Nell: You have argued before that to transform the nonprofit capital market we need a few capital deals at the top of nonprofit market. How do you think the bottom 80% of nonprofits (those with budgets under M) fit into a transformed nonprofit capital market?

George: I absolutely believe that the nonprofit capital market needs to extend everywhere, not to just the high profile “darlings” that seem to get all of the attention, but also the millions (!) of smaller nonprofits that truly make up the lion’s share of our vital nonprofit sector.

So why focus first on multi-million dollar growth plans? This is an excellent question!

One part of my response comes in the form of a reminder. Remember: MONEY AND CAPITAL ARE NOT THE SAME THING. Every nonprofit needs money to operate. But quite appropriately, only a small percentage of nonprofit organizations actually aspire to undergo major growth, or any of the other disruptive transformations that are inextricably linked to a capital investment. Very few for-profit companies with revenues of million or less are interested in taking on equity. Nor should they! Small is beautiful! They are the bedrock of our economy. The same goes for our smaller nonprofits.

Still, what about the small organizations that DO aspire to undergo a big transformation, perhaps to double their ongoing impact, for example? Why not focus on them?

Well, I believe that it is absolutely vital that we come up with a way to better capitalize these smaller organizations. Sadly, though, at this stage of capital market evolution, it is still quite expensive to prepare for a successful nonprofit equity campaign. Unless several million is being raised, the hundred thousand or more dollars of required planning, documentation, due diligence, marketing, reporting and campaign management expense is prohibitively high. This constrains us to campaigns of million or more, which, in turn, constrains us to organizations that are already pretty large.

In some ways, we shouldn’t be surprised. There are hundreds of professional fundraising consulting firms that assist with traditional capital campaigns, involving billions of dollars each year. But they, too, are unable to justify their fees unless the campaigns involve a lot more money than most “small” nonprofits are prepared to take on.

I hope that some day there will be a less expensive way to create compelling “asks” for equity capital, but that day has not yet arrived.

As a field, we are still in the very early days of showing how (learning how!) philanthropic equity can help organizations thrive. As such, it seems prudent to focus initially on the limited number of comparatively high-profile organizations that seem best prepared to implement their social impact growth plans. This has led equity funders to partner, at least initially, mostly with organizations that have already shown they can scale. To date, NFF has worked on 16 transactions, involving 0 million of new philanthropic equity raised. Every one of those 16 organizations went into their campaigns armed with track records that showed, compellingly, that they already know how to grow, and are now prepared to accelerate. So far, in just two or three years, the group that we track closely has more than tripled its level of program execution, while also more than doubling the long-term business models that will sustain the execution once the equity runs out. If results like these can be kept up, I expect it will help to attract more and more equity-like funders that serve an ever-broadening range of high-performing nonprofit organizations.

Nell: You have argued in the past that the reason a nonprofit market for growth capital has not materialized is because nonprofit accounting does not allow for a distinction between money to build the organization (investments) and money to maintain services (revenue). But beyond the accounting issues there is also a fundamental lack of understanding about finance in the sector. What do you think will change that?

George: I envision an evolution where funders become more and more specialized. Most funders, I envision, will migrate towards playing the role of BUYER. They will be the real connoisseurs that search among providers to learn what works best. Then, without seeking to change those providers, they will fund the providers to do what they do so well. Collectively, the buyers will be an important part of the field’s overall portrait of sustainability. I would include government as being among the most important buyer-type funders, but so, too, would be the many philanthropic funders who seek the most effective existing ways to achieve social impact with their money.

I would expect a smaller number of funders to focus on playing the role of BUILDER — they are financiers, really, or banks. These financial specialists will play a niche role. Because nonprofits can only take on a limited amount of equity, the BUILDER funders will actually have to compete against each other to “win” the right to invest in the most promising nonprofit firms. And the way they will win in this competition is by offering not just money, but also very sound financial know-how, to the organizations they partner with.

Lots of accomplished BUYERS, a smaller number of accomplished BUILDERS. I sometimes explain this line of thinking by describing what happens when you go into a flower shop – suppose you want them to send flowers to your mom in Florida. Clearly, the vast majority of money that flows into this flower shop is money in exchange for flowers (BUYER-type money). Only a very small percentage of the money that flows into the flower shop comes in the form of capital – a bank loan, perhaps, or, in the early days, an initial equity stake. Thus, the vast majority of check-writers are interested in FLOWERS and the benefits that flowers bring. Only a very small minority of check-writers are interested in BALANCE SHEETS and the other technical details of finance.

