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Can PRIs Support Fundraising and Capacity Building?

Posted by Tony Wang on 2010-02-22 17:06:54 1 comment

This is a guest post from Nell Edgington, a nonprofit consultant and President of Social Velocity. Nell submitted this post at our invitation as part of our effort to stir the conversation. The opinions expressed do not necessarily reflect the opinions of Blueprint Research & Design.

I think there is a tremendous opportunity that most foundations and nonprofits are missing. PRIs (program-related investments) are an under-used tool that could provide much needed capital for nonprofits to transform how they finance social impact.

PRIs are loans that foundations make to nonprofits at low, or no interest. At the end of the loan period (typically 3-7 years) the loan is repaid, or forgiven. PRIs are usually used for capital projects or land purchases in the nonprofit world. But they could also be used to increase the fundraising capacity of a nonprofit organization, through increased fundraising knowledge, planning, tools and staffing. The current economic climate seems like the perfect opportunity for this new use of PRIs when foundations are trying to hold on to their dwindling corpus while maintaining their past level of community support.

A nonprofit could use a PRI to improve their fundraising infrastructure in several ways:

• Create a strategic development plan. Many nonprofits don’t have the expertise or time to put together a strategy for how they will bring money in the door. With funding to hire an outside consultant to put together such a plan, the nonprofit would have a much better chance of increasing their fundraising revenue.
• Get fundraising training for their staff and board. If a nonprofit staff and board have the tools and expertise for successfully raising money, they will be more likely to do so.
• Hire a seasoned Development Director. Many nonprofit organizations can only afford to pay the bare minimum for a Development Director, which means that they are often forced to hire someone with little experience who must learn on the job. If instead they had enough funding to pay a market rate salary for a seasoned fundraiser, they could hit the ground running, increasing the likelihood of fundraising success.
• Purchase a new donor database. A key element to success in individual donor fundraising is an organization’s ability to capture and use data about donors and prospects. A good donor database makes this effort easier and more successful.
• Upgrade their website, email marketing, social media efforts. As direct mail appeals (a nonprofit fundraiser’s traditional standby) continue to become less and less effective, nonprofits need to move effectively into the online world. Funds for technology upgrades and staff could help them do this.
• Launch a major gifts campaign. The vast majority of private funding in the nonprofit sector comes from individuals (80+%), so to stay competitive nonprofits need to move into the world of major gift solicitation. But that takes expertise, staff, collateral and other infrastructure elements.

These are just a few examples of how nonprofits could make investments to strengthen their fundraising efforts. But currently it is difficult to find funding to support things like this.

But a PRI could provide an initial investment that sets the nonprofit on a path toward more diversified, more sustainable fundraising for the social impact they are working to create.

There are tremendous benefits to a PRI program like this. First, for the foundation:

• Increases their ability to meet past levels of giving, despite any losses they might have found in the market, because the loaned money will eventually come back to them.
• Encourages their nonprofit grantees to be proactive in creating fundraising streams that will make them more sustainable. Thus, increasing the likelihood that their nonprofit grantees a) won’t have to come back to them year after year for ongoing support and b) will become more sustainable and thus achieve greater social impact.
• Stretches their capacity-building dollars further. Because PRI money eventually comes back to the foundation, they can increase their level of impact by helping more nonprofits improve their capacity than they could with grants alone.
• Increases the level of accountability among nonprofit recipients because of the expectation of repayment.

And second, for the nonprofit:

• More diversified and sustainable fundraising streams.
• Increased fundraising knowledge and experience.
• Increased ability to work towards social impact.

Although PRIs used in this new way seems, at least to me, to be an obvious win-win, very few foundations are doing it. PRIs in general are used (according to the Foundation Center) by only a few hundred of the thousands of grantmaking foundations in the country. And I know of only one example of a foundation using a PRI to upgrade the fundraisng capacity of a nonprofit (the KDK Harman Foundation in Austin just launched a program like this last Fall, but does not yet have any participants).

