Stanford Social Innovation Review

Short-term vs. Long-term Focus in Philanthropy

In the summer 2007 edition of the Stanford Social Innovation Review, Charles Conn, a senior advisor to the Gordon and Betty Moore Foundation and a high tech executive, wrote about the short-term focus of most foundations in an article titled Robbing the Grandchildren:

“If future generations could vote on how foundations invest their money today, would they choose the current allocation? Byron Swift, chair and executive director of the World Land Trust, suggested this thought experiment to me, and I am disturbed to find that my answer is no…U.S. charitable foundations are better positioned than companies, governments, and universities to address these long-term, potentially catastrophic problems. One of the few sources of long-term risk capital, they control more than $500 billion in assets, generating funding that with other charitable giving totals almost 2 percent of GDP. With Warren Buffett’s gift, the Gates Foundation alone will control more than $60 billion in assets and $3 billion to $5 billion in annual spending. Other foundations closely associated with the digital revolution (such as Dell, Ellison, Packard, Hewlett, Moore, Omidyar, Page and Brin, Yang) could account for at least $50 billion to $70 billion more.

Perversely, though, many of these new tech entrepreneurs are worsening foundations’ shortsightedness by implementing businesslike metrics and controls in a way that reinforces short-term thinking and behavior. Other questionable management practices, such as low payout rates and lack of coordination with other organizations, further aggravate foundations’ myopia…A recent movement, sometimes called philanthrocapitalism or venture philanthropy, seeks to avoid complacency and lack of focus in foundation management by introducing rigorous success metrics and accountability practices. Many of these new-style foundations limit their scope to a few problem areas and, like corporations, intensely monitor outcome metrics, often with tight windows for review. To those of us who came to foundation work after a career in business, this sounds eminently sensible; after all, the foundation world is littered with fragmented, unfocused, and failed programs…This short-term, metric-focused approach likewise hampers grantees. Foundations take the passionate and committed people in these institutions and harness them to near-term indices of progress. Grantees, in turn, stop playing the long-term game in order to keep the money flowing. They aim lower, too.”

I agree completely with Conn’s thesis, but I want to elaborate, since Conn fuses “short-term,” “metric-focus,” and “businesslike” as if they automatically go hand in hand.

In the stock market, most people have become more and more short-term oriented. In the 1950s, investors held stocks for an average of 7 years. Today the average is 11 months. Investors have gained access to vast amounts of information they never used to see; and yet in many cases, this information has resulted in investors frequently changing their minds rather than gaining more conviction in their decisions.

However, almost all great investors make financial decisions based on a long-term outlook, not a prediction of what will happen in the next three months. At the investment management firm in which I am a partner, we talk about “arbitraging other investors’ time horizons.” In other words, we try to identify situations where short-term bad news about a company causes other investors to sell the stock so that we can buy it at lower prices. We use short-term good news that causes a stock to move higher to sell stock in companies whose longer-term outlook we think is deteriorating. Warren Buffett, or most any great investor, will tell you that Wall Street’s obsession with quarterly earnings reports is misplaced. Some companies (such as Coca-Cola, a company Buffett has owned a long time) have stopped issuing guidance to investors regarding what their next quarterly earnings might be.

Frequently, a short-term focus goes not with a quantitative metric focus, but with knee-jerk emotional reactions. When an investor buys a stock and then sells it soon after based on “bad news,” it is highly unlikely that the new information justified a reversing of the investors’ position. More likely, the investors threw out the fundamental reasons they chose to buy the stock and decided to sell out of fear.

It is human nature to want results as quickly as possible. But to achieve success, we must match our investment decisions to our time horizon. If we want to fix a local school because our child will be attending starting next year, then it might make sense to focus on short-term solutions. But most donors fund issues because they want to have a sustained impact on a situation. The techniques that might reduce crime in a bad neighborhood the most over the next month are unlikely to be the techniques that will have the largest, permanent impact on reducing crime rates over the next couple of decades.

Financial market participants are often short-term focused. They often focus on metrics that describe short-term conditions, but do little to illuminate long-term trends. But great investors and great philanthropists must focus on the information that matters to the long-term success of their projects. The short-term focus that Conn complains about may well be a problem common to many people in business. But it is a characteristic of meritocracy, not of the best business minds. Metrics and businesslike thinking have a place in philanthropy (but in no way are the best approaches to every problem). But short-term thinking is rarely useful.

Disclosure: Nothing in this post should be considered investment advice.

Sean Stannard-Stockton is a principal and director of Tactical Philanthropy at Ensemble Capital Management. Ensemble Capital provides families both traditional investment management and philanthropic planning. He is the author of the blog Tactical Philanthropy and writes the column On Philanthropy for the Financial Times.

Posted by Katie Harrington

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Big Challenges in Nonprofit Growth

The charitable marketplace keeps growing, putting even greater pressure on nonprofits and their supporters to run smart, lean, responsible operations.

Nonprofits employ more people, generate more revenue, and contribute more to the U.S. economy, says the just-released Nonprofit Almanac 2008.

But growth alone does not ensure that nonprofits are making the best use of their resources.

Sadly, the charitable marketplace is saddled with fat and inefficiency.

Fueled by a sense of entitlement and righteousness, far too many nonprofits focus more on perpetuating their own organizations than on improving the way they do business or deliver services.

And while their services often overlap, far too few nonprofits are willing to truly consider, let alone pursue, consolidating their operations or even merging their organizations.

Having cultivated their own donors, volunteers and customers, nonprofits invest more time in defending and expanding their turf than in looking for the best way to put common community resources to work to address common community problems.

Nonprofits do not bear sole blame for the sloppy and self-absorbed way many of them operate.

Lacking the will or courage to ask tough questions or to encourage collaboration, foundations and other supporters are the enablers of nonprofits’ waste and turf-driven mindset.

By continuing to invest in nonprofits without challenging them to be more efficient, open and collaborative, foundations and other supporters simply perpetuate the feudal fiefdoms that divide and weaken the charitable marketplace.

To address the symptoms and causes of the urgent social problems we face, the charitable marketplace needs to do a lot better.

Todd Cohen, a veteran news reporter and editor, is editor and publisher of Philanthropy Journal, an online newspaper published by the A.J. Fletcher Foundation in Raleigh, N.C.

Posted by Katie Harrington

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Data, Data, Everywhere…But How Do You Find What You Need?

Ever noticed that we seem to be simultaneously drowning in information but can’t find what we need when we need it? We’ve got data everywhere, but not what we need, when we need it, and the knowledge of how we can use it.

Several efforts at addressing information in social capital markets make recommendations to address the availability, accessibility, comparability, and value of performance, outcome, indicators data. These efforts are focused on the need for emerging philanthropic capital markets to be able to track, compare, and discuss social outcomes in comparable, meaningful ways. Here are some of the data efforts that I know of:

• Great Nonprofits
• Connectipedia
• SocialMarkets
• Xigi.net
• Social Capital Index
• Keystone’s ” Impact” sessions
• RootCause
• Urban Institute Outcome Indicators
• Acumen Fund/Google/Salesforce’s work on Portfolio Data Management
• Jed Emerson’s new work, From Fragmentation to Function: Critical Concepts and Writings on Social Capital Market’s Structure
• Performance data commons, a recommendation from Keystone
• UPenn’s Center on High Impact Philanthropy
• Various reports and services from New Philanthropy Capital
• IssueLab
• The Nonprofit Reporter
• SmartLink
• HealthyCity.org

Of course, existing data providers such as Guidestar, Center for Effective Philanthropy, Charity Navigator, GiveWell, Charity Scorecard, the IRS, Attorneys General, Better Business Bureau, etc. form a core component of this expanding marketplace of data.

These efforts are exciting, and, be there necessity, duplicative. Why is this duplication necessary? Because we don’t know what data matter, to whom, and for what purposes. This is a period of experimentation and market sizing, and many of the organizations above are seeking ways to price their products, entice potential customers, massage business plans, and source their data.

Several factors drive what happens to these various providers. Some of these forces are fairly obvious - donor motivation, economic trends, demographics of donors, growing reliance on the internet for information, and continuing shifts in the marketplace of financial products for donors. Other forces, such as regulation of nonprofits, new hybrid organizations such as L3Cs and B Corporations, and changes in the capital markets themselves, also matter. And then there is a circle of influences another level removed which matter - decisions about who owns and can resell certain data. The Guardian Newspaper company in the UK is experimenting with some ideasthat may hold lessons for purveyors above. Legislation and regulation about net neutrality, data access and ownership currently in play in the US are added to the list of what matters and influences what happens providers. The future of newspapers matters to these efforts - they have been trusted sources of information for decision makers for years - but what does the future hold?

