For-profit companies consider an array of financial instruments to provide funds needed to run their plants, pay their employees, and produce their products and services. They analyze the best ways to fulfill their missions—creating shareholder value—by managing their balance sheets through public appeals for cash (offering shares to the public), loans (bond offerings or bank borrowings), and business combinations (mergers and acquisitions).
Those in the nonprofit world seeking money for social purposes rarely think in similar terms, yet they have the same tools at their disposal. According to a recently published guide (Essentials of Impact Investing), fewer than 20 percent of Ohio charities were even aware of available funding mechanisms beyond annual donations.
Foundation leaders can and should help program providers and prospective grantees understand that they can access an array of financial products similar to those used by for-profit companies to help them better serve their target populations. Below are some strategies we are employing at the Heckscher Foundation.
1. Asking basic questions
One of the first questions we ask ourselves when we consider funding an organization is: How can we best deploy our capital to help the organization meet its mission? The answer might be a one-year grant, a multi-year commitment, a challenge grant, a Program Related Investment (PRI), or a Mission Related Investment (MRI). All too often, prospective grantees are not thinking in these same terms. By asking prospective grantees to consider how they can have greater impact using one or more of these funding tools, we can open their eyes to the possibility of not having to spend most of their time raising annual dollars, planning annual appeals and benefit evenings. Frequently, we direct nonprofits to missioninvestors.org, which published the guide mentioned above; or for a deeper dive, the recent Brookings study, The Potential and Limitations of Impact Bonds. In some instances we’ve hired consultants for grantees, such as nonprofit advisors Arbor Brothers and SeaChange Capital Partners, both of which are experienced in advising nonprofit leaders and boards.
2. Funding board building
Nonprofit leaders often tell us of their difficulties in recruiting big name hedge fund and private equity board members. Our answer is to look instead for early and mid-career professionals. These next generation trustees will become major donors and business leaders, who can use their business acumen to help nonprofits better understand their own balance sheets and identify opportunities for alternative sources of funding. So over the past four years, we’ve focused on the need for next generation board members among youth-serving nonprofits, and we have helped to place qualified, engaged younger professionals with financial skills on nonprofit boards and evaluate their impact. Funded programs took various forms, including:
3. Collaborative impact investing
In 2014, we encouraged SeaChange Capital to launch the New York Pooled PRI (NYPRI) Fund to help funders increase their impact through pooled PRIs. Co-funded by the Altman Foundation, the Thompson Family Foundation, and one other private family foundation, NYPRI investments generally range from $250,000 to $750,000 and take the form of secured and unsecured loans, loan guarantees, equity, or equity-like securities. Terms are determined case-by-case to achieve the programmatic objectives of NYPRI participants while remaining below market. Through the fund, we’re able to make investments that, despite offering an attractive balance of social return and financial risk, are poorly suited to grant funding and in many cases require more flexibility and/or risk-tolerance than commercial lenders will undertake.