I am hopeful that nonprofit equity accounting will allow funders to be better at self-selecting into their chosen areas of expertise. Most will need to be BUYERS of program execution. A smaller number of funders will emerge as the financially-oriented BUILDERS that are needed to provide philanthropic equity and growth stewardship.

Nell: Do you think there is something to be gained by having the bottom 80% of nonprofit organizations better financed, more knowledgeable about finance and with more access to patient capital? What needs to happen to get there?

George: This may sound strange, but I believe that the key to helping most nonprofits to thrive has more to do with improving our BUYING behaviors than to do with finding more capital. To me, the problem is not so much that the bottom 80% lacks access to the capital they would need to maintain healthy balance sheets. Rather, they find themselves chronically saying “yes” to funding arrangements that cause them to deplete these capital reserves. The capital can be raised — but the unhealthy buyer relationships cause the capital to evaporate.

It’s hard to place blame for this phenomenon. Taken one at a time, most of the grants that an organization relies upon make a lot of sense. But, collectively, when multiple funders converge upon an organization with differing theories of change, or expectations that someone else will pay for overhead, or a hunger for customized reporting, special tweaks to the program, and long conversations about small checks, organizations can’t help but burn through whatever small cushions of capital they may have squirreled away.

We need to raise consciousness among BUYERS that whole enterprises — not just programs — should be kept in mind when they make their grants.

About the Author: Nell Edgington is President of Social Velocity (www.socialvelocity.net), a management consulting firm leading nonprofits to greater social impact and financial sustainability. In addition to leading Social Velocity’s efforts to accelerate social innovation, she is a regular contributor to Change.org’s Social Entrepreneurship blog and speaks at social innovation gatherings.

Related posts:

1. A Radical Spin on Capital Campaigns: An Interview with George Overholser, Part 1
2. A Revolution in Nonprofit Finance: An Interview with Clara Miller
3. The Beginnings of a Social Capital Market

Here are five steps to get you started:

1. Move Beyond Direct Mail. While direct mail used to be the only way to find individuals willing to support your cause, there are now many additional channels you must explore to stay relevant (email, blogs, Facebook, Twitter, etc). Beth Kanter and Allison Fine’s new book The Networked Nonprofit makes a fundamental argument about how nonprofit organizations can use social media to leverage people outside of the organization (donors, volunteers, supporters) to build momentum (resources, funds, mind-share, advocacy, etc) for their cause. If nonprofits more effectively used social media to build their networks, individual donor fundraising could be revolutionized.
2. Don’t Separate Donors From Other Supporters. Just as fundraising is often sequestered from the program work of the organization, funders are also often kept separate from other organization supporters.  Volunteers are often left off funding appeals for fear of asking them to do “one more thing” for the organization. And funders are not asked to become volunteers or advocates. Instead of putting organization supporters into silos, open all opportunities to everyone. Better yet, ask (or allow) supporters to create their own ways to accelerate the work of the organization (like tapping into their own networks to help). Once integrated, the possibilities for building support are endless.
3. Stop Fearing the Major Donor. Many nonprofit organizations would love to have major individual gifts coming in the door, but don’t know how to find and solicit those donors. The process, once understood, is actually pretty simple. You must identify, qualify, cultivate, solicit and, most importantly, steward donors. Use your board, volunteers, supporters to help identify and qualify people who meet three criteria: 1) belief in the organization’s cause 2)connection to a person at the organization 3)personal capacity to give at your major donor level. Once board, friends, supporters are involved in a well-defined process, major donors are sure to follow.
4. Get Your Board Focused. Boards of Directors are often misused in fundraising. They serve on event committees, write grants, make cold calls, or seal envelopes. Instead of using them for these low ROI activities, give them one fundraising job and one job only: to help move major donors through the cycle outlined above. Even if board members don’t have networks of wealthy friends, there is still much they can do to help raise major donor dollars. Board members can help identify major donor prospects, uncover information about potential prospects, invite prospects to a cultivation event, go on a major donor call, send thank you notes or make phone calls. The board is a key part of your organization’s network, put them to their highest and best use.
5. Do Away With the Pity Ask. To effectively raise money from individual donors, especially major donors, you have to move away from the pity donation and toward the investment opportunity. Donations and investments differ in every aspect:
   And investment opportunities are not only for the major donor. Even your smallest donor can be made to understand the broader impact of the organization’s work, how important their dollar is, and what the return on investment can be.

