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September 21, 2010
Report Encourages the Application of For-Profit Business Model to Nonprofit Management
    by Robert Kropp

NFF Capital Partners issues report detailing the success of some nonprofits in attracting philanthropic equity investments to subsidize their activities.

The Nonprofit Finance Fund (NFF), a leading community development financial institution (CDFI), is the only CDFI focused exclusively on lending to nonprofits. Since 1980, NFF has provided more than $200 million in loans to nonprofits, and leveraged $1 billion of capital investment.

One of the more intriguing of the organization's initiatives is
NFF Capital Partners. Formally launched in 2006, NFF Capital Partners focuses on helping nonprofits attract philanthropic equity investments to fund growth, achieve financial sustainability, and increase social impact.

2010 Portfolio Performance Report published by NFF Capital Partners documents many of the success stories of nonprofits with which it has worked, and provides insight into how a for-profit business model can help nonprofits use philanthropic equity to build sustainable organizations.

Traditionally, capital campaigns for nonprofits have focused on the funding of specific projects, such as buildings or endowments. The model employed by NFF Capital Partners on behalf of its clients, on the other hand, raises capital that is unrestricted; that is, "the capital raised in these campaigns is free from the limitations of traditional bricks and mortar or endowment campaigns."

According to NFF Capital Partners, funder roles in the social sector fall into two categories, buyer and builder. Buyers are the traditional donors in the nonprofit sector, basically providing funds for the specific execution of programs. Builders, on the other hand, by providing philanthropic equity, pay "for deficits incurred ahead of a rebuilt business model."

The report states, "Philanthropic equity is designed to subsidize an organization until it reaches a point where its activities are fully sustained by buyer-type funders, under a chosen business model."

"Importantly," the report continues, "It is an episodic process once an enterprise is built, the builders can exit." The report goes so far as to envision the day when the "most promising nonprofit business plans and management teams may discover that their equity campaigns are 'oversubscribed.'"

Clearly, applying a for-profit business model to the ongoing management of nonprofit organizations seems to be an idea whose time has arrived, and the report documents a number of case studies in which the comprehensive engagement of NFF Capital Partners has led to $116 million in campaign commitments, a compound annual growth rate of 57% in program delivery, and a compound annual growth rate of 36% in business model revenue. Furthermore, annual business model revenues for the nine portfolio members for which multi-year data is available "are currently $30 million higher than the baselines that were set before $87 million of associated philanthropic equity was invested," representing a leverage of 35%.

The comprehensive engagement of NFF Capital Partners consists of due diligence, development of an investment prospectus, implementation of standardized accounting methods, and development of financial and social metric reporting. spoke with Craig Reigel, a Partner at NFF Capital Partners, about the success of the initiative thus far, as well as potential for having a much wider impact in the future.

"The initiative puts together two things that have existed for a long time," Reigel said. "One is investing growth capital to grow enterprises, and the other is capital campaigns to raise money to pay for things."

"Getting out of the habit of fundraising based on being needy and into demonstrating how they can deliver a powerful impact with capital is an important shift for nonprofits," Reigel continued. "You certainly wouldn't invest in a start-up company because it was needy and running out of money, but because it has a really strong model and a great story. Why would nonprofits be any different?"

However, Reigel added, "What comes naturally in the for-profit space has been unnatural in the world of nonprofit management."

Harkening back to the model of donors as buyers and builders, Reigel observed, "Certainly, all donors are entitled to choose what causes they support. The question is how you can get the most impact for your investment. For a lot of donors, the right thing to do will continue to be to support programs that work. It provides regular revenue to nonprofits."

"For those donors who want to have an impact that lasts beyond their dollars, finding a way to support the growth of an enterprise is a great way to get leverage," he said.

One success story documented in the report is that of
Year Up, a Boston-based training program that promotes professional careers and higher education for urban youth. One advantage enjoyed by Year Up was its early adoption of the philanthropic equity model, which allowed it to raise money for the model in advance of the economic downturn. Thus, according to Reigel, Year Up was able "to continue to invest in their geographic footprint. When support for workforce redevelopment came down the pike, they were in a position to really be helpful. I think their story would not be such a happy one if they had tried to fund their growth year by year."

Reigel continued, "In 2008 and 2009, raising money for ongoing campaigns became very hard, and starting new capital campaigns became very hard. But the organizations that had pre-raised their growth capital earlier withstood the downturn better than many of their peers."

Although the report documents a number of successful case studies, Reigel said, "The most important thing about the report is not about philanthropic equity. It's about the business that comes out of it, the more than tripling of program activity that's happened because of it."

"This is a work in process," he continued. "The real story is ten years from now, when the $160 million in invested capital gives rise to a billion dollars a program."

Noting that other organizations have begun to be active in the same space, Reigel concluded, "We think the concept and the learning of this is widely applicable. Our strategy has been to foster emulation."

NFF Capital Partners plans to publish updated reports "on roughly an annual basis." Reigel said.


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