Investing In Nonprofits

Recently I’ve been consumed with thinking about the implications for philanthropy of a mindset where donors want to achieve a certain goal they think is valuable (such as provide mentors to low-income students) and then go looking for nonprofits to help them do this vs. a model where donors go looking for great nonprofits in a general focus area (education) and the nonprofit focuses on the tactics. In the first model, funders spend most of their time studying how social good is created. In the second model, funders spend most of their time finding and analyzing nonprofit organizations.

Below is a list of organizations who to varying degrees seem to focus their time on studying nonprofit organizations rather than social problems (or are involved in helping great organizations attract capital). This list does is not meant to imply that anyone on this list agrees with me on this issue.

  • Growth Philanthropy Network: Working to build a capital market that provides capital to top-performing nonprofits.
  • Nonprofit Finance Fund Capital Partners: Helping high performing nonprofit attract growth capital.
  • Edna McConnell Clark Foundation: This foundation says on their website, “Rather than design initiatives or programs itself, the Foundation works to develop and expand a pool of organizations that can serve thousands more youth each year with programs that produce these outcomes. It focuses solely on high-performing organizations”
  • SeaChange Capital Partners: Identifies, vets and presents outstanding nonprofits to their high net worth donor network.
  • Social Venture Partners: A network of 20+ regional groups of “high engagement” donors who provide time and money to a portfolio of nonprofits.
  • New Profit: Helps a portfolio of social entrepreneurs build world-class organizations and scale their impact.
  • Venture Philanthropy Partners: a philanthropic investment organization that helps great leaders build strong, high-performing nonprofit institutions.
  • GiveWell: Performs in-depth research on nonprofits to identify the ones that donors should support to achieve as much good as possible.
  • Acumen Fund: Provides philanthropic capital and business acumen to help build thriving enterprises that serve the poor.

A number of the groups above describe themselves as engaging in “venture philanthropy”. That’s fine, but that’s not what I’m talking about. Venture philanthropy borrows from the venture capital model whereby money is invested and the venture capital firm takes on a board seat or some other high degree of involvement in the investee’s management. Instead I’m talking about a more broad approach that might be called “capital market philanthropy”. The capital markets are a system for delivering financial resources to organizations. They include venture capital that provides money to start up organizations, to public stock markets that provide capital to the largest companies in the world. I’m very explicitly NOT arguing that the philanthropic sector mimic every aspect of financial markets. But I am arguing that the goal of philanthropy should be that of a social capital market. A system for providing capital to nonprofit organizations.

As I’ve said before, not all philanthropy needs to be an investment. There is plenty of room and need for donors who want to “buy” social good (program execution from nonprofits). I’m simply talking about a shift in emphasis from one in which foundations think of themselves as social impact engineers to one in which they think of themselves as social capital investors. The ramifications for how foundations operate, who they hire and their relationship with nonprofits would be huge.

But wait! One of the most attractive things about the private foundation legal structure is the flexibility in what it is allowed to do. I would hate to see my thoughts interpreted to be arguing for foundations to do nothing but make grants and loans. Foundations can engage in advocacy and they should. They can fund media and they should. They can execute their own programs and the should not ignore this opportunity what it makes sense.

For a moment, let me refute my own argument. The Siebel Foundation is well known for The Meth Project:

The Meth Project is a large-scale prevention program aimed at reducing first-time Meth use through public service messaging, public policy, and community outreach. Central to the program is a research-based marketing campaign that graphically communicates the risks of Meth use. The Meth Project has been repeatedly cited as a powerful private-sector response to a devastating social problem and was recently recognized by the White House as one of the nation’s most effective prevention programs.

The Meth Project was conceived and founded by businessman Thomas M. Siebel. First launched in Montana as the Montana Meth Project, the program is focused solely on prevention. Since its inception in 2005, the Meth Project has achieved substantial results. Meth use among teens in Montana has declined by 45%, Meth-related crime has dropped 62%, and workers testing positive for Meth have declined by 72%, the largest drop in the country. The Meth Project has since expanded its programs into Arizona, Idaho, Illinois, and Wyoming.

