At The Giving Institute’s November board meeting, Rodney Christopher of the F.B. Heron Foundation and Richard Shaw of Youth Villages delivered a thought-provoking presentation on an emerging trend in philanthropy called growth capital.
The basic premise the speakers suggested is that healthy organizations can achieve greater success through investments of growth capital. Foundations seeking measurable, scalable impact (as opposed to placing restrictions and specifically directing their dollars) should carefully select the right nonprofits and make unrestricted, major, multi-year grants to increase the organization’s capacity for future revenue—both contributed and earned.
Last year approximately 200,000 nonprofits (or 16%) shut down according to the IRS, as reported by Giving USA. The overwhelming majority of these closures are attributed to financial pressures. The organizations were undercapitalized and had weak balance sheets going into the Great Recession and simply couldn’t pull themselves out. One cause was too many restricted assets and restricted endowments for underfunded programs. Simply put: not enough growth capital.
It has been common practice at foundations to focus on outcomes and measurable results directly attributed to the dollars they give. Grants come with restrictions and expectations, designated to specific program areas and capital expenditures. Funders continue to expect detailed impact reports after the nonprofit uses their money for specific needs.
I’m certainly an advocate of more accountability, but what is really going to move the needle for these organizations? More viable nonprofits need access to growth capital, defined as substantial, unrestricted multi-year gifts to grow capacity, scale and sustainability. While it has taken on many names including venture philanthropy, philanthropic equity, flexible capital and change capital, the concept is the same. It is founded on the notion that financial stability planning is critical and there should be a shift from raising only restricted capital (buildings, endowment) to raising unrestricted dollars that allow for growth. This financially positions nonprofits for a more sustainable future.
In their presentation, Christopher and Shaw discussed the shift from funder as a “buyer,” making short-term project-based grants that provide support on an annual basis with no commitment beyond current year, to the funder as a “builder,” making longer-term investments to help scale impact and stabilize the nonprofit financially. With growth capital, the funder is investing in a sound business plan and making a multi-year (3-5 years) commitment of flexible dollars. This is comparable to an investor taking equity in a for-profit company, but the financial return remains with the nonprofit, not going back to the investor.
The presenters emphasized that growth capital should only go to nonprofits that are ready to use it—in most cases they are already healthy enterprises. Characteristics include: the nonprofit’s services and products are in demand, they have a viable business model, they can show a strong balance sheet and they have excellent leadership, management and governance. It has been proven when growth capital is invested in these types of nonprofits there is great success. It allows organizations to expand programs, hire new development staff, develop new revenue generating opportunities and in general build capacity for the future.
This is a powerful concept that is gaining visibility in the foundation community . As fundraising consultants we’ve seen the power of foundations investing in nonprofits to build capacity, and we’d like to see this concept more widely embraced. For a recent article on the topic by Giving Institute colleague Leo Arnoult, visit the Giving Institute’s blog.