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.

The Purpose Economy

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Plenty of for-profit corporations operate with some measure of community benefit, often limited to charitable contributions to offset tax liabilities. However, there is a growing trend toward purpose-driven business. The indirect benefits to corporations who "give back" are hard to measure, but clearly arguable. Employees who work for an engaged company and witness positive impact in their neighborhoods are likely to be happier, more productive and loyal. Potential customers who observe the same actions may be more inclined to purchase the company's products or services.

Socially responsible corporate leadership could argue that an investment in the community beyond the standard 1-2% of pre-tax profits positively impacts the bottom line. But, would their argument hold up in court?

eBay vs. Newmark

Did you know that eBay purchased a decent share of Craigslist in 2004 and owns approximately 25% of the for-profit corporation?

Craig Newmark, the founder and namesake of Craigslist, along with CEO Jim Buckmaster, have been fairly transparent about their desire to simply provide classifieds, rather than maximize shareholder value.

Obviously, this isn't in eBay's best interest as a major shareholder and making a fairly long and complicated story short, eBay sued Craigslist and won on several points.

The bottom line?

For-profit corporations have a law-binding fiduciary duty to maximize profits. Which makes it difficult to divert any significant resources to social impact.

In steps the BCorp

As described in a prior post, benefit corporations are a recent corporate entity breed that maintains the for-profit nature of business, but adds in a mandate to have a “material positive impact” on society and the environment.

As of this post, 27 states have passed benefit corporation laws. In May, local purpose industry organization, P3 Utah, celebrated the addition of Utah to the list of states benefiting from BCorps.

P3 Utah is a nonprofit promoting business for people, planet and profit. Founder and Executive Director, Steve Klass, was interviewed by Utah Business last month and described benefit corporations:

They define success by what is called the ‘triple bottom line,’ or the degree by which they can improve human existence for their employees and communities and the environment, while also making a profit. It’s doing good while doing well.”

Becoming a B-corp doesn’t come with any financial benefits, tax incentives or preferential treatment. However, as a B-corp, the company can expand its fiduciary duty beyond maximizing profits, without fear of investor or shareholder whiplash.

One might also predict that the new breed of consumer will begin looking for the B-Corp designation when making purchase decisions.

A Purpose-Driven Economy? 

Economists and marketing experts have commented on the timing of socially responsible businesses, noting that the millennial generation has much greater expectations of the businesses they patronize, demanding a give back philosophy and tangible results rather than an annual corporate social responsibility report on dollars donated.

Aaron Hurst, author of The Purpose Economy, describes the concept of an economy that caters to our need for something more:

 

Could an increasing consumer demand combined with a highly entrepreneurial generation equate to a major impact to our economy?

Harvard professor and corporate strategist, Michael Porter, thinks so, having launched the Social Progress Index, a global index that measures more than GDP (the US ranks 16th with an overall SPI of 82.77 as of 2014).

There's also been an explosion of mutual funds and investment opportunities for the socially responsible investor, from 50 in 1995 to over 500 "SRI" funds today.

Claim Your Stake

Businesses like TOMS Shoes with it's one for one donation promise and Starbucks with its healthcare coverage for even part-time employees are proof that social impact is highly correlated with profit in light of the changing values of consumers.

Is your business ready for such scrutiny?

P3 Utah's 4th annual conference will provide insights, tools and resources, and a network of role models on September 18th and 19th in Salt Lake City. Session topics include social enterprise, local partnerships, employee engagement, sustainability through LEAN, and more.

Register now to ensure you get a seat at the purpose economy table.

P3 Utah Conference

The Last Days of the Superbowl as a Tax-Exempt Fundraiser

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The fact that the NFL is still considered a nonprofit tax-exempt entity is really an embarrassment to Congress and a slap in the face to the genuine charities who are working hard to change the world for the better, including the many sporting organizations that actually serve a higher purpose than primetime ratings. Legislation was introduced in both the Senate (Senator Tom Coburn-R, Oklahoma) and the House (Representative Chaffetz-R, Utah) in the past few months to finally close the loophole that allows the National Football League, the Professional Golf Association, and the National Hockey League, among others, to slip under the tax radar while organizations like the National Basketball Association and Major League Baseball pay.

Cleverly named the Properly Reducing Overexemptions (PRO) Sports Act, the legislation would amend Federal tax code to prohibit professional sports organizations who garner more than $10M in annual revenue to qualify for the 501(c)(6) tax exempt status as industry trade associations and public interest groups.

While some may argue that professional sports enrich our lives and provide a culmination that encourages involvement in lower level sporting leagues and organizations, I'm not sure anyone could suggest that the NFL operates with a mission-first approach. Even their mission statement reeks of a profit-first model:

To present the National Football League and its teams at a level that attracts the broadest audience and makes NFL football the best sports entertainment in the world."

This is not to suggest that the NFL is "bad"; for-profits play an enormous and important role in the economy and in our lives. Americans (including myself) love football. In fact, the Superbowl is the one thing most of us can agree on. Whether it's the wings, commercials, or the intense action of professionally-tuned athletes at their peak, 81% of us said we plan to tune in today.

Major League Baseball apparently renounced their tax exempt status voluntarily in 2007. If you quack like a duck, be loud and proud about being a duck. The Superbowl is not a fundraiser for charity.

Author's Note: This particular piece reflects my personal opinion on this topic and other thoughtful opinions are welcomed. 

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.