From my perspective this is all exciting, and utterly predictable. It represents a moment when we can truly see how philanthropy operates within many of the same forces of creativity, maturity, and disruption that mark other industry cycles. Is the answer to the “data problem” in philanthropy contained somewhere in the list above? Possibly - but it probably has roots and tendrils in several of the efforts/organizations above and the next few years will be a process of teasing out the key pieces and re-organizing this cycle of providers into a sustainable set of credible and independent sources.

A good portion of what will determine success for any of these ventures is the degree to which they can develop their products and services with a keen eye on the needs, wants, and willingness of their final customer. Who is that customer? What does s/he need? What does s/he want? And what will s/he pay for? Sadly, most of the reports, papers, and proposals that I have read are woefully thin on real answers to these questions. Without those answers, these “supply side” proposals and business plans can get us only so far in building new markets for information. We may be at the point where all of these “information suppliers” should turn their attention to really understanding what thirsts the “info users” really have, will really use, and will really pay for.

I am working with a colleague, Steve Goldberg, to build out this list as comprehensively as possible. We also want to see if the minds behind these efforts will join us in thinking about what this all means, where it all may be going, what else might be needed. Here is how can you get involved:

1. Comment on this list (use comments function below) and add other organizations or efforts
2. Email me (lucy@blueprintrd.com) and let me know if you want to be added to an email group -the first step in organizing conversation.

**Disclosure: I have or have had board, advisory board, or some kind of professional working relationships with several of the individuals/organizations on this list, including, but not limited to, GiveWell, Nonprofit Reporter, SmartLink, Keystone, Aspen Institute, Center for Effective Philanthropy, and Jed Emerson.

Lucy Bernholz is the Founder and President of Blueprint Research & Design, Inc, a strategy consulting firm that helps philanthropic individuals and institutions achieve their missions. She is the publisher of Philanthropy2173, an award-winning blog about the business of giving, and serves as executive producer of The Giving Channel on Fora.tv.

Posted by Kelsey Walker

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“Moneyball,” “Freakonomics,” & Philanthropy

Earlier this spring, The New York Times Magazine featured the fascinating article “What Makes People Give.” The article chronicles the attempts by John List and Dean Karlan, economists at Yale and the University of Chicago respectively, to understand why people give.

List and Karlan considered the usual answers—to make the world a better place, to see your name printed on the back of an annual report and the like—as too pat, too simple, and sometimes just wrong. Over the years, whenever one of them asked fundraisers why they did what they did, their responses were vague and unimpressive. There didn’t seem to be much empirical evidence to support the strategies employed by most fundraisers. So the two economists wondered whether charities were wasting a lot of effort.

When charities are designing their donor appeals, they often go by nothing more than a few rules of thumb, some of which may be profoundly insightful and others a good deal less so. “I think some fundraisers have developed terrific intuitions, passed on through the fraternity of fundraisers,” says Paul Brest, president of the William and Flora Hewlett Foundation in Menlo Park, Calif., which often works with charities. “But a lot of the intuitions don’t work. Look at how much junk mail you get.” Matching gifts were another good example. People figured that they worked, because—well, how could they not? They seem so sensible.

The story reminds me of two of my favorite books, Moneyball and Freakonomics.  Michael Lewis studied the Oakland A’s’ use of statistical analysis to drive the way they built their baseball team and played the game. In Freakonomics, Steven Levitt and Stephen Dubner used economic analysis techniques to understand falling crime rates, the organizational structure of street gangs, and the inner workings of professional sumo wrestling.

What both books (and the New York Times Magazine article) use as their premise is that quantitative analysis is incredibly useful in understanding our world. Yet all three also understood that statistics do not themselves give you answers; they just help you understand your environment better so that you can more easily find the answers you are looking for. This is the promise of metrics and other quantitative measurements in philanthropy. They are not themselves the answers we seek, but they help describe the world we live in.

When used as tools to advance our understanding, metrics in philanthropy are wonderful. But when viewed as some sort magical answer that shows us the Truth, we are better off with Mark Twain as a source of insight than Moneyball or Freakonomics:

“There are three types of lies—lies, damn lies, and statistics.” - Mark Twain

Sean Stannard-Stockton is a principal and director of Tactical Philanthropy at Ensemble Capital Management. Ensemble Capital provides families both traditional investment management and philanthropic planning. He is the author of the blog Tactical Philanthropy and writes the column On Philanthropy for the Financial Times.

Posted by Kelsey Walker

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Heat Wave: Part 2

Day 1 at last week’s Clinton Global Initiative broke news.  Day 2, breaks buzz and color from all over the blogosphere.

Some highlights:

*itsgettinghotinhere.com is written by Jake Brewer, reacting here to Al Gore’s surprise outrage over slow progress on global efforts to fight climate change:

“...Gore used the word “insane” or “insanity” at least three times (we’ll check the records to see if there are more) in his descriptions of various political and business decisions made (or not made) with regard to climate…”

*seeingtheforest.com is by Dave Johnson, who is covering CGI live for the Skoll Foundation’s Social Edge site:”

“...I have been asking around, trying to get a sense of how the Wall Street financial crisis is affecting the funding of non-profits/NGOs attending this conference. What I am hearing is that the economic crisis—or at least fear of it—is affecting funding and in some cases significantly. But here’s the hitch: Almost every conversation I have had except one was about how the funders are afraid that the economy is getting worse and that is why they are cutting back. Only once was I told that an organization’s primary funder had cut back because of necessity from actual financial difficulties. So it appears that fear that the economy is turning down is causing many funders to cut back. (Perhaps this is to preserve capital?—please discuss this in the comments.) Of course, actual economic stress hits people at the lower end of the ladder or in poorer and less developed regions much harder than it hits the rest of the population. These are the people and organizations that the funding institutions and individuals are committed to serve. And it is the nature of philanthropy that even in the worst of downturns the funders will not suffer to the degree that to poorest will. Since an economic downturn brings with it a much greater need on the part of the recipients of the world’s philanthropy, shouldn’t fears that this is coming trigger a greater commitment of assistance rather than cutbacks? A metaphor might be helping purchase plywood and tape to cover store windows before a hurricane hits. Discuss.”

*techPresident.com is a new group-blog about the 2008 presidential campaigns. This is from a post by Nancy Scola, called How Bill Clinton Gets Results:

“...I had the good fortune to plop down next to a wonderful woman named Muriel Glasgow. Muriel spent decades at the United Nations building latrines and other infrastructure all over the world, and now runs the United Nation’s Yak podcast. I told her what I did, and she asked if I thought the next American president, whether Barack Obama or John McCain, will have the good sense to take the tremendous excitement and energy this election has uncovered—especially among the young folk—and use it to create change after November 4th. It’s a very good question…We’re witnessing one way of doing it here at CGI. Bill Clinton’s model for making progress is to prove success, then replicate it. The holy grail of CGI is simply “a measurable result that can then be modeled in other places.” This high-flying former president seems entirely weary of the political hot air that blows at lesser atmospheric levels. But he eats up stuff like what happened this morning, when the Nike Foundation joined Johnson-Sirleaf to present a $5 million check for the Adolescent Girls Initiative, a discrete three year project to teach technical skills to Liberian women between 16 and 24…What’s striking to me about CGI is, for lacking a better way of putting it, forcefully applying business-world metrics to philanthropic space…”

Full disclosure: I’m blogging CGI for the Stanford Social Innovation Review and covering a bit of it for msnbc.com and Contribute Media.

There were also some additional news highlights:

* Wyclef Jean and his three-year-old NGO, Yele Haiti, urged CGI attendees to help Haitians displaced by Hurricane Gustav’s category-4 winds that slammed coastal cities on August 26. “Remember Katrina?” he asked. “The hurricane that hit Haiti was Katrina times a million.” In the coastal city of Gonaives, he said, “the devastation is heart-breaking. The whole city smells like dead bodies; kids are still on rooftops; people haven’t eaten for 12 days.” The musician said 55 schools were destroyed and 593 were damaged and are in urgent need of repair. “When I was growing up, I remember being so poor, I ate dirt from the ground,” Jean said at a press conference. “...We are hungry in Haiti all the time; after Gustav, people are starving faster.”

* Philanthropist Eli Broad announced a new, $44 million, three-year research and development initiative called EdLabs, which will partner with three of the largest urban school systems in the country: NewYork, Chicago and the District of Columbia. It will be housed at Harvard and work, starting October 1, to identify and advance strategies to improve student achievement in America’ s troubled public schools. “The military had DARPA; this will be the educational equivalent,” said Broad, whose private foundation is contributing $6 million to the venture. New York Schools chancellor Joel Klein said: “Everybody talks about reform but it’s really the same tired bromide, like applying a tongue to a sore tooth… It’s time for innovation. This is it.”

* Barack Obama addressed the conference via satellite and promised (as did John McCain in remarks earlier) to eradicate malaria and pursue new energy policies to combat climate change. He also said that if elected, he would focus on the four issues that CGI has held dear since its first gathering in 2004. “Climate change. Poverty. Extremism. Disease. These problems offend our common humanity,” Obama said. “They also threaten our common security. You know this. The question is what do we do about it?” For a full transcript of Obama’s remarks, click here. For a full transcript of John McCain’s remarks to the conference, click here.

Marcia Stepanek is Founding Editor-in-Chief and President, News and Information, for Contribute Media, a New York-based magazine, Web site, and conference series about the new people and ideas of giving. She is the publisher of Cause Global, an acclaimed new blog about the use of digital media for social change. She also serves as moderator and producer of New Conversations for Change, Contribute’s forum series highlighting social entrepreneurs and new trends in philanthropy.

Posted by Kelsey Walker

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Securitizing Philanthropy

There is an irony in the fact that so much of the conversation at the recent Social Capital Markets conference was about moving philanthropy towards a financial markets approach that seems to be in the process of breaking down in the for-profit financial markets. However, we should not confuse financial innovation with excessive risk taking.

I just read the great book When Markets Collide. Published this year, the book comments on events that were occurring in the financial market as recently as the spring of this year. Author Mohamed El-Erian is the former head of the Harvard endowment and current co-CEO of PIMCO, one of the largest investment management companies in the world (he also spent 15 years at the International Monetary Fund). In the book, El-Erian says that when asked what career he would suggest a young women go into he replies “structured finance” without hesitation. His point is that while we are in a cyclical move away from structured finance due to excessive risk taking, the structured finance movement will continue to dominate financial markets over the long term.

All of this brings me to a great session I attended at the SoCap conference in which my friend George Overholser of NFF Capital Partners described how grantmakers can inject capital into a nonprofit debt financing deal to make it more attractive to for-profit lenders. The idea is that if a profit seeking lender will only lend to a nonprofit at a 10% interest rate, they may be willing to lend at a lower rate if a philanthropist puts up capital that will act as a “first loss” cushion. Let’s say that for example the loan is for $5 million. The philanthropist might put up $500,000 that the lender could lay claim to if the nonprofit was unable to fully repay the loan. This reduces the risk to the lender and therefore lowers the interest they are willing to accept to complete the loan. The philanthropist is willing to put up the money because the injection of a relatively small cash cushion can unleash much larger new cash flows into the nonprofit system. While the provider of the “first loss” cushion can achieve a maximum financial return of 0% (just getting all their money back if the nonprofit doesn’t default on the loan) and a maximum loss of 100%, this actually compares favorably to the guaranteed 100% “loss” that occurs when you make a grant. While a first loss capital cushion is not superior to making a grant, it is another tool to be considered by high-impact grantmakers.

This brings me to a recent announcement by Schwab Charitable (the national donor advised fund) of its pioneering program to allow their donor advised funds to put up capital to guarantee microfinance loans. The program is being run in collaboration with the Grameen Foundation. According to the press release:

“‘We are excited to be partnering with Schwab Charitable to expand the reach of microfinance loan programs around the world,’ said Alex Counts, President of Grameen Foundation. ‘Historically, guarantee programs have only been open to large foundations or to the very wealthy. This program opens up participation to a much broader range of donors, democratizing access and building a solid base of ongoing support.’
…Donors who agree to participate will recommend that up to 10 percent of their Charitable Gift Accounts be set aside for a period of 24-36 months to help guarantee microfinance loans. Any funds used to guarantee microloans will stay in their accounts, will continue to be invested for the entire period and will be applied to the guarantee only if the microfinance program has losses in excess of reserves. In addition, Schwab Charitable will report back to participating donors on the social and economic impact that these microfinance loans provide to their various recipients.”

Like all tools, structured finance can be used in inappropriate ways. As El-Erian points out in his book, the “securitization” of home loans (pooling them and reselling the loans to investors) was a positive development. However, misaligned incentives encouraged excessive risk taking that is now coming back to haunt the mortgage markets. Structured finance is a powerful tool and powerful tools can be dangerous, but I think the development of social capital markets towards more sophisticated forms of structured finance is inevitable. Let’s work on getting it right.

Sean Stannard-Stockton is a principal and director of Tactical Philanthropy at Ensemble Capital Management. Ensemble Capital provides families both traditional investment management and philanthropic planning. He is the author of the blog Tactical Philanthropy and writes the column On Philanthropy for the Financial Times.

Posted by Katie Harrington

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Foundations Can Provide a Giving Stimulus

Foundations can help nonprofits fundraise at this end-of-the-year giving season by providing a stimulus for giving. Take a page from the Columbus Community Foundation, which today announced a giving stimulus plan created to match gifts to local nonprofits. The foundation aims to “raise $1 million in 48 hours.” More details here.

At a time when individuals and families are feeling the pinch or hesitating with “let’s see how things are at the end of the year,” knowing that their donations will be matched can be a powerful incentive for them to give today.

Do you know about any other stimulus initiatives? Please share them with us. Post below. We need these creative ideas to boost giving during this time, when nonprofits are asked to provide more services than before. 

Perla Ni, founder and former publisher of the Stanford Social Innovation Review, is the founder and CEO of GreatNonprofits. She is also a co-founder of Grassroots.com.

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Time for Foundations to Dig Deeper

The looming recession represents a big challenge for nonprofits and foundations alike.

Nonprofits face rising demand for services from people hit hard by the economic downturn. They face higher costs of doing business. And they fear that individuals, corporations, and foundations may reduce or shift the focus of their giving.

Times also are tough for foundations, which have seen the value of their endowments shrink because of plunging capital markets.

These challenges represent an opportunity for nonprofits to focus on their mission, strengthen their operations, and fine-tune their message and their marketing, making sure they are telling the most compelling story they can about the impact they have and the need for givers to support them.

The economic crisis also should serve as a powerful jolt to foundations.

Using their clout, foundations in recent years have waged a fierce fight to limit to 5 percent of their assets the annual payout the law requires they make, a payout that includes not only grants but also overhead expenses.

And most foundations are reluctant to make grants to support nonprofit operations, preferring instead to fund programs or projects that often bear the funders’ names.

Foundations need to move beyond giving as usual.

They should give more and they should recognize that nonprofits need funding to build their operations so they can more effectively deliver services.

Foundations claim that increasing the required payout would drain their assets and force them to go out of business.

But the idea that foundations have a right to exist forever defies fairness and common sense.

While the law gives donors up-front tax breaks for creating foundations, it lets foundations hoard most of their assets.

In a typical year, the investment returns on a foundation’s endowment will cover the payout the law requires it to make, and in good years those returns will result in actual growth in the endowment.

So foundations, often controlled by donors and their families, simply accumulate wealth and power out of proportion to what the foundation actually gives back to the community.

In return for tax breaks the donors enjoy up front, and tax-exempt benefits foundations enjoy on an ongoing basis, taxpayers should receive equivalent value, and they should enjoy it sooner rather than later.

That means, simply, that foundations should pay more to address social needs, rather than investing tax-exempt funds to finance high-powered battles to fight moves in Congress to increase the required payout.

The economic crisis is hurting low-income and middle-income taxpayers, as well as the nonprofits that exist to address critical needs in our communities.

Instead of pitching fits about the plunge in value of the endowments they count on to perpetuate their power, foundations should be digging deeper and paying out more to begin to give back what they and their donors have received from taxpayers in the form of tax breaks and tax-exempt benefits.

Todd Cohen, a veteran news reporter and editor, is editor and publisher of Philanthropy Journal, an online newspaper published by the A.J. Fletcher Foundation in Raleigh, N.C. Cohen has taught nonprofit reporting and media relations at the University of North Carolina at Chapel Hill and at Duke University, and regularly speaks on the topics of nonprofit media relations and trends in the charitable world.

Posted by Kelsey Walker

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Givers Next Door Have Much to Give

Below the philanthropic radar that has focused on the gloom and doom of the ailing economy beats an underappreciated resource that offers huge potential for nonprofits.

Family-owned businesses represent nearly two-thirds of gross domestic product in the U.S., according to estimates, yet those closely-held firms are largely invisible to nonprofits, says philanthropy consultant Phil Cubeta.

“There is a tendency for philanthropy to be perceived as high-class and for these businesses to be perceived as low-class,” says Cubeta. “These are often blue-collar people who make good, and make good big-time.”

Many of those business owners are Baby Boomers who are nearing retirement, says Cubeta, who works with a national financial-services company’s advisers whose main clients are business owners with median net worth of $10 million to $15 million.

And if those business owners’ companies survive the economic downturn, they will need to make decisions about their companies’ future and what to do with the wealth and time they will have in retirement, says Cubeta, who in January will become the holder of the Sallie B. and William B. Wallace Endowed Chair in Philanthropy at The American College in Bryn Mawr, Pa.

That transition in the life of boomers’ businesses is “following a wave larger than the current economy,” he says. “It’s a demographic wave.”

So instead of panicking about the impact of the downturn on charitable giving, he says, nonprofits should look for ways to connect with Boomers who own small businesses.

Those business owners are rooted in their hometowns, where they often grew up, went to high school and even college, built their businesses and likely will die, he says.

“They really care about the community,” he says.

When asked, they typically voice a “heart and care for philanthropy, but it doesn’t come out that way,” Cubeta says. “They would like to do it but they’re not connected. They’re isolated from the world of people in town outside their business groups and church.”

One strategy for connecting with those donors might be to work in partnership with professional advisers to develop events likely to appeal to aging Boomers who own small businesses, he says.

Professional advisers who typically work closely with owners of small businesses include life-insurance agents, certified public accountants, estate-tax lawyers, financial planners, and chartered advisers in philanthropy, Cubeta says.

Working with those advisers, particularly those who serve on their boards or their planned-giving advisory committees, nonprofits should aim to develop events that will focus on topics business owners care about, such as “life after business,” “passing on their values as well as valuables to their children,” or “business-transition issues.”

Nonprofits also should work with advisers to find ways to introduce philanthropy, and their own organizations, to the business owners.

“Shirtsleeve businesses are where a lot of this country’s wealth is,” Cubeta says. “Those people still have the same issues this year as last.”

Todd Cohen, a veteran news reporter and editor, is editor and publisher of
Philanthropy Journal, an online newspaper published by the A.J. Fletcher Foundation in Raleigh, N.C. Cohen has taught nonprofit reporting and media relations at the University of North Carolina at Chapel Hill and at Duke University, and regularly speaks on the topics of nonprofit media relations and trends in the charitable world.

Posted by Kelsey Walker

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Why I Like Fair Trade… And What it Needs

At Good Capital we have done one Fair Trade investment in Adina, a company that competes with Starbuck’s Frappuccino with a ready-to-drink line of iced coffee sold in supermarkets. Adina’s bottled coffee products are aimed at women under 35 and are lower in calories than their competitors, Organic, and sourced from Fair Trade cooperatives.

Because of our investing partner and the management team assembled, Adina has a great chance of success, at least financially. That is, we and our investors are likely to make good money. But if that’s all we do, our investors will not be happy. They are investing with us for more than financial reasons; they also want to know that they are leveraging their positive impact in the world by putting their money in our hands.

We tie directly into their philanthropic motivations but through a new angle; one that also engages their rigorous, investor mindset and doesn’t ask it to turn itself off or play by a second, less rigorous set of rules. We want the investors in our funds to bring their “A” games to the table. We are playing the real game, trying to get the ball in the pocket, not some soft form of bumper pool.

For us, Fair Trade solves a couple of problems and helps us overcome some investor objections. If Good Capital is selling both the prospect of leveraged social impact and a financial return, then, people ask, how do you measure that; how do I as someone who has trusted you with my money, know you are doing good?

Well, with Fair Trade we can quickly answer that there is a third party certifier at every point along the supply chain, that the coffee, vanilla, sugar, and tea in Adina’s products come from certified Fair Trade and democratically elected coops in places like the Oromia region of Ethiopia, the Ixil Triangle of Guatemala, and Surinam, Paraguay, and India.

We also get around the imperialist-tinged element of people with money deciding what is good for poor people producing commodities with the way the Fair Trade premium is delivered. In addition to paying the farmer a price higher than the market rate for the commodity, Fair Trade rules require the buyer to deliver a further premium to the cooperative to be spent as the community sees fit. They have to report on what they do with the additional premium, and it often involves building or fixing a school or clinic, achieving Organic certification, digging a well, or repairing some kind of irrigation or water project.

For us as investors, the benefits are two-fold; we don’t have to build a measurement system to prove the social impact to our investors, and the democratic element finesses political and power considerations, helping left-leaning investors and activists concerned about empowerment issues feel good about the way they are deploying their money.

Many of the most socially minded and active people of wealth still have a problem thinking of social impact and investing as existing in the same realm; they have a hard time accepting that investing for good can be an asset class. The cultural framework they have inherited is that you do your good out of your philanthropic pocket, expecting the total loss of your capital.

Then even these socially minded activists and philanthropists invest with a mindset in which you are not being who you should be unless you think only about financial return when you invest; it’s the bastard child of Milton Friedman and heir of Andrew Carnegie’s Gospel of Wealth from the devil’s side of the family.

The good news is that Good Capital is raising money, even in this climate, through this premise; more money is teeing up to come our way.

But the prospect of success, as slowly as it is creeping our way, creates risk for us and investors like us. If people are willing to invest with us, buying our premise that we can deliver financial and social value in greater measure than if they had just given their money away, we have to prove that we really are doing good.

We can point to the premium and what it has done in each coop, but have we really changed the lives of the people in that community in a positive way by our intervention? Some studies say that the real good is achieved through making a cooperative a viable decision-making structure; we get the people in the community to cooperate in hope of a realistic gain and the benefits derive from that. So Fair Trade’s role in helping people lift themselves out of poverty might be a secondary benefit.

So if we and our peers successfully funnel more money to Fair Trade, we have a risk factor that we need to address. What is the real impact of our money? What do the people affected say that it does for them, aside from what they did with the Fair Trade premium and other than what our metrics allow us to report back to our investors and the consumers who buy Fair Trade products?

To look into that issue, I’ve started substantive conversations with my friend Sabina Alkire of the Oxford Poverty and Human Development Institute at Oxford University. Her metrics, which are based on Amartya Sen’s capacity approach to development, incorporate and quantify the voices of the poor. They are being incorporated into how several countries (which can’t be announced yet) measure poverty, and are starting to be used by several development agencies. They are working because they really do empower the poor to say what’s working for them and what’s not; so you can more accurately know what impact any effort to alleviate poverty is having on the ground.

We’re going to see if her approach could be applied to the data that is already being gathered by Fair Trade coops in an effective way at a reasonable cost. If we can do that, then we will reduce the risk of funneling money to Fair Trade companies that promise that they are doing good, only to discover that we are not making the difference we and our investors had hoped we were.

Finding the right Fair Trade partner for this research is something to be managed carefully, of course, but that’s a step down the road. The first step, according to Sabina, would be to deploy a researcher funded by her institute to look at the data from a Fair Trade coop and company and see if it’s the kind of information her method could use to answer the key questions we want to answer on a regular and consistent basis.  We would also find out whether the effort would provide sufficient value at a reasonable cost.

We hope to have this project teed up during December and be able to talk more about it in January.

A potential positive upside if we succeed is that commercial companies and private sector companies would be measuring the same things that the development agencies and nations are starting to measure.

That could lead to significant partnership opportunities between venture-backed companies and development agencies. The chief barrier so far has been that the development agencies speak their own agency-centric, theory-of-change language, and social venture funds and venture philanthropy funds use vocabulary adapted from the market, like risk, return and social impact.

SoCap Media is convening another Social Capital Markets event in Washington D.C. in the spring, bringing together social investors and venture philanthropy funds with development and other government agencies. If things work out, the effort with Sabina could lead to a prototype of a Rosetta Stone that we could unveil, in beta, and subject to massive transformation and evolution, at that event. 

Kevin Jones is a cofounding principal of Good Capital, an investment firm that accelerates the flow of capital to enterprises that use market forces to create large-scale social change. Jones is a successful serial entrepreneur, angel investor, and cofounder of Social Capital Markets, the groundbreaking conference on social venture investing.

Posted by Kelsey Walker

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This IS the Rainy Day

Our colleagues at Philantopic have been posting major foundations’ statements on the current economic situation. With the happy exception of the Gates Foundation, the words “grow our payout” are conspicuous by their absence from these statements–and even Gates modifies the phrase with the unwelcome word “less.” Typical of the statements is the one from the Voldemort Foundation [name changed to protect the guilty], which leads with the all-important question, “How is the Foundation doing?” As though the health of our nation’s repositories of unspent private wealth really were–or should be–everyone else’s most pressing concern.

Which leads the Nonprofiteer to wonder, not for the first time, why our sector pays any attention to anything written by a foundation executive which omits the words “Pay to the order of.” If now is not the time to increase foundation payouts–when governments are strapped, businesses are shaky, and individuals are tapped out–when would be? And if it’s never time to spend more than 5 percent of charitable money on charity, what is the justification for the foundations’ tax-favored status?

This point was made several months ago more calmly and thoroughly by Steven M. Teles at the Reality-Based Community (a broad-spectrum policy blog edited by the Nonprofiteer’s brother). He was right then, and is even more right now, when he pointed out that increased payouts are only a bad idea “if your basic mission is to stay in business forever. That’s not the purpose of charitable foundations. Their purpose is to support groups and causes that reflect the objectives of those who endowed the foundation in the first place.”

Mr. Teles advocated “shaming” foundations into assuming this component of their responsibility. Absent any evidence that foundations feel shame, the Nonprofiteer advocates taxing them into it.

If not now, when? And if not the foundations, who?

Kelly Kleiman, who blogs as The Nonprofiteer, is a lawyer and freelance journalist whose reportage and essays about the arts, philanthropy and women’s issues have appeared in The Wall Street Journal, Washington Post, Christian Science Monitor and other dailies; in magazines including In These Times and Chicago Philanthropy; and on websites including Aislesay.com and Artscope.net.

Posted by Kelsey Walker

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Recession Is Prime Time for Giving Sector

Times are tough and getting tougher, and the giving sector needs to step up and lead.

Even in good times, nonprofits are overworked, underpaid, underappreciated, always scrounging for support, and always under pressure from givers and funders to build their operating capacity and show their impact.

Now, instead of fearing the worst from the sinking economy and capital markets and hiding its collective head in the sand, the giving sector must dig deeper to better cope with urgent social needs that will only get worse.

Nonprofits should be laser-focused on serving their clients, streamlining their operations, minimizing their risk, sharpening their message, and understanding and engaging their donors, funders, and partners.

Using passion, metrics and compelling stories, nonprofits must make crystal clear the needs they address and the impact they have, helping charitable foundations, corporate giving programs, and individual givers see the need to give more.

And givers and giving organizations need to pay closer attention to the real operating needs of nonprofits and the rising demand they face for services.

In short, the giving sector needs to return to its roots, focusing on the nuts and bolts of serving clients well, running smart shops, and securing the right resources.

Coping tools for nonprofits in the recession will be the focus on an online webinar Dec. 9 sponsored by the Philanthropy Journal and featuring a panel of national experts, including Eileen Heisman, president and CEO at the National Philanthropic Trust; Doug Bauer, senior vice president at Rockefeller Philanthropy Advisors; and Jennifer Pryce, director of advocacy at the Nonprofit Finance Fund.

The panel will examine how nonprofits can build their organizational capacity, minimize their risk, make contingency plans, approach givers and grantmakers, build awareness about their cause and their needs, and make their fundraising case.

In tough times, the challenge for the giving sector is to be the best it can be, with nonprofits and givers alike looking for ways to dig deeper and work smarter to help make our communities better places to live and work.

Todd Cohen, a veteran news reporter and editor, is editor and publisher of Philanthropy Journal, an online newspaper published by the A.J. Fletcher Foundation in Raleigh, N.C. Cohen has taught nonprofit reporting and media relations at the University of North Carolina at Chapel Hill and at Duke University, and regularly speaks on the topics of nonprofit media relations and trends in the charitable world.

Posted by Kelsey Walker

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Making Nonprofit Collaboration a Foundation Strategy: The Lodestar Foundation

How One Foundation Found a Way to Ethically Support Collaboration Strategies for Nonprofits

In my recent Internet wanderings, I came across the work of a fascinating foundation which devotes much of its giving to support nonprofit mergers and partnerships. It’s called the Lodestar Foundation, and its president, Lois Savage, kindly agreed to be interviewed for this blog posting.

Mission Plus Strategy: How did the Lodestar Foundation decide to support nonprofit collaborations, mergers, and other cooperative activities as a major strategy for your philanthropy?

Lois Savage: Since Lodestar’s inception 10 years ago, our mission has been to support and leverage the growth of philanthropy in two ways:

1. Through capacity-building of organizations directly promoting philanthropy, volunteerism and public service (community foundations, venture philanthropy groups, volunteer centers, etc.)
2. By maximizing the efficiency and effectiveness of grant funds. Because Lodestar’s chairman, Jerry Hirsch, and I had had personal experience with nonprofit inefficiencies and ineffectiveness stemming from overlapping missions and duplication of efforts, we adopted the strategy of supporting long-term collaborations as a way to maximize the impact of our grants in furtherance of our second objective.

Mission Plus Strategy: Do you feel that this strategy has proven out over time? How many grants have you made and what is the range of your grants?

Lois Savage: We have numerous examples of the synergistic value of collaboration (nonprofits being able to achieve more impact through collaboration), the efficiencies achieved through collaboration, and the leverage we have achieved by funding collaborations. As for some general conclusions, we have learned that the most durable collaborations are initiated from the ground-up, not top-down, and that while investment in this strategy is risk capital—not all collaborations will survive—there are good lessons to be learned from each project. We have funded approximately 30 collaborations and mergers. About 15 percent have either dissolved when funding stopped or not progressed to a full-fledged collaboration. The range of our grants has been from $5,000 (for a consultant to determine whether a nonprofit should merge or go out of business) to $3,000,000 (for a consolidation of homeless-serving agencies in a one-stop-shop campus). Most of the grants are in the $10,000 to $40,000 range.

Mission Plus Strategy: I am very excited about your newest initiative, The Collaboration Prize, a $250,000 cash prize for the best nonprofit collaboration in the U.S. Can you tell us more about it?

Lois Savage: In the spring of 2008, we launched “The Collaboration Prize” as a means to uncover successful collaboration models and blueprints that can be utilized to inform and educate the sector. We received a total of 644 nominations and uncovered a rich treasure trove of information that we are in the process of analyzing and categorizing, with the goal of making it easily available to the public. At this point in time, the 644 nominations have been pared down to 30 semi-finalists (listed at www.thecollaborationprize.org). A distinguished Final Selection Panel is in the process of selecting the eight finalists. The winner of the prize will be announced on March 5, 2009, during a collaboration conference in Phoenix, sponsored by the Association of Small Foundations. At that time, the 120 quarter-finalists will be named as well.

Mission Plus Strategy: The response to The Collaboration Prize is great, but it still seems that despite the benefits of collaboration strategies, they receive little notice in the nonprofit sector. Why is that?

Lois Savage: First, I think the response to the prize shows there is more of this going on than we realize. Second, collaboration is not easy—it takes time, utilizes already scarce resources, needs leadership, and requires resolving numerous challenges. Third, while the business world has voluminous scholarship on mergers and other restructuring models, there is no counterpart body of knowledge in the nonprofit sector, so models, blueprints, and guidance are extremely limited. Fourth, there is no secure network or marketplace (no “dating service”) where nonprofits can meet prospective partners or otherwise discuss collaboration issues with each other. Finally, almost no funding is available to assist nonprofits in facilitating the collaboration process. 

Mission Plus Strategy: To your last point, donors sometimes worry that if they create a specific fund for collaborations, then nonprofits will be driven by the funding opportunity to try collaborations. Has that been your experience?

Lois Savage: There is a big difference between program grants that require collaboration as a condition and capacity-building grants that facilitate collaboration. The former grants are funder-mandated and can drive the collaboration process; however, our grants are capacity-building grants, not program grants. We fund only collaborations that already are forming at the grassroots—our funding helps them complete the collaboration. The funder-driven collaborations generally are tied to a specific program area (“we will fund your project only if you do it in partnership with another nonprofit”). 
Because the collaboration process is difficult and because our funding is tied only to facilitating the collaboration, I never have encountered, nor would I anticipate encountering, parties collaborating just because the funding for the process of collaboration is there. As noted above, what drives nonprofits is funding for their programs and services—program grants that are conditioned on collaboration can be coercive. Our grants, which facilitate the process of collaboration, would not be a driver.

Mission Plus Strategy: What advice would you give to a foundation that would like to start doing so?
Lois Savage: I think there are several ways a philanthropic community can create an environment that encourages nonprofit collaboration:

1. Provide funds for convening, on an ongoing basis, nonprofits working in the same area
2. Provide technical assistance grants to nonprofits exploring a collaboration option
3. Sponsor workshops that can provide nonprofits with tools to facilitate collaboration
4. Support programs that bring funders, government, and nonprofits together to focus on cooperatively addressing difficult community issues.

Mission Plus Strategy: When will your database on collaborations be ready for the public?

Lois Savage: Currently, we are in the process of identifying a team to organize and categorize the prize data and design a Web site that will make the information easily accessible. We are hoping to have the site operational by March, 2009.

Mission Plus Strategy: Thank you Lois, for sharing your thoughts on the subject of nonprofit collaborations. Readers who would like to find out more about the Lodestar Foundation or the Collaboration Prize, can go to:http://www.lodestarfoundation.org/index.html.

Jean Butzen, Mission Plus Strategy consulting, specializes in mergers and alliances in the Chicago area.

Posted by Kelsey Walker

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Foundations Need to Kick Fixation on Themselves

Foundations just do not get it.

With nonprofits and the communities they serve trying to cope with the worst economic crisis in the U.S. since the Great Depression, many foundations still act as if they are the only ones suffering.

A new effort known as the Philanthropic Collaborative says it wants to defend the giving sector from any federal policies that might emerge to address the recession.

But the effort simply continues the war big foundations have been waging for years against efforts to require they give more and disclose more about who they are and how they operate.

A report prepared for the Philanthropic Collaborative estimates the average return on every dollar in grants and support from private and community foundations totals $8.58 in direct, economic-welfare benefits, or a return of $367.9 billion on $42.9 billion in grants and other support in 2007.

While that sounds like a great return on investment, foundations could do a lot more and have an even greater impact.

A separate report prepared for Grantmakers for Effective Organizations says foundations have failed to practice what they preach.

Grantmakers themselves, along with nonprofit leaders, agree foundations should improve the type of financial support they provide, including support for nonprofit operations and multi-year support, and should improve their relationships with nonprofits.

But the report says grantmakers are giving a median of only 20 percent of annual grants to general operating support, and that only 36 percent of foundations surveyed solicit feedback from grantees.

“The study seems to suggest that most grantmakers see themselves as an island,” says Beth Bruner, board chair for Grantmakers for Effective Organizations. “The sense of reaching beyond the intellectual and operational corpus of the foundation is rarely there.”

Charitable foundations and corporate-giving programs are quick to tout their generosity and preach to nonprofits about the need to be more effective, collaborative, strategic and transparent.

Yet a top priority for foundations has been their fierce fight against efforts to require they be more open about their own operations and increase to 6 percent from 5 percent the share of assets they must pay out each year in grants and overhead.

That fight, in which they have invested millions of dollars, argues they can police themselves and that increasing the payout rate would deplete their assets over time and force them out of business.

And now, with the value of their assets plunging, foundations have stepped up their whining.

But now is precisely when foundations should be making good on the investment taxpayers have made in the form of the tax-exempt benefits foundations and their donors enjoy.
Foundations need to pull their collective head out of the sand and take a good hard look at themselves and the needs of nonprofits, and start working harder to improve the operations and impact of the giving sector on the urgent needs our communities face.

Todd Cohen, a veteran news reporter and editor, is editor and publisher of Philanthropy Journal, an online newspaper published by the A.J. Fletcher Foundation in Raleigh, N.C. Cohen has taught nonprofit reporting and media relations at the University of North Carolina at Chapel Hill and at Duke University, and regularly speaks on the topics of nonprofit media relations and trends in the charitable world.

Posted by Kelsey Walker

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Generations Converge at the Intersection of Money and Meaning

The social capital markets are convening at the intersection of money and meaning. Sometimes that intersection acts like an asset class, and sometimes it shows up more as a movement driven by a passionate desire to get more out of the professional part of life than the exchange that traditional business offers.

The most vital element in the social capital markets is the capital that shows up on two legs, rather than on a balance sheet as a new investment. That influx of new people is what’s starting to tip the balance as this movement heads toward the mainstream. The flow has not let up since the Wall Street meltdown. The people who were committed to social enterprise, to financially sustainable, mission-focused business as the way to make a difference in the world, are no less committed. In fact, the problems they are tackling, from alternatives to predatory payday checking businesses that pray on cash-strapped poor people, to solutions like roof-top gardens that green the inner city, are growing.

The number of new people wanting to join them, eager to get involved, is growing as well; the downturn has created an important inflection point where people are willing to examine and even start walking away from existing beliefs that kept them enmeshed in the old-style, greed-is-good market system.

As I encounter this new influx of people when I speak at an event, or when they come to the events we put on, I’ve started to use a generational filter to put them into context. That’s because how they enter, what they expect, and what they have to learn or how they have to compromise seems to differ according to whether they are a millennial (roughly 30 and under), a Gen X’er (30s and early 40s), or a boomer (mid-40s to late 50s).

The millennials are, in large part, not buying into the system. They seem to be naturally entrepreneurial, wanting to create their own initiatives, while they live five to an apartment.

The Gen X’ers who have heard the call are often stuck; they’ve got kids, mortgages, or at least nice apartments and have gotten used to regular paychecks. But when they can manage to make the switch, they have a decade of practical and professional experience on the millennials. Their professional skills are sometimes the exact right fit for the problem of a particular social enterprise at a particular point in its growth.

If you find the right ones for the right companies, they can often manage to deliver the perfect injection of professional skill for a short consulting gig that doesn’t make them leave behind the day job that’s paying the rent. And, since most social enterprises, at whatever stage of funding, are often cash-strapped or working within tight budgets, the Gen X’ers are a core group that is providing the movement cum asset class an essential nudge forward.

Working with them often requires a long engagement by the funder or advisor or board member who’s trying to round up the right ecosystem of talent to push a particular social enterprise toward its full social and economic potential. They often need some level of career counseling as they learn to put together the new, meaningful part of their professional life with the other part that’s paying the bills.

My own group, baby boomers, is often the most difficult to work with. The problem is, boomers have often been successful and kind of suddenly wake up and realize that the meaningful part of their life has been segregated from the professional part. They have a legacy problem: “Oh no, this can’t be all that I’ve done. How did I get to this place? I need some more meaning in my professional life right now.” There’s a real opportunity for someone to develop some kind of career change curriculum or practice for both Gen Xers and boomers.

It often takes boomers a couple of years to realize their skills are not directly transferable, that the nonprofit-infused social capital market is a different culture with different rules and norms, and that their habits of command and fast action run into barriers they don’t see coming. That’s about how long it took me; it may not take others as long.

I tell boomers it’s like being transferred to Japan; there are customs that you don’t recognize, that you can’t change, and that you have to pay attention to; walls you will run into that you didn’t see coming. When I encounter recent cash-outs or early retirees, I try to send them off on a quest. Start going to the events in the space, become a mentor to a raw student startup in a social venture competition or a particular nonprofit and learn the different kinds of funding and execution challenges facing businesses with an embedded social mission.

The overlaps of the three generations are pretty interesting as well; boomers and millennials are natural allies; they are both impatient and unwilling to do it the old way. They can work together on projects well, but longer-term engagements can be more difficult. Boomers are used to long-term commitments while millennials reassess the link between their engagement and meaning more often; but I’m seeing a lot of potential as they learn to figure out the roles of experience and enthusiasm.

The desire to take the next step into social capital markets may be just as strong for all three generations. For the short term, however, it seems to me the Gen Xers, the ones who are in some ways stuck, are able to provide a social enterprise the most bang for their scarce bucks. They don’t have the habits of power to unlearn that the boomers do. And unlike the millennials, who continually question their engagement, Gen Xers are used to taking on a particular task and working until it gets done. They have 10 years of honing their professional skills, and are thrilled when their particular talents can be the answer to a mission-focused business at an inflection point.

This is just a tentative hypothesis, based on gathering a lot of observations. I don’t consider them rules or a methodology. And that is the real problem; I wish somebody would make their own version of this concept into a methodology and maybe a career counseling and curriculum business. The biggest gap I see is a way to scale the intake, evaluation, and assessment and matchmaking processes as these three generations work their way through the intersection of money and meaning and try to find a way to make a difference helping or starting a social enterprise.

Kevin Jones is a cofounding principal of Good Capital, an investment firm that accelerates the flow of capital to enterprises that use market forces to create large-scale social change. Jones is a successful serial entrepreneur, angel investor, and cofounder of Social Capital Markets, the groundbreaking conference on social venture investing.

Posted by Katie Harrington

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How to Fund Nonprofit Mergers and Partnerships

One of the questions I’m seeing pop up frequently on listservs lately is: Where can I go to get funding for a merger? It’s a good question. If you don’t have enough unrestricted funding available to pay for your I.T. system, chances are you don’t have funding available to pay for a merger or partnership. These strategies can be costly depending on the number of entities involved, their size, and the complexity of the deals. Here is where I recommend looking for funding for merger costs:

