Tag: Raising Capital

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

~ Sasha ~ 6 Comments

(This post first appeared on the Tactical Philanthropy blog, as part of a conversation Sean Stannard-Stockton kicked off on creating a ‘capital market’ for philanthropy.  It is the continuation of my earlier post on whether foundation program officers should be more like venture capitalists.)

One of the big problems we need to solve as a sector is how to find ways to scale highly effective nonprofit organizations.  Kudos to Sean 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.

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

~ Sasha ~ 7 Comments

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…

Why overhead ratios are meaningless for Kiva and Acumen Fund

~ Sasha ~ 8 Comments

Matt Flannery, the CEO of Kiva, wrote an excellent post on nonprofit overhead over on the Social Edge blog.  Kiva has been a game-changer in the poverty alleviation space: they use Kiva.org to connect donors to microfinance loan recipients in the developing world.  What’s important is the loan part — rather than getting a grant the borrower has to pay back the microfinance organization, which in turn pays back the funder.  Conceptually, this is similar to Acumen Fund, where I work – we raise philanthropic donations and then make debt and equity investments in enterprises that serve the poor in the developing world.  When we’re paid back, we recycle that capital into new investments.

One of the challenges that Acumen Fund and Kiva both face is that our models – focused on innovation, accountability, investment, and better leverage for each philanthropic dollar – are in direct opposition to the traditional metrics that rate nonprofit efficiency.  This is because invested capital (loans and equity), unlike grants, don’t factor into ratio of “overhead costs as a percentage of total cost.”  It just stays on the balance sheet but is not part of the annual budget.

The conventional nonprofit wisdom is that “best in class” nonprofits will spend no more than 20% on “overhead,” breaking down roughly to 10% on fundraising and 10% on administrative costs.

As Bridgespan, one of the leading consulting organizations to the non-profit sector, reports, “Many organizations and their funders are locked in a vicious cycle in which nonprofits are pressured to under-invest in overhead and to under-report their true overhead costs, even when those costs are still below what their senior managers feel is needed.”  Worse still, Bridgespan reports that “The majority of nonprofits [75-85% they studied] under-report overhead on tax forms and in fundraising materials.”

If we’re going to break the cycle, we have to uncover how flawed the underlying logic is.  Here’s where the logic falls apart:

An example: Both the Grameen Bank and BRAC in Bangladesh are world-class organizations that have changed the lives of tens of millions of poor people (mostly Bangladeshi women) through the provision of microfinance services.  Both organizations were founded by visionary leaders upon whose shoulders my generation stands in our work to bring an end to global poverty.

Yet, if forced to choose, I would argue that Grameen had the greater impact on the world because Mohammed Yunus, Grameen’s founder, won the Nobel Prize.  This was a major marker that “mainstreamed” microfinance and allowed the world, and not just the development community, to understand that lending money to poor people could change their lives in new and exciting ways. The result was a huge influx of commercial capital, and significantly more growth in the sector – ultimately leading to millions more served.

My question is: in the 30 years prior to Yunus receiving the Nobel Prize, does it sound right to you that every meeting Yunus had with a world leader, a powerful donor, or a leading journalist would have been counted in Grameen’s “overhead” cost, as separate from the “program” cost of delivering microfinance services to Bangladeshi women?  Should Grameen have “stuck to its knitting” in delivering microfinance services and not wasted money on all the “overhead” of external communications and building a community of friends, advocates, advisors, and supporters, which ultimately led to a global movement in support of microfinance?  (and yes, I know it wasn’t all Yunus, but without him, I don’t think we’d be where we are today).

My point is: it’s not just a little wrong to try to separate out “program” from “overhead,” it’s an outdated (or maybe it was never right) mode of thinking that is based on the premise that nonprofits are primarily delivery mechanisms for pre-determined services.  In reality, nonprofits play an active role in shaping our collective understanding of how to solve important social problems.

And getting back to Kiva and Acumen…: There’s a whole new segment of hybrid organization – encompassing the likes of  Kiva, Acumen Fund, Root Capital, E+Co, Agora Partnerships, sitawi, and others – that deploy mostly non-philanthropic capital for social ends.  Much as we’d like not to worry about the conversation, people do often ask about “overhead ratios” when making philanthropic decisions.

In closing, here are four (more or less related) thoughts:

  • Until “social investors” like Acumen et al. can develop a common vocabulary to  assess how efficient and effective we are (or are not), we will be at a disadvantage in the philanthropic marketplace
  • The nonprofit sector as a whole would be significantly stronger, and better positioned to weather economic downturns, if nonprofits didn’t rely on annual funding cycles.  But raising money over 18 months to pay for costs over 5 years requires an upfront investment – one that will look “inefficient” based on traditional ratios
  • If you care about fundraising efficiency, ask how much it costs an organization to raise a dollar, not how much they spend in total on raising money.
  • Even when asking this question, take the answer with a HUGE grain of salt – raising money, teaching, inspiring people, changing attitudes, motivating people to act….there’s huge overlap in these activities. If you don’t agree, please read my NonProfit CEO Manifesto and let me know how we can all do this better.

