thoughts. I do see many people making this error and I think you are correct to criticize it. But I do not think I am guilty of this error.
Very interesting discussion. One that we’ve put a great deal of thought into over the years.
It may come as a bit of a surprise to those looking at VolunteerMatch from the outside, but our commitment to measuring impact has more to do with our own internal management systems, than it does with our desire to prove to potential philanthropists that we are having an impact.
I’m certainly not disappointed that it serves two vital purposes, but I do think it is important that the motivation was to better understand our work, not to impress others.
I can’t speak for all nonprofits, but it has been a very useful framework for us.
If the data a nonprofit shows to “investors” is not data they find useful themselves, I would suggest they are just doing a marketing job on the potential funder.
This is why I don’t agree with people who think that impact measurement is an expense that nonprofits can’t afford. If done right (as you are doing it Greg) I think it is a cost that nonprofits can’t afford to avoid. There should be a huge return on the expense of self-evaluation.