philanthropy

Funders Who Reward Capacity Development

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Creative and sustainable nonprofits are drawing more and more funding from "investors" while the pool of feel-good "donors" is shrinking.

You can trace much of how nonprofits operate back to the source of their funding.

The majority of nonprofits have a Development Director whose key role is not development of the organization, but development of funds for the organization. They are in charge of writing grants, reporting on grants, courting foundation contacts and major donors, managing fundraising campaigns, and basically asking for money.

In my experience, very few nonprofits see "development" beyond the role of asking for money, over and over and over again.

If we trace this back, it's easy to see the reason for this reliance on repetitive fundraising.

Historically, many foundations and donors demanded that the greatest possible percentage of their funds be invested in direct program services. In other words, donors have demanded that nonprofits spend donated funds right away, with no investment in the future.

This idea was set in stone by organizations like the Better Business Bureau Wise Giving Alliance, Guidestar and Charity Navigator; sites whose profit model was based on giving donors solid information about the nonprofits they were considering donating to, but whose lack of concern or awareness of genuine indicators of mission efficacy resulted in a long era of comparing nonprofits based on one major indicator: their "overhead".

In fact, many states (including Utah) still publish the percentage of donations invested in direct program services on charitable solicitations permits - requiring these permits to be displayed on location and making such information available online, as if it were a genuine indicator of impact that was comparable across mission focuses.

This hyper-focus on a particularly meaningless percentage has resulted in enormous pressure to pay as little as possible for everything, from space to supplies to talent. Nonprofits are expected to get everything donated and to attract bleeding hearts who will work hard in crumbling offices on the bad side of town for less money and terrible health insurance.

I was talking with several talented employees of a local nonprofit that I admire a great deal for their forward-thinking revenue models last week. I was amazed to learn that because of their location, they are approached daily by drug dealers and have to watch their young clients deal with the same interactions as they come and go from classes.

A for-profit arts school would absolutely never subject their clients to this type of environment; it's bad for business. This organization is catering to the same clientele with unique and important STEM education, yet they have not made it a priority to move to a better location. Why? Almost certainly because it would increase their overhead.

While many nonprofits are responding to opportunities for sustainability and internal revenue creation, they continue to sacrifice in ways that ultimately lead to poor performance of those initiatives, or outright failure.

However, the nonprofit culture is shifting, albeit slowly.

Family foundations are now being run by a younger generation, a generation characterized by entrepreneurship and impact. More and more corporations are investing in nonprofit grants and awards that reward sustainability and innovation. And thanks to technology, we are witnessing nonprofit and for-profit startups that are making a splashy impact, while giving 100+ year old nonprofit in the same niche a run for their money.

With this shift, those big three online nonprofit rating services finally backed away from this percentage as an indicator of mission performance with an open letter in 2013 and a follow-up letter to nonprofits in 2014.

The days of doling out $10,000 checks for feel-good programs are petering out and it's a good thing.

While I've witnessed many nonprofits deny this shift and struggle to incorporate better business models into their long-term mission strategy, the process is leading to stronger, more accountable, and increasingly sustainable cause organizations who may very well multiply their impact on homelessness, domestic violence, animal cruelty, addiction, and every other mission focus.

And much of this credit comes back to funders and donors who are willing to invest in the long game, who are looking beyond the percentage of donations invested in one-time services and reinforcing the importance of internal capacity.

Eide Bailly's Resourcefullness Award is just one example of a funder that sees the bigger picture, investing a total of $15,000 in nonprofits with creative and sustainable revenue generation initiatives in Utah, Arizona, Colorado and Minnesota (applications are due August 12th).

Here in Utah, our Community Foundation just held it's third Social Investors Forum, curating a community-wide dialogue around the importance of funding unique, innovative, and sustainable nonprofit initiatives while bringing new funders to the table who are more comfortable with "investing" rather than "donating".

Our state Arts & Museums Division invests up to $2,500 in arts organizations each year specifically to aid them in developing their capacity.

These focus changes are critical to creating long-term impact. In effect, these are genuine investments that multiply the impact of the funders. They trigger and support internal capacity development and revenue generation programs that allow the nonprofit to further its reach and its mission, year after year.

That's a donation check I want to write.

So, whether your making a personal donation, a grant award, or a creating a corporate giving program, consider reaching out to nonprofits within your mission focus area and finding out which ones are making this leap.

