George Overholser on how to finance social organizations so they learn to fend for themselves
One of the key questions in the social sector is: What kind of financing is needed to help build great organizations, i.e. organizations that genuinely succeed in solving problems and improve as they expand? George Overholser, the founder and managing director of Nonprofit Finance Fund Capital Partners, has been a leader in developing one of the most innovative funding models: assisting high-performing nonprofit organizations in attracting “equity-like” philanthropic growth capital. Since 2006, NFF Capital Partners has supported 16 capital campaigns involving $312 million in philanthropic commitments. The organizations that they have worked closely with have, on average, tripled their annual program delivery. Overholser will be speaking about his work at the SOCAP Conference in San Francisco, which is taking place from October 4-6, 2010. Here, he explains why nonprofit organizations that aim to grow need equity every bit as much as businesses.
Dowser: Several years ago, you helped the college access program, College Summit, rethink its approach to financing through your ‘equity simulation’ approach? Can you tell me what you did?
Overholser: College Summit needed a way to grow that didn’t continue to add to [its founder] J.B. Schramm’s fundraising burden over time. He needed to build something that could eventually fend for itself. To do that, he needed equity. Equity is like the few hundred thousands of dollars that parents plow into their children’s development so that they can be independent adults. Another way of putting it is: equity pays for the deficit incurred en route to sustainability.
How did College Summit figure out how to ‘fend for itself’?
With College Summit, the idea was to get the variable costs [costs associated with each additional student the organization serves] paid for by schools and colleges, so that even as the program continued to grow, the fixed costs covered by philanthropy would remain relatively stable. That meant developing a new model, testing it, selling it, hiring the right people, and making mistakes along the way. J.B. liked the idea and he suggested creating a plan to demonstrate it in a few cities over four years.
We calculated the amount of money they would need to pay for the deficit that would be incurred until they got the model working. It was about $15 million. They went out to raise it. They called it the ‘Proof Fund’ – because it was intended to prove that the organization could scale up to meet the needs of an entire community.
But nonprofits aren’t set up to handle equity. Was this a problem?
Yes, in a nonprofit, everything is called revenue. They needed a way to account for this capital differently. There is a one-timeness to equity that’s different from revenues. So we created something called a SEGUE, a Sustainable Enhancement Grant, and treated it like equity. They created a capital account that separated Proof Fund dollars from the rest of their revenues. College Summit raised the Proof Fund in about nine months. At NFF, we’ve since prepared many SEGUEs for other organizations.
Why is it important to account for equity differently than revenues? What changes?
The way you think. In the for-profit world, if you get a big equity check, your revenue is still zero until you use the equity to earn something. In fact what equity does is create a greater hunger to build something that folks will want to pay you for.
Here’s the difference: I had two meetings in the same day a while back, venture capital in the morning and venture philanthropy in the afternoon. In both cases we had just agreed to write checks to the organizations. In the morning, everyone was high-fiving, and the CEO looked uncomfortable and said, ‘Oh boy, look at our revenues, they’re still zero. Let’s get busy.’ That afternoon, in the venture philanthropy meeting, everyone’s high-fiving again and the CEO says, ‘We’re done with our fundraising for the year.’ And I’m thinking, ‘We just gave you a check that is increasing your cost structure and apparently we’ve prompted you to dismantle your revenue generation capacity for the rest of the year.’
With the venture philanthropy, our idea was to protect the fledgling organization until it became strong enough to fend for itself, not to set it up for a problem in the future when money ran out.
There are so many organizations that are doing a great job solving social problems at a modest level. What do you see as the biggest challenge in terms of amplifying their overall impact?
I go back to faithful replication. My metaphor is Julia Child. She cooked great and wrote a great cookbook. But hand her cookbook to the average Joe and the food won’t taste that great. The key to faithful replication is not the recipe, it’s the design and management of the enterprise that implements the recipe.
That’s why I focus on philanthropic equity. It’s the money that lets us build high performing nonprofit enterprises that can grow faithfully.
This interview was edited and condensed.
Dowser is a media partner of SOCAP 2010.
Photo courtesy of Nonprofit Finance Fund