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Financing the Social Sector

September 15, 2014

Last week, we explored ten ideas for nonprofit organizations and social entrepreneurs to use in raising capital for their enterprises. This week, our focus is on the funder's side.

The Nonprofit Finance Fund has a handy document that outlines what it believes funders and investors should keep in mind when considering whether to support nonprofit organizations and social enterprises. In essence, this is a top 10 list of "to dos" for foundations and corporations.

  • Effective funders understand that nonprofits must balance mission, capacity and finance in order to be effective.
  • Effective funders never ignore the "enterprise platform" -- that each of their grantees has a distinct enterprise platform (or business model), even when their missions or programs are similar.
  • Effective funders realize that "nonprofit" is a tax status, not a business plan. A wise funder is glad when its grantees operate with surpluses.
  • Effective funders make grants that take into consideration and accurately reflect a grantee's financial state.
  • Effective funders think outside the grant by understanding the "whole enterprise," not just the individual program they're funding.
  • Effective funders think "net grants" and tread lightly on "unfunded mandates" accompanying project and restricted funding.
  • Effective funders understand that nonprofits manage in a looking-glass world, commercially speaking - that many of the conventions that for-profit managers rely on are reversed or improbable in the nonprofit environment.
  • Effective funders understand that nonprofits run at least two businesses: the core business, related to delivering on mission, and the business (usually fundraising) that makes up for the market flaw.
  • Effective funders understand that growth is especially demanding in the nonprofit world, for commercial reasons: growth for nonprofits is more capital intensive, takes longer and is riskier from a quality control and mission perspective than for for-profits.
  • Effective funders know their role - as a buyer or builder - and play it well: they distinguish regular, routine operating revenue from capital and extraordinary revenue.

While I can't say that we follow all these guidelines for every single grant at American Express, we are pretty cognizant of a nonprofit's ability to undertake a new program or service, and we ensure that our project grants include funding for operating costs associated with those projects. Through our programs we sometimes act as a "buyer" - particularly when funding an existing program or helping an organization do more of what they are already doing. But, we are also a "builder" when funding capacity building in the use of volunteers, leadership development, and the preservation of buildings and historic sites.

And, despite the huge success of this summer's ALS Ice Bucket Challenge and various crowd-funding initiatives on Kickstarter and other social media sites, what the nonprofit sector really needs is to grow the overall funding pie from its current 2 percent of GDP to 3 percent of GDP. In order to do that, nonprofits will need to invest more in growth and develop more capacity in gaining access to capital.

Next week, we'll take a look at some of the efforts that we've made to build the capacity of leaders from a fundraising and financing standpoint, and we'll also report on a Funder's Panel that we hosted as part of a recent Leadership Academy.

If you have a comment or question, please follow me on Twitter at @timmcclimon and let's start a conversation there.

Next week: Building the Capacity of the Social Sector


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