Individuals are able and want to do so much more. If nonprofits more effectively seized opportunities to engage and invest individuals, the sector could become more sustainable and better able to create change.

Related posts:

1. Financing Not Fundraising: The Plan
2. Financing not Fundraising
3. Financing Not Fundraising: A Social Velocity Blog Series

There is a concept that good entrepreneurs know only too well, but nonprofits could stand to explore. A “value proposition” is the unique value a product or service provides a consumer. Without a value proposition a business has no place in the market. For a nonprofit, a social value proposition is just as critical to success, but often ignored. In an increasingly competitive marketplace, due in part to the growth of for-profit social entrepreneurs, nonprofits must analyze, articulate, and deliver on a social value proposition.

In the past, nonprofits could exist without a value proposition. Donors wouldn’t argue that a library, homeless shelter, food pantry or school provided a necessary service. But as we move further down the road of social innovation, the assumption that money will automatically follow good works is no longer valid…

You can read the entire post here.

Related posts:

1. Bringing Small Nonprofits to Scale
2. Nonprofits and the Emerging Social Capital Market
3. What Nonprofits Can Learn From Social Entrepreneurs

The Social Innovation Fund (SIF) was modeled after the idea of venture philanthropy funds who were themselves modeled on venture capital funds. The idea with the SIF is to grant million to private grantors (foundations, venture philanthropy funds, etc) who match the money and then turn around and grant it to promising nonprofits to scale their proven programs. Is the idea really innovative? No. But what is innovative is that the government is  recognizing the concepts of social innovation and scale and is experimenting with becoming a builder instead of just a buyer of nonprofit services.

But this experiment is in danger of failing before it even gets out of the gate. A major controversy developed this week with the announcement of SIF grantees. The controversy centers around whether New Profit, arguably the inventor of the venture philanthropy concept, was given preferential treatment in being awarded a grant.  Paul Light, the Nonprofit Quarterly and others voiced their concerns about the granting process. You can read all the details of the saga here.

Let’s be honest, everyone knew New Profit was going to get a SIF grant. New Profit pioneered the idea of venture philanthropy. And their spin-off organization, America Forward, which works to connect the vast governmental resources to social innovation, was behind getting the Serve America Act,  containing the SIF, formulated and made into law.  Would the SIF make any sense without New Profit? They have been scaling nonprofits for years, and they have unlocked the door between government and social innovation. How could they not be at this table?

And the growing amount of documents being released by the Social Innovation Fund demonstrates the fairness and process behind the grant awards and more than makes up for any of SIF’s initial ignorance of the importance of transparency.

I understand that discussion, transparency, and refining of process are all critical elements to getting change to happen, but too much of that before the actual experiment happens can actually prevent change. Let’s not conduct business as usual by over-analyzing a new project to death. Let’s see where this experiment takes us instead of railroading it before it even begins. It’s not perfect innovation, it’s not a perfect process, but experiments never are. If we don’t give the government some space to actually innovate, they may never go down this road again. Instead of beating innovation to death, let’s get out of our own way and see where this goes.

Related posts:

1. Will the Social Innovation Fund Really Change the Nonprofit Market?
2. The Significance of the Social Innovation Fund
3. Two Weeks to SoCap

As Clara writes in the inaugural post:

Great ideas, deep caring for those in need, creativity, resourcefulness, a service ethic, and an expansive vision for the future are abundant in the nonprofit world. But we lack the financial capacity to meet these ideals, and our financial habits undermine efforts to build it. We need to think of finance as more than a muddle of fund raising, budget monitoring, and compliance with overhead rules. The current, tough economic environment is spurring needed change. Now, understanding money concepts like risk, leverage, and accounting, seems to be a moral imperative.

Indeed, the nonprofit sector has for too long been burdened by a lack of financial literacy and thus an inability to use money effectively. Sure there isn’t enough money in the sector, but if nonprofit leaders better understood the financial tools available to them and how to use them to their advantage, the results could be revolutionary. This is the argument in our Financing not Fundraising series.

