Podcast: Are you ready to consider impact investing?

impactinvestorcoverAs Millennials move into new leadership roles, they are demanding the opportunity to align every facet of their lives with making a positive difference in the world. A new capitalism, what Ben Thornley and his coauthors call Collaborative Capitalism, is focused on more than just financial returns to make an impact on the world’s issues.

One tool of Collaborative Capitalism is called impact investing. This new form of investing focuses on delivering positive social and environmental outcomes alongside competitive financial returns.

In the new book, Impact Investing: Lessons in Leadership and Strategy for Collaborative Capitalism, the authors examined 12 outstanding impact investment funds that met or exceeded expectations in a two-year study.

They uncover the practices that make these funds successful and outline the strategies that all investors, from corporate executives to change agents to philanthropists, can apply to their own organizations to achieve high performance in both social and financial outcomes.

We had a chance to discuss the exciting implications for nonprofits in a recent conversation with coauthor, Ben Thornley. Feel free to click on any of his answers to the topics we present below in the podcast excerpts:

1) Ben Thornley–Premise and NP benefits

2) Ben Thornley–Indicators for nonprofits

3) Ben Thornley–New trends

4) Ben Thornley–Nonprofits first steps

Increasingly, financial institutions and corporations around the world are using Collaborative Capitalism as a tool to generate clear, positive social outcomes in addition to profits. This book will help nonprofits learn how capital can be used to drive social and environmental change as well as how to attract potential investors.

Financial tools are increasingly being used to support community vehicles, including nonprofits, cooperatives and social enterprises. The Impact Investor gives a comprehensive overview of the approaches successful impact investors have used to increase their probability of success.

See also:

The NON Nonprofit: For-Profit Thinking for Nonprofit Success

Cash Flow Strategies: Innovation in Nonprofit Financial Management

The Nonprofit Business Plan: The Leader’s Guide to Creating a Successful Business Mode

Leave a reply



Nonprofit decisions: Complexity made clear with matrix mapping

According to a recent Nonprofit Finance Fund’s State of the Sector survey, “Forty-two percent of organizations reported that they do not currently have the right mix of financial resources to thrive over the next three years.”

This level of economic uncertainty requires the kind of adaptive leadership and system-wide reckoning that feels like a daunting task until now. Authors Steve Zimmerman and Jeanne Bell have introduced a proven method for change management called matrix mapping. The matrix map cultivates sound decision-making that embraces the entire organization’s capacity rather than one program or person.

Zimmerman and Bell have accumulated a deep understanding of how the matrix map tool is working for nonprofits thanks to five years in the field with their first book, Nonprofit Sustainability. Today, The Sustainability Mindset builds on the candid self-reflection and bold decision making created by the first title.

Introduction to the matrix map

Simply put, the matrix map allows organizations to view both their impact and profitability at the same time. Often, during a strategic planning meeting, organizations will look at the success of their programs in one conversation and then their budget in another. The map gives them a combined look so they can make better decisions. For example, if one program shows high impact but low income, the organization can turn to other sources of income that can cover the expenses. To see a sample of the map, click here.

Zimmerman’s favorite example of the matrix map in action

We asked Steve Zimmerman to tell us about one of his favorite case stories where the matrix mapping process brought to light the critical observation of impact and profitability simultaneously.

CausePlanet: Would you tell us about your favorite case study that implements the matrix map?

Zimmerman: One of my favorite uses of the matrix map is to help organizations make decisions that have been put off for too long. An example of this comes from a 100-year-old social service agency that had offered mental health counseling for their constituents among several other programs including financial literacy, job training and a day care program.

Over the years, the counseling program had fallen on hard times, but because it was the founding program of the agency, they kept re-tooling it and bringing in new supervisors to improve the program. When the matrix map was completed, it showed counseling, financial literacy and job training operating at financial deficits. However, counseling also was considered a low-impact program.

Deeper analysis showed that while the program was important for the organization’s impact, there was a lot of competition for quality counselors and the organization couldn’t match competitors’ salaries. This led to poor outcomes. What is more, the job training program showed very high impact but was relatively small because the organization didn’t have enough resources to grow the program.

The organization used the matrix map to engage in a robust discussion about the future of counseling and decided to close the program. Because it was still an important component of the organization’s overall impact, it partnered with another agency in the city to deliver those services to constituents. It then invested the money that had been utilized to subsidize counseling to expand the job training program. This included partnering with local corporations for job placement on a fee-for-service basis.

The opportunity cost of decision-making

This example demonstrates using the matrix map to highlight the opportunity cost of decisions. The leadership often thinks in terms of “Should we offer Program A or not?” when the correct question is, “Should we invest in Program A or Program B?” By investing in the high impact program, the organization was able to increase its impact and financial viability. It would not have had the resources or capacity to do so unless it focused its program offerings. By presenting the map in this way, even those leaders who strongly supported the counseling program came around to see the organization and its constituents were better off as a result of this decision.

If you’ve historically looked at your budget and your programs in isolation of one another, Zimmerman and Bell would argue that this kind of decision-making will only lead to poor sustainability for your nonprofit. Get a copy of The Sustainability Mindset and turn complexity into clarity.