So what is holding foundations back from launching a PRI program like this? A number of things:

1. Nonprofits lack the expertise to put a plan together and pitch it to foundations. This is where Social Velocity comes in to help nonprofits create a plan to upgrade their revenue function and pitch that plan to foundations and other funders.
2. Most foundations have an aversion to capacity building funding and prefer that their money go to direct program service. However, as more nonprofits can demonstrate to funders that capacity building actually results in even more impact, this aversion can be alleviated.
3. Foundations lack awareness of or experience with PRIs. However, this is changing, especially in the last year when the poor economy has made foundations increasingly interested in finding alternative ways to maintain community investment levels.
4. Foundations that are experienced with PRIs are not aware of using them to improve a nonprofit’s fundraising function.

So there is a disconnect. But I am optimistic that as nonprofits learn to put a plan together to upgrade their fundraising function and articulate to funders how PRI’s could finance it, more examples of this new use of PRIs will surface.

Grants vs. Loans for Nonprofits – Common Justifications for Using PRIs

Posted by Tony Wang on 2010-02-19 13:02:34 2 comments

In the last post, we alluded to the many benefits of PRIs that have been written about since the PRI was formally established as a philanthropic tool in 1969. These include:

• helping investees retain a commitment to mission
• becoming better grantmakers
• extending the foundation’s resources
• capacity-building for individuals and institutions; catalyzing or strengthening good management within recipient organizations
• enabling nonprofit organizations to build long-term assets
• obtaining project or venture financing
• increasing impact and sustainability
• increasing activity and meeting goals for both mission impact and financial self-sufficiency
• proving a market or the creditworthiness of an institution; helping prove creditworthiness
• gaining discipline and efficiency through intensified financial analysis and accountability
• leveraging and bridging to capital markets; providing a bridge to mission-related investing
• lending to new entrepreneurs or homeowners who lack access to traditional capital markets
• filling financing gaps for projects requiring subsidies due to modest revenue streams, high transaction costs, or other limitations
• allowing commercial lenders to participate in large deals by taking higher-risk positions
• establishing track records for pilot programs or new financial products to help move program to scale
• leveraging other capital from conventional sources by taking on real or perceived higher risk
• strengthening recipients by fostering long-term sustainability and improving cash flow
• offering flexibility to make larger distributions or increase payouts during rapid foundation growth

For grantmakers who only provide grants, some of these benefits might sound familiar. Indeed, grants are often used to build nonprofit capacity, obtain project financing, and strengthen recipients by fostering long-term sustainability and improving cash flow. Even objectives like gaining discipline and efficiency through intensified financial analysis and accountability can fall under the umbrella of venture philanthropy, while still using grants. Thus, the real challenge for those who believe PRIs should be more widely adopted by foundations isn’t around understanding how PRIs generate impact, but how they generate additional impact compared to the common counterfactual – for example, what would have happened if the foundation provided a grant instead.

For illustrative purposes, let us assume there is a nonprofit that requires $1 million in capital to engage in a particular activity that will start generating revenue in the second year (at this point, let us assume the activity doesn’t matter – we’ll examine the tradeoffs between PRIs and grants for specific activities later). Let us also assume that a foundation is willing to provide the $1 million in capital the nonprofit needs, as either a grant or a PRI. If we assume that the performance of the nonprofit will not vary based on the type of capital it receives, what differences in impact could we expect from a funder providing a PRI instead of a grant?

In this extremely simplified scenario, a quick mental calculation using BACO analysis reveals that in the first year there is no immediate tradeoff between a PRI and a grant; the nonprofit receives $1 million from either to engage in whatever activity it needs the funds for, whether it’s purchasing a building, investing in equipment, or providing microfinance loans. Since we assumed that the performance of the nonprofit will not vary based on the type of capital it receives, the social impact and subsequently the BACO ratio for the grant and PRI in the first year are the same.

The difference in social impact potentially comes in the second and subsequent years. The PRI and the grant, like in the first year, have the same costs, which in the second year is nothing since the foundation only provides capital in the first year. However, the social impact projections will be different based on how capital is allocated. In the case of a PRI, the nonprofit repays the foundation which could then use the funds to provide more loans or grants. In the case of a grant, the nonprofit would not repay the foundation but use the money instead on its own programs. In theory, if a foundation provided a PRI and used the repayments to provide the PRI recipient additional grants, there would be virtually no difference between the foundation providing a PRI or a grant. But by providing a PRI, the foundation is able to have more precise control over its grantmaking and potentially better allocate philanthropic capital by giving the foundation the option of providing a large amount of capital to one organization and the ability to use loan repayments to fund several other organizations in the future.

