Philanthropic IPOs

From the Ottawa Citizen (hat tip to Ani Hurwitz):

Non-profit ‘IPO’ invests in future of girls

The TSX may be flagging, but a Toronto-based non-profit foundation is betting that the IPO it offered yesterday at the exchange is the way to raise $1 million to fund programs for girls by the end of the year.

The IPO — as in “Immediate Public Opportunity” — of the Girls’ Growth Fund is a fundraiser by the Canadian Women’s Foundation.

Shares in the fund are $100 each. Donors get a share certificate and a prospectus. The funds will be used to support programs that develop self-esteem, leadership and critical thinking skills for girls between the ages of nine and 13 over the next three years.

While there is no monetary return, the IPO is one of a new breed of fundraisers billed as an investment that builds “social equity.”

…The non-profit IPO concept has been used before in charitable circles in the United States — last month, George Overholser of Nonprofit Finance Fund told The Economist that about $200 million U.S. in “philanthropic equity” has been raised in recent years.

…As the idea developed, the Girls’ Growth Fund had its eye on Mr. [Warren] Buffett’s philanthropist sister, Doris Buffett, said Ms. Babcock. It was a coup that Ms. Buffett agreed to become one of seven “angel investors” who bought $10,000 in shares in advance of the IPO.

BMO Financial Group chief economist Sherry Cooper was also an angel investor. Another 100 high-profile individuals purchased at last one share before the IPO, including writers Margaret Atwood and Gloria Steinem, former diplomat Stephen Lewis, actress Jane Fonda and Indigo Books founder Heather Reisman.

…The non-profit IPO is a bit of a gimmick. But it is one that plays into a growing mindset among donors, who see their contributions as more of an investment than a gift.

This is a pretty fascinating article. The author (knowingly it seems) blends together the “marketing gimmick” of the IPO concept with the new accounting methodology being put forth by George Overholser when he refers to “philanthropic equity”.

Part of me reads about the “IPO certificate” and the “prospectus” and is annoyed that what appears to be a typical fundraising effort is being dressed up as a new sort of “investment”. On the other hand I see the excitement the offer generates and the well known donors and it validates my belief that people want to give in a financially sophisticated way, but don’t know how.

What do you think? Is the Nonprofit IPO concept dillutive to real efforts at building philanthropic equity or is it a positive sign of donor demand?


  1. Hey Sean

    There was another thing like this that I wrote about a few months ago at Do Good Well.

    I tried to get the community to respond with their thoughts, but whoops! I didn’t have a community yet.

    Anyway, I think that it *is* a gimmick, but its got the right intentions and the right instincts, which is to say that stakeholders – whether they’re donors or volunteers or “beneficiaries” – want a higher level of engagement with nonprofits and their programs. A fundraiser dressed up as an IPO might not actually give them ownership over the project, but it might compel a new set of questions about how different types of stakeholders work with one another more collaboratively.

  2. ani hurwitz says:

    Interesting questions. My own take is that it’s old wine in new bottles (a gimmick)—and that anything can be packaged. I’m not at all sure that most charitable people want to give the kind of attention that is required of “investors.” And because I’m really leery of social capital markets (indeed, I think they’re a chimera), I don’t worry about the dilution factor.

  3. I think Nathaniel makes a good point with the concept that what the IPO *is* (a gimmick) isn’t as important as what it is tapping into (the desire by donors to “invest” in nonprofits). By “invest” I don’t mean make a profit, I mean “invest” in the sense that you might “invest” time in a young person who needs help. Investing in this sense is fundamentally different than simply giving something to someone.

    Ani, I think you’re right that the IPO is a gimmick, but the very fact that the gimmick works means that their is donor demand for this sort of thing. I can only assume that donors would be even more interested in an IPO-type “donation” that was the real deal. Real in the way that George Overholser’s “growth capital offerings” are real.

  4. George Overholser says:

    I also worry about gimmicky approaches to “IPOs” and fear that there are knock-offs out there that could potentially do more harm than good.

    I have not read the GGF prospectus, but would be surprised if it complies with the “philanthropic equity” standards we developed at Nonprofit Finance Fund and call the Sustainable Enhancement Grant (or SEGUE).

    Properly executed, SEGUE’s are decidedly *not* gimmicky. The core idea is to use a rigorous accounting treatment to reveal whether or not the investment of philanthropic equity results in a sustainable enhancement of the organization’s ability to turn other people’s money into effective social impact.

    Ask two simple questions:

    (1) What happens when the IPO money runs out? If the answer is “We do another IPO”, then this is just a gimmicky way to raise money for next year’s budget, and it shouldn’t be called a capital campaign. If the answer is, “By then we will have built a better way to attract 100% of the revenues needed to sustain what we do”, then it begins to look like a proper SEGUE.

    (2) Is a rigorous accounting treatment in place that allows your IPO investors to know whether or not the sustainability plan was realized? In other words, is accounting for the growth capital separated from accounting for business model revenues? And will this round of IPO investors find out if another round of equity investors are tapped — the dilution concept.

    In the for-profit world, equity pays the bills while growing companies learn how to become sustained by the customers who eventually use them year in and year out to turn money into execution. The SEGUE methodology does something similar for nonprofits.

    The SEGUE methodology allows IPO investors to know whether they can take financial credit for merely paying for next year’s budget (the gimmicky outcome) or, much more powerfully, take credit for giving rise to an organization that delivers against mission for years to come. Again, did they build an institution so compelling that other people choose to use that institution, year in and year out, to turn *their* money into effective program execution.