See also:

Nonprofit Sustainability: Making Strategic Decisions for Financial Viability

The Nonprofit Leadership Transition and Development Guide

Building Nonprofit Capacity: A Guide to Managing Change Through Organizational Lifecycles

Image credits: julianreese.com, vbpm.org, wallbasehq.com

 

Leave a reply



Nonprofit planning: Mindset over matter

Last week I enjoyed a keynote address delivered by The Sustainability Mindset coauthor Steve Zimmerman in Baton Rouge, Louisiana. With smarts and wit, Steve enlightened a room of nonprofit executives about the advantages of looking at financial and programmatic sustainability in the same conversation. According to Steve, most nonprofits look at these critical elements in isolation of one another, which deprives them of accurate sustainability evaluation and productive planning.

What is the mindset?

You might be asking what mindset means. The Sustainability Mindset is about financial sustainability: meeting the needs of the present without compromising the future. It’s also about programmatic sustainability: the ability to develop, grow and retire programs in sync with your constituencies. Because this is easier described than done, Steve Zimmerman and his coauthor Jeanne Bell provide experienced-based guidance and a specific framework to follow using their supremely helpful visuals and templates.

Introduction to the matrix map

The primary visual that facilitates the authors’ process is the matrix map. The matrix map allows organizations to view both their impact and profitability at the same time. Often, during a strategic planning meeting, organizations will look at the success of their programs in one conversation and then their budget in another. The map gives them a combined look so they can make better decisions. For example, if one program shows high impact but low income, the organization can turn to other sources of income that can cover the expenses.

How it works

This map can provoke strategic discussions on how to strengthen the model. For example, the organization can look at the upper left quadrant (see below) to decide if the Youth Services and Adult Education & Family Literacy are worth the expense for a high mission impact. If they are covered by other
bubbles and if they provide a necessary service that no one else provides in the community, they may be worth the expense.

Organizations can create these maps during strategic planning, annual budgeting and operational planning meetings, loss of funding, new opportunities, or changes in external environments.

Depending on the purpose, the map can either be a quick look or a more detailed vision of the organization’s status. Again, depending on the purpose, various people should be involved. For example, funders and constituents could be surveyed for a closer look at mission impact in a more detailed version. Otherwise, the senior leadership, staff and board can be involved in the input and can learn more about the organization through this process.

Ultimately, the map provides what is for many leaders the first time they’ve seen their nonprofit programs mapped according to their financial and programmatic viability in one single action.

What are the stages?

In the book, the authors cover these stages of the matrix map process: 1) introductory meeting, 2) articulating intended impact, 3) defining programs, 4) assessing mission impact, 5) determining profitability, 6) plotting your map, 7) analyzing your map, and making strategic decisions.

When looking at these stages, my editor and I were compelled to ask Steve and Jeanne about where most leaders experience challenges when applying the matrix map process and what is the most critical step within the process:

CausePlanet: At what point do nonprofits experience challenges when trying to apply the matrix map to their organizations and how do they overcome them?

Zimmerman: Senior management teams are often not used to having open, candid discussions about the contribution a program makes to the organization’s intended impact relative to other programs or about how the program is differentiated from other offerings in the community. As a result, assessing mission impact can be a challenge in the matrix map process. These conversations can be frightening, as participants often fear hurting a co-worker’s feelings or being vulnerable in front of a group. However, the leadership’s efforts in creating a safe environment where candid feedback and discussion is encouraged, appreciated and respected will ensure the success of the matrix map process. Everyone in the room is committed to the organization’s mission and with the appropriate lens of continuous improvement, the organization will have an opportunity to better understand the perception and reality of its programs’ impacts.

CausePlanet: What is the most critical step in the Sustainability Mindset process?

Zimmerman: Moving toward greater sustainability requires making hard decisions. It isn’t that the leadership doesn’t necessarily want to make decisions, but they’re fraught with implications. Constituents who depend on services may find them suddenly not available or the staff may find shifts in their jobs. These are difficult decisions. The leadership may feel it doesn’t have enough information or even worse, may have conflicting information about which decision to make. Like any strategic decision, the leadership is ultimately guessing at what the future may hold. The matrix map is a useful tool for engaging key stakeholders in a discussion about what the future should be. However, it is just a tool. It ultimately is up to the users to make a decision, learn from implementation, adjust and learn again. We say often that sustainability is the integration of financial viability and mission impact, but there is a third equally important component–leadership. The most critical step is the leadership ultimately making a decision to begin implementation and move toward greater sustainability.

If you and your fellow leaders on the board are in a place where you could benefit from taking a rigorous and candid look at the viability of your current programs, I encourage you to get a copy of the The Sustainability Mindset. You may never allow yourself to look at sustainability the same way again.

See also:

Nonprofit Sustainability: Making Strategic Decisions for Financial Viability

The Six Secrets of Change: What the Best Leaders Do to Help Their Organizations Survive and Thrive

The Necessary Revolution: Working Together to Create a Sustainable World

Image credits: pixabay.com, wiley.com, Steve Zimmerman and Jeanne Bell

 

Leave a reply



The worst of economic times brought out the best in nonprofits

“A crisis is a terrible thing to waste,” American economist and NYU professor Paul Romer was credited for saying in 2004. His sentiment, unfortunately, is appropriate again today as nonprofits throughout the sector learn from tough decisions that help them recover from the Great Recession and what we are now seeing will likely be dubbed, “The Great Correction.”

Many of you are familiar with the notion that negative news often gets repeated more often than positive news. This post is an effort to tip the scales toward encouraging information I recently read in The Chronicle of Philanthropy: “How Recession-Racked Charities Emerged Stronger Than Before.”