The previous example proves a very basic point – that when a foundation makes a PRI instead of a grant for the same activity, it has more control over how future dollars are spent. However, it also underscores the fact that when a PRI and a grant fund the same activity, the benefit of recycling funds to the foundation may be overstated. Although a grant does not recycle funds back to the foundation, when it funds the same activity as a PRI, the dollars are still recycled – just back to the nonprofit. A classic illustration of this would be Kiva – providing a grant or a loan enables Kiva to provide loans to microfinance institutions, where choosing one financial instrument over the other simply changes who has ultimate control over the funds provided in the future. Thus, when considering the use of PRIs versus a grant, it is more accurate to say that a PRI provides the foundation more control on how recycled funds are spent rather than to say that PRIs recycle more funds or generate more dollars than a grant would.

Another point to consider, though not applicable to every foundation especially those who practice unconstrained philanthropy,  is that some foundations place ceilings on grant funds. A foundation may choose to place an arbitrary limit on the size of a grant, which is usually less than the limit placed on PRIs. Thus, when conducting a BACO analysis to compare a grant and a PRI, the comparison is not between a $1 million grant and a $1 million PRI, but 10 $100k grants to different organizations and a $1 million PRI. For example, when the Studio Museum in Harlem, at the time America’s only accredited black fine arts museum, approached the Ford Foundation for a grant to finance the renovations for a building it had recently secured, its grant request would have been most likely turned down. But the Ford Foundation was willing to make a PRI to provide Studio Museum the capital it needed. For nonprofits that are looking to secure a large amount of funding immediately, whether it’s to invest in an earned income venture or secure property, grant funding will often not provide the total amount of capital the organization needs; a $100,000 grant may not provide the financing it needs for expansion, but instead may only fund incremental improvements to its program. Thus, for foundations who have limits on grant sizes and are comfortable making larger PRIs, a large PRI may be preferable to providing a set of smaller grants when a nonprofit has sizable upfront capital needs.

To illustrate the fundamental difference between PRIs and grants, which by definition would be the expectation of repayment, we assumed that ceteris paribus, the major difference between the two financial instruments is really in how future philanthropic capital is allocated. In the subsequent posts on financing an earned income venture, leveraging government dollars, and supporting fundraising and capacity building, we relax some of these assumptions to look at how providing a PRI or a grant may actually result in different behaviors in nonprofits that ultimately affect impact.

Grants vs. Loans for Nonprofits – Introduction

Posted by Tony Wang on 2010-02-19 13:00:52 0 comments

Grants that provide financial resources without expectation of financial return are still the primary source of philanthropic capital. It wasn’t until the Tax Reform Act of 1969 that program-related investments were formally recognized as an addition to the philanthropic toolbox. According to Ford Foundation records, Louis Winnick, a deputy vice president at the foundation, advanced the idea of program-related investments after reviewing a proposal from a group that wanted funding to support on-the-job training for minority youths as they rehabilitated a tenement building.[1] Realizing that the group would be creating an asset that would generate revenue, Winnick suggested that the foundation support the group by giving them a loan instead of a grant.

When the Ford Foundation launched its PRI program, it made the following statement:

The Foundation does not have nearly enough cash to meet all the demands on its agenda, so the program-related investments should be a way to stretch limited funds, as well as to attract the funds of others to good projects. PRIs will arm the Foundation with a range of options for achieving its objectives-the outright grant at one end, something a shade less than a regular market investment at the other, and in between such devices as guarantees, low-return stock and bond purchases, and even interest-free loans.

But how exactly does a program-related investment stretch limited funds or attract the funds of others to projects in ways that grants do not? How could a program-related investment generate more impact per dollar? There are several reports that list the historical benefits of PRIs. PRIs are recycled and can be reused. They often help build capacity at nonprofits by improving management’s financial literacy and the overall financial health of the organization. Making PRIs can also have a positive effect on grantmakers as well, exposing program staff to a wider range of issues and expanding their philanthropic toolset. The following Apture embed contains references to the various lists of benefits involving PRIs:

However, although it is true that the benefits of PRIs can be numerous and diverse, achieving the stated benefits alone does not always maximize impact. Just because a loan can be made to a nonprofit and repayments can be reused and recycled in the future doesn’t automatically make a PRI the right choice. This is especially true when you consider a grant of the same size for the same purpose would also have repayments that can be reused and recycled (just not by the foundation). Some of the benefits of PRIs such as capacity building around financial literacy can also be achieved by traditional grantmaking, without the associated higher transaction costs common to PRIs. Furthermore, the reasons and analysis for providing certain types of PRIs differ depending on the type of activity the PRI is funding; the rationale behind and potential impact of funding a nonprofit pursuing an earned income opportunity is very different than providing a loan for a conservation easement.

