Philanthropy Daily Digest

June 19, 2009 – 5:03 pm | By Sean Stannard-Stockton |
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  • Philanthropy Daily Digest

    June 18, 2009 – 5:02 pm | By Sean Stannard-Stockton |
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  • UnitedProsperity.org

    June 18, 2009 – 10:24 am | By Sean Stannard-Stockton |

    It sure does seem like new philanthropic/social ventures are popping up all the time. As BusinessWeek declared recently, there’s A Bull Market in Social Entrepreneurs.

    One of the recent entrants is UnitedProsperity.org. At first glance, it looks like a Kiva.org knock off. But there is a hugely important difference. Whereas Kiva.org helps people make loans to entrepreneurs in developing countries, UnitedProsperity.org helps people guarantee these types of loans.

    A loan guarantee means that the donor is essentially providing collateral so that a local bank will make a loan to the entrepreneur. The amount of the guarantee is less than the amount of the loan. If I make a loan of $100 to you, I might have a certain degree of worry about getting paid back. But if a third party puts up $20 in collateral so that even if I don’t get paid back I still recoup $20, than I will worry less and be more likely to make the loan. In theory, this means that UnitedProsperity.org can offer a leveraged opportunity to donors where every $100 in loan guarantee money they put up results in $500 in loans being made by local banks.

    That’s nice in theory, but the setup assumes that there is local capital available in the developing world but that it is not being lent out due to risk aversion. So I asked UnitedProsperity.org CEO Bhalchander Vishwanath about this issue:

    Bhalchander: There is enough capital on the ground to be freed up. In fact banks in most developing countries lend much less as compared to banks in the developed world. Some banks may be even over-liquid – i.e. They have more savings deposits than lending. Guarantees definitely free up that capital.

    Having said that I would state the direct delivery of new capital to emerging Microfinance Institutions is also important as banks in some countries may not engage effectively with microfinance institutions and Kiva plays a very valuable role there.

    Overall I see our approach and Kiva’s approach complementary in making capital available to poor entrepreneurs.

    All of this is a great example of a concept I wrote about last October: The Securitization of of Philanthropy. I wrote the post as the world financial markets teetered on the edge of collapse, due in large part to misappropriate securitization of loans in the for-profit market place. In the post I discussed how grantmakers can inject “first loss capital” into nonprofit debt financing deals to help grantees. Noting the irony of advocating for securitization given the state of financial markets I wrote:

    Like all tools, structured finance can be used in inappropriate ways. As El-Erian points out in his book, the “securitization” of home loans (pooling them and reselling the loans to investors) was a positive development. However, misaligned incentives encouraged excessive risk taking that is now coming back to haunt the mortgage markets. Structured finance is a powerful tool and powerful tools can be dangerous, but I think the development of social capital markets towards more sophisticated forms of structured finance is inevitable. Let’s work on getting it right.

    I think UnitedProsperity.org has a fantastic concept. Let’s hope they get it right!

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  • Philanthropy Daily Digest

    June 17, 2009 – 5:01 pm | By Sean Stannard-Stockton |
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  • Philanthropy Daily Digest

    June 16, 2009 – 5:02 pm | By Sean Stannard-Stockton |
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  • The Importance of Language

    June 16, 2009 – 7:31 am | By Sean Stannard-Stockton |

    From the Values Blog, written by Matthew Bishop and Michael Green the authors of the book Philanthrocapitalism:

    Praise for Philanthrocapitalism as “extremely well written” from an unexpected source – our old sparring partners at Gates Keepers. True, they do also take us to task for being too soft on Bill Gates, but that’s not really a surprise.

    The really surprising thing about the review is that, having attacked the idea of philanthrocapitalism for several months, the Gates Keepers admit that have only finally got around to reading the book!  We are getting used to that, having already been subjected to one pre-emptive strike from Michael Edwards, albeit now updated (sign up required). Edwards also confesses to have enjoyed the book, when he finally read it. Ho, hum.

    Recently George Overholser suggested the term ROPE as a measurement of the performance of venture philanthropy funders. I pointed out that the phrase did not have the financial markets “baggage” of the phrase SROI (which is similar to the financial metric ROI).

    Language is important. When the financial crisis first hit, a number of people asked if I would change the way I wrote about philanthropy because I often use concepts from financial markets. My response then and now is that I’m not going to change my position based on what goes in and out of style. But I’ll always change my position if I come to the conclusion that I’ve been wrong in some way.

    Philanthrocapitalism was a huge debate last year, probably because of the word itself. It seems a shame to me that people have such knee jerk reactions to things based on what they are called instead of what they are. But that’s the reality of humans. So it seems to me that we need to be careful what we call things.

