Instead of waiting years for a book to be written or months for a report to be published, what if researchers could publish up-to-the-minute findings of their latest research or thinking? Research (and thinking) could be done in real-time across organizations, involving not only the research team but members of the community, and be indexable and mashable by the latest in search and social media technology. David Roodman is writing his new book on microfinance in public, the Monitor Institute is posting tidbits of insight from its experience of Working Wikily, and Independent Sector’s Future Lab is culling insights from the nonprofit sector writ large. Though the practice has yet to become widespread, imagine if all organizations operated as open organizations – what an interesting and fun world that could be.
The purpose of Conversations is not to simply be a place for announcements or the latest insights, but to be a real hub for discussion – part digital water cooler, part wisdom of the crowds. In this pilot test of Conversations, we will be focusing on the topic of impact investing. The Rockefeller Foundation and Monitor Institute define impact investing as ”the industry which involves making investments that generate social and environmental value as well as financial return.” We are thinking about these principles and possibilities as part of our work for the John D. and Catherine T. MacArthur Foundation and its Digital Media and Learning initiative.
The MacArthur Foundation’s work in Digital Media and Learning (DMaL) gives them the opportunity to work with nonprofits, universities, commercial game makers, technology companies, and influential individuals. Because of the multi-sector nature of DMaL there are many chances to consider the choices between grants to nonprofits, below-market rate loans, and market-rate equity investments in for-profits. Is there an optimal allocation of all three? Plenty of reports detail the tactics and mechanics of program-related investing and mission investing. But when it comes to the critical question of when to apply different types of capital in what kind of situations – the question of “What Capital When?” – the answer is elusive.
Over the next several months, Lucy and I will be blogging here on “What Capital When?” as we think through the different forms of capital that exist within the philanthropic capital markets. We plan to range far and wide in our scan, looking at legal structures and financial theory, revisiting the principles of political economy, developing theoretical hypotheses, and experimenting with visualizations along the way. We invite everyone to join us in the conversation and participate by commenting and writing responses to our posts, tell us what we’re missing, and recommend what we should be reading and who we should be talking to. Thanks and enjoy the ride!
Stay tuned for our next post, which will be a literature review of the reports on program-related, mission-related, and impact investing.
Great to see you launch this! “What capital when?” is an important question that too few people have helped answer.
Sean – thanks for jumping in. What do you think is most important part of the question? What do you get asked most frequently?
Lucy
I think all organizations, regardless of tax status, depend on revenue, “equity investments” (growth capital for nonprofits) and debt. The tax status of the beneficiary seems to me to be largely dependent on the goals of the funder and there is no “optimal mix” of tax status.
I think the key is for funders to recognize the purposes of different types of capital and when each is needed. During the financial crisis a grantee of one of my clients had their credit line pulled. The grantee then asked my client for a grant to help them through the crisis. We helped the client (a foundation) consider extending a credit line themselves or work with a local bank to offer a letter of guarantee so the bank could extend the loan.
That’s an interesting point Sean. In some of the reports that I’ve been reading, extending loan guarantees or direct lines of credits to grantees has been a popular practice. Like the recent financial crisis, external events will cause traditional nonprofit grantees to require something besides grant capital.
Something I’m mulling over and am not sure how this plays out in the discussion is the distinction between proactive and reactive mission investing. Sometimes existing grantees will need alternate forms of capital and a foundation responds to those needs, which would be an example of reactive mission investing. In those cases, the foundation program officer needs to have a strong understanding of what type of capital best fits the capital needs of a grantee and why a loan is better than a grant (one reason offered by The Ford Foundation is that sometimes grants will displace other philanthropic or public dollars and that the size of the grant request may be too high for a grant but just right for a loan).
But sometimes foundations, albeit the larger ones, will be creating some kind of new initiative that requires the foundation to allocate pools of capital – some for debt, some for equity, and some for grants. In these cases, it seems a much more nuanced understanding of how the field ought to develop, and what types of activities are better funded through grants and what types of activities are better funded through investments, is required. For example, if I want to encourage widespread use of digital media and learning, does it make more sense to support an open-source nonprofit platform similar to the Wikipedia model or a for-profit transactional platform like Teachers Pay Teachers? Supporting both might be dangerous if the nonprofit eats into the business model of the for-profit; and if the nonprofit is helping the for-profit, issues of private inurement become relevant. The question becomes less about how best to meet an individual organization’s needs, but how best to meet the needs of the field. I think being very clear about the implications of different combinations of supporting nonprofits and for-profits as a larger theory of change is essential, but at this point that’s just a hypothesis.
Lucy,
I am a newcomer to the world of philanthropic resources however I am a veteran in utilizing mezzanine-financing techniques to get affordable housing built in Boulder County Colorado. I am intrigued with the opportunities that could come from your “What Capital, When Conversation”.
In the work we are doing here in Colorado around creating renewable energy affordable housing communities we seem to cross paths especially around the discussion of what capital and when. Our non-profit agency is also focusing its efforts to develop a socially equitable community with environmental value while providing an economic return back to the community. Our success in getting such community development in the ground requires very early commitment of start up capital (grants) in the predevelopment process and hopefully increased capital (grants/loans) contributions as our project evloves from concept to sketch, sketch to plan, and plan to blueprint. Gap filling on a final proforma is best accomplished with leveraged grants and subordinate loans.
Hi Scott,
Thanks for joining us in the conversation and I look forward to hearing some of the insights you might be able to share from your work in Colorado. You mentioned how grants are used in the startup phase and then a combination of grants and loans are used in later stages, with “gap filling on a final proforma is best accomplished with leveraged grants and subordinate loans.” Could you elaborate a little bit more on this? Are the organizations involved all nonprofits or a combination of nonprofits and for-profits?
I’ve heard similar patterns of funding, especially from funders working internationally, but am curious to hear your perspective on the rationale behind the different types of funding for each of the different stages of development. To contrast, the for-profit sector doesn’t give out grants to startups, but makes equity investments instead – so I find it interesting that earned income nonprofits might use grants instead as startup capital.