While I do not intend to endorse The Meth Project, it is widely viewed as an incredibly effective program. That’s wonderful and no change to philanthropy’s core practices should discourage this sort of activity. Foundations and all funders should utilize all tools at their disposal. But if we truly want a high performing nonprofit sector, we need a shift of emphasis that positions funders as capital providers and nonprofits as executing organizations.

When this happens the currently trendy use of words like “investment” instead of “grant” will cease to be simply semantics and actually signal a truly “new” New Philanthropy.


  1. @adincmiller says:

    Tactical Philanthropy post on foundations positioned as social capital investors: – who else can be added to the list?

  2. @adincmiller says:

    Tactical Philanthropy post on foundations positioned as social capital investors: – who else can be added to the list?

  3. Joseph Sinatra says:

    How about Ashoka?

  4. George Overholser says:

    Well said, Sean. Your argument is a bit like Copernicus putting the Sun at the center of the Solar System instead of the Earth.

    I am struck by three things.

    (1) One of my clients described his organization as reluctantly being in the “chameleon business,” constantly contorting the various components of his program design and strategy to fit into the many programatic funding streams among the funders. They are so busy chasing chameleon dollars that their own very compelling core strategy for social impact hasn’t gotten the focus it would need to bring funders into alignment.

    (2) If it is to bring funders into alignment, an enterprise needs to become VERY compelling . And this takes a large amount of growth capital – more than any single funder is likely to provide. Growth capital can be defined as “money that pays the bills while an organization learns how to be compelling”. Compelling enough, that is, to attract simply-pay-us-for-what-we-do money that covers all the costs of the enterprise.

    What does being compelling entail?: Not just a program that works. But also: a proven way to replicate the program faithfully, and… enough scientific proof of impact to change minds, and… a business model that can reliably generate money in return for program execution (not program change), and… a management team and board that instills great confidence.

    Tally it up, and we are typically talking $10 to $30 million of growth capital before an organization can be compelling enough to bring funders into alignment. That is more than any single fund is likely to provide. Hence the need to run syndicated growth capital campaigns.

    (3) I don’t want to give the impression that I believe funders shouldn’t develop strong strategies for social impact. I think the field has plenty of room for different approaches. It’ll be interesting to see if those who are pursuing a more enterprise-centric approach will be able to demonstrate superior levels of social impact. Time will tell!

  5. Even fully capitalized for-profits can be invested in via secondary markets (the stock market). While the investor takes ownership, no capital flows to the company. Do you see any role for nonprofit investors once a nonprofit no longer has a need for new capital? Or does the capital market model break down at that point?

  6. Sean, I don’t know the language of finance and investing well enough to know which of its metaphors would best serve the philanthropic sector, but I enthusiastically support your argument. It feels very consistent with what former World Bank economist David Ellerman refers to as the role of the “helping agency:” to catalyze, foster, and otherwise amplify 1) positive things that are already happening and 2) any experimentation that’s already happening for the purpose of improving upon what’s already going on. From this perspective, the role of a foundation is to amplify **what is already happening within a community/demographic that is already working well** and not to engineer-and-insert a project from the outside. More of my thoughts on that here:

    It also seems you’re describing what Bill Somerville calls Grassroots Philanthropy, the subject of your May 2008 Financial Times article:

    Bill’s Philanthropic Ventures Foundation might belong on your list?

  7. Thanks Christine. When George referenced Copernicus, he was pointing out that this model doesn’t “change everything” it just realigns the philanthropic model. I think that’s right. So while I agree with you, I also think there is a role for foundations to “engineer and insert”. That’s why I profiled The Meth Project. But I do think that the emphasis (or the “center of the universe”) should be investing in what is already happening.

    Bill Somerville is my friend, but I don’t think PVF belongs on the list because he is interested in making grants to individuals. He doesn’t create his own programs, but he also doesn’t see his role as an investor in organizations. He sees his role as a supporter of individuals.

    That doesn’t mean I disagree with his approach, just that it is not part of the model I’m discussing.

  8. @NYCVPF says:

    @TheWaterProject Good question. Check out post, explores social investment:

  9. @NYCVPF says:

    @TheWaterProject Good question. Check out post, explores social investment:

  10. George Overholser says:

    As you suggest, Sean, I think the nonprofit capital market metaphor does indeed break down when we consider the secondary market.