Capital campaigns provide a great example of this. Nonprofits have used capital campaigns for years to raise money for a new building or, less often, an endowment. Capital campaign money is raised and used in a very different way from how general operating money is raised and used. A capital campaigns USES money raised to buy a building. An annual fundraising campaign USES money raised to buy additional services that the nonprofit provides (food for a food bank, mentors for kids). An annual fundraising campaign often RAISES money by cobbling together various activities (events, grant writing, some direct mail appeals) hoping that the sum will equal the expenses needed for the year. A capital campaign, however, RAISES money by conducting a feasibility study to determine how much they can likely raise, then creates a plan, budget, and case for support. Then potential donors are cultivated and solicited in a systematic way. This is a deliberate, strategic way to bring capital campaign investors in the door.

However, capital campaigns are often misguided attempts to grow the impact of an organization. A nonprofit thinks that in order to be taken seriously in the community and attract larger donors they need to build a new building. Enormous amounts of time, energy and money are spent to create a building they don’t need, burn out their development staff, and eventually shoulder new building maintenance fees for years to come.

What if nonprofits could pour those same desires–to do more, to make a bigger impact, to attract more resources, to build deeper networks–and that same time, effort and resources into a campaign that will actually help them build a more effective, more sustainable organization that delivers more impact? What if the methods of a capital campaign were instead employed to raise growth or capacity capital that allows the organization to provide more, better services to the community? That would be huge. Enormous.

The Nonprofit Finance Fund turned capital campaigns on their head with their SEGUE (Sustainable Enhancement Grant) program. It is essentially a capital campaign, but instead of buying a building, the nonprofit raises growth capital to scale the organization for greater social impact. NFF takes a concept nonprofits understand and are comfortable with, a capital campaign, and transforms it into a way to raise organization building money, a completely new idea. I’d love to see more nonprofits using financial tools already available to them to accelerate their ability to create social impact.

Like it or not, money is an incredible tool. If nonprofit leaders could better understand it, stop fearing it, and learn how to wield it effectively, the results could be transformative.

Photo Credit: piermario

Related posts:

1. A Revolution in Nonprofit Finance: An Interview with Clara Miller
2. Financing Not Fundraising: The Plan
3. 7 Things Board Members Can Do To Raise More Money

Our interview with Lucy is below, but you can also read our past interviews with Kevin Jones, Clara Miller, and Paul Tarini.

Nell: You have become increasingly interested in data sharing and crowd-sourcing for change. What are the risks in these new forms of social problem solving?

Lucy: Data are not objective – quantitative data is subjectively collected, categorized, sourced, and analyzed and its “reputation” as neutral is unearned. Using data well requires skills that most of us don’t have – statistical analysis, methods, etc.

That said, when I talk about data I mean “anything that can be digitized.” Stories. Video. Anecdotes. Numbers.  We may not all have all the skills to make sense of every type of data, that is partly why crowds are important. For decades, only experts and the wealthy had access to data – so their subjective analyses dominated the discussion. Now, many of us – crowds – can have access, make sense of, add nuance, ask questions. That changes the “subjectivity” and changes the dynamic. Data are disruptive when access to them is broad, cheap, and easy.

We still need to be skeptical, ask questions, and think deeply about the biases behind both data collection and presentation. But, as computer programmers say, “many eyes make for shallow bugs.” Crowds and data are two sides of the same coin when it comes to disrupting the social sector.

Nell: In Disrupting Philanthropy you examine the long tails of donors (foundation and individual contributors of money for social change) and doers (nonprofits, social entrepreneurs receiving that money) and how information technology is connecting the two. But as a future teller, how and when do you see more conservative/fearful nonprofits and philanthropists embracing these new technologies?  What is the tipping point?

Lucy: There are few pressures on endowed foundations to change their behavior. It is hard to force this change from the outside.

The drivers of change in this day and age include new expectations about information at a societal level, the government 2.0 movement, the skills of two to three generations of employees and managers in using online tools and finding information when they want it. These are the soft, cultural, and ultimately most meaningful drivers of change. Regulations that require more disclosure, new expectations of transparency, efforts such as The Foundation Centers Glasspockets.org, the Center for Effective Philanthropy’s assessments are other possible influencers of the timeline.

That said, don’t discount the inevitable backlash against transparency, which is coming. Recent online “revelations” that have been fueled by political agendas and resulted in “flash decision making” highlight the need for all of us to be careful about the pace of information, believing everything we read, and the need for thoughtful, investigative, well-referenced and fact checked information. As Craig Newmark says, the news business is the “immune system of democracy.” As the news business is caught in this wildly transformative moment, we must all consider where we get our information, how we use it, who provided it to us, and what its credibility is. There is no straight line to widespread adoption of new tools – it is episodic and includes strange diversions.

