Virtuous Capital

Jim Menkevich

Virtuous Capital

The life-blood of a non-profit organization (NPO) is donations. Donations can come from individuals, institutions or foundations. Up to 50% of a NPO CEOs time is spent just raising funds.[4] If raising capital is the highest priority of a NPO, one would assume that spending it wisely is second. That, however, is not always the case. Innovation in delivery of program’s mission trumps organizational strength and longevity in most cases. What if there was a better way to achieve the long term mission of a NPO? What if their was a better way to make sure that ever dollar had a better bottom line impact? What if those foundations that donate funds want to demonstrate themselves to be morally excellent? Donors are now demonstrating their capabilities with NPOs to drive change. At the same time, they are transitioning from a passive to an active role in these donations. Want to increase the social benefit of your NPO? A new breed of capitalist may be the answer. 

Foundations that donate to non-profit organizations see their job as done. They already accomplished their intended goal – distribution of funds to non-profits that need it. Emphasis is put on how well a NPO is scaling access of their services. For example, the number of facilities opened and people that are using these facilities may be the a key performance indicator (KPI) of a NPO. These metrics are great in terms of efficiency. An organization can take it’s mission and goals and scale it. This, however, does not address effectiveness – the social return on donation. What if we changed the word “donate” to “invest”? Investing implies that you have skin in the game and are willing to incur a certain level of risk. Outcomes matter. How your money gets allocated matters. How you interact with those who have accepted your funds matter. From this perspective, it starts to look like venture capital.

So what can traditional philanthropy learn from the venture capitalists? First, cash is only one of an organizations many needs. NPOs need more to survive the next funding cycle. Structure, leadership, infrastructure and systems are required to keep the ship afloat. In order to discover these needs, donors need to maintain a more active relationship with NPOs. By being intimate, trust is developed and needs can be matched with donor competencies. In the case of Venture Philanthropy Partners (VPP) and See Forever, Dave Domnicki said of VPP, “They asked every single question about our school, our personal lives. They looked at every single record.” The result – $2 million, 4-year commitment which yielding an almost 3x increase in students (80 to 225) and double the number of schools. VPP was also able to offer “strategic assistance”, installing a new chairman of the board and offering financial advisors. [5] Through intimate knowledge, VPP was able to give See Forever what it needed most – leadership and fiscal discipline.

“Investing” in NPO doesn’t stop there. There has been a shift from traditional philanthropy to catalytic philanthropy. In catalytic philanthropy, donors take an active role in an organizations success. They see themselves as change agents and differentiators. They will use all tools available to make sure the investment is maximized. Funders in catalytic philanthropy don’t consider the NPOs responsible for success. They prefer to assume some of that burden. Take for example Bob Pattillo . He noticed that microfinance was not flourishing in the Middle East. Instead of writing a check, he decided to get to work. Bob took the initiative to get microfinance literature translated to Arabic, organized the first ever Arabic microfinance conference and built key support functions to catalyze this change. The result – microfinance borrowers in the Middle East grew from 40,000 to 3 million! [6] Good strategy and plentiful donations will get you in the door. At the end of the day, it’s ultimately action that drives results. Rolling up the collective sleeves of philanthropy will contribute to better return and value creation.

Lately, the dynamic of being wealthy is changing. The disproportion of wealth between classes has created a super rich elite producing 691 billionaires[1] according to Forbes. These new rich are ushering in a new era of giving. Their fortunes are being mobilized to solve the world’s biggest problems. And this quest is starting earlier and earlier. Typically, billionaires would start thinking about “giving back” in their 60s and 70s. Now it’s occurring it their 30s and 40s. Take for example, Bill Gates. Bill retired early as CEO of Microsoft to co-chair the Gates Foundation with his wife, Melinda. The Bill and Melinda Gates Foundation focuses on eliminating poverty. To achieve their goals, the following values are employed: Optimism, Rigor, Collaboration and Innovation. Under Collaborate it states, “we embrace risk and learn from failure, helping others to avoid the same pitfalls in future” [3] This doesn’t sound like your Grandma’s philanthropy. These types of values fly in the face of writing a check and just moving on. They covey that “we” are in this together. And the solutions they are attempting to implement for improvement of living conditions and economic activity in third world countries are unique. Take for example their project to reinvent the toilet. About 2.6 billion people don’t have the access to a safe and affordable way to “go to the bathroom”. By improving sanitation, economic conditions improve. Every $1 in sanitation investment yields $9 in economic activity.[3] It takes a new breed of foundation to go after these types of problems.