    (ALERT, this is going to get technical!)

    For those who aren’t familiar, the vast majority of trades that take place in the stock market involve one investor swapping money with another in exchange for shares. None of the money goes to the firm — its just an exchange between shareholders.

    It all works because shares have value: shares confer to their owners the right to receive a portion of the firm’s earnings for ever more, they confer certain decision rights and they confer the right to “assign” ownership of the shares to other investors. All of these right are seen to have value and that’s why they can be traded for cash in a secondary market.

    What’s interesting is that often, the shareholders actually never receive any earnings (in the form of dividends)and never even expect to. Instead, earnings are retained by the firm.

    What’s fascinating (if you are nerdy about such things) is that even though no one expects to receive any earnings, the shares nevertheless can have great value.

    This is because shareholders think in terms of how much earnings COULD be distributed in the future, should the shareholders or their representatives in the board choose to start demanding those dividends.

    Thus, secondary market shareholders think in terms of the firm’s future ABILITY to distribute earnings, and, even though the distribution never happens, that is enough to place a value on the shares.

    I find this intriguing because, financially speaking, a nonprofit bears a strong resemblance to a for-profit that retains all of its earnings.

    The nonprofit tax code doesn’t say nonprofits can’t have profits. It says that nonprofits can’t DISTRIBUTE their profits. This is called the non-distribution constraint.


    What you do need to have is a belief on the part of the shareholders that customers will continue to use the firm to change their money into whatever the firm has to offer.

    Translating to nonprofitdom, a nonprofit enterprise has value to the extent that it is expected to continue to turn funders money into socially beneficial program execution.

    My point here is that when it comes to finance, nonprofits and for-profits may be more similar than meets the eye, and this is something we capital-market makers can maybe take advantage of.

    Nevertheless, the big difference is that for-profit shares grant the shareholder two things that nonprofit shares do not. First, they confer the RIGHT to extract dividends. And second, via voting or board representation, they confer the right to influence a bunch of firm-level choices including whether or not earnings will be distributed.

    To finally get to an answer to your question, Sean, I believe we may one day be able to use analogous features to get a nonprofit secondary market of some sorts to work.

    We couldn’t offer shares that confer a right to receive dividends, but perhaps we could confer a right to brag about being the official Builder-steward of the enterprise. This is kind of a naming right. Instead of having your name on a building, though, it is being named as a steward of record. Not super compelling, perhaps, but who knows? Naming rights for all the bowl games sure have certainly worked well, and are bought and sold regularly in a secondary market.
    Perhaps more potent would be to build certain decision rights into nonprofit shares. “In owning this equity share of nonprofit xyz I formally have the right to weigh in on whether or not we will merge and change the mission.”

    These are just musings of course – I can see all sorts of things I don’t like about what I’ve described. But its good food for thought, and perhaps, with alteration, there may be something that could work!

  11. Great points George. But publicly traded stock is held up in value by the fact that the company can pay their earnings out as dividends. The fact that they withhold earnings and reinvest them in growth leads (or hopefully will) to potentially higher dividend potential in the future.

    I’m not sure I buy the concept of a secondary market. Although Dan Pallotta in his book Uncharitable posited the idea of nonprofits spinning out their fundraising arms which could share profits with stock holders. Not sure I like that either, but maybe there is a twist that makes something work.

    But I love the thought puzzle you lay out!

  12. Jeff Berndt says:

    I don’t pretend to think New Profit has the answer in the important debate about what causes systemic change, but we’re honored to weigh in on a topic we’ve spent a lot of time thinking about. Thanks, Sean, for provoking and facilitating this discussion.

    New Profit believes that many solutions to our country’s most entrenched social problems already exist. But many of the social entrepreneurs who have created these innovative solutions lack access to the financial and human resources to grow their enterprises, as well as the connections to policymakers at the city, state, and federal levels that could help them scale their solutions.

    What’s the result of this situation? The nonprofit sector today largely consists of “mom and pop shops”—the vast majority (91%) operates with an annual budget under $1 million. And the social problems we face persist.