Nell: Where does government fit into the connection between donors and doers? What can/should government do to encourage use of data sharing, crowd-sourcing, etc.?

Lucy: The government 2.0 movement is way ahead of nonprofits and foundations in the open sharing of data. That said, most of this is a “supply side” effort at this point – cities, states, and federal agencies shoveling data over the wall into the public domain with little knowledge of what information communities want or need and even less support for communities to use the information well. Firehousing data into the public domain is one thing, but it is not enough (It can also work to distract – “You want data? Here have it all”)

As for nonprofits and foundations, the data disclosure requirements of the new 990 are small steps in the right direction. Most of what will happen as far as nonprofits and foundations sharing their data is likely to be voluntary, led by innovators, and taken up by others over time as communities and constituents learn to ask for what they want. The expanding ecosystem of nonprofit ratings/raters – from GiveWell to Greater Nonprofits to Philanthropedia to National Councils of Nonprofit Analysts, etc. will also spur this.

The proposed legislation, HR 5533, which calls for a national council on nonprofits and a central system for tracking nonprofits as funded by federal agencies is the wildcard here – if it passes, the data game on nonprofits and philanthropy will change. How so, and whether for the better, I can’t say at this time because I just don’t know enough (yet) about what is being proposed, how it is supposed to work, and how it will really work (if enacted).

Nell: As you mention in Disrupting Philanthropy, 10 years ago socially responsible investment was a small niche, but now it makes up 10% of professionally managed investment funds. How much bigger will it grow? How much can mission and money be blended in our economy?

Lucy: Socially responsible screened assets have been growing for more than a decade. This is a multi-decade trend that is growing mostly outside of the realm of the charitable and philanthropic sector and within the realm, incentives, and returns of the mutual fund business. Philanthropic efforts to connect to these assets and to promote Mission Related, Program Related spending are only now getting real traction and advocacy from within philanthropy.

Nell: Your focus is largely on philanthropy, but what do you think nonprofits should be doing to tap into these trends and take advantage of the long tails of donors and doers?

Lucy: Nonprofits are experimenting with every tool to reach the long tail that they can – from “donate now” buttons to text giving. For the most part, the process has been focused on marketing and fundraising. The exciting changes are happening where we see people developing solutions that take the digital connectivity and data as the starting point for the work they are trying to do – think about Ushahidi or CrisisCommons – their entire programs/projects/initiatives/governance models/organizations are built on deep understanding of the power of disbursed long tails. That is powerful.

Nell:  Because you are such a proponent of data and measurement, what do you make of the emotional part of giving? Do you think we can ever get to a place where it’s all about the data? And should we want to?

Lucy: I have always said that philanthropy is a business of passion – it is largely emotional. The use of data, as Hope Neighbor’s recent report shows, is a small part of the process of philanthropic decision making. And it will always happen within the personal interests of donors. And please remember, when I say data, I don’t mean just numbers.

Related posts:

1. 2010 and the Future of the Social Sector
2. Foundations Can Lead the Charge Toward a New Philanthropy
3. The Future of Financing Impact: An Interview with Kevin Jones

• Punching at Your Own Weight in Social Media
• Philanthropy’s Next Decade
• Leadership to the Rescue
• The Social Innovation Fund One Year Later
• The Giving Pledge and the Opportunity of a Generation
• U.S. Lagging, Not Leading, Social Entrepreneurship
• Warren Buffett’s Philanthropic Pledge
• How Can Nonprofits Plan for Growth and Impact?
• The Networked Nonprofit
• Social Media Listening: You Don’t Have To Be Joey Chestnut on the 4th of July!
• Wall Street Saves the World!
• Getting Results: Outputs, Outcomes & Impact
• The Slacktivist Debate Continues
• Is All Entrepreneurship Social?
• Are You Crazy Enough to Change the World?

What caught your interest this month?  Add to the list in the comments.