Invest in the long game, not low overhead, which is too often an indicator of low growth, unsatisfied employees, high turnover, and ultimately, low impact.

And for you nonprofits, invest in talented, creative minds that can challenge your status quo, and brag about how you are positioning to make a difference for now, and for the future.

Capacity Building and the Overhead Myth

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The concept of capacity building seems to be unique to the nonprofit sector, although it's immediate definition could apply to any organization, or anyone for that matter:

Capacity building or development is the process by which individuals, groups, organizations, institutions and societies increase their abilities to: perform core functions, solve problems, define and achieve objectives; and understand and deal with their development needs in a broad context and in a sustainable manner."

Within the nonprofit sector, capacity building has gained substantial attention over the years, primarily because we all created an environment where nonprofits did the opposite: their activities consumed capacity, every bit that they had.

Why do nonprofits eat away at their capacity rather than use it to build more?

1. Nonprofits are mission-driven, to the core.

There are always more mouths to feed, babies to save, and water to clean. The job is never done and the leaders we attract to serve within nonprofits are motivated by the mission, lacking the long-term perspective of a seasoned executive.

2. Funders and donors demand it.

The unfortunate truth is that private foundations, corporate funders, and many major donors are still part of the problem: they want warm fuzzies in exchange for their cash, so they only award it to nonprofits who promise to use it for direct services.

3. Government and industry organizations made capacity building a black mark of doom.

This is the holy "overhead" percentage myth. Here in Utah, as in many states, it is printed with pride, or shame, directly on your charitable solicitations permit, supposedly as a way to protect the donor.

Industry organizations, like Guidestar, the Better Business Bureau Wise Giving Alliance, and Charity Navigator, touted the overhead percentage as the single biggest determinant of whether a charity was worthy of a donation. Luckily, they have since removed the thorn that demanded service over capacity to serve and are trying to undo the damage.

The overhead percentage, if you're unfamiliar, is simply this: all of your spending on anything besides programs and services as a percentage of your total spending.

Charities have attempted to live up to superhuman standards: to perform their charitable services while spending as little as possible on leadership, marketing, fundraising, talent development, research, and organizational development.

The result is a nonprofit organization you should never want to invest in.

An ill-equipped executive team with zero experience leading an organization or managing its finances. The inability to attract any talent to it's employee pool. Poorly delivered services as employees receive zero development or mentoring. High turnover since employees are asked to perform miracles in a crappy office with no supplies or support.

Even more critical is that a nonprofit where 90%+ of funding is eaten up by services is extremely inefficient.

They cannot deliver their mission effectively because every dollar donated is just a dollar. It does not get multiplied by investing in marketing or fundraising where it could turn into 5, 10, or even 100 dollars. It cannot be invested in the salary to recruit a talented Executive Director with the experience and abilities required to do more and better.

Capacity building is the inverse of this mess. It is a purposeful investment of resources in increasing efficiency, engaging in strategic growth, and refining internal mechanisms for service delivery to become more effective.

Nonprofits have an obligation to seek new and even more effective ways of making tangible progress towards their missions, and this requires building organizational capacity.

All too many nonprofits, however, focus on creating new programs and keeping administrative costs low instead of building the organizational capacity necessary to achieve their aspirations effectively and efficiently…This must change: both nonprofit managers and those that fund them must recognize that excellence in programmatic innovation and implementation are insufficient for nonprofits to achieve lasting results.

Great programs need great organizations behind them.”

Effective Capacity Building in Nonprofit Organizations, Report for Venture Philanthropy Partners by McKinsey & Company (2001)

Which is your organization engaging in? Fear or hope?

How to Score During a Give-A-Thon

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Utah is in the midst of our annual day of giving, Love Utah, Give Utah. Founded and hosted by the Community Foundation of Utah, 400+ nonprofit organizations are working to score new donors, exposure, and prizes. What factors set apart the winners from the less lucrative campaigns?

1. Cultivate Community

The nonprofits who really stand out during give-a-thons have an established community of fans, both live and online. They don't wait until a week before or the day of the event to blast their mailing list with an appeal. Instead, they curate ongoing communication and opportunities for interaction. Just like on social media, you want to communicate for the purpose of engagement at least five times for every appeal.

Lacking this foundational component and its already the day of? You can still improve your results.