    I worry that the recent spate of knock-offs will lead to large grants that, in turn, lead to crises when the money runs out.

    Any thoughts on how best

    to move forward?

  5. I find it interesting that the Nonprofit IPO got celebrity support as well as backing by people well versed in economics and philanthropy.

    I continue to think the success of the IPO is a good indicator of donor demand, yet I agree that more of this sort of gimmick is a bad thing. I guess the question is why did the nonprofit IPO get media coverage while true growth capital offerings have had limited coverage?

    George, maybe you need to call your next growth capital offering an IPO and ring the opening bell of the New York Stock Exchange? Good marketing is just as important as having a good product. Gimmicky marketing of a weak product is boring. Gimmicky marketing of a great product can be a huge winner.

    George, this isn’t meant as advice for NFF Capital, I’m just thinking out loud about the space.

  6. ani hurwitz says:

    and consumer demand is an indication of . . . what? often a need, yes, because of product quality, yes, but American consumption patterns seem to suggest that demand is simply a result of good marketing–no matter the product.

  7. That can be true in the short term, but if you believe that consumers follow great marketing instead of their own needs in the long run, than you’re essentially saying that people are dumb and don’t know what’s best for them. I believe that individuals are best positioned to make their own decisions.

    Also, labeling something an “IPO” today isn’t really good marketing. Most people want nothing to do with financial markets if they can help it. So we’ll find out pretty quickly whether the enthusiasm for financial-type philanthropy was just a quick blip. I don’t think it is, I think we’re in the midst of a very long term trend.

    Remember Socially Responsible investing is 30 years old and still growing fast.

  8. Hi Sean,

    George covered the points very well. I would like to add one more point.If it is possible for the shareholders to sell their equity at a later point, then the IPO model holds a lot of promise as it allows for the reuse of capital. It also follows that the organization should have some way of generating a revenue stream for its services and the IPO should not be another way of raising donations.

  9. George Overholser says:

    You raise a very interesting topic, Bhalchander. It would indeed be powerful if we could find a way to recycle philanthropic equity when nonprofit enterprise-building investments are successful.

    I have wrestled with this quite a bit and have several thoughts to share, some of which (I must warn) are technical:

    (1) In many ways, philanthropic debt (or PRIs, Program Related Investments)are already quite similar to what you have described. If an organization borrows money for growth purposes and is successful at creating new streams of revenue to sustain what is built, then, sometimes, they also have enough to pay back their philanthropic debt stakeholders.

    (2) But debt is usually not a very good financing vehicle for enterprise growth, since organizations don’t have enough positive cash flow to pay back the principle. Instead, they need their retained earnings to finance continued growth.

    (3) For this reason, (and others) even for-profit growth companies use equity (sometimes called “burn capital”), not debt, to finance their growth.

    (4)It is helpful to remember that even though for-profit equity stakeholders do indeed get their money back, it typically doesn’t come from the companies in which they invest. Rather, the early stage investors cash out by trading shares in the secondary market with other equity investors.

    (5) The physics of nonprofit enterprise growth investment are no different. To get their money back, philanthropic equity stakeholders would need a secondary market in which to trade their shares, and – here’s the rub – they would need a concept for why ownership of someone else’s prior investment is worth paying for.

    (6)For for-profits, ownership valuation has to do with a theoretical notion of how much money equity holders could pull out, in the form of profits, at some point in the future. But for nonprofits, the tax code disallows any distribution of enterprise earnings. (The so-called nondistribution constraint in 501(c)3 law.) Without financial returns to bank on, the valuation of philanthropic equity shares traded in a secondary market would need to be based, I suppose, on something akin to bragging rights, or perhaps naming rights, and/or some notion of stewardship rights. But not a cash on cash return.

    (7) In any event, the “return” associated with an investment of philanthropic equity has to do how much social good is accomplished by the enterprise throughout its entire life-cycle. I’ve done the math, and these returns tend to be extremely handsome — much higher than using money to simply help pay for next year’s operating expenses, for example.

    Sorry to overwhelm!!! I’d love to discuss this further with anyone who is interested in further refining the finance theory behind it.

  10. George – I would be certainly delighted to discuss this further. Some of the ideas you mentioned are very similar to what the Nobel laureate Mohammad Yunus talks of in the Social Business concept.

    To make this work, I think we need a ‘social stock market’. I think we also need to make a distinction between ‘equity’ in a Non-profit and PRI or debt in terms of their risk profile and financial return. PRI or debt have low risk and predictable financial return and have lower stewardship rights. ‘Equity’ in a non-profit on the other hand is high risk and has potential for capital appreciation through sale on the social stock market. The non-profit by itself gives no financial return to the ‘equity holder’. The ‘equity’ also gives higher stewardship rights.
    At United Prosperity which is a California Non-Profit Public Benefit Corporation we are exploring the possibility of ‘equity’. We currently see two exit options for the ‘equity holder’ and are exploring several aspects of this ( legal, commercial). :
    1. Sale of the equity to another individual:
    – Can the equity be sold at above or below original price?
    – Does this in any way contradict Non-Profit law /regulation?
    – Should we have private sale or are public sales also okay?
    2. Can the equity be converted into a donation at a later point so the equity holder can get a tax write off?
    a. How can the conversion to donation option be called?
    – Who can call it?
    – When can it be called?


  11. James Pruett says:

    Another place to start is to create what I refer to as a World Social Brand Market, an index and directing of social signs that communicate social needs. This brand symbols would be available for licensing.

    James Pruett