Photo Credit: pixel0908

Related posts:

1. Making Change the New Norm
2. Organizing the Chaos
3. 2010 and the Future of the Social Sector

Paul Tarini is the head of the Foundation’s Pioneer Portfolio, which actively seeks innovative projects that can lead to fundamental breakthroughs in health and health care.  Because the Pioneer team is dedicated to thinking and talking about new ideas and groundbreaking approaches, including those from nontraditional sources and fields, Pioneer enables the Foundation to make conceptual leaps and take risks in grantmaking that would otherwise not be possible. Since funding is so critical to making social innovation a reality, we thought Paul would have a unique perspective on what funders can do to incentivize social innovation.

Nell: The Pioneer portfolio strikes me as a more risk-tolerant approach to giving than typical foundations are used to. Why is RWJF more comfortable with the risks inherent in this kind of portfolio of projects?

Paul: RWJF is comfortable with the higher risk, unconventional, future-facing ideas Pioneer supports because it first identified a specific niche that needed to be filled within the institutional ecology.  We call that ecology our Impact Framework.  It was conceived of at a time when RWJF was thinking hard about how we organized our work.  The Impact Framework helps us understand our grantmaking as a whole, so, not just what do the grants in a particular area add up to, but what does the whole enterprise add up to.  As we were thinking about the impact we wanted to have, we knew we needed to work in fewer, more focused teams that were/are accountable for specific outcomes.

But we realized that while focus brings power and discipline, it also can be limiting.  We wanted a way to look out beyond the work of these targeted teams.  We were thinking about how to stay relevant for the long run as a philanthropy that operates on a national scale.  We felt that in addition to the targeted work being done, we needed a place devoted to the exploration of new ideas, where we could bring in new concepts, work with different people, and support more unconventional and future-facing ideas.  Such work could help RWJF stay fresh, bring in new ideas and new grantees, continue to grow, stay ahead of the curve.  And, if we found some real winners, health and health care would benefit from the outcomes of those projects.

Out of this came Pioneer.  Here are some examples of the work we’ve supported…We funded a natural resources economist to work on the problem of antibiotic resistance (Don’t approach it as an infectious diseases problem; think about our stock of antibiotics as a natural resource that needs to be managed and develop new policy from that perspective; we’ve been funding research into whether and how digital games can be effective therapeutic interventions (Can a game that uses a breathing tube as the controller that moves characters around the screen help kids with cystic fibrosis improve their breathing therapy?); we’ve funded early work exploring whether there are specific health strengths which, if strengthened more, could serve to forestall disease and mitigate effects once disease strikes.  We’re also supporting work that builds platforms that could produce lots of new knowledge and improve care, including Kaiser Permanente’s Research Program on Genes, the Environment and Health; and, efforts to link electronic health records databases with millions of patient records in order to learn much faster about what works for patients (Rapid Learning).

Nell: I understand that the Pioneer program has a rolling unsolicited application process, but I imagine you probably need to do a good bit of on-the-ground scoping and cultivation of ideas in order to get the most promising projects into the portfolio. How do you create a deal flow for innovative projects?

Paul: This is a constant challenge for us.  We do have an open door, and we do accept unsolicited proposals at any time. But most of the proposals that come in through this door are not good fits for Pioneer. We were set up to explore unconventional and untested approaches to problems, to bring in ideas from other disciplines, to look to the future.  We were not set up to support projects that promise incremental improvements, however important those improvements may be.  We look for projects with the potential for transformative change, the kind of change that can reach beyond a single discipline or group.  Most of what comes in unsolicited doesn’t meet that standard.  Finding ideas takes work.  And because we look for ideas across the breadth of health and health care, we can’t focus on just one haystack to look for needles.  We network.  We connect with interesting people at conferences, we go to events, we take meetings and phone calls, we visit people.  We are experimenting with other ways to source ideas.  We’ve had some success with open-source competitions, though the back end, taking a winning idea and creating a fundable project, takes time.  We are putting a lot of time and energy into social media right now as another way to build networks and find ideas.  Half of me wishes there was an easier way to find ideas, but I suspect that easier would also mean more passive on our part and passive is really boring.

Nell: You currently only invest in nonprofit projects, correct? Do you see the potential for investing in for-profit or hybrid organizations, through mission-related investing, down the road, particularly as social entrepreneurship grows and for-profit solutions to healthcare issues become more prevalent?