    “Nonprofit” and “tax-exempt organizations” compared to “social enterprise” and “social entrepreneurs” is probably a good example of this. The first two are horrible words that say nothing about what the organizations do. The second two are far more engaging and dynamic. What words do you use that you think you should change?

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  • Philanthropy Daily Digest

    June 15, 2009 – 5:01 pm | By Sean Stannard-Stockton |
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  • Guest Post: Exploring Nonprofit Mergers and Alliances

    June 15, 2009 – 9:27 am | By Sean Stannard-Stockton |

    This is a guest post authored by Eric Kessler, founder of Arabella Philanthropic Investment Advisors.

    By Eric Kessler

    Nonprofit mergers and alliances (M&A) are a hot topic these days among philanthropists and nonprofits alike. Both the Association of Small Foundations and the Council on Foundations are hosting teleconferences on the subject later this month. And at Arabella Advisors, we’re releasing an issue brief this week, “Investing in Nonprofit M&A.” (You can download a copy here.)

    What’s behind all this interest? And what should philanthropists know about how nonprofit mergers and alliances work (and don’t)? Let’s start with a look at some key statistics.

    First, the nonprofit sector has recently undergone a period of remarkable growth. In just 10 years, between 1996 and 2006, the number of U.S. nonprofits grew by more than 36%, from one million to nearly 1.5 million. Over roughly the same period, the sector nearly doubled its revenues.

    Then came the economic downturn. Foundations’ endowments fell, philanthropists’ portfolios shrank, and giving to nonprofits contracted: Giving USA’s latest numbers show total giving falling by 5.7% between 2007 and 2008, on an inflation-adjusted basis.

    So we now have a large number of nonprofits in the field and a shrinking pool of resources. Meanwhile, we’re also seeing an increase in demand for many nonprofits’ services, as the population at large feels the effects of the downturn. In this context, any solution that holds the potential to cut costs without undercutting impact looks especially attractive, and M&A holds just that potential.

    Done well, nonprofit mergers and alliances can be powerful tools for success, enabling merged or allied groups to realize economies of scale, expand their reach, tap into new funding options and achieve greater impact. But only if they’re done well, and doing them well isn’t easy.

    Nonprofit M&A efforts often face significant barriers. With personal and institutional egos on the line, nonprofit leaders sometimes find it hard even to talk about mergers and alliances. And upfront costs and third-party expenses–from feasibility studies to new IT and back-office programs–sometimes undercut even the best-laid M&A plans.

    Meanwhile, unrealistic expectations can cloud the entire process. Fears of M&A often stem from worst-case horror stories from the for-profit world, and hopes that M&A will produce significant short-term savings often have little grounding in reality. In fact, successful M&A usually requires significant upfront investments of time, money and patience. The returns on those investments can be huge, but they are mostly realized over the long term, not in the next few months.

    It should come as no surprise, then, that M&A efforts that begin by focusing narrowly on the bottom line often go awry. Nonprofit mergers and alliances are far more likely to succeed when forward-thinking organizations put mission first and think strategically about how they can most effectively work together to achieve shared goals.

    Philanthropists can help them do that in a variety of ways. They can bring together grantees working in the same geographic or program areas to discuss shared objectives, common problems and strategies for addressing them. They can sponsor educational activities that raise awareness about M&A possibilities among grantees or that help to develop knowledge within the field. They can also directly fund the costs of M&A, from initial feasibility analyses to final assessments.

    A handful of foundations have already established funds to help groups defray the costs of restructuring, including the San Francisco Foundation, Dayton Foundation and Toledo Community Foundation. Meanwhile, the Lodestar Foundation has identified a variety of model cases for mergers and alliances through its Collaboration Prize.

    Used effectively, such funds and tools have the potential to improve the nonprofit sector for the future–even in the midst of the current downturn.

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  • Philanthropy Daily Digest

    June 12, 2009 – 5:02 pm | By Sean Stannard-Stockton |
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  • Philanthropy Performance Do Over

    June 12, 2009 – 8:36 am | By Sean Stannard-Stockton |

    I wish I was a better writer. Too frequently, I fail to communicate my point in the way I intended. This failing showed up big time yesterday in my post about the government backed Social Innovation Fund and they way the fund might spur a standardization of venture philanthropy performance measures. Note the comments that post generated from George Overholser of Nonprofit Finance Fund, Mario Marino and Carol Thompson Cole of Venture Philanthropy Partners as well as comments and emails from others.

    So I’m going to simply take another shot.

