Commentary: Could "philanthropic equity" revolutionize the nonprofit sector?
Nell Edgington of Social Velocity, About.com Nonprofit blog, 2/13/12
There is a fairly new concept in the nonprofit world that has the power to completely transform the sector. "Philanthropic equity" (or "growth capital") is a one-time infusion of significant money that can be used to strengthen or grow a nonprofit. [The] distinction between revenue and capital is one that the Nonprofit Finance Fund first suggested the nonprofit sector recognize. Late last month the NFF released a report demonstrating that nonprofits that raise growth capital increased services to their communities by almost four times and increased organizational revenue by 170%. And other entities that provide growth capital to nonprofits (like New Profit and Venture Philanthropy Partners) have seen similar growth for the nonprofits in which they invest. While the nonprofits [involved] tend to be very large organizations, the concept of philanthropic equity can still apply to smaller nonprofits. Social Velocity has worked with a number of small to medium sized nonprofits to create a pitch for capital. Let's take the example of Charlotte Chamber Music. Elaine Spallone, [its] executive director, felt they were stuck. As a small, but beloved arts organization they had a great product, but they couldn't get beyond the vicious cycle of never having enough money, never being able to expand their presence and impact. They had a solid board, and a great vision for the future, but lacked philanthropic equity to build the organization to achieve that vision. You can read the on-going case study about [their] work to raise philanthropic equity. Charlotte Chamber Music is now actively raising capital, and it's very exciting. It's incredibly powerful to think about the implications of this concept for the entire nonprofit sector. We'd no longer see great programs wither on the vine. All it takes is the right kind of money, invested in the right place at the right time, and the solution can take off.
Commentary: Capitalization planning
Rebecca Thomas & Rodney Christopher, Nonprofit Finance Fund blog, 1/17/12
Great art is often created without lots of money and can be enjoyed for many years. Great arts organizations without the right kinds and amounts of money, however, struggle to see another day. Behind every successful strategy there should be a sound approach to obtaining and stewarding the financial resources required to support mission execution over time. This is a capitalization plan...an approach to building the right balance sheet. Specifically, [it] should address an organization's financial health and goals in the following three areas: liquidity, adaptability and durability.
- Liquidity: having adequate cash to meet ongoing operating needs
- Adaptability: access to flexible funds to adjust to evolving circumstances
- Durability: assets to address a range of future needs
Most arts organizations don't own property or have ambitious growth plans. For them, a capitalization plan that focuses on liquidity and adaptability may be sufficient. [However,] growing organizations should be clear in their capitalization plans about the resource requirements of long-term durability. Consider the case of a mid-sized theatre company that is taking the next step in its growth trajectory. Its strategic plan calls for purchasing a new facility that houses two additional theatre spaces. The organization achieves its capital campaign goal, but the costs of the building run over budget. To cover the shortfall, existing cash is depleted and a ten-year loan is required. Once the facility opens, expenses increase as more performances and staff are added. For the first time in many years, the organization runs a sizable deficit because anticipated audience growth does not materialize and loyal funders and donors have been tapped out by the campaign. Within three years, deferred maintenance on the original facility reaches a crisis point and cash on hand dwindles to negligible levels. This organization's critical error was not planning for the short and long-term capital and operating requirements of program and facility expansion. A capitalization plan helps organizations identify the range of needs that a capital campaign should address and make strategic choices about what they can realistically raise and, therefore, do.
Commentary: Philanthropic equity investments are key to growth of nonprofits
Sean Stannard-Stockton, Tactical Philanthropy blog, 3/8/11
The Philanthropic Investor seeks to invest resources into nonprofit enterprises in order to increase their ability to deliver programmatic execution. It is classic "builder" behavior as defined in George Overholser's Building is Not Buying. The Philanthropic Investor, like a for-profit investor, is primarily focused on the longer term increase and improvement in programmatic execution relative to grant size. Unlike the Charitable Giver who is looking to buy program execution that delivers a good value, the Philanthropic Investor is interested in how their grant dollars can be put to use to build the nonprofit enterprise. While nonprofit accounting does not recognize "equity" on the balance sheet, Philanthropic Investors are providing equity funding, not revenue to their grantees. The challenge facing the nonprofit field is that growing via retained surplus is difficult. Especially during the early stages of growth, most organizations require some sort of external investment of additional equity before they can grow to a level where they are able to self-fund growth out of retained surplus. I believe the lack of understanding around the role of equity in the growth of nonprofits is a primary reason why since 1970 only 144 nonprofits have launched and grown to annual revenues of at least $50 million while in the for-profit field, 46,136 organizations have crossed the $50 million revenue hurdle during the same time frame.
Commentary: Equity funds needed for partnerships between large & small theaters
Teresa Eyring of Theatre Communications Group, Grantmakers in the Arts blog, 12/8/11
[In] often invisible ways...larger and mid-sized organizations deploy financial, human and capital resources for the benefit of individual artists, smaller organizations and diverse communities. These systems of mutual support often go unnoticed by the wider public, but they are tremendously valuable. I think of the La Jolla Playhouse and its "Resident Theatre Program". Each year, a local company without a venue is selected for a year-long residency. They receive two productions in LJP's performance space --rent free. They receive sound and lighting support, as well as marketing and fundraising advice. La Jolla Playhouse doesn't receive any special grants in order to serve as home to those companies. They simply do it in order to share their bandwidth, and to support the larger cultural ecosystem. This is part of a wider trend profiled in a recent American Theatre Strategies article. Programs like Arena Stage's Visiting Companies Initiative, Steppenwolf Theatre Company's Garage Rep program, New York Theatre Workshop's Companies-in-Residence program and South Coast Repertory's Studio Series are all examples of the power of collaboration between larger and smaller theatres. One outcome of our national conversation about philanthropic equity may be a shift in the awareness and priorities of some funders to award more dollars directly to marginalized groups. Another outcome may be a series of funding strategies both to document and to cultivate more relationships and practices in order to help strengthen art-making and build overall capacity in marginalized artistic communities. In a world where there isn't enough funding to begin with, there may be clear advantages to exploring both avenues.