Paul: While the majority of our investments, our funding, are in the form of grants to nonprofit organizations, there is nothing that precludes us from supporting for-profit entities.  The largest award to come out of Pioneer to date—$15.6 million—went to a for-profit, Archimedes, Inc. However, before we can make an award to a for-profit, we need to clearly establish that RWJF’s dollars are going to fund an activity with a clear charitable purpose that relates to our mission.   This is just an additional test we need to meet.  The challenge we face on Pioneer is less about whether an entity is a nonprofit, a hybrid, or a for-profit.  Our challenge is whether that entity is doing work that isn’t merely an improvement, but is doing something unconventional, disruptive and future-facing and could produce breakthroughs in health and health care.  If we’re convinced the work meets that standard, we can usually figure out how to fund it.

Nell: What is holding philanthropy back from becoming more innovative and/or risk tolerant?

Paul: People who spend more time observing philanthropies are better suited to answer this question than I am.  That said, I think it’s hard to ask this question about philanthropy as a sector.  Philanthropies have a lot of latitude; you can’t assume they are fairly similar and that we can generalize our way to an answer.  In the same way there are differences between a business that employs 200 people and one with 20,000, there are big differences between a multi-billion-dollar philanthropy and a small community foundation.  Political contexts differ, staff sophistication differs (bigger isn’t always more sophisticated), boards and donors have varying levels of influence, so I think there’s a range of reasons — philanthropy by philanthropy — for being less risk-tolerant.

If I had to pick one reason, it would be that there’s no inherent reason for a philanthropy to be innovative and highly risk-tolerant.  A lot of good can come—and has come—from philanthropies that are cautious.  As I noted above, the decision at RWJF to have a portfolio that takes on more risk came from an institutional recognition of the long-term value to us—and to the field—of such investments.  So the niche-in-the-institutional-ecology point is important here. Also, frankly, our ecology is much larger than most, and so it can be more diverse.  Other philanthropies would need to work though their own reasons to embrace more risk-taking.

Nell: The nonprofit capital market overall is fairly immature compared to the capital market of the for-profit world. Do you see other foundations creating new giving programs or financial vehicles to expand the types of capital available to nonprofits?

Paul: There is a great discussion and a lot of effort being devoted to maturing the nonprofit capital market.  More money, philanthropic and otherwise, is examining and entering this space; and, more nonprofits are thinking about what they need to do to operate in this space.  It’s very exciting and I definitely think we’ll see more of that over time.  But I also think it will be years before we see a robust capital market for nonprofits.  As much interest as there is in moving into this space, the amount of money there and the portion of nonprofits positioned to take advantage of such a capital market is still relatively small compared with traditional ways of financing and operating.

Also, I think it will take a while to understand when it makes sense for nonprofits to access capital markets and when more traditional sources of philanthropic funding are more appropriate.  Philanthropies need to understand better—given what they’re trying to achieve—when a traditional grant makes the most sense and when some other financial vehicle does.

Nell: What do you think is the potential for greater partnerships between foundations and individual investors to bring more capital to social entrepreneurs, particularly in the healthcare sector?

Paul: Good question.  For large foundations such as RWJF, I think we need to consider carefully when looking at when individual investors as funding partners makes sense.  The projects we fund, by their nature, tend to be large.  The effort involved in soliciting individual investors might not be worth the result unless we are looking at folks who have considerable wealth at their disposal.  It’s a lift when you’re trying to aggregate a bunch of $100,000 contributions to reach $5 million; fundraising is not a core competency of ours.  I do think, though, that efforts such as the Social Impact Exchange, where individual dollars would flow directly to the organizations that need them, make a lot of sense.  So I think the opportunities for individual investors to participate as true funding partners on projects with RWJF are probably limited, though we are open to them if they make sense.  But there are definitely opportunities for foundations such as RWJF to help individual investors find groups that are worthy recipients.

Related posts:

1. The Future of Financing Impact: An Interview with Kevin Jones
2. Across the Pond: Perspectives on Social Innovation in London
3. Will the Social Innovation Fund Really Change the Nonprofit Market?

Maile started English at Work in 2004 when she was a waitress in an Austin, Texas restaurant. She realized that her co-workers needed customized English language instruction to ensure their and their employers’ success. Why not bring customized English classes to the workplace in a focused and systematic way? These courses, paid for largely by restaurant and hotel owners who see the value in having a more fluent workforce, get dramatic results. English at Work creates greater proficiency and fluency gains in a shorter amount than their closest ESL instruction rivals. The program works so well because it is a win-win. Students become more fluent and successful at work, paving the way for promotions and a way out of poverty. Employers get more productive, loyal and customer-service oriented employees.

