What If Someone Gave You $5 Million (…and then asked for it back)? – