With hundreds of billions of dollars given to charities every year by individuals alone ($180 billion in 2003), foundations with assets larger than most countries’ GDP, and a culture that places a high value on ambitious visions and entrepreneurship, one would expect it to be easy to find funding to grow social innovations to scale in the United States. It isn’t.
One of the primary obstacles to scale is lack of access to growth capital. Without sufficient growth capital, social entrepreneurs are forced to continuously focus on scrambling for funds and cannot put sufficient energy into the other activities that would ultimately make their organizations more compelling to a wide variety of funders.
Of the roughly half million US non-profits, 92 per cent operate with a budget of less than $1 million a year. Small can be beautiful, but for those with aspirations to reach millions in need and address large-scale social problems, small is inadequate. Over the last 30 years, an estimated 10,000 such high-aspiration social entrepreneurs have started new organizations to ‘change the world’. Only 21 of these organizations have reached an annual operating budget of $20 million or more. The result is that the 3,300 organizations (0.6%) that achieved an operating budget of $20 million or more are dominated by outfits like the Salvation Army, Boy Scouts of America, and other non-profits that are between 50 and 100 years old. In the battle for capital, the best ideas and most impressive results of contemporary social enterprises struggle to compete for resources with the household names and alumni databases of incumbents.
Some contemporary social entrepreneurs whose organizations have been growing rapidly have turned to venture philanthropy firms that specifically support the formation, establishment and growth of social enterprises. As this article will show, the US does have a developing growth capital market for social entrepreneurs, of which these venture philanthropy firms are part, but what this market provides is far from meeting the needs of social entrepreneurs in the US today.
College Summit and its partners in growth
Take Washington DC-based College Summit as an example. Founded in 1995, College Summit prepares low-income students for college application and enrolment. ‘Getting that kid who’s the first in his family to go to college effectively ends poverty in that family,’ says founder and CEO J B Schramm. Over the last three years, College Summit has grown at nearly 50 per cent per year in both revenue and number of students served. In 2004, it served nearly 3,500 youth with a budget of close to $6 million. With a scalable model and an increasingly diversified funding platform, College Summit is well on its way to scale.
Along the way, College Summit has worked with a number of different organizations that focus on supporting social entrepreneurs at different stages of their organizational development.
· In 1997, J B Schramm received funding from Echoing Green, a non-profit that supports promising social enterprises during their launch phase with start-up capital (typically $60,000 over two years), some technical assistance and peer-to-peer learning for the social entrepreneur.
· In 2000, J B Schramm was named an Ashoka Fellow. Ashoka focuses on social entrepreneurs who are moving beyond the launch phase and have the aspiration and potential for national impact by changing patterns across society. Ashoka provides financial resources (typically $90,000 to180,000 over three years), cross-sectoral technical assistance and opportunities for ongoing collaboration and learning among Ashoka Fellows around the world.
· In 2002, College Summit became a New Profit Inc portfolio organization. New Profit works with the whole leadership of the social enterprise (including the board), focusing as much on the model and the organization as on the individual entrepreneur. New Profit provides greater financial resources (typically $1 million over four years); it also works very intensively on a one-to-one basis with its portfolio organizations on strategy, growth planning, leadership development and other key areas of development critical to scaling social innovations.
· In 2004, College Summit received $300,000 over two years from the Skoll Foundation for developing and systematizing organizational operations to enable scaling.
· In December 2004, College Summit entered into an investment partnership with Venture Philanthropy Partners (VPP) to build out College Summit’s regional organization in the Greater Washington DC region, with an initial target of serving 3,000 students.
Other growth-oriented, highly successful social entrepreneurs have followed a similar path. Interestingly, five of the eight social entrepreneurs leading New Profit portfolio organizations have been Echoing Green Fellows.
The growth capital providers
At the Venture Philanthropy Summit last November, more than 200 representatives from several dozen US philanthropic organizations that focus on supporting social entrepreneurs and their organizations at different stages of their development met to share their experiences and reflect on joint opportunities and challenges. The table below provides an overview of some of the organizations represented.
What these capital providers have in common is that they all work in long-term (three to seven year), mutually accountable, high-engagement relationships with a focus on results and capacity building. All provide non-financial as well as financial support. Not all of the organizations are purely growth funders, and they don’t necessarily use the term ‘venture philanthropy’, but they all focus on social enterprises and they all care deeply about growing the social impact of the organizations they support.
What is missing?
While this group of social entrepreneur supporters has been an enrichment to the philanthropic landscape in the US, and many successful social entrepreneurs have received critical funding and intellectual resources from them, the less than $100 million in their collective annual payout is only a drop in the bucket – and not all of that is directly for social entrepreneurs, nor is intended to serve as growth capital.
Examples of individual donors, corporations and the government playing a growth-funder role exist, but this is not their specific focus. More often these capital providers prefer working with well-established organizations or restrict their giving to programmatic support. Nor are they geared to providing the sort of non-financial input that dedicated growth funders provide.
There are also capital providers like the Non Profit Finance Fund (NPFF) and Calvert, which provide zero interest or reduced-rate loans and other financial non-grant arrangements. These organizations tend to provide working capital rather than unrestricted growth capital. Bell, for example, one of New Profit’s portfolio organizations, received a $1.5 million bridge loan from NPFF to make up for a temporary shortfall of cash and working capital in their pursuit to grow the number of kids served in New York from 300 to more than 3,000 in three years. Earned revenue strategies can in certain circumstances yield unrestricted income that can be used for growth purposes, but for many social change organizations such opportunities are limited.
More, and larger, venture philanthropy funds, and other growth capital providers who understand social entrepreneurs, are therefore needed to satisfy the collective capital demands of rapidly growing, high-impact social enterprises.
Dollars aside, the other piece that’s missing is the next step up from New Profit. While New Profit typically helps social enterprises grow to approximately $10 million over four or five years, no issue-agnostic, nationally oriented, next-stage funder exists that can support these organizations’ expansion from $10 million in revenue to $20 million or $30 million.
What is growth capital?
It’s important to differentiate between programmatic revenue and growth capital. New Profit defines growth capital as the deficit incurred en route to a sustainable new level of enhanced performance. Enhancement could mean several things. Enhanced quality of impact, enhanced scale of impact or enhanced financial health. Programmatic revenue doesn’t pay for any of this. It pays for delivering a certain service without really augmenting the quality or financial health of the organization in a sustainable manner. Social entrepreneurs need to know how much of each category they need – internal accounting as well as interactions with funders should be different in each case. Funders also need to understand how much of each they give and what exactly they are ‘buying’. Are they ‘buying’ a stronger, more capable organization, or the services and ‘output’ of an organization within its current strengths and capabilities?
Where is the income of a ‘sustainable’ organization going to come from? New Profit encourages its portfolio organizations to develop diversified funding – with an appropriate combination of government contracts, corporate sponsorship, individual donations, foundation grants, and fees for service. In most cases, however, where the clients are young or poor or otherwise marginalized people, fees are never likely to make up a significant proportion of income. What the growth funder wants to help build, therefore, is the capacity to raise these diversified funds.
Should growth capital be repayable? For many social enterprises, unless there is a third party payer, this is not a realistic option if they want to keep the service at a price that is affordable by their clients. In effect, this would mean charging poor and vulnerable clients premium fees in order to pay back loans – something that is unacceptable to all parties involved.
1 The total assets of the Bill and Melinda Gates Foundation, for example ($26 billion), are larger than the gross domestic product of 103 countries.
2 Another major barrier is lack of access to top talent. Yet another is the difficulty for relatively small organizations in carrying out satisfactory performance measurement – something that is vital if they are to raise the money they need.
3 This figure excludes religious organizations, church and school organizations and organizations not required to file with the IRS. Altogether, there are currently 1.4 million non-profits in the US and that number currently grows by 40,000 a year.
4 This is in stark contrast to the for-profit sector where the largest company (Wal Mart) is 40 years old and many Fortune 500 giants such as Microsoft, Dell and Home Depot have been founded in the last 30 years.
5 These figures are valid for the US only; in general, Ashoka provides a stipend that is equivalent to the remuneration of an executive director of a start-up non-profit.
6 My thinking in this paragraph was very much influenced by George Overholser, who is an expert on the topic of non-profit growth capital and the difference between ‘building’ versus ‘buying’.
Heiner Baumann is Chief Knowledge and Learning Officer at New Profit Inc. He can be contacted at Heiner_Baumann@NewProfit.com