Paul Romer would be pleased to learn the nonprofit sector did not waste the Great Recession. They’re making good use of it and demonstrating impressive resolve. “Hopeful lessons” are shared in the Chronicle article, and one in particular involves Voices for Children. Voices is a nonprofit dedicated to providing every foster child in San Diego County with a volunteer court advocate.

Voices for Children

After laying off a quarter of the staff, the board resigned itself to the fact that it would have to scrap its ambitious fundraising goal set years earlier and rebuild by stepping up with its own members and setting up a skeletal development shop. The executive director courted and hired a seasoned development director from the arts arena and paid the fundraiser more than anyone else. Today the budget is approaching $6 million, double the amount of its pre-recession budget. Payroll has reached 73 employees. Voices is now in a better financial position and perhaps better equipped to handle the next economic downturn.

Administrative and space collaborations

Stronger nonprofits have also resulted from collaboratives to share space and administrative resources. For example, in Denver, international development nonprofits renovated a 19th-century horse and trolley barn, which they call the Posner Center. The Center is a 25,000-square-foot space that now houses 60 nonprofits. According to the Chronicle, “The Center recently awarded $60,000 in grants to fund partnerships among its tenants, including one between Engineers Without Borders and a group that builds footbridges in Guatemala.”

Built to last

In a related article, “Bold Choices in Dark Times,” St. Louis Opera general director Timothy O’Leary was faced with collecting promised pledges on the day the stock market crashed. The donors told him they needed to “trim” their major gift commitments. O’Leary reported, “The difference [between pledges and fulfillments] was not unsubstantial.”

On the heels of these discouraging donor visits, O’Leary, the new board chair and artistic director, set to work creating a long-term strategic plan that would weather a long economic crisis. While other arts organizations were reducing schedules and turning to crowd-pleasing classics, the St. Louis opera committed to commissioning new and creative work. O’Leary was convinced new and exciting material would compel loyal patrons to return and support the opera.

“The downturn hit the opera’s corporate sponsorships the hardest, and revenue slipped further when the company reduced its draw from its $16.5-million endowment. To compensate, it froze salaries, suspended staff 401(k) contributions, and renegotiated deals with its unions. Yet as the opera rallied donors around its commitment to risk-taking productions, individual giving climbed — gradually at first, and then 21 percent in 2011.”

In 2013, a commitment to innovation and collaboration paid off with an unprecedented debut of “Champion,” which generated more ticket sales than any other production in the history of the St. Louis opera. “Champion” was named a finalist for international opera of the year. Today, the endowment is now topping $28 million.

Always in crisis

With the Great Recession over and a market correction that hopefully will be fleeting, it might be tempting to try risky ventures or allow yourself some wiggle room with financials. Perhaps the lesson here is that nonprofits should act as if they’re always preparing for a crisis. Look for ways to work smarter and leaner and focus on what’s working and core competencies. If you’re interested in engaging in financial forecasting or looking at different scenarios, consider contacting us at Execute Now! where we can help you assemble a financial plan you can feel confident about following.

Image credits: nonprofitcenters.org, urpe.wordpress.com, nytimes.com

Leave a reply



Nonprofit technology doesn’t need to be a burden

There are co-ops for everything from farmers to food merchants, and many have existed for decades or longer.  So why not technology cooperatives for nonprofits ?

The simple response to this question is – there already are technology co-ops.  Sort of.  Large hospitals and universities have been quietly operating technology-oriented co-ops for decades.  Not far from where this is being penned there is a substantial cooperative whose members are nonprofits such as hospitals, universities, colleges, a health insurer and a private high school.  What they have in common is that all or a large percentage of each of their operations are within the area served by the co-operative.  This mutual proximity doubtlessly made it easier to initiate and cheaper to run the co-op, a lesson we should apply to other similar ventures.

The institutions that belong to the co-op are mostly large, highly sophisticated nonprofits.   In effect, they succeeded because they were adequately capitalized and served a ‘closed’ market.  No one needed to carry out an expensive advertising campaign because the members themselves decided to build a shared platform and created the co-operative as a way of accomplishing this.

But what about the vast majority of nonprofits, the ones whose smallest bank accounts don’t have six zeroes behind the first digit?  The story is very different for these groups, which are the majority of nonprofits in the country.   Yet their need for technology is proportionately the same and perhaps even greater.  There are three aspects of this riddle that need to be solved in order to improve technology use and access for nonprofits that otherwise wouldn’t be able to afford a complete program on their own.

Fixed costs

Fixed costs are one of the quietest of the Budget Devils.  Most costs rise or fall in some kind of coordination with the demand for a nonprofit’s service.  Direct staff, for example, usually increase if the need for the organization’s service grows.  These are called variable costs, because if one were to chart the arc of growth in the need for an entity’s services, the volume of direct staff hired would almost certainly vary according to the arc of the demand.

By contrast, in an ideal world the growth in the need for administrative services should not be comparable to the growth in service demand because administrative costs tend to be a ‘step function’.  This means that growth in administrative resources is likely to come in ‘spurts’ and frequently over time administrative staff can actually lower the overall administrative costs by creating efficiencies greater than the growth in demand.

At its economic simplest, technology is a fixed cost.  That computer server has the same price tag if it is going to be used 24 hours a day or just a portion of each day.  The upgrades to the wiring system to power the thing also had to be incurred even if it was just intended to be a backup system.  That finicky server needs just the right blend of temperature and humidity, which drives up the utility bills.  And the additional Computer Guy’s salary and benefits are inescapable.  Members of co-ops can better manage the costs by collaborating at the infrastructure level (servers, storage, etc.) or at the software level.  Or both.

Fixed costs abound in technology which is one of the reasons it is so hard for most nonprofits to develop a robust technology platform.  Large nonprofits such as universities and hospitals can absorb a substantial amount of these fixed costs before their budgets start to complain, but smaller nonprofits find it difficult if not impossible to take on such fixed costs.

Capital

Having the financial resources (or ‘capital’) is a second technology hurdle.  Economists refer to technology as a ‘capital-intensive’ operation, meaning that one has to buy a lot of assets such as computer equipment.  Here, capital means something akin to ‘reserves’, or cash that’s not needed for day to day operations.   The problem for nonprofits is that, unlike for-profit businesses, nonprofits can’t invite outsiders to invest in the operation in return for a share of ownership.  The only way a nonprofit can gain resources for capital acquisitions is through profitability or donations (development specialists: which ask would you rather make – requesting that a potential donor ‘buy a few computer servers’ or ‘invest in kids’?).

Productivity

The third need is to run a productive and economically feasible operation.  This is more difficult than one might imagine because staff productivity is not necessarily an automatic must-have unless a nonprofit operates in certain areas of health or human services.  Large for-profit companies, by contrast, often demand a certain number of ‘billable’ hours from each employee whether the company is a law firm, an internet cable company, or a medical laboratory.   No matter what the tax status, low productivity is a Budget Devil itself.

The Co-op Model

The obvious solution to this dilemma for most nonprofits is to buy as little as one can get away with, at as low a price as possible.  But this can lead to disastrous trade-offs in which an organization makes too many compromises.  The formula is to minimize variable costs while managing fixed costs as

tightly as possible, and this is where the co-op model comes in.  In effect, the co-op carries the fixed costs and the burden for falling short of revenue goals (as does any for-profit service provider).  They also assume responsibility for hitting productivity targets.

The co-op model can be viable in this setting because it is not like a drugstore, with items sitting patiently on the shelf, waiting to be scooped into shopping baskets.  Both parties must make a commitment to each other, and it almost certainly will take the form of a written contract.  The composition of their client base gives the co-op not only funds for operations but – if the market co-operates – some level of capital accumulation as well.

Perhaps surprisingly, there are already a number of cooperatives accepted by the IRS, such as co-operatives serving hospitals and educational organizations – and even farmers (who helped originate the model two centuries ago).  This may be good encouragement to begin a technology co-op in your area if there are no comparables in existence.  Perhaps more likely, a nonprofit is free to go out of the sector to find companies that provide these kinds of services.    Whether your information technology supplier is an actual co-op or a for-profit company offering professional services should be largely immaterial: good service is good service.  What is more pressing as a new client is what you will get for your money.  Note that if you and your peer organizations decide to form a co-op you should automatically have an advantage in the value-for-payment transaction.

The models we have sketched are most likely to succeed in an urban or suburban setting because it’s easier to achieve the desired productivity levels when your customers are located relatively near each other.  Sixty percent productivity for your field staff should be a good starting point, though it may be possible to push it higher.   More intriguing is that finding the capital may be easier than you think.  After years of promoting collaboration in general, some major foundations are beginning to experiment with funding certain aspects of collaborative processes.  Program Related Investments may be an option from savvy, well-established foundations.  L3C corporations were designed for social enterprise ventures, and they can be an invaluable structure on which to build a robust new service for the nonprofit field.  And the B Corp, or ‘Benefit Corporation’, offers traditional for-profit businesses an opportunity to convert to a different status as long as they can prove that they seek to create a ‘public benefit’ in tandem with private gain.  In fact, we know a for-profit entity that recently completed just such a switch.

With a little imagination, some energy, and some good financial strategic thinking, it should be possible to develop market-serving entities for information technology purposes and/or find existing suppliers that are effectively doing the same thing.  Good IT may be a cost but it doesn’t need to be a burden.

See relevant Page to Practice book summaries:

Managing Technology to Meet Your Mission: A Strategic Guide for Nonprofit Leaders

Zone of Insolvency: How Nonprofits Avoid Hidden Liabilities and Build Financial Strength

Zilch: The Power of Zero in Business

Image credits: naturalpapa.com, craftcouncil.org, somdnews.com

Leave a reply



Understanding philanthropic capital: How to invest in social causes and gain financial returns (Part 2)

In my first installment on this topic, I discussed why investors are combining financial and social goals and three social investment tools they could use to accomplish this union of interests: Pay for Success (PFS) or Social Impact Bonds (SIB), Program-Related Investments (PRI), and Mission-Related Investing (MRI)). In this final installment, I’ll explore two more tools: Impact Investing and Social Enterprise.

Millennial influence

The thinking driving the more diverse deployment of philanthropic capital is coming from a range of influences including shifting demographics. The receding idea of separate financial and social returns is largely being driven by the changing attitudes of younger generations.

A recent World Economic Forum report on impact investing cites a “study of 5,000 Millennials across 18 countries where respondents ranked ‘to improve society’ as the number one priority of business. This does not imply that the next generation of investors will not seek market returns … However, the emerging generation of investors is also likely to seek achievement of social objectives in addition to financial returns.”

