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Fundraising

The New Nonprofit IPO

A unique funding model goes beyond donations and offers funders a tangible stake in organizations they support.

In 2007, Homeward Bound of Marin County, a social service agency for the homeless, was able to leverage the star power of Warren Buffet to raise more than $1 million. As The Wall Street Journal reported, Buffett bought the first share of the organization’s immediate public opportunity (IPO)—Marin’s nonprofit version of a for-profit IPO. This begs the question: What caught the eye of the Oracle of Omaha?

Let’s not mince words: Nonprofits are starved for growth capital. As Dan Pallotta noted in his phenomenal TED talk, “The way we think about charity is dead wrong.” Since 1970, 46,000 for-profits have crossed the $50 million annual revenue barrier, as opposed to only 144 nonprofits. That’s shocking. The most effective and economical way to solve big problems is not 10,000 organizations serving 100 people per year, but rather 100 operationally and programmatically excellent organizations each serving 10,000.

Why? For one thing, the more services a nonprofit delivers, the lower its cost-per-unit should be. Second, there’s a reason why big companies are big and why those companies can convince start-ups to sell to them: Market share, growth capital, and top-notch personnel are all tremendous advantages for young ventures. What’s ironic is that, rather than selling sugar water (which, at the end of the day, isn’t that hard—it’s sugar, after all!), most nonprofits and social enterprises are selling hope, justice, and opportunity. These organizations are the ones that need the best ad campaigns; the best technology; and the best legal, consulting, branding, and other services. What’s more, the impetus for nonprofits to grow is also a financial matter; many nonprofits operate a very high-volume, low-margin business. For instance, in the microfinance sector, organizations such as ours make little profit per loan and therefore need to lend out many loans to cover expenses.

This problem led the employees at Homeward Bound to ask: What if nonprofits could have their own unique version of for-profit IPOs? At the Capital Good Fund, our ears perked up at the mention of the concept. It struck us as an excellent branding and growth tool, and we followed suit. Capital Good Fund is a nonprofit that uses financial services—one-on-one financial and health coaching, personal loans, and free tax preparation—to tackle poverty in America. Five years after our founding, we are proud of our growth, and we’ve been reasonably successful with traditional funding (we have, after all, kept the lights on). However, we haven’t come close to securing the funds we need to reach 10,000 families in a year, let alone 100,000 or a million. Just look at the numbers: The 3,500 families we’ve served in five years is impressive, yet that number barely scratches the surface of the 100 million Americans that live at 150 percent of the poverty line or below. And we’ve been at the grant-writing and donor-outreach games long enough to recognize that only a fundraising paradigm shift will enable us to become a national organization.

This is why we recently launched our own IPO to end poverty. The concept certainly jumps out at you from the crowded field of donation pitches. The goal of the IPO is to raise unrestricted funds by using a unique model: For every $25 donated, the donor receives one “social innovation share.” Each share entitles the shareholder to a vote at the annual meeting on a board of directors seat. Shareholders also have exclusive access to the organization’s quarterly financial and impact reports, as well as shareholder-only conference calls.

The idea for a nonprofit IPO was first floated in the social innovation community in 2006. A Fast Company article mentions how both Teach for America and College Summit, a nonprofit that helps low-income students attend college, started offering “private placements” for investors to become venture funders. Teach for America is a model for growth in the social innovation world; Harvard Business School has written four separate cases about the organization.

Yes, one could call the IPO a gimmick—at the end of the day, a share is a fancy term for a donation. But that misses the point. Just asking someone to purchase a share, as opposed to donate a dollar, has a different feel to it. From a behavioral psychology perspective, the IPO taps into the human need for reciprocity. We like to get something in return for what we do, even if it’s a certificate, the title of shareholder, and the ability to vote to elect a board member. And what makes our approach unique is the notion of giving shareholders a real, tangible stake in the organization, one that is about more than just a donation.

That said, there are still challenges. We are caught in the classic catch-22: For the IPO to succeed, we need to aggressively market it—yet we lack the money to pay for that marketing. On the whole, though, we feel that this approach gives us another tool in the fight, not so much against poverty as against knocking down the barriers to earn the revenue we need to fight poverty.

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COMMENTS

  • BY Jenny Harms

    ON January 30, 2014 11:58 AM

    Andy and Mollie,

    This is great! Congratulations on all your work.

    I would also argue that the Nonprofit NPO adds another level of transparency for your donors. It also gives you another level of donor education. All around, I think it helps move your work forward.

    Keep up the great work!

  • BY Peter Miragliotta

    ON January 30, 2014 12:03 PM

    This is an innovative / intriguing approach, which should catch the imagination of innovative social investors, however, I caution against limiting quarterly financial and impact reporting to investors only.  This could have the opposite of the intended effect.  By limiting information available to all potential supporters, overall donations may not be optimized.