    We see our role as a funder as identifying the best solutions to social problems, then providing these solutions with the financial and strategic support needed to grow their social impact. At New Profit we’ve decided not to become subject matter experts. We don’t subscribe to any one point of view on education reform, healthcare efficiencies, or workforce development strategies. Instead, we believe entrepreneurs hold the insights and are best suited to design and grow their innovations. Like venture capitalists, we look for leaders and innovations with the potential to create fundamental, widespread change. We then provide financial capital (multi-million dollar growth capital grants over four to six years), access to networks (other funding sources, experts in content areas, policymakers), and necessary strategic assistance (management consulting, portfolio managers) to help each entrepreneur grow their solution to new communities and to drive their own strategy for scale through policy, creating markets, or another widespread change strategy.

    So where does systemic change come in? We’ve realized that scaling great organizations alone won’t be enough to solve the persistent social problems we all face today. To realize transformative change we’re going to need to improve the environment in which all nonprofits operate. New Profit believes this means building effective social capital markets, and, connecting policymakers at the city, state, and federal levels with solutions to social problems, as well as a range of other strategies. For these reasons, in addition to working with a portfolio of innovative organizations, we’re also working with a coalition (see America Forward), and a broader network of colleagues, to inform policy, improve capital markets for social innovations, and advance a national dialogue about how we can support and grow what works.

  13. Chuck Harris says:

    On behalf of SeaChange Capital Partners, let me add to the excellent comments from George Overholser and Jeff Berndt.

    At SeaChange Capital, we also take an enterprise-centric approach, believing that outstanding entrepreneurs and their boards and management teams deserve and require unrestricted, multi-year philanthropic support in pursuit of significant increases in impact. Certainly this is how great companies are funded, and while acknowledging imperfect mapping between business and social enterprise, we do believe the equity investor’s mindset is applicable to both sectors.

    We add to this the conviction that, as the social problems faced by children and youth in our low-income communities are enormous in scale, at least some of the responses need to be of scale as well. This suggests that the funding required from the philanthropic sector, often and ideally in partnership with government, needs to be quite large, larger than any single funder can provide. So we have taken on the assignment of supplementing our own resources with those of a national network of wealthy individuals and families who see the need to act collaboratively, with SeaChange Capital conducting significant due diligence (including utilizing prior research done by others willing to share their insights) and working to arrange the multi-party financings.

    Yes, only time will tell if well-capitalized nonprofit enterprises can effect meaningful social change. I would suggest that results from the handful of youth-serving organizations that have achieved financings of this nature (see, for example, Teach for America, College Summit, Year Up, Youth Villages, Citizen Schools) support our thesis.

    Thanks for engaging the conversation.

  14. Not a whole lot to add to the great posts already up. Chuck, George, Christine, and Jeff said it well. There is no doubt room in the non-profit capital market for multiple approaches, but the fundamental premise here is that people on-the-ground that have been living their work real-time for many years know more than we as funders do. I think that’s safe to say.

    In our work at SVP, I think the most fundamental philosophy that guides our work with non-profits (human and financial capital) is that the relationship is with and about their ORGANIZATION. We ultimately invest because of a non-profit’s social outcomes, but the most effective way to do that is to help them build a strong organization for the long haul – strong infrastructure, flexible funding, leadership development, clear outcomes, etc.

  15. Sean, my thanks to you for starting this conversation, and to George Overholser, Chuck Harris, and Jeff Berndt for adding their perspective.

    I wholeheartedly agree that one of the big problems we need to solve as a sector is how to find ways to scale highly effective nonprofit organizations, so I applaud you for raising this question and also for highlighting the power dynamic that can often exist between funders and grant recipients. (I particularly like George’s reference to the need to be a “chameleon”, which captures the issue very nicely).

    At Acumen Fund, about two years ago we realized that we were in a position for a major scale-up of our work, and we also recognized that the best way to do it would be to raise a large pool of unrestricted philanthropic capital that would take us to the next level. We set out to raise $100M over two years in unrestricted capital in May of 2007, and by the end of 2008 we raised $85 million against this goal.

    One of my reflections having led up this effort is that individual philanthropists are typically much more prepared than institutions (foundations and corporations) to make large, long term, multi-year, unrestricted gifts. (That said, there are some institutions that are exceptions to this rule, and I do believe that when programmatic goals of a nonprofit align closely with those of a foundation, large gifts with some restrictions can provided needed growth capital that allows for the kind of organizational investment that growing nonprofits need to make.)

