Starving Successful Nonprofit Organizations for Capital

"Hidden in Plain Sight" is the perfect title for Clara Miller's 2003 dissection of how broken the principles of growing and managing capital structure (which work quite well in the for profit sector) can be for nonprofits. She correctly portrays nonprofit executives as totally rational beings who operate in a funding environment that rewards the creation of new programs that stretch organizational resources over the scaling of successful existing programs, among other strange features.

Miller's organization, Nonprofit Finance Fund, is a leader in helping nonprofits structure their programs and capital expenditures to have the best possible alignment with the realities of this funding environment. I was fortunate last week to have the benefit of hearing her recommendations at an Independent Sector committee meeting for what changes could be made by funders (foundations, donors, and government) to reverse the unique disincentives inherent therein:

1. Funders need to better self-identify whether they fund only new programs or will add capital to help scale existing programs. Anecdotally, the sense is that the current universe of foundations and donors is strongly skewed toward funding new programs. If it is, and my experience says it is, better awareness might tilt more funders to fund successful, existing programs.

In the end, a big shift is needed to "reverse the pyramid" where the easiest capital to get becomes for "operating support" and the most difficult (and riskiest) is for new programs. The Building Value Together committee of the Independent Sector, chaired by Paul Brest, president and CEO of the Hewlett Foundation, Kevin Klose, President of National Public Radio, and Hilary Pennington, Director of Special Initiatives at the Gates Foundation, has issued a statement supporting such a shift.

2. Funders need to find ways to syndicate (join together, not make the nonprofit patch them together) and help worthy organizations scale.

3. Some organizations should stay small. As Miller notes, growth makes organizations financially fragile, so it should be undertaken with care.

4. Government should pay 100% of cost for nonprofit contracts as it does in the for profit sector, not at 40 cents on the dollar. (As one wise participant said "We want the deal Halliburton has.")

This is not rocket science, but it does take some real digging to appreciate how few of the principles that drive success in the for profit sector are at work in the nonprofit sector. Getting at the heart of those issues is a must for making the sector more effective.

Carla E. Dearing