We've all heard the complaint: Nonprofits, even some of the great ones, just can't get to the scale needed to have real impact. And funders, even ones that believe in these nonprofits, too often won't lift a finger to help organizations really break out.
Well, here's a story about a funder that set out to break this familiar pattern, and what it learned.
In 2007, the Edna McConnell Clark Foundation (EMCF) launched something called the Growth Capital Aggregation Pilot, which was a collaborative funding effort to mobilize $120 million in capital to "propel the growth of effective nonprofits poised for scale."
The foundation was taking some big risks. It was taking a risk on the three social service grantees in which it initially made exponential investments. It was also risking its time and money, as it not only rounded up a number of funders to join the effort, but greatly increased its own investments.
It turns out that these bets were well placed. The three chosen programs blossomed like never before, and reaped manifold benefits for their recipients. And the foundation went on to expand its capital aggregation work. It reports:
Partnering with co-investors in an increasing number of investments, we have leveraged $113.75 million of our own resources to help 16 grantees secure nearly $282 million in additional private and public funding.
What were the factors accounting for this success? We decided to connect with Chuck Harris, director of capital aggregation at Edna McConnell Clark, to find out. Harris joined the foundation in 2011, and he came with 23 years of experience in banking, retiring in 2002 from Goldman Sachs, where he had served as a partner and managing director.
While EMCF's aggregation approach is not unique, its particular formula and the story of its pilot are well worth digging into. After hearing Harris's thoughts, we've distilled five keys to making this kind of approach work.
1. Give Big, Unrestricted Support
In framing the need for more pooling of capital in the social sector, Harris describes the unique challenge that nonprofits face when trying to scale up their services: They often have investors who want to dictate the uses and exclusions for every dollar they put forth. As a relative newcomer to the world of philanthropy from the finance world, Harris finds the common practice of doling out program grants to be, well, asinine. "Imagine if a for-profit company had to raise capital the way nonprofits too often do—one investor wants to pay for only raw materials but not salespeople, while another investor waits for all expenses to come in before turning over his capital. It’s incredibly inefficient and restricting to our nation’s nonprofit leaders," Harris remarked. Amen to that.
The Growth Capital Aggregation Pilot took the exact opposite approach. It made big investments without nickel-and-diming grantees every step of the way, program by program.
That type of backing allows grantees to "fully execute their growth plans with confidence," said Harris. "This creates the headroom for nonprofit leaders to focus on getting the job done, and not get distracted from ongoing fundraising for capital needs."
It's also important to note that EMCF was able to get big players to the table right from the start. For the Nurse-Family Partnership, for example, the initial co-investors were Bill & Melinda Gates, Robert Wood Johnson, W. K. Kellogg Foundation, the Kresge Foundation, the Picower Foundation, and the NFP Board of Directors. So gathering a group of kingmakers, as opposed to a group of paupers, is big. And Harris notes that capital aggregation, if structured appropriately, aligns the "interests of multiple funders behind a common objective so that everyone investing shares the same vision in a manner that is much more efficient and effective."
2. Have a Trusted Lead Investor
Any successful effort to mobilize a lot of capital will benefit from a having one funder that is taking the lead, putting up the biggest bucks, and doing the most legwork to make the collaboration work. But trust is key if you want a bunch of strong-willed funders to accept that leadership.
What makes for trust? Basic good relationship skills, Harris said. Reliability, follow through, praise for success and hard work, and regular communication to ensure that resentments don't fester and mistakes don't get repeated. None of that is rocket science, but requires care to make sure it all happens.
3. Be Structured AND Flexible
One really interesting thing about the Growth Capital Aggregation Pilot is that while co-investors shared a common vision and agreed to certain terms, the vision and the terms were not set in stone. When the Great Recession dictated adjustment, they adjusted, re-allocating some capital to safety reserves and existing programs.
And here, as well, having a lead investor proved to be key. EMCF was the glue that held the whole thing together in good times and bad. EMCF helped the nonprofits and co-investors revisit the document and make adjustments when the environment changed dramatically. ECMF played a critical role of intermediary in helping to foster both structure and flexibility. While the terms of the pilot needed to adjust, the co-investors remained committed.
The point here is not that EMCF is the hero of the story, but rather that the effort was structured to ensure that a leader stepped forward at crunch moments to navigate tricky challenges.
4. Foster Strong Leadership Both Locally and Centrally
"In my experience, the highest performing nonprofits blend strong central AND local leadership with sophisticated performance tracking in order to manage fidelity and innovation," Harris said.
In other words, you want people who are feeling this work in their bones and who express that to each other, and to the recipients of service. You also want people who trust their leadership enough to come to them with problems before they get too big. That leadership needs to talk to the top leadership so that everyone is on the same page.
Also, leaders need to use a reliable tool to track performance. The metrics shouldn't be too cumbersome, as documentation in the social services can sometimes be, but good leadership requires knowing specifically what is being done by direct care practitioners on the ground. It's the only way to figure out what works and what doesn't.
5. Develop the Public Policy Environment
"Of course, part of this requires a shift in policy making that incentivizes the identification and funding of evidence-based programs and practices," Harris noted. Here is where Harris thinks we need to focus more energy.
Harris noted the basic reality that philanthropy can't shift public policy by itself. He emphasized the need to engage policy makers in conversations with funders and nonprofits, so that the public policy environment fosters real commitments from government.
As an outsider from finance, Harris is keenly aware of the problems of scale facing nonprofits.
"While I think philanthropy is doing more to help grow innovative programs, we’re not doing enough," said Harris. "The social sector is still learning about what it takes to spread and scale the most worthy innovations. For example, despite its potential, NFP (Nurse Family Partnership) still only reaches a fraction of the 800,000 low-income women who become pregnant each year and could tremendously benefit from its services."
"We have seen greater efforts and experimentation," remarked Harris, but he added, "Funder collaboration has not yet risen to the challenge before us. There isn’t enough partnering, and the amounts being aggregated is nowhere close to meeting the need. In short: We need better, more innovative forms of collaboration at a bigger scale, and we need this to happen at both the national and at the community level."