    Where things get really tricky is when a nonprofit that might be ready for tens of millions of dollars of growth capital (the $10-$30M that George Overholser suggests is a good reference point) finds itself mostly able to raise programmatic grants (often narrowly restricted) in $50,000-$100,000 increments from foundations. Programmatic grants like this can create the two-headed hydra of not having sufficient funding for “overhead” (a.k.a. non-program staff), combined with the communications, relationship and reporting challenge that can come with having 100 individual $50,000-$100,000 grants (an absurd number, but this would get you to $5-$10 million) – the “chameleon” problem.

    The irony is that in other lines of work – venture capital; executive search; etc. – being able to find and invest in a world-class team of people is seen as THE differentiator between good and great firms. Yet all too often, foundations seem unwilling to invest in people and organizations, instead seeing nonprofits as a means to a programmatic end.

    The problem with a world in which the most proactive, risk-taking philanthropists are individuals (rather than foundations) is that it has the potential to limit severely the types of new nonprofits that will be successful at growing to scale – namely, the winners will be those organizations that are run by individuals who are capable of building strong and deep relationships with ultra high net-worth individuals. Nonprofit CEOs who can do this bring together a unique combination of skills, but if this is only real way for anyone looking to grow a new nonprofit, then we as a society have a problem. (though large scale retail fundraising using Web 2.0 tools is a potentially interesting solution).

    The potential I see is to have foundations bring together both know-how about what it takes to solve major social problems AND a risk appetite to put capital behind organizations (and not just programs) that have a real chance at building those solutions.

    For now, at least, it seems like we’re coming up short on the appetite for risk and for openness to the idea that investing in great teams and building great institutions will be what brings forth the next wave of groundbreaking nonprofits.

  16. David Lynn says:

    One comment that has been touched on here but doesn’t come through to me in the semantic discussions of “grant” vs “investing”: where does the involvement become more than money, and how does that relate? Should there be different terms?

    A grant with no strings is certainly different from a grant requiring the recipient to execute a specific (possibly new) program, but they’re both grants. An investment into a sector or into a specific non-profit is different if it’s just money or if it is comes with volunteering, consulting, or other forms of stewardship and monitoring.

    Metaphor from the public market: buying shares but never going to a shareholder meeting, voting on proxies, or even reading annual reports. One word of “investment” doesn’t cover that spread.

    I certainly don’t know what’s good or what’s bad, but if we’re trying to frame the “new philanthropy” issue, then I’m curious what part of post-funding is relevant.

  17. David, for now, the phrase “investment” vs. “grant” is only about expectations from the funder. However, George Overholser and I recently wrote an op-ed that laid out an accounting change that would create a real difference between investments (equity) and grants (revenue). Without the accounting change, an “investment” is all about giving a nonprofit money with the expectation that it will be used to building the strength of the nonprofit (rather than provide services).

    However, while the op-ed calls for an official accounting change. George has already developed the SEGUE accounting system that allows for nonprofits to internally account for investments vs. grants.

  18. Mario Morino says:

    Sean, you and the posting that followed present a solid case for “capital market philanthropy.” But, to be honest, I don’t see the world as bifurcated as you do. Yes, there is a distinction to be made between those who look for great nonprofits in a general issue area (e.g., education) vs. those who have a specific goal and then try to find nonprofits that can help them achieve that goal. However, I have seen good examples of funders pursuing each of these approaches and advancing what I consider to be “capital market philanthropy.”

    In my mind, we advance capital market philanthropy every time we help to steer capital preferentially to nonprofit organizations that are clear about what they’re trying to accomplish and have evidence (qualitative and quantitative) that demonstrates they are making progress toward those goals. We do even more to advance capital market philanthropy when we help nonprofits to clarify their goals and collect evidence of progress?and then make this information widely available to other potential investors. I see a wide and growing array of different grantmakers—from large, established foundations like Hewlett to newer, comparatively small funds like the one I co-founded—taking both of these approaches.

