Chairman’s Corner: July 2004

Toward a “Social Services Financial Industry”

by Mario Morino, Co-founder of VPP

My thanks to Bill Shore, Community Wealth Ventures chairman and VPP board member, for co-writing this column with me which is derived, in part, from our work on the report High-Engagement Philanthropy:  A Bridge to a More Effective Social Sector.

Wide-ranging Congressional hearings and the likelihood of far-reaching legislation on nonprofit practices, abuse, and oversight, are grabbing headlines and the attention of foundations and charitable organizations everywhere.  To be sure, more transparency, stronger boards, and greater accountability will be good for nonprofits.  However, the question that isn’t being addressed is the issue of effectiveness in how funds are deployed to nonprofits.  It’s an issue foundations and nonprofits should be exploring together.

Last month, VPP and Community Wealth Ventures jointly published a report, High-Engagement Philanthropy: A Bridge to a More Effective Social Sector.  The dialogues between nonprofit leaders and high-engagement philanthropists suggest that the most pressing need in the nonprofit sector is financial sustainability, especially of the nonprofit organizations that have increasingly assumed responsibility for everything from charter schools to maternal and child health.  The lack of sufficient funding to build strong and healthy organizations is what keeps the sector from leveraging its assets and knowledge to maintain its most successful organizations and help those that seek to grow and scale.

Most of the organizational challenges that the investors (funders) and investment partners (grantees) discuss in the report include lack of management depth, ability to recruit and retain leaders, inadequate investment in infrastructure, etc.  All of these problems stem from lack of growth capital or are exacerbated by it.  Greater effectiveness and access to capital are inextricably linked and the challenge facing nonprofits, funders, and policymakers alike is finding ways to increase access to capital—money to fund and grow nonprofits—and the means to distribute it effectively.

In the economic marketplace, access to capital is a naturally occurring phenomenon.  This is not to say that all businesses have access to all the capital they want or need but rather there are structures and institutions in place for business that can demonstrate a return on investment to compete for capitalization.  When a business succeeds, the capital markets respond.

In the nonprofit environment, this is simply not the case.  When a nonprofit is successful, it sees a market response but it comes in the form of an increased demand for its services, often to a saturation point.  The organization may see an increase in private donations but rarely equal to the scale of what it seeks to accomplish.  This inability to access capital turns scaling an effective and high-performing nonprofit enterprise into a Herculean task, akin to lighting a thousand fires in communities around the country without the benefit of matches but rather by relocating one log at a time from the original campfire.  This is such an inefficient and exhausting process that it is likely to wear down and wear out all those who engage in it, leaving them spent long before they achieve their goals.

High-engagement philanthropy, sometimes called venture philanthropy, arrived on the public’s radar screen a number of years ago offering a different approach to funding nonprofit organizations.  Adapting aspects of venture capital investing, high-engagement philanthropists focus on making substantial investments of both growth capital and strategic assistance in a select few high-performing nonprofits to help them build and scale their organizations.  While much has been written about this field, it is premature to judge its effectiveness.

High-engagement philanthropy often plays one of the roles that capitalization structures would play if they existed for nonprofits: pooling substantial amounts of capital to be invested in a select number organizations whose leadership and performance promise high social rates of return.  Although relatively small and formative at this stage, they create access to capital at a level that doesn’t readily exist elsewhere for nonprofits.  Like commercial investors, high-engagement philanthropists recognize that an investment that combines capital with strategic assistance and that leverages their own resources and networks is a stronger investment than capital alone.

In this way, high-engagement philanthropy may be seen as yet another step on the philanthropic continuum, not an answer in and of itself and certainly not a panacea but an indispensable stage in the evolution of a philanthropic and public policy partnership that truly meets our needs.

The volume of discussion about capital and financial services for community-based nonprofits must be turned up.  There are no hard and proven answers, but clearly more needs to be done to engage the venture capital and the broader financial services industries.  Such expertise combined with comparable expertise of the foundation and nonprofit worlds could rapidly advance the inherent financial understanding of the sector that would lead to new options and, hopefully, to the development of a “social financial services industry.”