2. Invite Interaction

Spy Hop Productions, a youth media nonprofit

Some donors have reported having received more than 15 email appeals from different organizations just today. That's a crowded field, especially when you consider the dozens of work-related emails that demand attention.

Beyond the obligatory email appeals (which you should ensure include a photo or two of your purpose in action), the frontrunners have created opportunities for hands-on interaction with the mission. Some organizations are running open houses, some are having parties, and others are running telethons. Some great examples:

If you can interact in person with community members who are interested in your cause, even strangers who weren't aware that their hobbies or activities aligned with your mission, you'll generate more buzz and potential new donors.

Not sure if you can command enough participation to come off as a success? Team up with other organizations who share your donor base.

3. Seed Momentum 

The real trick during a give-a-thon is to convert strangers into fans during the event. This is an incredible feat as people are generally wary of donating to organizations or causes they aren't familiar with. However, if you can generate a lot of momentum and excitement, you are much more likely to attract unfamiliar visitors to your campaign.

Consider Noble Horse Sanctuary, a nonprofit that operates on a total budget of $58,000 and has already attracted $9,000+ from 158 donors.  This small organization has outraised 197 other small nonprofits (as of 5 PM, there are still 7 hours to go). Their results are so compelling that many of us at the headquarters for the event have talked about their mission, visited their campaign page, and checked out their website.

How do you build momentum?

  • Find vocal corporate partners to make matching grants, especially those with a large employee base and an eager marketing team ready to take advantage of the sponsorship.
  • Cultivate scheduled donations early so that you start off at midnight with a bang.
  • Task your evangelists with spreading the message on your behalf throughout the day, multiplying your network reach, online and offline.
  • Don't just communicate at your community. Spur an online Instagram and video campaign to stand out from the crowd and create online interaction.

Utah Film Center

4. Fearlessness

Finally, there is a fearless quality among many of the nonprofits who have capitalized on the day. They volunteered to stand in front of the cameras for the stream-a-thon, they joined in the honk and waves, they asked local celebrities to hold up their sign for a photo opp, and they reached out to real celebrities on social media for a retweet.

When it comes to standing out during a free-for-all fundraising campaign, a little bit of an edge helps.

Good luck to all the Utah nonprofits and those of you with your own community give-a-thons coming up. If your community or state lacks an annual day of collective philanthropy, team up with your local community foundation and make it happen!

Social Impact Bonds are Booming

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Social impact bonds are fairly new funding vehicles for social impact, with the first agreement dating back to 2010; however, the model was first advocated 22 years prior to that by a New Zealand economist in 1988. As with all things funded by the U.S. government, these bonds have a super appealing nickname: Pay for Success Initiatives.

What is a Social Impact Bond?

A social impact bond  brings together private investors and public dollars to solve tough social issues. It's essentially an agreed upon bounty. Ideally, the business-minded investors fund innovative projects that make a substantial dent in an entrenched problem that is costing the government X dollars. In exchange for funding the successful project and reducing their costs, the government entity pays an agreed upon amount, theoretically sharing the cost savings they realized.

In the past few weeks, three new social impact bonds were announced nationwide:

Goldman Sachs, billionaire John Arnold, and other partners just funded the largest social impact bond ever. As of yesterday, these philanthropic investors set the record with a $27M social impact bond aiming to prevent young men in Massachusetts from returning to incarceration. In 7 years, if the project realizes the projected 40% reduction in in incarceration among program participants, then the investment is paid back with 5% annual interest by the Massachusetts' Juvenile Justice Department.

The funding from the investors is split between a large nonprofit, Roca, and a nonprofit advisory firm, Third Sector Capital Partners. Roca will be doing the heavy lifting, working with just under 1,000 young men, ages 17-23, to achieve the desired outcomes.

This begs the question: What makes this any different from direct government funding of nonprofits, which has been going on for decades?

There's a lot of money on the line; therefore there's greater accountability to the outcomes which will theoretically spur increased collaboration and innovation, leading to better outcomes than have been achieved through the government-nonprofit funding model.  In this example, if the initiative fails, both the investors and the nonprofit will suffer, as the nonprofit has agreed to defer $3.3M in fees.

Additionally, the government doesn't have to pay unless the results are achieved, which is a lot more palatable to tax payers who are funding these social programs. In the Goldman deal, Massachusetts stands to save between $1M and $45M; the corresponding "success payments" range from $0 to $27M.

