Could Philanthropic Equity Revolutionize the Nonprofit Sector?

Welcome to guest blogger, Nell Edgington! Nell is the President of Social Velocity, a consulting firm that helps nonprofits grow their capacity and become financially sustainable. When a new report recently appeared about philanthropic equity, I asked Nell to comment and explain what it all means.

There is a fairly new concept in the nonprofit world that has the power to completely transform the sector. "Philanthropic equity" (or "growth capital") is just a fancy term for the money many nonprofit organizations desperately need.

Philanthropic equity is a one-time infusion of significant money that can be used to strengthen or grow a nonprofit organization. It can be money that grows a successful program to other clients, other cities, other regions. Or it can be money that strengthens the organization and makes it more sustainable.

But before you can understand philanthropic equity properly, you must understand a critical distinction about money. There are two kinds of money.

• Revenue is the day-to-day money required to run programs. For a homeless shelter, revenue buys meals, beds, sheets, job training programs, staff time.
• Capital is the one-time infusion of money that builds or grows an organization. Again for a homeless shelter, capital could purchase a better system for gathering data on clients, a donor database, a Development Director.

This distinction between revenue and capital is one that the Nonprofit Finance Fund first suggested the nonprofit sector recognize.

Late last month the Nonprofit Finance Fund (NFF) released a report demonstrating that nonprofits that raise growth capital increased services to their communities by almost four times and increased organizational revenue by 170%.

And other entities that provide growth capital to nonprofits (like New Profit and Venture Philanthropy Partners) have seen similar growth for the nonprofits in which they invest. That's powerful evidence that philanthropic equity investments can dramatically increase the effectiveness of a nonprofit.

While the nonprofits that are in the portfolios of NFF, New Profit and Venture Philanthropy Partners tend to be very large organizations with multi-million dollar budgets, the concept of philanthropic equity can still apply to smaller nonprofits.

For example, as any nonprofit will tell you, it is nearly impossible to get a funder to pay for a Development Director, a donor database, marketing collateral, a new website. These are elements that would allow an organization to dramatically improve its revenue function. If a nonprofit could raise the capital required to purchase these elements, they could become much more sustainable and provide much more social impact.

Social Velocity has worked with a number of small to medium sized nonprofits to create a pitch for capital to strengthen revenue functions, grow programs and otherwise build organizations.

Let's take the example of a small arts organization in Charlotte, North Carolina.

Elaine Spallone, executive director of Charlotte Chamber Music, felt that they were stuck. As a small, but beloved arts organization they had a great product, but they couldn't get beyond the vicious cycle of never having enough money, never being able to expand their presence and impact. They had a solid board, and a great vision for the future, but lacked philanthropic equity to build the organization to achieve that vision.

I worked with Elaine and her board to create a long-term strategic vision, a plan to get there, and a funding pitch for capital to build the organization. You can read the on-going case study about this work to raise philanthropic equity at a small nonprofit here. Charlotte Chamber Music is now actively raising capital, and it's very exciting.

It's incredibly powerful to think about the implications of this concept for the entire nonprofit sector. If a nonprofit that provides a solution to a social problem was no longer impeded by a lack of capital, it could be revolutionary.

We'd no longer see great programs wither on the vine. The best and the brightest ideas could travel all over the country, indeed, all over the world. All it takes is the right kind of money, invested in the right place at the right time, and the solution can take off.

Got questions for Nell? Please leave them in the comments.