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A Role for Corporate Philanthropy in Capital Funding?

By Jessica Stannard-Friel on January 27, 2006No Comment
Money

Do you have a grantee that stands out among the rest for its ability to do high-quality, high-impact work?  Have you ever considered, rather than simply funding its programs, helping it grow to the next level, to expand its programs or locations?  Would such a grant make sense for your company and its goals?  ICP attended a recent panel on growth funding in the nonprofit sector; below, we examine the concepts presented and their application to corporate philanthropy.

On January 18, the Manhattan Institute hosted a panel entitled “Going to Scale: A New Era for Funding Nonprofits.”  The event was moderated by Howard Husock, the Director of the Social Entrepreneurship Initiative at the Manhattan Institute and a Research Fellow at Harvard University’s Hauser Center for Nonprofit Organizations; it featured two speakers with Wall Street pedigrees who’ve gone on to apply their business knowledge in the nonprofit sector.  George Overholser, Founder and Managing Director of NFF Capital Partners, a division of the Nonprofit Finance Fund, and a member of the founding management team at Capital One Financial Corporation, was joined by Robert Steel, a Senior Director at Goldman Sachs, to discuss their experiences helping nonprofits secure the funding they need to grow to the next level.

The panel’s discussion revolved around how to help successful nonprofits grow their programs and extend their good works.  As Husock framed it, in the past, donors supported new programs as pilots, and if the programs succeeded, the government would step in with funding to allow the programs to continue to operate.  According to Husock, between government budget deficits and new wealth coming into the philanthropic sector, this presumed sequence of events has been disrupted. 

How, then, can successful organizations find the funding they need to replicate proven success?  Overholser and Steel made the case that the nonprofit sector needs a new approach to such funding, borrowing business concepts and attitudes toward growth capital.  

Growth capital, as Overholser framed it both in his speech and in his working paper “Nonprofit Growth Capital: Defining, Measuring and Managing Growth Capital in Nonprofit Enterprises, Part One: Building is not Buying,” is an investment in the firm, whether it be nonprofit or for-profit.  As defined in this article, “Growth Capital is used to build the means of production,” while “Revenue is the money a firm receives from its customers in return for products or services rendered.”  In other words, growth capital is intended to grow the capacity of a nonprofit, while revenue pays for its operations.

Overholser also argues that, in addition to covering the costs of “bricks and mortar” and similar needs, growth capital plays the important role of paying for mistakes, for the learning process that an organization goes through in its quest to become “compelling” to other funders, those who will provide the revenue it needs on an ongoing basis in order to deliver services.  Says Overholser, the “enterprise that surrounds the program” needs support growth capital and often doesn’t get enough.

Both Overholser and Steel are currently exploring how they might contribute to the development of mechanisms to facilitate the granting of growth capital in the nonprofit sector.

With corporate philanthropy ever on the mind, ICP asks the following question:  Should corporate funders provide growth capital?  Will it help them or hinder them as they seek to fulfill both social and business goals?  Providing growth capital, compared to more typical grants for operations, offers both advantages and disadvantages to corporate funders; the decision to make such a grant depends both on the quality of the prospective grantee and the unique needs of the funder.

What advantages might making a grant for capital funding offer a company?  Husock, while distinguishing between social entrepreneurs in the beginning stages of creating a nonprofit and those seeking to grow already-operating organizations, highlights synergies between corporate funders and nonprofits that approach funding with a business perspective.  “If they’re up and running, there might be a better cultural match…  They might speak the language a little bit better” than organizations without an entrepreneurial mind-set.  Overholser agrees that the business-like terms of the investment-like grant would be appealing to a corporate donor: “The equity paradigm would look familiar to a corporation.” 

Overholser says companies may appreciate that capital funding grants are “much more transparent than they’re probably used to.”  In addition, he says, “It’s a structure that allows for a naming opportunity at the enterprise level” and offers a way to create deep relationships with accountability.

In addition to these benefits to the company, Overholser argues that, “By putting in the accountability, you’re raising the possibility that the innovation leads to deployment, whereas the system we have now doesn’t have as strong a feedback loop,” and innovation frequently fails to lead to the perpetuation of successful techniques.

How, though, might making grants for growth capital inhibit a company’s ability to meet its goals?

According to Husock, “I think the bottom line would be that it’s difficult for corporations to take risks with their contributions in a way that individuals are more free to.”  He says, “I think it’s appropriate for them to be somewhat distrustful” and to focus on funding organizations for whom the funder can examine a track record, due to the “risk of embarrassment.”  Husock points in particular to the hazards of supporting social entrepreneurs “unless those entrepreneurs are reasonably well-established,” unless the growth capital will support the replication or development of a successful program, rather than an earlier phase of growth. 

In general, Overholser believes that the challenges facing companies making growth capital grants are the same as those facing other funders interested in this strategy.  For instance, he has worked to secure capital funding for nonprofits by bringing together a group of funders who accept “similar terms” for their investment.  This has the potential to complicate a corporate funder’s PR-related expectations.  In addition, while a company (or any funder) may make an ordinary gift in any denomination, with capital funding, “We’re talking about checks of between half a million and five million” dollars.

Robert Steel took a different angle when asked, at the Manhattan Institute panel, if he expected to target companies as he seeks to match interested funders with selected, high-quality nonprofits as they attempt to go to scale.  According to Steel, he expects not to target such donors, but instead to focus on wealthy individuals who can “connect with, have relationships with, and resonate with” the organization in question.

In addition to large grants, however, a company interested in helping to build a nonprofit’s capacity might also consider its in-kind assets.  Overholser calls such donations “tremendously valuable,” and points particularly to needs, among organizations attempting to go to scale, for marketing expertise, information technology knowledge, process design, analytical services, and management coaching.  In addition to these capacity-building services, these analogs to capital grants, Overholser says, “You can add to that, of course, volunteer opportunities at the program level.”  Husock agrees that corporate partnerships with nonprofits seeking to replicate their success may involve either donations or labor.

Are you interested in making a grant for capital funding?  If so, consider the nonprofit characteristics Steel has identified as predictors of success in his work to link interested philanthropists and organizations with the capacity to grow.  The organization should have:

1) A declared, clear mission and business model
2) Good governance
3) Good management
4) A commitment to metrics and measurements of outcomes
5) An interest in and enthusiasm for reporting on progress to stakeholders, against metrics and ambitions.
Source:

“Nonprofit Growth Capital: Defining, Measuring and Managing Growth Capital in Nonprofit Enterprises, Part One: Building is not Buying,” by George M. Overholser. For more information, contact george.overholser@nffusa.org

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