Impact Investing

So just what is Impact Investing? A clear definition is one of the challenges of this emerging sector and the term can be described in many ways. According to the recently published The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism (2015) by Clark, Emerson and Thornley, “Impact Investing is capital management in pursuit of appropriate levels of financial return with the simultaneous and intentional creation of measurable social and environment impacts.” Many impact investors expect market rate and higher financial returns on their investments, noting that organizations that address social and environmental concerns in their business planning and execution will perform better over time as they reduce risks and create stronger workforces.

Examples of impact investments include a $3 million investment by the Colorado Impact Fund (coloradoimpactfund.com) into Bhakti Chai for expansion. The company sustainably sources fair trade, non-GMO ingredients and practices zero waste environmental standards. The company is growing, adding employment to expand its brand nationwide. Another project example is developing an app to help farmers in developing countries better predict weather patterns. This helps them plant and harvest at optimal times, increasing family income and improved food supplies for their communities. The app is easily accessible on cellular platforms, available to millions of customers worldwide.

Social enterprise

Social enterprise is also on the rise in the US and around the world. According to the Social Enterprise Alliance, a social enterprise is a business whose primary purpose is the common good. It uses the methods and discipline of business and the power of the marketplace to advance the social, environmental and human justice causes as well as earning a profit. Support for social enterprise can come in the form of investments, contributions and product purchases, with each form of capital needed at different times of the organization’s development.

The Colorado Nonprofit Social Enterprise Exchange strives to build the field for social enterprise by working with existing nonprofit organizations and engaging philanthropic, traditional and impact investments. Its Social Enterprise Cohort works to develop a business idea that supports both the mission and finances of the organization as well as creating employment opportunities when possible. Businesses in operation as a result of this program include: Art Restart, which supports homeless women through card sales; the Safety Store, which sells supplies and equipment for child safety; and Strong, Smart and Bold Beans, a coffee shop that teaches young women entrepreneurial and business skills as part of its youth development programs.

Complexity

There is a lot of excitement and energy surrounding all these tools to advance social change, and rightly so. These tools can allow for the engagement of more dollars to address big issues, to support organizations that prove their impact and to advance several goals at once.

However, the use of a diverse range of financing tools does not make problems less complex or easily solved. The development of the right deal with the right partners at the right scale takes time and resources.

But I look forward to the day when I can live in a state of optimism, believing both in our ability to make the changes we need as well as our ability to engage the right philanthropic capital to do the work effectively.

See Page to Practice summaries related to this article:

The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism

Zone of Insolvency: How Nonprofits Avoid Hidden Liabilities and Build Financial Strength

The Nonprofit Business Plan: The Leader’s Guide to Creating a Successful Business Model

Cash Flow Strategies: Innovation in Nonprofit Financial Management

Image credits: idpfoundation.org, justmeans.com

Leave a reply



Collaborative Capitalism: Positive social outcomes and competitive financial returns

As Millennials move into new leadership roles, they are demanding the opportunity to align every facet of their lives with making a positive difference in the world. A new capitalism, what the authors of The Impact Investor call Collaborative Capitalism, is focused on more than just financial returns to make an impact on the world’s issues.

One tool of Collaborative Capitalism is impact investing–investing that focuses on delivering positive social and environmental outcomes alongside competitive financial returns–is a response to this changing world.

Two years, 12 outstanding funds, four primary practices

In a two-year study, the most detailed release of information on impact investing to date, the authors of The Impact Investor examined 12 outstanding impact investment funds that met or exceeded the expectations of their investors.

In this book, they uncover the four primary practices that make these funds successful and outline the strategies that all investors, from corporate executives to change agents to philanthropists, can apply to their own organizations to achieve high performance in both social and financial outcomes.

We interviewed coauthor, Jed Emerson, about The Impact Investor and what you should consider if you want to take the first steps toward blending social causes with financial returns. We also asked about the most significant obstacles.

CausePlanet: If someone wants to jump into the field of impact investing, what does he/she need to focus on first?

Emerson: The first thing those interested in impact investing need to focus on is to get up to speed with what is already known about the field, its practices and the variety of ways one can become involved. For example, CASE at Duke has a great web site (http://bit.ly/casei3100) with seminal research and insight every impact investor should read. ImpactAssets has its Issue Brief series which presents a set of concise memos addressing various aspects of the field. Finally, The Blended Value website (www.blendedvalue.org) also has a host of resources worth perusing. Attending a few conferences would also be a good thing to do—SoCap or High Water Women are both good places to start. And Cathy just made a great 12-minute video intro to the field: http://youtu.be/zwGCKhTis5s

CausePlanet: What do you really want nonprofits to take from your book? For example, are you giving them ways to attract impact investors or become more of impact investors themselves?

Emerson: Nonprofits should take away many of the same principles as other types of organizations, namely that there is a shift taking place in both capitalism and the arena of how we address social issues, and this shift represents real opportunities for nonprofits to position themselves as providing a unique value to society that is distinct from traditional business or government. There is a growing universe of funders, investors and procurement officers who want to understand how best to leverage this distinct approach and bring it to scale, including through the provision of operating capital, which has been historically difficult to come by in the nonprofit sector.

Nonprofits also have an important role to play in driving the impact investing field forward considering two key attributes. One is their attention to stakeholders. Nonprofits are built on the premise that constituencies matter and much of the field of impact investing is taking this lesson into the arena of finance. The other attribute is heightened attention to social outcomes. Impact investors need to manage to specific, intentional outcomes and are often drawing on nonprofit practices to do so.

CausePlanet: What do you think is the most significant obstacle to becoming an impact investor?