The psychology of real

~ Sasha ~ 3 Comments

Today I was talking about the economy with someone who I respect a lot.  She said that we still don’t know how much of what’s going on in the economy is real and how much is psychology.

I respectfully disagreed.  What strikes me most about this economic crisis is that what’s psychology is real.  There’s no distinction any more.  Sentiments drive markets as much or more than what’s “real.”  And 6 months worth of sentiments might create real, irreversible hardships.

Her broader point, my rebuttal notwithstanding, is that people have short memories, and if psychology does drive markets then things have the potential to get better very quickly.  A new President who has a successful first 100 days could set a good tone, and by the second quarter we could see the first glimpse of things no longer getting worse.

My worry is that enough real hardship will come from the psychology of fear we’ve lived through since October that a shift in mindset won’t be enough to avoid a protracted economic downturn.

Either way, it feels like we’re navigating between 2-3 years of things being bad and a Lost Decade a la Japan in the 90s.

So here’s the question if you’re in the nonprofit sector: is your current business plan, at a minimum, premised on things being bad for 24-36 months?  And what if things are bad for a lot longer than that?  Are you ready?  And if not, what can you do to make yourself ready?

And if yours is the kind of nonprofit organization where the best and the brightest don’t spend much (or any) time thinking about the revenues side of the equation, don’t you think now is the perfect time to change that?

Toe to toe with Dan Pallotta

~ Sasha ~ 1 Comment

If you enjoyed my post Should NonProfit Leaders be Like Boiled Broccoli, you might be interested in the discussion on Sean Stannard-Stockton’s Tactical Philanthropy blog between Dan Pallotta (author of Uncharitable), Robert Egger (founder of DC Central Kitchen), with me chiming in from time to time.  (It’s also worth checking out Sean’s FT article, “Sacrifice Notion Sabotages Nonprofits” that appeared today.)

Lots of food for thought here, including how much is the “right” amount an organization should spend to raise money, whether raising more money quickly is always better, appropriate compensation in the nonprofit sector, and how to think about efficiency and effectiveness for nonprofits.

Congrats to Sean for writing a post that inspired this conversation.

Alert the press!! Weingart Foundation breaks new ground

~ Sasha ~ 6 Comments

If I were writing for the NY Observer or some other similarly sensationalist newspaper, I’d write a headline that says:

“Nation Stunned: LA-based Weingart Foundation Places Trust in Nonprofit Grantees”

This is absolutely, positively not meant to be a dig on the Weingart Foundation.  To the contrary, they deserve praise.  As the LA Business Journal reports, the Weingart Foundation has announced that it will “offer unusual ‘core support’ to underwrite administrative costs for social service agencies that provide necessities such as food, shelter and health care to the region’s poor, unemployed and sick.”

This is contrary to normal practice, wherein “Most philanthropic foundations traditionally give large grants that pay the costs of specific programs but do not underwrite non-profits’ operating costs, such as staff salaries and rent. Many non-profits get their operating cash typically from their own fund raisers or from direct donations.”

My point is: the fact that this is newsworthy is a reflection of how far (too far) things have swung in terms of foundation grantmaking to nonprofits.  There’s a serious power imbalance here, one that has to change if we are going to increase the impact and efficiency of the nonprofit sector.

There’s a longer history here, one that I will be exploring over time on this blog, but as a starting point imagine the following in the for-profit sector:  Blackstone or some other private equity fund investing three million dollars in a portfolio company, but restricts the funding to the purchase of an Oracle database, with 10% for “overhead.”   Guess what?  That never happens, because it doesn’t make a lick of sense.

So why have we ended up at this perverse equilibrium in the nonprofit sector?  The list of reasons might include:

1. A desire for funding to go “to the beneficiaries”

2. Concern that nonprofits are not efficient enough, and that limiting grants in this way will lead to increased efficiencies

3. Because there’s a serious power imbalance between people who hold the money (the foundations) and the people who use the money (the nonprofits), so the people with the purse strings get to write the rules. (something I talk about more here)

4. Because the donors have their own philanthropic agenda, and fitting unrestricted funding into a specific agenda is difficult

5. The fear that on the part of the foundation program officer that one of their grantees will end up as front page news because of exorbitant salaries paid to their top executives or CEO

The result of all of this is that we end up with scores of nonprofits twisting themselves into knots to manage a series of too-small, too-specific “program” grants, with individual donors asked to pick up the difference between what’s funded and what’s needed to deliver on the non-profit’s mission (weren’t the foundation supposed to be the trailblazers in this equation?).

Worse, the nonprofits get tied into a cycle of yearly make-the-numbers funding, and they end up perpetuating the myth that you can neatly separate a non-profit into “program” and “everything-else-that-really-isn’t-that-worthwhile-but-we-have-to-do-some-of-it-even-though-we’d-rather-not.”

