Grantmakers for Effective Organizations is “a coalition of more than 350 grantmaking organizations committed to building strong and effective nonprofit organizations.” On their website they write:
Why is it important to focus on organizational effectiveness? Nonprofits cannot have impact unless they have well trained, capable staff, strong management and a committed, accountable board of directors. Grantmakers have the power to increase the impact of their grantees by giving grants that encourage them to build well managed structures that support their mission-based work, and measure performance to inform the work and make the mid-course corrections necessary to succeed.
Recently GEO released a reported titled Is Grantmaking Getting Smarter? The study found that there is a “persistent gap between nonprofit needs and grantmaker practices.” Given that most foundations are interested in “buying program execution” from nonprofits rather than investing in nonprofits, it shouldn’t be surprising that the gap exists. After all, as a customer who is buying something from an organization, you don’t really care about the organization, you just want what you paid for. But investing is different. As an investor, you are attempting to provide the capital needed for the organization to grow and prosper. Investors are partners (literally) of the organizations they support, while customers are simply engaging in a mutually beneficial transaction.
So since few funders see themselves as investors or are willing to truly invest in nonprofits, it is no wonder that the nonprofit field as a whole is undercapitalized and constantly struggling.
Does the model I’m discussing favor nonprofits? No. I’m not arguing that foundations “should” treat nonprofits better. I’m not arguing in favor of nonprofits. I’m saying that the field of philanthropy can achieve more impact through a capital market model. It could be tempting for someone to read the GEO report and take away the idea that there is a David and Goliath story at work. That those big mean foundations are not being nice enough to nonprofits and that they should do thing like give general operating support because it is the nice thing to do.
Investors and investees are on the same side of the table. Buyers and sellers are on opposite sides of the table. I’m arguing for a capital market approach to philanthropy that would align the interests of foundations and nonprofits. People in philanthropy love to talk about partnerships. But when nonprofits become chameleons in order to obtain funding, they are not partnering with the funder.
If a foundation is interested in their own program results, they will structure grants to achieve their own aims. If foundations care about building outstanding nonprofit organizations who achieve their own program impact, they will structure grants that serve the needs of the nonprofit.
GEO says their credo is “grantmakers are successful only to the extent that their grantees achieve meaningful results.” Their tag line is Smarter Grantmaking. Stronger Nonprofits. Better Results.
I like it.
You wrote: “Investors and investees are on the same side of the table. Buyers and sellers are on opposite sides of the table.”
I think this is a profound distinction that is worth savoring.
“Buyers” simply pay us to do what we do. “Builders” partner with us to change what we CAN do.
Sometimes we call the Builders “investors” (as you did), but this can be confusing because Buyers are investors, too. Indeed, both hope to generate social return by prompting more execution of a program they like.
The difference is that Buyers pay for the program execution directly, whereas the Builders are more indirect. More precisely, Builders invest by giving rise to enterprises that are then used by the Buyers.
So even though Builders are one step removed, both Builders and Buyers ultimately derive social returns by stimulating programmatic investment into a community.
But getting back to your point, I agree that Builders and the enterprises they support are indeed on the same side of the table. (Once the check has been written, that is!) Their ongoing relationship is all about creating a nonprofit organization that has staying power: “OVER THE LIFETIME OF THE ENTERPRISE, how many Buyers did I get to pay for the program I like so much?”
Buyers, on the other hand, have the job of shopping around among firms and then exploiting those firms on behalf of the communities they serve. A Buyer’s job (should be, I think) is to promote competition among firms, and then squeeze as hard as the firms will let them.
So yes, the Buyer/seller relationship is more at odds: “I love the program,” says the Buyer. “Now, how much program execution will the firm give me for my money? And how much is the firm willing to customize what it does to match what I am looking for? If you don’t have what I seek, I will go elsewhere.”
Once the check has been written, Builders can’t go elsewhere. They are married to the firm! And, while acting in concert with their co-Builders/with the firm, they can be at odds with the many prospective Buyers that come along.
Builders push back against Buyers, because unlike Buyers, they measure success based on the cumulative impact derived from the firm, not the incremental impact derived from any single grant. Builders help organizations say “no” to Buyer propositions that may, despite attractive near term benefits, threaten to compromise the long term enterprise outlook.
Indeed, Builder growth capital is often used as “no capital”: “No, I am sorry but we can’t accept your grant. And we don’t have to because we can use our growth capital to make payroll anyway.” (Or, later, “No, we don’t have to accept your grant, because growth capital helped us become so compelling that we can now find other funders to simply buy what we have to offer at full price.”)
The distinction matters because it is difficult for a single funder to play both roles at the same time — am I the protective Builder or am I the demanding Buyer? Moreover, the skills involved, the amount of due diligence, and the methods of reporting are very different.
One last point. I believed that the push-me pull-you relationship between Builders and Buyers is a beautiful way to promote a nonprofit capitalist system that evolves towards ever-improving social impact.