Emerson: Perhaps the most significant obstacle is simple inertia, the challenge of overcoming analysis paralysis and actually making an investment. Some folks feel impact investing is new or that people must accept below market returns and so are waiting for it to become so mainstream that the actual investment opportunities may pass them by. The best way to explore and learn about the practice is to make smaller investments, to collaborate with other investors or take other initial steps to simply get going and learn by doing. And in fact, one can become an impact investor now with as little as $20 online, through a site called vested.org, where you can choose the places or impacts that are important to you.

Increasingly, financial institutions and corporations around the world are using Collaborative Capitalism as a tool to generate clear, positive social outcomes in addition to profits. This book will help nonprofits learn how capital can be used to drive social and environmental change as well as how to attract potential investors. Financial tools are increasingly being used to support community vehicles, including nonprofits, cooperatives and social enterprises. The Impact Investor gives a comprehensive overview of the approaches successful impact investors have used to increase their probability of success.

See other Page to Practice nonprofit book summaries related to this topic:

The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism

Zone of Insolvency: How Nonprofits Avoid Hidden Liabilities and Build Financial Strength

The Nonprofit Business Plan: The Leader’s Guide to Creating a Successful Business Model

Cash Flow Strategies: Innovation in Nonprofit Financial Management

Image credit: blendedvalue.org

Leave a reply



Understanding philanthropic capital: How to invest in social causes and gain financial returns

Combining financial and social goals

Being an optimist and a pessimist at the same time may seem contradictory. But, I believe we can make real progress on some of the big issues that face us today including poverty, the environment, education and equality among others. However, I don’t believe the way in which we have approached these issues in the past will make the progress we seek.

As the focus in philanthropy shifts from activities to outcomes, and we all expect more impact from change efforts, we can expand how we think about financing this change and what instruments will be most effective. The world is changing at a faster rate than ever before, and even though we have focused on these issues for many years, there is still much work to be done. Have we been looking at these issues and their solutions through too small a lens?

In the past, most philanthropic capital has been distributed in the form of contributions to nonprofit organizations. These have high social return but no financial return. And traditional investments often have high financial return and questionable social impact. By thinking in a one-dimensional way, we have limited the range of solutions available and squandered opportunity by not engaging the full capital markets in making change.

New partners in problem-solving

In order to address the more complex issues that now exist, it’s time to shift the paradigms of how to address these big, complicated problems. And those shifts are happening all around us. No longer is it the sole realm for nonprofit organizations to tackle social problems; social enterprises and businesses are proving capable as well. Many investors no longer separate social and financial return when looking at how to best deploy their dollars. As many billions of dollars as foundations have in their endowments (estimated to be $850 billion), these pale in comparison to the trillions in mainstream capital markets (estimated to be $34 trillion).

Now more than ever, it is appropriate to bring a range of financial tools to create change and to think more expansively about how to support organizations beyond just providing monetary contributions.

Problem first, tools second

Grants and contributions will always be part of the funding portfolio to support organizations working on important issues, but they can be one tool in a toolbox full of options to provide capital and support the work that makes a difference. Thinking more about stacking capital instead of a one-size-fits-all model can be more effective. Additional tools include Pay for Success/ Social Impact Bond Financing, Program-Related Investments, Mission-Related Investments, Impact Investing and Social Enterprise development. Each tool has different applications and strengths. With a variety of tools, we can think about the problem first and the tool second instead of approaching every challenge with only one funding solution. I will cover the first three tools in this installment. Tune in to the next installment for an explanation of Impact Investing and Social Enterprise.

Social investment tools

Pay for Success (PFS) or Social Impact Bonds (SIB)

These financial instruments use private capital for upfront investment in social programs where a governmental entity agrees to pay for specific measurable results after they are achieved. This money is the bridge financing or working capital that allows prevention programs to prove their worth in saving government funds by using outside money. Most government resources are used to provide intervention, such as incarceration or remedial education. PFS switches the model and focuses on prevention services, such as housing and job training or early childhood education, that provide both more effective and compassionate services to people as well as providing cost savings once they are delivered.

This tool was originally developed in the United Kingdom with the first deal closed in 2010. Since that time, there have been almost 50 closed deals using this model (payforsuccess.org/pay-success-deals-united-states). For PFS projects to work, a collaborative group of partners must come together, including: a governmental entity willing to purchase outcomes, investors willing to invest for a risk-adjusted return, an intermediary that raises capital and manages the project, program provider(s) that scale up programs and deliver outcomes, and an evaluator that can play the auditing role by measuring the projected outcomes. Projects in the US include a $10 million program in New York to reduce recidivism by delinquents on Rikers Island, a $7 million program in Salt Lake City to expand high quality preschools, and a $8 million program reaching the final stages in Denver to provide supportive housing and services for the chronically homeless.

Program-Related Investments (PRI)

Program-related investments are another tool that foundations can use to support organizations, both nonprofit and for-profit. These are investments made by a foundation in support of charitable purposes with the explicit understanding that those investments will earn below-market rate returns adjusted for risk and mission. These investments can be applied to the foundation’s minimum payout requirement and become recyclable capital, being redeployed once they are paid back. PRI were made possible as a result of the Tax Act of 1969, but have not been widely used. That is beginning to change. The IRS outlines a few conditions for these investments, and there are many ways to apply them. The PRI option can save organizations significant dollars in interest payments while offering access to capital that might otherwise not be available.