But like most nonprofit organizations hit hard by the recession, a year ago English at Work was struggling to make ends meet. Although employers paid for the classes, those fees didn’t cover all organization costs. The additional necessary revenue came from individual donations and foundation grants, both hit hard by the recession. At the same time Maile knew that the program had the potential to transform the lives of so many more people. Despite financial troubles, she had big visions for growth.

With funding from a couple of key donors who understood the value of investing in infrastructure, capacity and planning, Maile enlisted Social Velocity to determine what was holding the organization back and to create a comprehensive revenue plan to get the organization on firm financial footing. Over the first two months of the engagement we interviewed board and staff members and reviewed all organization policies, by-laws, finances, collateral, plans and documents. We then created a detailed analysis of each area of the organization (strategy, program, finances, marketing, staffing, board, etc.) with recommendations in each area for how the organization could be more effective. Once completed, we worked closely with Maile over the next 3 months to create a detailed plan for increasing how money flowed to the organization from individuals, foundations, corporations and earned revenue. Finally, we trained English at Work staff and board on raising money.

Now that English at Work is on much firmer financial ground, they are ready to plan for growth, and so we are in the midst of creating a strategic plan for significant growth of the program. The hope is to take this great solution and bring it to scale.

English at Work is a great example of the many little-known nonprofit organizations that toil away under the radar. They may have a fabulous model for creating real change, but lack the infrastructure, capacity and strategy to grow their impact to scale. Although the Social Innovation Fund and other venture philanthropy funds that exist to bring solutions to scale are great, no ecosystem exists for the smaller nonprofits that may have equally important solutions. But there is a way. By combining a few key donors who understand the bigger picture, a smart strategy for growth and sustainability, and a determination to execute effectively, even the smallest nonprofits with a great solution and a vision for growth can get there.

Photo Credit: English at Work

Related posts:

1. 5 Ways to Scale
2. English at Work Case Study
3. Nonprofits and the Emerging Social Capital Market

As a nation, we are becoming more and more accustomed to a sense of helplessness. We no longer rise to the great challenges before us. It’s not just that we can’t plug the oil leak, which is the perfect metaphor for what we’ve become. We can’t seem to do much of anything.

Although his column is perhaps a bit too bleak, he does make the point that we have forgotten how to lead ourselves out of a mess, and the messes are getting larger and larger.

The messes of the American system are often cleaned up by the nonprofit sector. Nonprofits are usually borne out of some disequilibrium that the market creates (poverty, homelessness, poor education, lack of healthcare).

However, lately the messes have been too much for even the nonprofit sector to bear. And at the same time a deep recession, government’s increasing off-loading of social services to the sector, donors growing desire for measurement, and a more wired world are all combining to demand dramatic changes to how nonprofits operate. As a result, nonprofit leaders need to adapt.

The day has come for a new kind of nonprofit leader, one who has the confidence, ability, foresight, energy, and strength of will to really lead. This new nonprofit leader:

• Embraces the idea of a networked nonprofit and is willing and able to break down the walls of control and risk aversion and let the world in as fully engaged partners in the work they are doing.
• Works toward completely integrating money into the impact they are trying to create, understanding that big plans for impact are not enough, you also must finance them.
• Realizes that it is no longer enough to just “do good work.” They must find a way to measure, in some form, the work that they are doing and be able to demonstrate results to the external market.
• Looks to the social entrepreneurship movement for inspiration and new ideas for accelerating social impact.
• Recognizes the importance of strong infrastructure and works to recruit and keep top talent and create effective technology and systems by fundraising for those real operating costs every year.
• Refuses to play nice with funders who want to undermine the mission and impact of the organization, competitors who are providing an inferior service, and board members who won’t contribute.
• Maintains an external view on how their organization can continue to add value in the outside marketplace of community problems.
• Constantly forces themselves, and their high-performing team of board, staff, funders and volunteers to ask hard questions, make bold goals, push themselves harder, and deliver more and more impact.

It’s a tall order, but true leadership always is. We no longer have the luxury of so-so leaders. These times demand confident, capable, engaging leaders who are a beacon to a society whose mounting problems are overwhelming at best.

Photo Credit: 3n

Related posts:

1. Overcoming the Bias Against Nonprofit Capacity
2. Transforming the Nonprofit Fundraising Function
3. Changing Nonprofit Finance: The Other Side of the Story