    This is a time when we need many experiments. That donor investors care about important societal outcomes and are willing to make enduring commitments to see their efforts through (e.g., Seibel) is a great thing. The field needs an Edna McConnell Clark to illustrate that it is possible to transform a more traditional, established foundation. It needs a Hewlett Foundation to set a standard for the seriousness and strategic way in which philanthropy can be approached. It needs Acumen, New Profit, NFF, SeaChange, GPN, and others to succeed?for each presents a compelling model for others to emulate and adapt. Just as it took a long time to create the continuum of capital-allocation models we now see in the commercial sector (including some models that have clearly done more harm than good), the charitable sector is now engaged in a long process that might outlive most of us. I’d hope we look at these groups (and others yet to emerge) not as the definers of philanthropic capital markets but rather as pilots and demonstration efforts that with their success will stimulate further innovation, effectiveness, and efficiency.

    Producing innovative, effective, and efficient capital markets for the nonprofit sector will take many things. For example, it will take results. Sean, you put together a good list of organizations and were kind enough to include Venture Philanthropy Partners on that list. I believe these organizations are allocating capital in thoughtful ways. But perhaps the most important contribution that these groups are making is that they are “nudging the system.” For example, these and other groups have nudged some established foundations to think more in terms of making long-term investments in organizations and their leaders—rather than just making program grants. This mindset—and certainly the terminology—was considered heresy by many as recently as 15 years ago.

    Second, philanthropic capital markets require, well, capital. In spite of the many accomplishments of the organizations you cited and the nonprofits they?ve invested in, the sum of the capital they?ve raised remains but a speck within the universe of philanthropic monies. Although I believe these funds will continue to grow, I fear it may be incremental, not quantum or viral.

    Third, if we are somehow able to increase the flow of capital, we will need to couple that with an increase in the flow of talent—from entrepreneurial to executive management.

    Fourth, we need to be sure that even as we pursue greater efficiency in capital allocation,
    we should never try to squeeze out the human element. In contrast with the private sector, there is a great need for the “philanthropic investor” to be engaged, even directly involved, and emotionally affiliated. This phenomenon simply does not exist in the same way in the commercial capital markets. In the private sector, you deliver on or exceed your promised internal rate of return (IRR) and folks love you forever, with or without direct engagement—and with little questioning. The Bernard Madoff case stands as a dramatic confirmation of the detachment of investors in the private sector. On a small scale, I believe the Donors Choose model is highly instructive in that they seem to have found a good balance between “high efficiency” and “high engagement.” They could be looked at as the “high-tech/high-touch” example in philanthropy.

  19. Paul Hudnut says:

    I have posted a bit more on Mario’s intriguing “nudging” comment at

  20. On one hand, I don’t believe it’s wise for a funder to withdraw completely from the “What sorts of programs work?” discussion. Many programs simply don’t work, and the state of knowledge about effective programs is very poor – just because a program has raised a lot of money, has an excellent reputation, or even has excellent people working on it doesn’t mean it’s an effective program. “Investing in nonprofits” has to include separating better from worse nonprofits, and I believe part of that evaluation should include what they do and whether there’s a case for it as an effective program.

    That said, we see our primary role as identifying excellent charities with strong track records and funding them – definitely not as “subcontracting out” our own programs based on our own theories of change. More thoughts on this idea here and here.

  21. @scaldwell says:

    Worth another read. I’m Interested in further categorizing this list. Investing In Nonprofits…

  22. Lincoln says:

    Many of the benefits nonprofits provide produce wealth, like anti-drug groups raising human capital (the sum of discounted life time earnings) by improving health. The problem is that, unlike a for-profit organization, these financial benefits are not conferred to the organizations that produced them.

    It would seem that the government could conceivable collect a portion of these financial gains and redistribute these to organizations. The conditions for entering this government-created market would be some study creating a strong statistical connection between the organizations actions and a macroeconomic measure of wealth. For example, nonprofits financing poor students for greater educational attainment could receive money based on the rate of return in net human capital produced. This would effectively internalize some of the benefits produced by the organization back to the organization.

  23. Interesting idea Lincoln. I don’t believe we’ll ever be able to directly prove the link between specific nonprofits and community wide cost savings. But that being said, it could be that the government distributes grants based on evidence based success by nonprofits and frame the grantmaking as a return of public cost savings.