A foundation can offer a below-market rate mortgage to help an organization purchase a building and save on interest expense over the life of the loan. In Denver, the Alliance Center (sustainablecolorado.org) received a PRI from a donor-advised fund at The
Denver Foundation that will save the organization $4 million in interest over the life of the loan and the original capital of $7.5 million can be used again for another investment. In another scenario, a foundation can make a loan to a company that works with poor farmers to help them create a cooperative and market for their products that will eventually generate enough revenue to pay back the loan.

Another way to use philanthropic capital to advance community change is through Mission-Related Investing (MRI). This tool takes the endowment or long-term assets and aligns investments with the specific mission and social benefits of an organization. For example, if a foundation was funding in health prevention and education, the investment portfolio might contain companies focused on health food production instead of tobacco companies. The same might be true for an organization working to improve the environment. Investments could be focused on renewable energy and weatherization instead of fossil fuel production. Typical investment portfolios at foundations are much larger than their charitable distributions, so investing to support the work being done instead of contributing to the problem can address issues using two different avenues of capital, thereby increasing impact.

See Cindy Willard’s upcoming installment to discover more about Impact Investing and Social Enterprise.

See Page to Practice nonprofit book summaries related to this topic:

The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism

Cash Flow Strategies: Innovation in Nonprofit Financial Management

The NON Nonprofit: For-Profit Thinking for Nonprofit Success

Image credits: qualitymatters.ie, eoi.es, metabusinessanalyst.com, charitable-nation.com, peakstravelelite.co.uk, colorado-construction.com

 

Leave a reply



Kick these tires before you embark on challenging roads ahead

Last week, we introduced Mission-Based Management by Peter Brinckerhoff and his three philosophies that informed his 30-plus years in the successful business of guiding causes. They are:

“Nonprofits are businesses.”

“No one gives you a dime.”

“Nonprofit does not mean no profit.”

He convincingly demonstrates the truth in each of these points throughout the book and in each of the management competencies he explores—from leadership, governance, and finances to marketing, mission, ethics, and more.

But what exactly do these philosophies mean?

It’s worth asking and answering because these “Brincker-isms” are not a passing phase. Brinckerhoff has written three editions of Mission-Based Management—much to the appreciation of the sector. In other words, the nonprofit sector has kicked the tires and liked the journey in this book. So let’s take a closer look at what informed so many other readers’ decisions after reading it:

Nonprofits are businesses. “Your organization is a mission-based business, in the business of doing mission,” claims the author. He adds we don’t have license to be sloppy or ignore a good idea simply because it was originally designed for the business sector. “Using good business skills as a mission-based manager does not, I repeat, not mean dropping services simply because they lose money, nor does it mean turning people away because they cannot pay. But it does mean paying attention to the bottom line, having a strategic vision, and negotiating in good faith and from a position of strength—in short, being businesslike in pursuit of your mission,” explains Brinckerhoff.

No one gives you a dime. Brinckerhoff explains that nonprofits don’t get gifts. If a donor writes you a check for $100 to your social services organization, she isn’t making a donation. Rather, she is purchasing services for someone or some family she will never meet. Brinckerhoff says the business community calls this giving money in exchange for an expectation of outcome. When you purchase concert tickets, you have an expectation of entertainment. When you purchase an airline ticket, you have an expectation of transportation. When you send money to a nonprofit, you have an expectation of service. In other words, “you earn all the money you get,” asserts Brinckerhoff. An interesting paradigm shift.

Nonprofit does not mean no profit. Brinckerhoff encourages you to consider this point. Making money in a nonprofit is legal. Nowhere in the state or federal law does it say nonprofits cannot make a profit. He asks, “If you cannot make a profit, why do you need a tax exemption?” Profit is essential and a key tool for financial empowerment, a subject the Brinckerhoff covers at length later in the book.

As you move forward with your organization, ask yourself if anyone on your team subscribes to the thinking Brinckerhoff tries to overcome in these three philosophies. If so, how is he affecting your decision-making and outcomes? I know, it’s challenging to turn the corner on new thinking but well worth the effort.

Challenging terrain ahead

While I have you thinking about challenges, I’ll add one more. We asked consultant Raylene Decatur what she thought was most challenging about being a mission-based manager today:

CausePlanet: Where do nonprofit managers most commonly find challenges with leading a mission-based organization in your experience?

Decatur: Discipline is the number one challenge. The manager may be a disciplined individual but leading a disciplined department, division or organization is challenging. In a corporation, the bottom-line (profit and loss) creates discipline. Mission-based organizations have multifaceted impacts, which lack the quantified clarity of financial results. The board members, staff and volunteers may each love that mission differently and each be pulling the organization in slightly (or profoundly) different directions. It is the manager’s job to harness that energy and achieve the organization’s stated outcomes, year in and year out.

If you find yourself looking for a comprehensive analysis of how high-impact nonprofits lead their causes, consider Mission-Based Management; it’s grounded in Brinckerhoff’s road-tested philosophies and you’ll benefit from years of wisdom gained from many journeys.

See also:

Building Nonprofit Capacity: A Guide to Managing Change Through Organizational Lifecycles

Do More Than Give: The Six Practices of Donors Who Change the World

Forces for Good: Six Practices of High Impact Nonprofits

Image credits: Brinckerhoff, sikhchick.com, seriouswheeels.com

 

 

Leave a reply



Financial trends affecting your nonprofit in 2015

At Execute Now!, we’re often in the unique position of having a broad perspective on what trends affect financial management in the nonprofit sector due to the wide range of clients we serve. During this time of year, the legislative sessions are gearing up for what’s on the horizon in 2015. Most recently, we heard our country’s State of the Union address.