Lots more to talk about here, but here’s a starting point:  Do you think you’re going to get the best people to do a job that you (foundation program officer; non-profit grant-writer) have proclaimed is in the “not terribly worthwhile” bucket?

(Hat tip to Sean Stannard-Stockton at the Tactical Philanthropy blog for pointing out the LA Business Journal article.)


Chronicle of Philanthropy 400 Google Map

~ Sasha ~ 4 Comments

I just came across the Google map mash-up of the Chronicle of Philanthropy top 400.  First, just the simple fact that the Chronicle created this is just great — goes to show the power of a concrete image instead of a list.  And better yet (though not obvious) you can click on the pins in the Google map to see each organization’s name, rank, and funds raised

At first blush what’s surprising is how evenly large non-profits are spread throughout the country.  Not what I would have expected.

I do wish the Chronicle would take the map a step further, though, and I expect that they have the data and technology to do this easily.  I’d love to be able to filter the map by type of organization and date founded (religious organizations; universities; charities founded before 1950 and 1970 and 1990, etc).  We all know how hard it is to grow a new nonprofit — William Foster and Gail Fine’s great article last year in the Stanford Social Innovation Review titled “How Nonprofits Get Really Big” described this challenge incredibly well.  Just one data point from the article: “the average founding year of the 10 largest U.S. nonprofits is 1903.”

So I’d love the Chronicle’s map to allow some filtering that would help illustrate and understand this point, so we could visually learn more about the makeup of the top 400.

(hat tip to www.nonprofitmarketingguide.com for pointing out the map)

A NonProfit CEO Manifesto (blame it on Seth Godin)

~ Sasha ~ 51 Comments

Inspired by Seth Godin, and his new book Tribes, I collected my thoughts after nearly two years in my current role at Acumen Fund.

I wrote a manifesto.  You can read it here.

This one isn’t for everyone, but you probably know someone who’d like to read it. Do me (and them) a favor and send it to them.

And tell me what you think.  I think this one is important, and since the economy is blowing up and won’t improve any time soon, now is a good time for nonprofits to rethink how they think about raising money.

Sequoia Capital sounds the alarm bell

~ Sasha ~ 1 Comment

Sequoia Capital, one of the most well-respected venture capital firms in Silicon Valley, recently organized a meeting for the CEOs of its portfolio companies. The tagline?  “R.I.P.: Good Times”.   You can check out this write-up on  the GigaOM blog.  Here’s an excerpt:

They want the companies to cut costs, to figure out way to survive and emerge at the other end of this downturn, which could last years. The speakers went through each functional area of the business and told the companies how to cut costs. By holding this special meeting, Sequoia is telling its companies to put survival strategies in place and figure out ways to outlast the broader market troubles.

Ron Conway, a well-known angel investor who has backed the likes of Google, is pushing companies to “lower your “burn rate” to raise at least 3-6 months or more of funding via cost reductions, even if it means staff reductions and reduced marketing and G&A expenses.  This is the equivalent to “raising an internal round” through cost reductions to buy you more time until you need to raise money again; hopefully when fund raising is more feasible.”

While no one wishes this kind of impact in any sector, one can imagine that non-profits are going to feel the same fundraising crunch and will also have to make some tough decisions.

If you could get your donation back, would you?

~ Sasha ~ Leave a comment

I always read the Kiva blog with interest.  In it, Matt Flannery, the founder and CEO, gives a candid, blow-by-blow account of Kiva’s growth.  Kiva is an innovative organization that allows donors to lend money directly to clients of microfinance organizations in the developing world.  This means that donors have the chance to connect to an low-income individual who needs a loan, lend that person money, and then get the money back.

There is a lot of interest in the idea of using invested capital (meaning funds that eventually will get returned to the investor) to fight poverty.  Which is why I found Matt’s recent post on the Kiva blog so fascinating.  In this latest iteration, Kiva “lenders” (the donors) get their money back as it’s paid back, rather than as one lump sum at the end of the loan cycle.  The effect, as Matt writes, was that people quickly turned around and lent money back to other borrowers:

We had a lot of activity, in the first 10 days since the event, our users have lent about $2.5M on the site.  Before that, we had been lending about $3M every month, so this is a significant jump.  However, instead of new funds being injected into the system, this surge of lending is compromised mostly of dollars that are already in the system.  Instead of sitting in our account, they been liquidated…headed next into the hands of entrepreneurs on the site with the help of our Field Partner MFIs.

This is an incredibly interesting observation, as it speaks to the mentality of the “philanthropic investor” who has the option of getting their money back.  My suspicion has always been that people who have this option would, in general, choose to reinvest the money that comes back to them — that the return of their donation is really more about accountability than about actually getting their money back.

As the social investing world expands, it will be interesting to see how this further develops.  It’s perhaps the first real data set that will help us all to understand how people really think about their giving.