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JULY 2004
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."
-Mario Morino
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