With the transition from traditional to venture and catalytic philanthropists, NPOs are left scrambling to adapt. Fundraising is primarily a static activity. You explain your mission, invite wealthy donors to champion your cause then cash the check. In this new era of virtuous capital, NPOs need to redefine themselves to survive. It’s a necessity. NPOs that have their business in order will win the competition for capital. My prescription for preparing this change is as follows:

  1. Know Thyself – This involves taking a good look in the mirror. Be critical of what you do well and where you need help. The sooner you are honest, the sooner adaptation can come.

  2. Focus on Longevity – To truly achieve your goals, you’ll have to be around for the long haul. Make sure there is a balance between keeping the machine running for the next funding cycle and existing in the next 5 years. This will differentiate you from the pack when looking to drop a dollar in your bucket.

  3. Be Willing to Let Go – Whether it’s leadership or board positions; whether it’s systems or structures, be willing to accept help. If you are truly dedicated to the social bottom-line, nothing else should matter. Venture and catalytic capitalists are looking to partner and invest. As with conventional organizations, knowing when to make a deal for the good of shareholders means you have to be willing to compromise.

NPO funding is undergoing a major disruption. Savvy virtuous capitalists are willing to go “all-in” to catalyze lasting change. Innovation in what and how donations are made is looking more like the for-profit world. NPOs need to change now. Because their donors already did.

References

[1] Bishop, Matthew, et al (Feb 25th, 2016). The business of giving. The Economist

[2] Bill and Melinda Gates Foundation (2012) Reinvent the Toilet Retrieved on November 10th, 2012 from: http://www.gatesfoundation.org/infographics/Pages/reinvent-the-toilet-info.aspx

[3] Bill and Melinda Gates Foundation (2012) Values Retrieved on November 10th, 2012 from: http://www.gatesfoundation.org/about/Pages/values.aspx

[4] Letts, Christine; Ryan, William; Grossman, Allen (March 7th 2001). Virtuous Capital: What Foundations Can Learn from Venture Capitalists – Harvard Business Review

[5] Conkey, Christopher (July 3rd, 2006) – Strings Attached; Along With Their Big Bucks, Rich Donors Want to Give Charities Their Two Cents – The Wall Street Journal

[6] Kramer, Mark (Fall 2009). Catalytic Philanthropy – Standford Social Innovation Review

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One thought on “Virtuous Capital

  1. tlhill2012 November 24, 2012 at 12:19 PM Reply

    Mim – thanks for this lively post. It is true tat, as you say, “Innovation in delivery of program’s mission trumps organizational strength and longevity in most cases.” But this is because innovation in program is what has been rewarded. That is, many foundations have (this is changing) invested only in new programs, not organizational capacity. Indivduals are worse, especially those that rely on the rankings of charity navigator with its emphasis on the % of dollars donated that go to direct service – w/o necessarily enough for infrastructure. Of course, everyone wants efficiency, and the good feeling that comes with knowing that a $ donated generates a $ of impact, but the balance between short-term and long-term is hard to strike.

    In this context, the investor approach is encouraging, because it looks to build capacity and to measure impact at every step of the process. This long-term building towards change is exciting. It is also tricky because the question arises, who watches the investors? Do we depend on their judgment? Their measures? This speaks to the wider question of measuring social return on investment in some sort of transparent way. And of wondering who should control investment in social wealth. Can we rely on the billionairres to do this? What is their incentive? And how durable is it?

    No solutions yet, but clearly the investment approach is encouraging, measurment is critical, and governance remains on open issue…

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