New Profit provides multi-year financial and strategic support to innovative social entrepreneurs and their organizations to help them realize their full potential for social impact. Elizabeth Riker shares her thoughts about the national venture philanthropy fund's rich learning curve in raising funds from high-net-worth individuals and foundations, then providing nonprofits with multi-year flexible capital—the topic of this interview series.
Is it important to have more capital available to more high-performing nonprofits—that is, capital as distinct from revenue, including general operating support?
The answer obviously is yes, resoundingly. The sector needs more capital and more revenue. For us the primary difference between revenue and capital is related to how the money is intended—or required—to be spent, and how the funder measures success. We consider our money to be capital since it’s aimed to help our organizations grow and scale their impact. Our money is unrestricted and our organizations use it to grow and build out their capabilities to test new ideas, and overall build the infrastructure and revenue model that ultimately could sustain the organization.
“By growing to multiple markets and doing work in different settings, you start to get very crisp on the true drivers of impact of your model, and what could be widely adopted if you were to affect much broader systems change.”
And yes, we absolutely believe that having more of this kind of capital is crucial to enabling high-impact organizations to get to scale. For us, it generally relates to significant program growth, but the growth is actually an avenue to continue to hone the organization’s impact. By growing to multiple markets and doing work in different settings, you start to get very crisp on the true drivers of impact of your model, and what could be widely adopted if you were to affect much broader systems change. We think of growth as a means to an end in many ways.
If you could more effectively build the capital side of the philanthropy market, perhaps that would allow for a more effective and functioning revenue side. Because it really is both that need to be high-functioning for organizations to be able to pull off the kind of growth and impact that is crucial if we’re going to solve the problems that we’re up against.
How does the capital-revenue distinction play out at New Profit?
Our first round of funding traditionally is four years, a million dollars. It’s unrestricted capital and is often the first investment of this magnitude that the organization has received. And it our hope is that it can signal the beginning of a new kind of fundraising for the organization where both capital and revenue are part of the mix. Our typical sweet spot entry point for our initial investments is organizations that have budgets anywhere from about one to three million dollars. What we’re looking for at that first stage of investment is a lot about potential. We’re looking for a great leader that’s had a track record in terms of what they’ve been able to build as an organization, as a mission, as a team, as a board, and funders. We’re looking for a model that’s got some real traction on the ground, and ideally has replicated to at least a second market and so has some understanding of what’s scalable, what breaks first when you take your first shot at scale. And we’re looking for an idea and a leader that have the potential and aspiration for significant national impact.
So we’re screening for a particular set of things, and when we find them we make this big, upfront commitment. What’s key to us is that it’s a multi-year commitment and that it’s unrestricted. We expect organizations to use it to facilitate their readiness for their second stage of funding from us, which we call a “growth capital” campaign. We’ve actually explored using the words “proof capital” campaign, because this money is often supporting the organization in building up the evidence that backs their model, that drives differential outcomes compared to others in the field.
Is the capital/revenue distinction is more meaningful in your second round support?
In the early days, when you have a budget of one to three million dollars, you’re not thinking capital/revenue, you’re just thinking month to month, quarter to quarter, year to year—“How am I going to raise the money to cover this year’s expenses and set me up for next year?” So much of their journey with us is education of this capital/revenue distinction, and how to work with prospects and current donors to move them in this direction. Over the four years that we work with them we get them ready for our second-round investment, and for those that we re-invest in, they’re doing a capital campaign of anywhere from ten to forty million. We typically want to be less than 20% of the campaign, so a significant stake, but not so much that it overrides bringing other significant funders to the table.
We’ve gotten, I think, crisper over the years as to what readiness looks like for an organization to take on that kind of a one-time raise, and then to be successful in actually executing and implementing on the back end of the plan.
Do you raise your money and then distribute it, is that how it works?
Yes. We raise our money; we raise every penny we give away. Historically, we’ve raised most of our money from high-net-worth individuals. We’ve had a small number of families, many in Boston but over time it’s included New York, Texas and the West Coast. They have typically made New Profit a pretty significant portion of their philanthropy, or at least of their high-impact philanthropy, and their aspiration has been to do a more effective job with their philanthropy through New Profit than they would do on their own. And our job is to steward their capital in ways that will prove that we really are able to select, support and accelerate a portfolio of very high-performing organizations.
Given your experience, what thoughts do you have on how to attract more high-net-worth individuals to give this way to nonprofits?
What’s curious for us is, historically, we’ve largely been supported by high-net-worth individuals. But more recently, there’s been a set of foundations supporting our work, especially as we’ve been broadening our work, not just to be working one-on-one with individual organizations but actually doing what we’re now calling domains. Our strategy has evolved to bring sets of entrepreneurs together who are working on similar or overlapping issues, and support these clusters of entrepreneurs with policy support and smaller gatherings that include funders, academics, and policy leaders. So as our strategy has evolved we’re diversifying our own funding. And we added the federal government through the Social Innovation Fund.
“Our strategy has evolved to bring sets of entrepreneurs together who are working on similar or overlapping issues, and support these clusters.”
Then our organizations themselves go out to raise these capital funds and they also have a range of funders: high-net-worth individuals, engaged foundations, and for some organizations there’s some government money--although generally government money tends to be revenue.
And so in some ways it’s almost a broadening of who it is that you’d want to have around the table. I think it’s anyone who has access to capital and a like-minded appreciation for the power of multi-year, larger-scale, and growth/impact-oriented gifts that allow organizations to make particular kinds of investments that ongoing annual revenue doesn’t allow them to cover.
When you think about the term impact investing—which provides both a financial and social return—and you look at the work that you’re doing, do you see conflict in terms of helping potential philanthropists understand the distinction between impact investing and this kind of capital grant-making?
It’s funny. I feel like some days it’s so crystal-clear what I think my answer is to this and other days it gets so fuzzy depending on who you’re talking to and what the direction the conversation takes. Early on we were very clear that philanthropy was the most effective, or at least a very significant lever to get at intractable social issues. For these issues, where markets are broken, philanthropy is required since the beneficiaries can’t afford to pay, and there are few stakeholders or other constituents that can influence systems and structures so that there would be a way to pay for the services. And so in the early days, it seemed as if impact investing as we call it today was this slightly blurry middle ground between for-profit investing and philanthropy where it was less clear that you could drive as much impact. Neither could you get great impact, nor could you get great returns. So on the two-by-two matrix, it fell out on both.
"Tax status is... not what allows you to define whether there’s high impact or low impact. It’s much more about getting the right tax status, the right structure to support the organization and its mission"
That said, we were incorporated from the beginning to be able to make investments in both for-profits and nonprofits, since our core belief was that we were part of creating a new way of supporting social innovation and we anticipated that it may take many forms. And I would say where we are today is more on a learning journey. We’ve made our first for-profit investment, and increasingly I see that tax status is not the defining principle. That’s not what allows you to define whether there’s high impact or low impact. It’s much more about getting the right tax status, the right structure to support the organization and its mission. There are differential benefits and tradeoffs to each status. So we’re getting more and more intrigued and we’re learning as we take on this first for-profit investment.
At Heron, we’re actually saying we are “tax-status agnostic.”
Yeah, exactly. Exactly. Check out more from thought leaders in impact investing and philanthropy in our Influencer Series.I also think the field has come so far since then. We’re seeing more and more organizations exploring different tax statuses and different structures as their work evolves, and it’s becoming clearer and clearer that the key is about getting the alignment right for a given marketplace and intended impact.