    The stated goal of the Social Innovation Fund is to “identify the most promising, results-oriented non-profit programs and expand their reach throughout the country.” They plan to do this via effectively outsourcing the selection of nonprofits by “awarding competitive matching grants to social entrepreneur venture funds.”

    This means that the Social Innovation Fund will not need to utilize metrics that attempt to capture how much social value a nonprofit is creating (see note at end of this post). They are outsourcing that decision making process to the venture philanthropy funds. But the Social Innovation Fund will need to track the degree to which the nonprofits in the program are effectively scaled. The degree to which they take their “promising, results-oriented programs” and “expand their reach throughout the country.

    What I’m doing in framing the issue this way (and what I think the Social Innovation Fund should do) is make the simplifying assumption that the nonprofits selected by the venture philanthropy funds they work with are creating cost effective social outcomes. This means that the grantee nonprofits are running organizations that can create at least $1 of social good for every $1 in expenses.

    In his comment to yesterday’s post, George Overholser suggested that Nurse-Family Partnership (a favorite case study of an effectively scaled nonprofit) is saving taxpayers $6 for every $1 in donations to NFP (I strongly believe that saved tax dollars is not the best way to measure social value, but it can be useful). But it is clear that the actual number might be more or less (which George points out). But the point is that NFP is almost certainly creating cost effective social outcomes.

    If the Social  Innovation Fund makes this simplifying assumption, then it can track the performance of venture philanthropy funds by measuring how successfully the grantees of the fund are scaled. Note that this does not just mean tracking revenue growth. It is easy to make a $5 million a year organization double in size. Just give it another $5 million. So in order to track effective growth, you must measure how an organization turns “growth capital” investments into self sustaining program execution growth.

    In the comments to yesterday’s post, George Overholser laid out the rationale for a measure called ROPE, Return on Philanthropic Equity. I’m sure their are other approaches.

    My point in all of this is that the Social Innovation Fund is in the business of scaling organizations that work, not identifying which ones work. Therefore, they do not need to look at outcome measurements, they need to track the rate at which the organizations they co-fund effectively scale.

    So my question again is: How should the Social Innovation Fund evaluate the historical performance of philanthropic funders? With the area of measurement being the degree to which the grantees of the venture funds effectively scaled.

    Postscript: The measurement of social value creation is complex, difficult to prove, subject to subjective interpretation of value, and likely rooted in measurement frameworks not connected to financial analysis.

    Measurement of organizational growth on the other hand, is relatively easy (if the accounting is does right), simple to prove, not subject to interpretation and obviously rooted in financial analysis frameworks.

    $1 given to a nonprofit might result in negative social value (if the program activity reduces quality of life in the focus area), social value of between $0 and $1 (if the program activity increases quality of life, but not by as much as other approaches), or more than $1 (if quality of life increases by more than could be achieve with other approaches).

    So the simplifying assumption that I’m making in this post is not that the venture philanthropy fund are finding the best performing nonprofits in terms of social value creation, but that they are finding organization that produce more than $1 of social value for every dollar of revenue. While we obviously want to scale the best organizations, all organizations that create cost effective social value are organizations that should be scaled.

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  • Philanthropy Daily Digest

    June 11, 2009 – 5:03 pm | By Sean Stannard-Stockton |
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  • The Social Innovation Fund & Philanthropy Performance

    June 11, 2009 – 8:51 am | By Sean Stannard-Stockton |

    There are two types of "metrics” that philanthropy needs to figure out.

    1. Metrics used to evaluate nonprofit organizations or programs to determine if they should be supported.
    2. Metrics used to evaluate the impact or performance of philanthropic investments.

    I believe that for the most part, the first set of metrics should not and will not ever be standardized. Experience with for-profit evaluation shows that even with the evaluation advantage of money being both an input and an output, investors focus on different metrics for different companies. Even when analyzing the same company, different investors focus on different metrics.

    There will never be a set of universal metrics that allow for good evaluation across nonprofit organizations.

    However, performance metrics are different. With the simplifying situation of cash being both input and output, for-profit investing has completely standardized performance reporting. How good a for-profit investor will perform in the future can be debated. But historical performance is objective and factual.

    I think philanthropic performance will likely converge on a standardized evaluation framework. I’m wondering if the new government backed Social Innovation Fund will be the trigger that sets this in motion.

    According to the White House Blog, “The Fund will identify the most promising, results-oriented non-profit programs and expand their reach throughout the country.” However, according to the actual Edward M. Kennedy Serve America Act that created the fund, the Social Innovation Fund will:

    Award competitive matching grants to social entrepreneur venture funds in order to provide community organizations with the resources to replicate or expand proven solutions to community challenges…

    Now realize how different those two statements are. The first suggests the fund managers will identify high impact nonprofits. The second states the fund managers will identify high performing venture philanthropy funders. I believe that this second strategy is best and will be the one that wins out. See my remarks in the comments section of this post for more.

    The Social Innovation Fund is currently only $50 million. But it will participate in creating a pipeline of organizations that may very well get much more government funding once they’ve grown. Note that the 2010 federal budget calls for $8.5 billion to support already scaled Nurse-Family Partnership, an organization President Obama cited when talking about the Social Innovation Fund.

    In order for the government fund to identify great venture philanthropy funds, they will need to evaluate the historical performance of these funds. If it becomes clear that big, big money will become available to organizations that make it through the scaling process, venture philanthropy funds will begin to actively compete for the attention of the Social Innovation Fund.

    If this happens, the Fund will be in a position to demand a standardized set of performance metrics from the venture philanthropy funds to whom they are providing matching grants.

    These metrics might not be perfect, but they will be standardized. I would suggest that it is very much in the interest of the philanthropic field to define these metrics in advance and encourage the Social Innovation Fund to adopt them. If we don’t, we may very well be stuck with bad performance metrics being broadly adopted. They will prove difficult to change once they are in place.

    So the task is before us. How should the Social Innovation Fund evaluate the historical performance of philanthropic funders?

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  • Philanthropy Daily Digest

    June 10, 2009 – 5:01 pm | By Sean Stannard-Stockton |
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  • How Much Did Americans Really Give in 2008?

    June 10, 2009 – 8:41 am | By Sean Stannard-Stockton |

    There are two factually accurate headlines that could run today about the newly released numbers on US charitable giving in 2008:

    Charitable Giving Exceeds $300 Billion. Second Highest Level of Giving Ever!

    or

    Charitable Giving Falls Dramatically. Largest Percentage Drop on Record!

    What’s going on here? Did Americans step up to support the growing needs of nonprofits or did they freeze their giving as the economy fell apart?

    There is no simple answer to that question. Here’s what you need to know (all stats come from Giving USA, a publication of Giving USA Foundation).

    Total giving in 2008 was $307.7 billion. The total giving in 2007 was $314.1 billion. This represents a 2% drop in giving. These two years represent the only years on record where giving exceeded $300 billion.

    However, Giving USA adjusts their statistics to account for inflation (as do most providers of economic data). Adjusted for inflation, the drop from 2007 to 2008 was –5.7%. The next largest year over year drop was the –5.4% fall in 1974. Even ignoring inflation, total giving dropped 2%. Since 1968, this is only the second time non-inflation adjusted giving fell (it fell 1.3% in 1987).

    So what’s the take away? I would say that the best way to think about charitable giving in 2008 is that it contracted sharply, but that the contraction was less than many people feared and the total amount given was within the range of the level of giving seen over the past few years. Giving as a percentage of GDP was 2.2%, within the normal range and very close to the 2.3% of GDP that was given in 2007.

    What if we only look at gifts made directly to secular nonprofits (excluding gifts to religious institutions and foundations)? On an inflation adjusted basis, donations fell 8.5%, the worst drop on record but not terribly different than the 6.1% drop in 1975. And even on an inflation adjusted basis, the amount given to these nonprofits exceed the level given in every year from 1968-2004 (from 2005-2007 giving to this group was between 4.4 and 9.3% higher than the 2008 level).

    Charitable giving behaved more or less as it normally does when the economy sours. This is, by most measures, the worst recession in a very long time and so we’re seeing charitable giving get hit. But it is only declining in line with the way it normally behaves.

    Things are tough, but there was no apocalypse.

    Update: On a non-inflation adjusted basis, giving to secular, direct nonprofits fell 5.0% (excluding religious institutions and foundations). This is the first year over year decline on record (since 1968). Much like the non-inflation adjusted numbers for giving over all, this represented a decline from 2007, but still represented the second highest level of giving on record.

    I just chatted with a reporter about inflation adjusted vs. non-inflation adjusted and for the record, inflation adjusted numbers are the “correct” ones to focus on. That being said, if a nonprofit reported to their board that they received $5,000,000 in donations in 2007 and $5,150,000 in donations in 2008, they would report that as an increase, even though under the inflation adjusted methodology used by Giving USA, this fundraising total would represent a decline.

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  • Philanthropy Daily Digest

    June 9, 2009 – 5:01 pm | By Sean Stannard-Stockton |
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