  • BY Linda Saris

    ON January 30, 2014 12:15 PM

    I often thought that non-profits needed Investment Bankers.  If you are planning a launch of a new service or site, for example, and you need $50,000, an ED has to go to several sources to get to that $50,000 and may never get there.  So what do you do when you only raise $25k.  You never give the money back, so you scale down you plans.

    What if there was the equivalent of an investment banker who made a book for your project. This would be someone who is expert in your field (education, healthcare, etc) and knows where to go to fund projects that have the potential to make a big impact.  A non-profit pitches its investment and if it is compelling the banker takes on the organization for a fee and takes the company on a road show to raise funds.

    I am not sure you could develop a fee schedule that would make this profitable enough for bankers and affordable by non-profits.

    Any thoughts, reaction?

  • BY Gregg Davis

    ON January 30, 2014 12:56 PM

    Thanks for this i assume you are well familiar with nonprofit growth capital and the philanthropic equity work of NPFF and Heron and others. Really the core concept is the same as yours but you have (helpfully) applied it at the front end of the growth spectrum. Great

  • BY Paul Fordham

    ON January 30, 2014 01:09 PM

    Good luck, Andy and Mollie.  The concept is something that is replicable and deserves great exposure.  In case readers are interested, here’s a link to a youtube clip about Homeward Bound’s nonprofit IPO with Warren Buffett - it’s humorous and worth 2 minutes and 40 seconds of your day: http://youtu.be/ofkKFSlnNi8

  • BY Stanley Samuel

    ON January 30, 2014 03:10 PM

    Thank you very much for your stewardship and thought leadership. Your research and article is very relevant to us as a social enterprise. We have been self funded, received some grants and raise capital via convertible loans. We have made great progress in a short time with support from various stakeholders. given our hybrid business model, we found it challenging to come up with the right formula for the missing middle to build capacity and scale up. Thank you for inspiring us. Best wishes in your professional endeavors.

  • As in for profit sectors, IPO exposes NGO/NPO to the risk of being forced to appeal to the shareholders, which may deviate the organization from the original purpose. This risk also lies in for profit sectors but not as much.

  • BY Mary Denton

    ON January 31, 2014 09:40 AM

    Great concept, I look forward to hearing how it goes.  A question—how does this differ from “membership” organizations that give voting rights to members?  Different in name only, or are there structural/legal differences?

  • BY Andy Posner

    ON January 31, 2014 12:36 PM

    Mary,

    Great question.  The difference is in name. We actually amended our by-laws to make us a membership organization, and we simply defined membership based on a special class of member, ‘Contributor Member.’  To be a Contributor Member you have to donate at least $25.

    Beyond that, there aren’t any structural or legal differences between us and a membership organization.

    Thank you for your support and comment!!

     

  • BY Andy Posner

    ON January 31, 2014 01:09 PM

    Hey Linda,

    Thank you for your comment and question!

    That’s actually exactly what we need.  Especially given that our business model has the potential for self-sufficiency, we are looking for “venture philanthropists” willing to lend us the funds we need to make enough loans to make enough money to pay back the investors…Just like a for profit would.

    That’s not easy, though, both because venture capitalists aren’t used to seeing the kind of pitch that would come from a nonprofit, and because nonprofits tend not to have access to those networks.

    So my reaction is this: do you have any suggestions for how we can connect with investment bankers and VCs that could help us?

  • Jim Fruchterman's avatar

    BY Jim Fruchterman

    ON January 31, 2014 01:13 PM

    It’s helpful to remember that all U.S. 501c3 nonprofits have already gone public!  We have the public financial reporting obligations, and our boards are charged with managing the organizations for the benefit of the public at large.

  • Mollie West's avatar

    BY Mollie West

    ON February 1, 2014 08:29 AM

    Jenny,
    Thanks very much for your comment. Good point about the transparency and how that could help.
    Peter makes an excellent point as well about how this might affect the other donors.
    Does anyone have ideas about how to balance the needs of the two types of donors?
    My best,
    Mollie

  • Mollie West's avatar

    BY Mollie West

    ON February 1, 2014 08:31 AM

    Gregg, Yes, we are big fans of NPFF and Heron!

    Paul, thanks for providing the link.

    Yi, you raise a good point. Do you think that the stakeholders could also help keep the organization on track and mission-focused?

    My best,
    Mollie

  • Confused Joe's avatar

    BY Confused Joe

    ON February 3, 2014 10:44 AM

    So you guys just became a member organization? Seems like a rose by any other name type scenario… I’m happy you guys are having success with this and I am sure you do a lot of great work, but this doesn’t seem like innovation.

