Why the nonprofit sector moves slowly

Recently I heard a telling narrative about the “old days” at some of the big American foundations.

The old-school modus operandi of these foundations (more recently than I’d have thought, closer to 20 years ago than 50) was a program officer locked away in her office for months, drafting PhD-type documents explaining a theory of change and a grant strategy. These documents would wend their way up to the Foundation President who would inevitably send them back with long and detailed critiques, asking for the next draft. Years could pass in this back-and-forth.

The apocryphal version of this story was that by version 16 version of the paper, an exasperated program officer would just send back the original draft….which would then get approved.

We’ve come a long way in the nonprofit sector, but we still are, by and large, slower than we should be.

Part of the cause is the looseness inherent in the kinds of financial transactions we engage in. There’s an organizational culture multiplier around how we act when money changes hands: years couldn’t pass if there were a real customer waiting to buy a real product from that program officer.  “Budgets” are just that – intentions and plans – and they operate with a different logic and profoundly less urgency than accounts payable and working capital. We convince ourselves that we are prioritizing getting things right, when all we’re really doing is letting another month slip by.

Because we mostly lack the tight and consistent drumbeat of traditional financial transactions – of buying and selling – we have to do extra work to create cultures of hard deadlines. These days we talk a good game about moving fast and being nimble, but the pendulum is just starting to swing in the right direction. To keep the momentum going, we need to make sure we ask ourselves questions like:

  • When we have a deadline, what happens when our intention to move fast hits up against our desire to get things right?
  • How often do we break an established process to keep a promise to make a call by a given date and time?
  • When a key decision-maker is unavailable to join a decision-making meeting, does the meeting get rescheduled?
  • Do we regularly track and review the external promises we make and how good we are at keeping them?
  • If we posed a free response question to our customers asking them to describe us, how sure are we that nobody would say “slow”?

Often we’re so busy asking those around us about their process and their results that we forget to look at ourselves in the mirror.

Should foundation program officers be more like venture capitalists? (Part 1 of 2)

One of the big unanswered questions in the nonprofit space is how new, innovative, effective nonprofits can raise enough capital to grow big and expand their impact.  At the core of the conversation is the fact that, unlike in for-profit markets, there’s no clear and established way for nonprofits to raise money around a great idea and a great team.

The ideal proxy, in my opinion, is the venture capital business.  Venture investors typically have a specific area of expertise (telecommunications, alternative energy, software platforms) and, within that area of expertise, they find high-caliber people who have assembled teams around a new and innovative idea, and they put up significant amounts of capital to support that team and the idea.  The capital is meant to be enough to get the team past a certain threshold, at which point the business will be positioned to raise capital from another source or have an IPO.

Here’s the interesting part: foundation program officers ALSO have, you guessed it…specific areas of expertise and large amounts of capital behind them.  At face value, they are positioned to act like venture investors, but they don’t typically act this way.

The analogy to VCs isn’t perfect, but I do think it’s worth considering that foundations as risk-takers and “venture partners” would be a welcome shift for the sector (and yes, there are foundation program officers who act exactly like this, but it’s not the norm).

That said, there are a number of features of the venture investing world that will be very unfamiliar to the nonprofit space, and we would have to figure out how to tackle these if we expect to make progress:

  1. Acceptance of failure. In a typical venture portfolio, 1-2 of 10 firms is a blockbuster success, 3-4 return capital, and the rest lose everything.  The venture world has acknowledged that failure is a necessary ingredient in creating innovation; in the nonprofit sector, “failure” is a four-letter word
  2. Betting on people and teams first. This is what VCs do.  But more often than not, foundations see nonprofits as implementers of a specific programmatic strategy.  Being a delivery vehicle is very different than being trusted to create something new, powerful, imaginative, and groundbreaking.
  3. Clear path to exit. When startup firms are successful, there’s a clear path to the next round of funding.  This is arguably absent in the nonprofit world.  (Though George Overholser at the Nonprofit Finance Fund has put forth the idea that certain nonprofits with a built-in income generation model can achieve financial self-sufficiency once they reach a certain size, if only they could raise growth capital.  I agree, but think the concept might be too restrictive since donations are the revenue model for most nonprofits.  So the model might be: Growth → Increased visibility/brand/recognition → Stronger board/donor community → Increased ability to raise funds).
  4. Aligned incentives between the venture investor and the entrepreneur. If the venture-backed entrepreneur is successful, the VC and the entrepreneur get rich.  But if a program officer invests in a nonprofit that, through its innovation and ability to listen to its customers, veers off in a radically different direction, in some ways this is necessarily disappointing to a program officer who has a specific (and often somewhat narrowly defined) set of programmatic objectives.
  5. We’re in this together. Venture investors typically play a very active (some entrepreneurs would say too active) role in bringing in resources (people, expertise, board members) to support the success of the enterprise.  It is extremely rare that foundations play this kind of active role in supporting the success of their grantees.

So there are lots of barriers, but most of them seem to be of outlook and mindset rather than being structural.

More on this soon…