In the next post, we’ll expound on the common reasons for making any PRI and in the subsequent posts examine the particular justifications for PRIs in supporting social enterprises, leveraging government grants, and improving fundraising capacity.

The Philanthropic Capital Matrix

Posted by Tony Wang on 2010-01-22 14:08:33 3 comments

There is a wealth of information for individuals who want to learn how foundations have historically approached the issue of mission investing. For program-related investments, there are the Ford Foundation’s two reports, Grantcraft’s guide, the Packard Foundation’s case studies, and the transcripts available from the 2006 PRI Conference. For mission-related investing, there are Rockefeller Philanthropy Advisor’s two monographs, FSG Social Impact Advisors’ report and SSIR article, the Case Study on the F.B. Heron Foundation published by Southern New Hampshire University, and Blueprint Research & Design’s report on community foundations.

To put the various pieces of mission investing in context, the Philanthropic Capital Matrix below illustrates 6 funding opportunities that foundation’s have to support nonprofits and for-profits. [1]

Financial Instrument	Nonprofit	For-Profit	Financial ROI	SROI
grants	traditional grant	expenditure responsibility grant	-100%	?
below-market rate investment	debt, guarantees	debt, equity, guarantees	> -100% and < market-rate	?
market-rate investment	debt, guarantees	debt, equity, guarantees	>= market-rate	?

The matrix illustrates a few key points. First, one of the fundamental characteristics that distinguish nonprofit and for-profit institutions is their ability to receive equity capital. While many in the nonprofit sector discuss the need for equity-like capital, [2] a for-profit equity investment is different in that it allows a funder to own a percentage of the assets of an organization, something that is legally impermissible in the nonprofit sector.

Second, in addition to debt and equity, foundations can provide guarantees to help capitalize both nonprofit and for-profit institutions. When a foundation provides a loan or an equity investment, it uses its capital to directly fund the activities of the recipient organization. A $10,000 loan or a $10,000 equity investment shows up on the recipient’s balance sheet. Guarantees on the other hand operate through an intermediary, providing insurance to a third-party lender for when loan recipients default. For example, when a bank makes a $10,000 loan to a business, it sometimes seeks a guarantee to limit its losses from a defaulted loan, paying a premium to an insurance firm like AIG. Nonprofits, community banks, and microfinance institutions that seek capital from a third-party may ask foundations to provide guarantees for the loans instead of making loans directly to help make the loans possible.

An additional point to consider is the difference between funding organizations and funding fields. A foundation that is looking to expand its support beyond just grants may not be concerned as much with the needs of the field writ large. It would focus its attention on the capital requirements of its existing portfolio of grantees, researching the financial statements and business plans of individual organizations. A foundation looking to make a difference in the field of microfinance, for example, would need to understand what the capital requirements are of the entire sector, examining total supply and demand as well as researching the needs of individual organizations.

Funders of social entrepreneurship, who generally support individuals and organizations rather than fields, often emphasize their process of identifying and supporting the best social entrepreneurs. Funders who practice what some call “catalytic philanthropy”[3] may be more likely to focus on the needs of a field rather than the needs of organizations, which is often the focus of traditional or venture philanthropy.

Thus, to help frame our analysis, we’ll borrow a page from the discipline of economics and discuss two different approaches to answering the question of what capital when, dividing our attention between microeconomic analysis (understanding which financial instruments to use to support an organization) and macroeconomic analysis (understanding which financial instruments to use to support a field). In our next post, we will look at the strategic difference between using grants and investments for nonprofits from the microeconomic perspective, drawing heavily from the Ford Foundation’s and Packard Foundation’s experiences in program-related investing.

[1] Since the distinction between grants, below-market rate investments, and market-rate investments is strategically more important than the distinction between grants, program-related investments, and mission-related investments, we categorize the term “recoverable grant” as a below-market rate investment since it offers some return between -100% and market-rate.