  • Deepa Ramesh's avatar

    BY Deepa Ramesh

    ON February 4, 2014 06:22 PM

    Thank you for this innovative and informative article.
    Deepa

  • Kevin Starr's avatar

    BY Kevin Starr

    ON February 5, 2014 09:06 AM

    molly and andy - good on ya for trying to come up with up with an innovative approach to bust open the dysfunctional gates of the funding world.  we do need a “funding paradigm shift.”

    this isn’t it, though.

    it isn’t a real analog to the pursue of a share in a commercial firm - as you said, it is simply a repackaging of a donation.  as such it reminds me of the brief fad of from a few years ago where enterprising NGO’s created “investment prospectus” vehicles to get donors to help them build up cash reserves in advance of new initiatives.  it was simply a repackaging of the old capital campaign, and as such, it worked a few times until the novelty wore off and everyone had to go back to raising dough the boring old way.  i think this idea will suffer the same fate.

    if you want to make a real difference, figure out a way to link donations to real impact (not just marketing or even the level of organization activities).  create a way to track the cost-per-unit-impact of an organization over time so the both the original donor and prospective donors can see the performance of a given donation over time (relatively few organizations will be able to supply you with this information, and that’s ok - it’ll put pressure on the rest).  if you could pull that off, and get donors to buy in, donations would follow the rise and fall of an organization’s impact over time and help make the sector start performing like a real market for impact.  that could change everything.  the huge missed opportunity of dan pallota’s great talk was that he didn’t tie fund-raising innovations to real impact.

    finally, the notion of having small “shareholders” interact with the organization is a terrible idea.  i wouldn’t want the staff of an organization that i fund to waste precious bandwidth answering the queries and responding to the pressures of minimally invested and informed donors.  they should spend that time and energy listening to their putative beneficiaries.  and having smallholder donors elect a board member?  please lord, no.

    again, thank you for trying to come up with an approach to loosen the purse strings of donors.  keep working on it - we need you.

  • Kevin Schulman's avatar

    BY Kevin Schulman

    ON February 5, 2014 03:02 PM

    The funding model for NPO is in need of massive revamping and there is no question the sector needs to make markets for debt and equity just like the for profit sector.  In fact, the road show and pitch need to be thought in the same way - a financial case to be made for repayment (in the case of debt) with a predictable revenue stream and growth in the case of equity - latter also needs buyers and sellers though the organization can be the primary buyer in this case.

    This is happening already on a small scale in the US and more so in Europe (Netherlands is one example).  In the US the companies making the “bets” are those directly tied to the sector, namely agencies and other vendors who do the arms and legs of raising the money. 

    The mainstream press, which is largely incapable of understanding basic business, wrongly positions this as immoral or unethical when a vendor fronts the money for growth in the form of a donor acquisition campaign.  The returns on such a campaign, if properly managed over time are a) good (better than debt instruments in for profit today) and b) very predictable. The Europeans have taken this a step further - again on a small scale - with some pooled investment from outside $ even though the entity typically involved with running the fundraising effort is one of those outside investors.

    It is not crazy to envision a scenario where the outside $ has no direct connection to the non-profit and of course opens up the market potential exponentially.

    We’ve found part of the problem is a largely enumerate sector and this includes senior management.  Some of the largest charities haven’t even exhausted “traditional” funding channels like commercial loans.  There is also some education that would need to be done with the outside $ folks but that starts by having the road show focus on the financial argument for doing this, not the social one.

  • BY Jennifer Johnstone

    ON March 11, 2014 08:38 AM

    This was an interesting article, and I wish you luck with your outreach. However, the idea of selling shares dates back long before 2005, as you suggested.

    Here in Vancouver, Canada, I am CEO of Central City Foundation, and 107 years ago, our foundation “innovated” by selling shares. We were created as the Central City Mission Corporation in 1907 - a not for profit company that sold $10 shares in community to help their neighbors in need.  By 1910 they had raised almost $40K in capital and built our first social purpose real estate building.  These shares continued to be issued until the early 1950’s when the not for profit corporation was transformed into a registered Canadian charity.

    Our innovative model of social impact investing continues today. We continue to raise philanthropic capital to invest in our community.  Almost half of the capital of Central City Foundation is invested in social purpose real estate - real estate that is financially sustainable and meets our mission to improve the lives of people in need in Vancouver’s inner city.  We build space and place for community by providing subsidized rent for non-profit partners who, in turn, deliver social housing, healthcare programs, daycare and family services, alcohol and drug treatment programs, youth support and outreach, and more.
    .

  • Mollie West's avatar

    BY Mollie West

    ON March 16, 2014 07:25 AM

    Hi Kevin S.,

    Thanks very much for your comments. I agree, the best way would be to link donations to real impact. I think the next task for us will be to take this IPO model and add on features like Kiva has, that allow linking from donors to clients. Another organization that is doing great work in this area is The Robin Hood Foundation.

    My best,
    Mollie

  • Mollie West's avatar

    BY Mollie West

    ON March 16, 2014 07:26 AM

    Hi Jennifer,

    Wow, so great to know that your organization was doing this in 1907! We’ll have to take a look at your organization and your model. Thanks for sharing.

    Best,
    Mollie

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