1.   Look to each nonprofit’s current donors. Even if your current donors do not specify that they fund merger and partnership expenses in their guidelines, if they are invested in your development as a nonprofit they may be willing to consider a one-time request from you for merger or partnership costs. Foundations usually see themselves as partners with their grantees; if they can be convinced of your business case to merge or partner with another nonprofit and if funding is available, the donor will often agree to make a grant towards the consolidation budget. Now, more than ever, donors are showing interest in nonprofits merging.
2. Check the guidelines of all the capacity-building grant programs among your community’s donors. Many foundations have changed their capacity-building guidelines to address the current difficulties that nonprofits are experiencing. One of the changes they are making is to include the costs of mergers and partnerships. For instance, my own community foundation, The Chicago Community Trust, changed its guidelines for its Basic Human Needs program, which provides human service funding in the Chicago metropolitan area. In response to the need to assist with stabilizing the nonprofit sector, the Trust created several priorities, one of which is funding costs related to merger/consolidation or building alliances between organizations. That is a recent change. The Council of Community Services of New York State sent out a press release recently announcing that they are providing grants of $2,000 for merger, consolidation or subsidiary development. Watch for more guideline changes supporting these types of strategies in your community.
3. Research national funding opportunities. These may be possible if you represent a nonprofit organization and are receiving grants from national philanthropies. If you aren’t getting these types of grants now, but believe your merger to have significant implications for your particular corner of the nonprofit world, then I would approach appropriate foundations after doing my research to see if they would be open to a discussion about a funding opportunity for a merger or partnership. Obviously, if you have a relationship with a philanthropy it makes the process easier; but I would not necessarily let the lack of an existing relationship stop you from trying. One foundation you should definitely research is the Lodestar Foundation based in Phoenix, Arizona. They have a specific strategy to fund nonprofit mergers and partnerships and will do so outside of the state of Arizona if there is a significant strategic incentive to do so. Check out their web site for more information and to see if you think your project would qualify.
4. Look for in-kind contributions towards consolidation costs. It is typical to get various consolidation costs donated, especially legal services, but be careful about this. The legal services on a nonprofit merger are very important and are not the same as a for-profit merger.  A common mistake that attorneys make who are brought in on a nonprofit merger is to treat these consolidations the same as a for-profit deal.  They absolutely are not. One attorney represents both parties in a nonprofit merger. Be particularly careful about the type of in-kind services you use in the due diligence phase of a merger or joint venture.

Though funding new initiatives in the next few years may be nearly impossible, the area of nonprofit mergers and partnerships may turn out to be an exception to this given the support this strategy seems to now be generating from the foundation community.
Do you have other good ideas about funding mergers and partnerships? If so, I would love to hear about them. Write in a comment below so everyone can read them.

Jean Butzen, Mission Plus Strategy consulting, specializes in mergers and alliances in the Chicago area.

Posted by Kelsey Walker

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Power Politics in the Giving Sector

The scrum is intensifying within the giving sector for clout with the Obama administration.

Groups and coalitions like Independent Sector, the National Council of Nonprofits, the Johns Hopkins Center for Civil Society Studies, America Forward and Service Nation have weighed in with ideas the administration should consider in addressing the needs of nonprofits and giving.

Two separate groups of nonprofit leaders reportedly are set to meet this week, one on Monday, apparently with the Obama transition team, and another on Tuesday and Wednesday, possibly with at least one member of the team or someone close to it.

The focus of both meetings is to develop and promote a nonprofit agenda.

According to sources, those meetings may include consideration of:

• A plan Independent Sector has circulated privately for a $15 billion “bridge loan” program the federal government would administer “with loans disbursed to eligible nonprofits through a network of qualified financial assistance providers.”
• A proposal by Service Nation for $3 billion in stimulus spending for nonprofits.
• A proposal by Johns Hopkins for public funding to build the capacity of nonprofits.
• A possible new office in the Obama administration that will focus on social innovation.

The press office for the Obama transition team has failed to return repeated phone calls about its plans for addressing the needs of the giving sector.

Nonprofits should indeed be pushing the incoming administration for a greater voice in helping to shape the policies that affect nonprofits and the communities they serve.

But as has too often been the case in the giving sector, the voices dominating the conversation are big nonprofits, big foundations and the big trade groups that represent them.

And the increasingly powerful class of social entrepreneurs that has emerged in the last decade seems to have been particularly effective at catching the ear of the Obama team.

Lost in the scramble for power by the giving sector’s power brokers seems to be the voice of smaller nonprofits, which make up the bulk of a sector that represents five percent of gross domestic product in the U.S., 10 percent of its workforce and the best hope for addressing our biggest social problems and their root causes.

What seems to be cracking wide open is a longstanding fault-line in the giving sector, with big nonprofits, big foundations and social entrepreneurs positioning themselves to push the new administration to adopt a giving-sector agenda that mainly rewards big nonprofits, big foundations and social enterprise.

Falling into the abyss will be what America really needs – an Obama agenda that addresses the urgent social problems most nonprofits are struggling to address, and the critical operating challenges they face.

And while President-elect Barack Obama’s pledged emphasis on volunteerism and public service will be essential to help address those problems and challenges, it runs the risk of perpetuating a giving-sector mindset that for far too long has treated nonprofits as an underclass that should swallow low wages and hand-me-down resources.

Solving America’s big social problems will depend on a thriving giving sector.

That will require regulations that promote a charitable marketplace that is fair, that requires nonprofits and foundations to be more open, and that increases, from 5 percent, the share of assets foundations must pay out each year for grants and overhead.

It also will require that any government spending or incentives for the giving sector be inclusive and give all nonprofits, not just big ones, access to the resources and tools they need to compete and operate effectively in developing and delivering programs, strategies and policies that will make our communities be better places to live and work.

All nonprofits should get an equal shot at whatever government funds or incentives are available to build their capacity and help them operate.

So the critical role of distributing those funds should not be handed to the big trade groups that represent big foundations and big nonprofits, often to the exclusion of smaller nonprofits, an exclusion that limits their ability to address the challenges they face and the needs of their constituents.

Todd Cohen, a veteran news reporter and editor, is editor and publisher of Philanthropy Journal, an online newspaper published by the A.J. Fletcher Foundation in Raleigh, N.C. Cohen has taught nonprofit reporting and media relations at the University of North Carolina at Chapel Hill and at Duke University, and regularly speaks on the topics of nonprofit media relations and trends in the charitable world.

Posted by Kelsey Walker

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Competition vs. Cooperation at the Base of the Pyramid (BoP)

There are two competing philosophies that, at first glance, seem to both provide value to the base of the pyramid (BoP) approach – competition and cooperation. In my mind, the BoP theory is as close as any to a “free-market” approach to development, as it promotes competition that will bring the best products and services to meet unmet demand. Competition is a part of a self-regulating market. It inhibits price-gouging, encourages multiple product and business model designs, and provides consumers with choice – all key tenants of the BoP philosophy.

However, as organizations working at the BoP compete, their focus can shift – from the customer to the competitor. If competition is not dealt with properly, it becomes a battle of resources and reputation, instead of a fight to serve the poor in the best way possible.

A similar phenomenon has plagued the NGO community over the years, and this is partially caused by serving two masters – the “client” on the ground and the “donor” (agency, charity, government) in the developed markets. Were the NGO community unconcerned about serving the latter, we would probably not see as many fancy websites or media releases – but the truth of the matter is that we need both constituencies.

I am not saying that we do not need BoP organizations to engage in competition on the ground, but rather that from what I have seen that is not where the battle has been waged.

From my perch at the William Davidson Institute, I have seen that as competition heightens, resources and energy shift away from improving direct delivery of goods and services towards building legitimacy in established markets. Leaders tell their teams: we have to have a case study written about us; it is time to re-brand ourselves; our Web site needs a facelift; why don’t we try to co-brand with a company, etc.

When it comes to organizations that are attempting to work at the BoP, but still reliant on legitimacy (i.e. funding and talent) from developed markets, there may be value in cooperation — a word that can leave free-marketeers shuddering with fears of inefficiencies.

Why cooperate? According to NextBillion.net’s Rob Katz, the base of the pyramid market is still largely a free-for-all.  The vast, untapped nature of the market means that it will take numerous organizations, working together, to spark more interest and investment in the BoP before the stakes are high enough to worry about stashing resources.

According to Katz,

“I would note that no VC fund in its right mind cooperates with its direct competitors, but it is a testament to (a) the size of the market and (b) the sub-optimal state of the field that Acumen Fund and others are looking to cooperate as much as we are when it comes to supporting small and growing businesses at the BoP. If this were a truly commercial opportunity, we could not be working together as we do. The fact is, it is still VERY much a hybrid space, and we need to band together to create a commercially viable, investable asset class. That’s why there’s plenty of cooperation. 

“I’m not the only one who thinks so, either. Brian Trelstad at Acumen Fund and Willy Foote of Root Capital have both articulated these ideas to me recently, and each notes that the need to cooperate in a hybrid space is what’s driving the growth of the new Aspen Network of Development Entrepreneurs. Think about how microfinance has grown – 30 years ago, non-commercial, hybrid microfinance institutions were all banding together at conferences. Gradually, with a lot of philanthropic support, they’ve developed a real industry, and now microfinance is a commercial, investment-grade asset class. We need to do that with small and growing businesses serving the base of the pyramid market.”

Despite the benefits of cooperation, and the numerous networks that have been established to promote cross- pollenization in the field, such as ANDE and PDMS/Pulse, BoP organizations, like any business or NGO, are concerned with their own growth and survival.