[2] Clara Miller, “The Equity Capital Gap,” Stanford Social Innovation Review (Summer 2008): 40-45, http://www.nonprofitfinancefund.org/docs/2008/ssir_summer_2008_equity_capital_gap.pdf.

[3] Mark Kramer, “Catalytic Philanthropy,” Stanford Social Innovation Review (Fall 2009): 30-35, http://www.ssireview.org/images/ads/2009FA_feature_Kramer.pdf

The BACO Method for Comparing Philanthropic Capital

Posted by Tony Wang on 2010-01-15 11:45:40 0 comments

Recap & Summary: Foundations can provide three functionally different types of capital (grants, below-market-rate capital, and market-rate capital). In order to manage assets strategically, a foundation should identify the optimal allocation of all three. This post describes a methodological framework used by Acumen Fund called the BACO methodology to help provide an analytical frame to assess different opportunities for allocating philanthropic capital.

If you were an arts funder and wanted to support the efforts of an arts organization looking to secure a building in which to operate from, would you give a $10,000 grant, an interest-free $100,000 loan, or a $100,000 loan at 10% interest? What if you were an international health funder who received two different proposals, one from a nonprofit and one from a commercial enterprise. How would you evaluate which organization you should fund? And finally, imagine you were an education funder building the field of digital media and learning with several million dollars to allocate. How would you allocate the funds across different strategies and different sectors?

All of these questions are variations on the theme of “What Capital When?” – whether it’s identifying the best form of capital for an individual organization, the best funding opportunities among multiple organizations, or the best allocation strategy for a field-building initiative. In order to answer these questions, funders must rely either on intuition or apply some sort of methodology to the decision of which type of capital to provide. Fortunately, several tools to compare philanthropic capital already exist. [A new database of such tools can be found at http://trasi.foundationcenter.org]

One common framework used in comparing grant capital to investment capital is Acumen Fund’s BACO (Best Alternative Charitable Option) Methodology and its investment in A to Z Textile Mills in Tanzania. To determine whether or not to make an investment in A to Z, the Fund calculates the net cost per unit of social impact per philanthropic dollar. For example, after calculating the true cost of a $325,000 investment at $32,500 and the expected social impact at 2,000,000 person years of malaria protection, Acumen Fund expects an investment in A to Z Tanzania will cost $.016 per person year of malaria protection. The best alternative charitable option, which Acumen Fund estimates by the best possible grant it could make to a nonprofit like UNICEF is $.839. Thus, in order to maximize its impact per dollar, Acumen Fund should choose the investment over the grant on the basis of its analysis.

As a framework, the Acumen Fund methodology is both powerful and flexible. It informs decisions about capital allocation by estimating the expected social impact and costs of each option. Comparing two different proposals from two different types of organizations? Ditto. Allocating millions of dollars across a portfolio? Check.

The devil, however, is in the details. Although calculating expected cost is fairly straightforward, calculating expected social return may feel like an unusual macroeconomics problem. In the A to Z example, there are several issues not explicitly addressed in the paper. In calculating the impact of an investment on the output of bed nets, does the analysis differentiate how many bed nets the company produces and the net change of bed net production in the region caused by the investment? It’s one thing to say that a company produced 400,000 bed nets, it’s quite another to be able to say that a company produced 400,000 additional bed nets without affecting total bed net production. And while the BACO analysis might explain why an investment into A to Z was more effective than a grant to UNICEF, it does little to explain why exactly Acumen Fund agreed to the particular terms of investment in A to Z that it did. What would the BACO analysis reveal if Acumen Fund considered making a grant to A to Z or insisted on a market-rate of return on its investment?*

The BACO method provides a theoretical framework that allows comparisons of grants to below-market-rate investments and market-rate investments. It leaves unanswered many questions for the program officer who seeks to apply the method to actual funding decisions. In the next several posts we will focus on retrospective case studies of particular foundation funding decisions to illustrate how others have answered the question of #wcwhen.

*For more information on how Acumen Fund approaches the issue of measuring impact, check out their article in  MIT’s Innovations journal. For a third-party analysis on whether Acumen Fund demonstrates impact with its investments, see this discussion on GiveWell among Holden Karnofsky of GiveWell, Brian Trelstad of Acumen Fund, and others.