The patient capital market gives rise to new firms. The demanding and less loyal Buyer market chooses among them.
Builders make nonprofit firms strong enough to get past the fledgling years so they can reach their true potential. Buyers shop around ruthlessly to supply the Darwinian forces we need to keep the progress going.
Might be nice… but until we formalize the Builder role and account for it properly, it won’t happen!
From Tactical Philanthropy: "Is Grantmaking Getting Smarter?" http://is.gd/hOuO
Very early in the growth cycle, for-profit raise capital from friends and family. The next stage is a small set of large funders. Than an IPO raises money from a large set of small funders. Would a similar pattern hold for nonprofits? Should nonprofit start off bootstrapping, then get “venture capital” from foundations, then do “IPOs” where the public could buy philanthropic equity?
But all along the way, the nonprofit would raise money from Buyers. What % of funds might then be called Builder money and what % would stay Buyer?
A lot of IPOs are really just takeout financing for the private equity investors that went before — I’m not sure how much of the money raised via IPO’s ends up being used as infusions of growth capital.
Overall, through the life cycle of a successful firm, only a small amount of the money that goes in is “Build” money (equity, that is). The large majority is “Buy” money (dollars in exchange for program execution.)
So, to make up numbers, a company like Apple Computers might originally have consumed something like $500 million of one-time paid-in equity growth capital to get to profitability, whereas since then it has attracted an average of $5 to $10 billion PER YEAR in exchange for products and services.
I would love to see an analysis of the real numbers, but I wouldn’t be surprised if less than 2% of all money paid into companies was equity and 98% revenues in exchange for whatever the company does.
If the same type of ratio holds among nonprofits, then we need far fewer Builders than Buyers. This is especially true when you take into account that Builders write checks that are perhaps 50 times as big as a typical Buyer check. ($5 million vs. $10,000 or, if it is citizen fundraising, much less)
I think a great deal could be accomplished if the field were to have 5 or 10 accomplished Builder shops emerge from the pack.
At the same time, it might be great if most smaller funders adopted more of a consumerist, shop-around-and-purchase-what-is-being-offered type of a mindset. Or… they could quietly co-invest as part of a syndicate led by one of the prominent Build firms.
I believe it is hurtful to nonprofit organizations when small check-writers adopt a Builder mindset. They simply don’t provide enough capital to bridge a strategy to its next weigh station. this brings about the chameleon behaviors we discussed earlier.
To answer your question about a “public” IPO for late stage nonprofits, I would guess that yes it could work, but no it wouldn’t involve much money compared to the more important task, which is to establish strong Buy markets that are bathed with and aligned by ample evidence of impact.
We need to remember that IPO’s are only a small fraction of what the stock market is about, and, again, that a lot of IPO money is for take-out (not growth capital) purposes anyway. My sense is that we’re better off using a more private equity approach to raise nonprofit growth capital.
An additional reason for this is the benefit of keeping sensitive data private from Buyers, who can be easily spooked, run like herds, and bring about self-fulfilling prophesies that kill emerging firms before they can reach their potential. This is one of the reasons that public markets (which require a very high level of PUBLIC transparency) aren’t a good fit for emerging not-yet-financially-sound companies. Private equity firms have great access to their investee’s financial data… but the customers do not. Instead, the customers stay focused on the outcomes they are purchasing, and they rely upon the private equity stakeholders to keep the company afloat. Meanwhile, the private equity stakeholders, if they continue to believe in the long run promise of the company, have an incentive to provide follow investments, should that be needed.
We also see the herd mentality in the nonprofit system. For example, there’s a lot of scrambling that’s done to avoid spooking funders with the possibility that an organization might be headed towards an embarrassing financial mishap. The fear of having a million nervous funders on the phone reduces the level of candor.
If we can create a formal information rights for Builders vs. Buyers, though, then the level of candor with Builders can become much higher (there’s only a small number of them, they are on the “same side of the table”) and the level of fear among Buyers can become lower (they know the Builders are in partnership with the organization and, as financial stewards, will work hard to avoid melt downs.)
Your 2% figure is probably correct. But that would be 2% of the $1.6 trillion that nonprofits collect in revenue (2005 numbers) or $32 billion of Build money per year. That’s roughly equal to all foundation grant dollars.
I don’t think that all funders or all grants should be Build money, but I don’t think that 5 or 10 accomplished Builders is even close to enough to capitalize the nonprofit sector (without even commenting on how scary it would be to have 5 to 10 groups controlling who got to go to scale and who didn’t).
Your point on information rights is really interesting. As a shareholder I have different rights than as a consumer. However, I think there is a value to companies being public and sharing a high degree of shareholder info with the public. I’m not sure how to reconcile that.
But keep in mind that some people think putting donor accountability first violates a nonprofits legal public accountability. What do you think of this argument?