Take talent, for example. The war for talented individuals with the skills and the passion to work at the BoP is intense. If an employee at a U.S. intermediary organization were to decide that he or she may be better suited for a project on the ground, how likely is it that his or her employer would say, “Oh yes, that sounds great, we want you to have the greatest impact possible.”

It is much more likely that the organization would do everything in its power to hold on to that highly-skilled person, regardless of whether or not it resulted in the greatest good for society. This is partially because we believe that our organization, and our cause, with which have sacrificed so much for, must be doing the most good.

Let’s take another salient example – intellectual property and technology rights. In the field of transporting water, there are many competing designs. The producers of the Hippo Water Roller, a South-African based design, have chosen to not patent their technology. Co-founder Cynthia Koenig told me that this is because:

“Rather than trying to control our design, we’d prefer to serve as an inspiration for similar tools. After all, we’re trying to solve a problem, and realistically, we won’t be able to distribute Hippos to all the 1.1 billion people who lack easy access to water.”

It’s main competitor – The Q-Drum, which is also located in South Africa, has chosen to take out a patent for its similar design. I’m not saying that either approach is better. In fact, founders of both organizations may believe that their approach to competition vs. cooperation may result in the best outcome for the BoP. Many staunchly believe that design for the BoP should be open source, but others point to the fact that patents can create incentives for innovation and result in better quality control. Which approach results in the greatest good for the greatest number?

Maybe the inherent enigma is tied to the fact that most BoP organizations are still serving the dual interests of talent, donors, and media in the developed world while providing on-the-ground services to customers that probably can’t even read their glossy English Web sites. However, there has certainly also been a push for greater cooperation in the BoP space, as we have learned from our NGO colleagues. In my mind, there is value in both cooperation and competition. I think that there is something to be found in the delicate balance of bringing together diverse perspectives on the back-end to establish a market of free competition that leaves the fate of the organization in the choice of the end-user.

Grace Augustine is a research associate with the William Davidson Institute, an educational institute focused on researching and supporting organizations in emerging markets. She writes for the NextBillion blog and has an interest in economic development and clean technology for the world’s poorest citizens.

Posted by Kelsey Walker

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Mission Related Investing for Individuals

In my column on the future of wealth management and philanthropy that appeared in Wealth Manager magazine last November I wrote:

“Mission related investing (MRI) is the term used to describe investments made by philanthropic entities in the pursuit of both financial and social returns. Unlike traditional socially responsible investing that relies on “negative screening”—the avoidance of public companies that do not pass certain social criteria—MRI implies proactively seeking investment opportunities that produce a blend of financial returns and social impact that are in line with the philanthropy’s mission. Still an emergent issue, MRI is characterized by limited deal flow, especially in deals that have minimums low enough to allow widespread participation. But MRI brings philanthropic advising directly into the domain of the wealth manager.”

Now, it appears that the Calvert Giving Fund has taken a significant step towards increased deal flow and lower minimums that should make it much easier for wealthy individuals and smaller foundations to participate in a strategy that has largely been the domain of institutional foundations.

The Calvert Giving Fund is a national donor advised fund. Like Schwab Charitable, Fidelity Charitable Gift Fund and the Vanguard Charitable Endowment, Calvert provides low cost donor advised fund administration without providing advice on where to give. While structured as a nonprofit, the group is affiliated with Calvert Investments, a leader in socially responsible investing.

For some time the Calvert Giving Fund has offered social responsible investment options to their donor advised funds, as well as “community investment notes” that pay a below market rate of return and finance community development projects. Now they’ve added a Global Impact Ventures Platform. The platform currently offers access to five mission related investment options:

• Acumen Fund: 10 year Senior Note (debt), 3% interest either paid or compounded into the principal
• LeapFrog Investments: Equity Investment into Limited Partnership with 10 year life
• MicroVest: 7 year equity limited partnership
• Public Radio Fund: Promissory Note, 3 years at 0% or 5 years at 4%
• Root Capital: Promissory Note, 3 years at 3% or 3 years at 0%, senior tranche

The investments all offer social impact in addition to a financial return. You can read summaries of the social impact potential here.

The really big news is that there is a minimum of only $25,000 to invest in each fund. Community foundations and national donor advised funds have a huge opportunity in the MRI space, because they can aggregate their donor/client’s investments into an investment in a fund like those above and count as a single investor. In other words, while a certain investment might have a $250,000 minimum, a community foundation or national donor advised fund can bring 10 of their donor advised funds in at $25,000 each and reach the minimum.

If an investment advisor or individual wants to invest in traditional profit driven investments, they can open an account at Schwab or Fidelity and have access to thousands of mutual funds, every publicly traded stock and bonds. If you buy stock, you don’t have to call the company, you buy it directly on the broker’s platform. Same thing if you buy a mutual fund. Now the Calvert Giving Fund has created a platform for mission related investing that integrates with existing financial markets.

Very cool. I hope that they are successful in marketing the program to advisors and individual philanthropists. I also hope that institutional foundations that care about mission related investing make some investment on the Calvert platform to help them grow.

Sean Stannard-Stockton is a principal and director of Tactical Philanthropy at Ensemble Capital Management. Ensemble Capital provides families both traditional investment management and philanthropic planning. He is the author of the blog Tactical Philanthropy and writes the column On Philanthropy for the Financial Times.

Posted by Katie Harrington

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Obama’s Call for Service, a Spur to Giving Sector

The giving sector got a big push from President Obama in his inauguration speech. It also got what should be a big wake-up call.

So while nonprofits and foundations may be riding high, anticipating a surge in giving championed by our new president, they also have a lot of work to do to be better stewards of the time, know-how and money Americans give.

In his speech, Obama called for a “new era of responsibility” and the “recognition on the part of every American” of the shared duties of “giving our all to a difficult task.”

But he also cast part of the blame for the meltdown in our economy to “our collective failure to make hard choices and prepare the nation for a new age.”

While it plays an irreplaceable role in addressing urgent social problems and their root causes, the giving sector faces serious operating challenges it must address to be effective at fixing those social problems.

Nonprofits are expected to do too much with too little, and too few are willing or able to invest in building their internal operations or to raise their voice to speak out and work for social change.

And too many nonprofits still act as if their cause entitles them to support without having to adapt their fundraising to better engage and serve the givers they depend on.

Big nonprofits and foundations also are moaning, respectively, about the difficult of raising money and the loss in the value of their assets because of the decline in the economy.

But instead of getting their own houses in order, they and the trade groups that represent them are tripping over one another in a rush to grab a piece of the government’s massive financial bailout package.

Foundations are flush with donated wealth dedicated to charitable purposes, flush even with the decline in the value of their assets because of the sinking capital markets.

Their job is to serve as vehicles for investing assets givers have dedicated to charitable causes in return for generous tax breaks the givers enjoy.

Yet foundations treat those assets as a source of private wealth and influence they make it their job to hoard and grow.

Far too few foundations are willing to give more than the five percent of assets they are required to pay out each year in grants and overhead.

And far too few are willing to use their voice or their shareholder role to try to shape public policies and the business strategies of companies in which they invest.

In a regulatory system with few rules and weak teeth, foundations operate pretty much as they wish and are accountable to no one but their own boards, boards that typically sleep at the wheel.

That lack of accountability can result in serious damage: Foundations were among the charitable investors that lost millions of dollars in the Madoff investment scandal, losses that might have been avoided had foundations been subject to greater oversight and required to disclose more about their operations and investment practices.

The economic crisis, Obama said in his speech, “has reminded us that without a watchful eye, the market can spin out of control” and that “a nation cannot prosper long when it favors only the prosperous.”

The giving sector does not operate under a “watchful eye,” and regulation of the sector favors big foundations and their wealthy donors, groups that have had the clout, and have exercised it, to successfully fight efforts to tighten regulation of them.

The giving sector can make a huge difference in the effort to fix America’s social problems.

But to truly become an effective vehicle for social change, the sector first must take a hard look at how it operates and fix what is wrong.

Nonprofits need to strengthen their operations, build their capacity so they can secure and absorb more giving, and raise their voice on important policy issues.

Foundations need to pay out more, give more to support nonprofit operations, be more open about what they do, and speak up on social change.

And government needs to do a better job policing the giving sector and making sure it operates fairly and in the light of day.

Rooted in values he called the “quiet force of progress,” the giving sector can continue to serve effectively if it is willing to be brutally honest about itself and work harder and smarter to engage and justify the “faith and determination of the American people” on which Obama said the nation relies.

Todd Cohen, a veteran news reporter and editor, is editor and publisher of Philanthropy Journal, an online newspaper published by the A.J. Fletcher Foundation in Raleigh, N.C. Cohen has taught nonprofit reporting and media relations at the University of North Carolina at Chapel Hill and at Duke University, and regularly speaks on the topics of nonprofit media relations and trends in the charitable world.

Posted by Kelsey Walker

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