New York State broke new ground just weeks ahead of the Goldman-Massachusetts deal with the first state-led social impact bond with a $13.5M deal, which was also the first-ever to be distributed through a leading wealth management platform, Bank of America Merrill Lynch, to qualified private and institutional investors.

Similar to the Massachusetts bond, the deal targets the ultra-expensive criminal justice system, aiming to expand comprehensive reentry employment services to 2,000 former inmates in NYC and Rochester in an attempt to reduce recidivism and re-incarceration.

On the other side of the country, California also announced a social impact bond this week. The much smaller $2.5M bond is more generalized, aiming to improve social services throughout the state over the next two years by engaging nonprofit and government leaders in an active learning group. The initiative illustrates some hesitancy - hoping to incubate the social impact bond concept through the learning group toward expediting successful future agreements.

Are Social Impact Bonds Smart? 

Critics suggest that because the public funds must be budgeted, regardless of whether the project works, social impact bonds don't actually increase capital for social program, instead displacing it from other programs. Additionally, it's expensive to set up the complex financial and legal mechanisms required to structure such agreements.

It's still too early to tell if any initiatives funded by social impact bonds have or will produce promising (and profitable) results, but many would probably agree that any innovative idea for better social outcomes from public funding is worth a shot when we only pay for real results.

Small donation...MAJOR impact

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It's easy to become so overwhelmed by the enormity of the social problems we care about to become apathetic and do nothing. The amount we have to give seems too small to make any real difference. A mechanism that turns that mentality on its head is gaining increasing popularity across the nation: giving circles.

Giving circles bring everything together to make giving easy, informed, social, and impactful, which is how giving ought to be experienced. By 2007, there were at least 400 giving circles nationwide, engaging more than 12,000 donors, and having given nearly $100 Million.

The basic premise: Small donations collectively fund larger, more impactful gifts decided by members. The magic is in the connections to a community rallying around a cause. A 2009 study of giving circles revealed that members give more, give more strategically, and are more engaged in their communities.

Giving Circles create opportunities to network with people who share your values, learn more about your cause, and become informed on the diverse nonprofits working to create solutions. These organizations are often volunteer-run, ensuring that all, or very nearly all, of your donation goes to your cause.

Importantly for the nonprofits, a larger grant from a giving circle means more than just funding. They gain valuable exposure to individuals who give through the process of deciding the grant and have the opportunity to gain additional exposure through media coverage.

A Peek Inside:

I recently became a member of the Utah Women's Giving Circle. The concept simply made sense to me, but I never expected the experience to be so informative and meaningful.

This last Tuesday, we came together to vote to distribute $20,000, with a ballot of 12 nonprofit organizations. I am already embedded in the nonprofit sector in Utah, but I was completely unaware of several of the organizations on the list prior to the voting process.

However, the point where the awards were announced was what converted me into a lifetime advocate.

With representatives from the nonprofits present, the excitement and tension in the room was tangible. The response from these nonprofit leaders was an experience I will never forget.

2013 Grantees

These critical organizations in our community didn't have to go begging for these dollars and they didn't have to search out our group and complete a tedious application to receive highly restricted funding. We simply invited them to complete a one-page application and then join us for a party in their honor, where we would vote and award the grants live.

That set the stage for a powerful evening centered around community, rather than competition and scarcity.

The positive swell of excitement and appreciation provided enormous reinforcement as a donor, a thousand times beyond a thank you card following a check. I have no doubt that lifetime donors were created in those interactions. The physical connection to the people who are so passionate about our shared cause left an indelible mark.

Get Involved:

While women's giving circles are the most prevalent and could probably take credit for creating this movement around collective giving, a variety of diverse causes and groups have utilized the concept to make a major impact.

If there isn't a giving circle near you that addresses a cause you care about, you should consider starting one. All you need is a fiscal sponsor so that donations are tax-deductible (your local community foundation is a great option) and a few friends or family members who share your ideals.

It's literally that easy, which is why the giving circle movement is only going to continue to gain momentum.

Learn more via multiple reports and resources, including 10 Basic Steps to Starting a Giving Circle and tools for community foundations and nonprofits interested in hosting giving circles: Regional Associations of Grantmakers' Giving Circles Knowledge Center.