If You’re Serious About Funding Real Change, You Need to Change the Way You Fund (Yes, Again)

Today’s model for funding nonprofits and social enterprises is broken. Despite shifts toward trust-based philanthropy, the majority of foundations still give grants that are project specific and time limited, with only 18% of funding explicitly designated as unrestricted. This short-term approach distracts nonprofit leaders from their core missions. Instead of tackling large-scale change, they twist their organizations into pretzels trying to adapt to funder priorities.

This funding pattern also disproportionately affects nonprofits led by people of color. A report from Bridgespan and Echoing Green, for example, found that unrestricted net assets of Black-led organizations were 76% smaller than their white-led counterparts.

There is another way: enterprise capital. While enterprise capital bears similarities to other approaches, like unrestricted, multi-year funding, it differentiates itself both in size and timing of grants. Unlike operational grants, enterprise capital is given not with a nonprofit’s current operating budget in mind, but with what a nonprofit’s full potential could be — giving nonprofits the full runways they need to scale and reduce racial inequities in funding. What barriers could be broken if a nonprofit had all the resources needed to fund its infrastructure investments, programs and services? Enterprise capital is a bet on a nonprofit’s full future.

Likewise, while multi-year funding is paid out annually, enterprise capital is committed upfront. By injecting immediate, massive liquidity into an organizational balance sheet, enterprise capital enables nonprofits to make game-changing investments in systems and staff, build new revenue streams or leverage debt capital. Just as venture capital does for for-profit enterprises, enterprise capital enables ambitious growth and systems change.

Perhaps the most well-known philanthropist of our times is MacKenzie Scott, and, indeed, much of what has gained her the admiration of many is the way she demonstrates the core tenet of enterprise capital: giving abundantly, based on the nonprofit’s full potential, not its current operating budget. As a result of Ms. Scott’s generosity, balance sheets across the social sector have transformed more in the past few years than we’ve seen in decades.

Even beyond Ms. Scott's transformational work, enterprise capital calls for one more essential service: aligned technical assistance that builds financial knowledge and systems. Most social sector professionals enter the field fueled by a purpose — rarely love of finance. But understanding business and financial models is vital to success. By pairing enterprise capital with these services, funders can improve both social and financial results.

If funders are interested in catalyzing the full potential of nonprofit changemakers, they should make enterprise capital their preferred approach.

The power of enterprise capital

An example of the power of enterprise capital comes from Scale Link, a nonprofit social enterprise building a more equitable small business financing system and increasing lending to entrepreneurs of color. By purchasing small business loans from community development financial institutions (CDFIs) and bundling them for sale to banks through its new secondary market, this innovative nonprofit social enterprise, at scale, could reshape the financial system as we know it.

“At scale” — that’s key. It’s where the success for this model lies. Yet initially, the organization was limited by its own balance sheet. There were plenty of CDFI loans to buy — and banks ready to buy Scale Link’s products — but Scale Link didn’t have sufficient cash on hand to buy the loans. It needed both debt and equity financing to build its business.

Microsoft was willing to provide debt to the nonprofit, but would only do so if Scale Link had a 3:1 debt-to-equity ratio. As a start-up organization, Scale Link did not yet have the necessary net assets; it needed an infusion of capital. Despite the atypical request, three foundations — Citi Foundation, the Bill & Melinda Gates Foundation and Robert Wood Johnson Foundation — stepped up with enterprise capital; that is, upfront, unrestricted capital that could immediately be added to the balance sheet.

With this financial cushion, Scale Link became an “investable organization.” Not only could it acquire debt financing to increase its loan buying; it could grow strategically to maximize its impact. In less than three years, the organization is able to cover 80% of its program costs. With a final round of enterprise capital, it will be fully funded for the long haul, with enough net assets to continue to scale on its own.

A win-win for funders and nonprofits

As another example of how enterprise capital can help both funders and nonprofits be more effective, the experience of Arkansas Advocates for Children and Families (AACF) is illustrative.

As a policy advocacy group, moving the needle on its key issues — like reforming the juvenile justice system — requires maintaining a consistent presence in the state capitol, building long-term relationships with lawmakers and nurturing committed coalitions.

For a brief moment, this type of advocacy was within reach. During the pandemic, as more funders recognized the benefits of operational support, AACF was able to hire a full-time government affairs director who made essential progress on policy issues for children and families.

But as funding patterns returned to business as usual, AACF’s general operational support tanked, from 22% of funding in 2021 to around 8% in 2023. As a result, AACF had to eliminate its government affairs position and sit out key legislative battles.

AACF’s experience demonstrates the volatility of operating grants. While operating grants are far superior to funding that does not cover operating costs, they still present risk for nonprofits as markets change and foundation priorities shift. Enterprise capital replaces risk with certainty and predictability, so nonprofits can invest in true systems change.

As Deputy Director Jennifer Ferguson puts it, enterprise capital would be “transformational” for AACF. Unrestricted, upfront liquidity is necessary for AACF to execute the major advocacy wins that both the organization and its funders desire.

How to incorporate enterprise capital

Philanthropic organizations should consider the following in order to shift to enterprise capital:

Structure your funding to support the nonprofit as an enterprise; don’t limit it by the organization’s current operating budget. Enterprise capital builds organizational infrastructure, human capital, financial reserves and innovation. Equip leaders to make investments that support the organization now and in the future.
Align your uses of capital with capacity-building services to deliver the full value of equity and equity stakeholders. Grantees often need technical assistance to unlock the power of your long-term investment. Remain an active partner by providing resources to strengthen financial capacities and help outline how the business plan and financial model are key to achieving sustainability.

Making the shift

Enterprise capital isn’t an entirely new concept. It builds on the work of others, such as Clara Miller’s introduction of “philanthropic equity” two decades ago. Though there is no data tracking how many grantmakers provide this type of capital, stories like that of Scale Link suggest the practice is growing. But there is a long way to go before this approach reaches its full potential. When it does, we will see a monumental shift not only in how funders approach giving, but in what nonprofits can achieve.

Andrea Levere is Social Enterprise Fellow at the Yale School of Management and President Emerita of Prosperity Now.

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