Philanthropy and the nonprofit sector have experienced an explosion of new actors, strategies and funding vehicles to offer new types of private capital for social good. The nonprofit sector is caught between declining government resources and increasing demand to show results and demonstrate accountability. This squeeze is fueling the development of new models of philanthropy – models that have aspects that look a lot like private enterprise. Each of these new models involves private donors and foundations embracing a ‘donor-as-investor’ view of themselves.
Over the last decade, new models — which include donor advised funds, venture philanthropy, “philanthrocapitalism”, and impact investing – have gained momentum as strategies and funding vehicles to contribute to economic growth and address social and environmental problems (Cooney & Shanks, 2010; Yunus, 2010). Foundations and nonprofit investment funders (such as The Edna McConnell Clark Foundation, Venture Philanthropy Partners and the Roberts Enterprise Development Fund) have started “investing” in “portfolios” that are aimed at addressing the root cause of a social problem.
But unlike traditional grants, many of these “portfolios” are intended to generate a measureable social – and sometimes financial – return. As a result, traditional grantmaking is no longer cited as the sole philanthropic archetype. “Social investors” (like Muhammad Yunus, Bill and Melinda Gates and Pierre Omidyar) are receiving notoriety for applying a business approach to address social problems.
The growing importance of new actors, strategies, and funding vehicles creates a need to better understand the shifting landscape as well as the opportunities and challenges such changes pose. The emergence of a new philanthropy begs reflection on what implications it has for the charitable sector.
This article outlines three fundamental questions facing the charitable sector as related to new forms of nonprofit capital. Independent Sector’s Nonprofit Capital focus area responds to these questions. The focus area includes a mix of research and articles from thought leaders and actionable tools that will help nonprofit and foundation practitioners who are entering this space understand the landscape and the rationale behind new capitalization models, as well as the opportunities and risks inherent to new forms of nonprofit capital.
First, who are some of the actors and what strategies and funding vehicles are they using to offer new types of private capital for social good?
The focus area dives deep into this question with a wide range of resources. We consider trends that led to the emergence of new forms of nonprofit capital. We also look at how new financing models attempt to address market failures in traditional nonprofit financing, but create new market challenges as well. We focus on how traditional foundations have adopted or adapted new strategies as part of their portfolios, while also considering some new actors in this space.
A limited number of foundations have switched the majority of their philanthropy to new models. The Edna McConnell Clark Foundation (EMCF) was among the first foundations to take the approach of growth capital aggregation investment model to scale programs that work. The F.B. Heron Foundation is another early adopter, their path to moving their endowment into mission-related investments is explained in a well-known case study.
More common are foundations that blend traditional and new approaches. The Ford Foundation, The Rockefeller Foundation, the John D and Catherine T MacArthur Foundation and others have maintained traditional grantmaking while establishing impact investing portfolios and other new approaches. In addition, the growth of donor advised funds has had a considerable impact among community foundations. Many have developed structures to manage significant donor advised funds alongside their preexisting grantmaking programs.
There are a growing number of foundations and others working to inform and recruit additional institutions to this work. In 2016, EMCF announced Blue Meridian Partners, a collaborative growth capital aggregation effort to invest over $1 billion in high performing nonprofits to improve the lives of disadvantaged youth. The Rockefeller Foundation and Case Foundation are among those that have produced research and guides to encourage impact investing. Understanding how private foundations are responding to shifting market demands and the emergence of new forms of philanthropy will better equip philanthropic and nonprofit leaders to think about how these changes pertain to their organization’s unique experience.
Second, will nonprofits need to adapt or change the ways they operate in order to access new types of private capital?
Nonprofits need to engage new ways of operating and form different types of relationships in order to make their organizations attractive to private foundations and receive funding. New and emerging models of philanthropy can influence 1) a nonprofit’s ability to attract funding, 2) its operations, and 3) the way organizational funds and resources are used.
For instance, traditional philanthropic strategies generally allow foundations to make grants to a number of nonprofits. In contrast, some new philanthropic models call for working more intensely with a few nonprofits, which can increase competition for already scarce funds.
As revenue sources for the sector are shifting, so will the organizational strategies used by nonprofits to secure them need to change. Nonprofits that position themselves to change their internal structure or the way they function may be better positioned to access needed resources (McDonald, 2007). With new and varied types of philanthropic entities entering the space, nonprofits may need to adjust how they identify, secure, and access capital. Among other priorities, this often entails a greater emphasis and precision around goals and measurement, as many of the new funding models drive towards measurable impact.
In addition to the need for restructuring existing types of social impact organizations, the new philanthropy has generated demand for creating entirely new ones. For example, hybrid organizations (such as Low-Profit Limited liability (L3C) companies and Benefit Corporations) that have both for-profit and nonprofit characteristics are becoming more mainstream. Nonprofits now find themselves navigating an environment in which the playing field for new and different types of providers has widened substantially, increasing competition not only for funds but for clients and constituents. The Nonprofit Capital focus area touches on these questions, and will consider them more deeply throughout 2016.
Third, what are the public policy implications of these new types of funding strategies and ways of giving?
Private charitable foundations account for only about fifteen percent of total annual charitable giving (Giving USA, 2015). Nevertheless, they disproportionately influence the direction of the nonprofit sector both due to their position as an ongoing direct source of nonprofit financing and their considerable (direct and indirect) effect on public policy through the programs they support.
Public policy ramifications of new strategies and funding vehicles may include a range of changes to tax structures, regulations, and legislative action. Issues at the forefront of policy implications concern the extent to which existing laws and tax structures should be modified or can sufficiently accommodate new emergent models of philanthropy, like donor-advised funds, PRIs, and MRIs. As new and different types of philanthropists and organizations mature and possibly alter the traditional role of private foundations, policymakers will need to reassess whether longstanding policies still apply, and determine whether to remove barriers or create new incentives for these efforts.
Navigating the new philanthropic landscape
The rise of new models of philanthropy does not signal a replacement for traditional philanthropic activities. In fact, neither new nor traditional models of philanthropy are going away anytime soon. This raises even more questions about how foundations and nonprofits can successfully navigate an increasingly complex environment.
We hope the Nonprofit Capital focus area serves as a useful foundation to begin considering these complex questions and to enable your organization to begin engaging with new capital in new ways. Please share your thoughts and feedback, and let us know if there are other resources or questions that we should consider here by emailing Marie LeBlanc.