In the spirit of evaluating the state of affairs, I couldn’t help but share some of my own nonprofit sector insights for 2015 in light of some of the trends I’ve observed in the news. Join me in taking a look forward:

Giving circles and impact funding

If you’re like me, you’ve noticed the growing popularity of giving circles. Millennials have helped make this movement a popular way to give collectively with others. Giving circles are a form of participatory philanthropy where groups of individuals donate their own money or time to a pooled fund and decide where to donate the funds. During this process, they may also engage in activities to increase awareness of and engagement in the issues surrounding the cause or community project. Giving circles can be as informal as a group of friends or as structured as a foundation. Some examples of giving circles can be:

Investors
Nonprofits
Students
Policy makers
Business leaders
Political leaders

An article in The Chronicle of Philanthropy about a Jewish Group launching its own giving circle, called the Natan Fund, reported that studies show people who participate in giving circles tend to give more, have stronger religious and community ties, and are more strategic in their charitable contributions. They are also younger. Most of the members in the Natan Fund are under 45.

Natan Fund’s executive director, Felicia Herman, observes, “Young givers like to do things in a community of their peers.” The Natan Fund has approximately 200 members and has given roughly $9.6 million in grants since its formation in 2002. It launched a website as part of its efforts to offer a resource library that helps potential philanthropists join in the growing movement of collaborative charity. Natan.org is one of many giving circle sites cropping up to make it easier for collective philanthropy. Websites like www.Tilt.com are one of the “easiest ways to pool money with your group and make amazing things happen,” according to the website tagline. Tilt and other giving circle sites abound on the Internet. Enter “giving circles” in the search bar to find 14 million plus results.

Philanthropy and politics

No forecast is complete without acknowledging the uncertainty created by politics and legislative sessions surrounding nonprofit tax laws. According to The Chronicle of Philanthropy reporter Alex Daniels, the Republican takeover of Congress will mean lawmakers will dig deep into the tax code.

Some of the provisions under scrutiny, says Daniels, will be:

Extending the charitable deduction window into April 15 after the calendar year-end

Benefits for land conservation, donations to food banks and contributions to charity made from certain retirement accounts

The IRS considering what constitutes political activity by social-welfare organizations and whether their donors can remain anonymous

Foundation excise taxes (The House passed a measure to simplify and lower this tax to one percent.)

A proposal to require donor-advised funds to pay out at least five percent of their assets each year

The provision of federal support for social-impact bonds that fund “pay for success” efforts at the state and local levels

Pending rules that limit how to conduct federated campaigns (The United Way, in particular, hopes a Republican Congress will remove recently added federal regulations.).

Most of the sector’s preliminary feedback on these issues surrounded the April 15 deadline for charitable gifts. Some large nonprofits don’t like the idea because it diminishes the emotional appeal during the holidays. Lawmakers argue that businesses don’t really know what they have to give until they’ve completed their taxes in the first quarter. Depending on the legislation that passes this year, nonprofits could be making a year-end and April push for gifts.

Light at the end of the tunnel

Allow me to give you a dose of certainty after looking at the uncertain legislative provisions above by sharing some good news I’m confident will positively impact charities this year. The federal Office of Management and Budget (OMB) announced effective December 26, 2014, that “governments at all levels entering into written agreements with nonprofits to deliver services to the public have an affirmative duty to pay their fair share of the costs that those nonprofits incur.” This will require government agencies to reimburse nonprofits for some or all of their indirect costs. Amazing. This report came as a delightful surprise, especially since I’ve written at length about the lack of consistency with government funding and underwhelming support from its agencies.

In Nonprofit Advocacy Matters, Tim Delaney, President/CEO of the National Council of Nonprofits was quoted as saying, “The changes promised by the new rules are a major victory for people who depend on nonprofits every day. If properly implemented, the new rules will finally end the harmful practice of governments imposing artificially low limits on the reimbursement of indirect costs that nonprofits must incur. Those arbitrary caps have essentially forced charitable nonprofits to subsidize government.”

I couldn’t have said it better myself. I hope these observations have given you a sense of what 2015 may hold for your nonprofit. Giving circles are an inspiring movement and demonstrate innovation behind our giving spirit. Politics will always provide a climate of uncertainty and challenge us to overcome bureaucratic hurdles. The OMB’s new requirement teaches us an important lesson: There is always room for optimism—even with the government. Bloomberg Businessweek reported on the economic power of optimism in a January 8 article: Optimistic people work harder, get paid more, get elected to office more often and win at sports more regularly. They even live longer. The effect of optimism spills over into business decisions. Let your optimism impact your leadership decisions this year. You may live longer and have time to start a giving circle of your own.

See also:

Cash Flow Strategies: Innovation in Nonprofit Financial Management

Nonprofit Sustainability: Making Strategic Decisions for Financial Viability

The Nonprofit Business Plan: The Leader’s Guide to Creating a Successful Business Model

Image credits: post-gazzette.com, givingcirclesnashville.org, latinorebels.com, businessobservefl.com, exacttarget.com, mpd.me

 

Leave a reply



Welcome! Please provide your log-in information below.
Forget your password?
Enter your email or user name and your log-in information will be sent to the email on file.