This article explores the reasons why a capital market for nonprofit growth capital has failed to materialize. Specifically, George Overholser, former venture capitalist and strategy consultant, cites the main reason for failure as the commingling of nonprofits’ investments and revenues, which makes it difficult for investors to define, measure, and know the outcomes of investment activities. The spread of business-like practices in the nonprofit sector is requiring changes to how nonprofits and donors think about investing and managing finances. This begs the question, in what ways are new models of philanthropy influencing nonprofit accounting practices and financial strategies? To underscore the difference between growth capital and grants for ongoing operations, Overholser makes a distinction between ‘builders’ and ‘buyers’: builders that provide capital by investing in a nonprofit’s enterprise and buyers that provide regular revenue by paying for nonprofit services and programs. As there is a small but growing number of organizations involved in providing nonprofit growth capital investments, this article will help funders and nonprofits not only understand the difference between investment and revenue, but better identify nonprofits that can benefit from growth capital funding.
For additional information, see David Bornstein’s blog for an overview of the Nonprofit Finance Fund (NFF)’s Growth Capital Services and the Nonprofit Finance Fund’s 2013 Portfolio Performance Report that presents the details and results of NFF’s client capital campaigns over time and further outlines the distinction between builders and buyers.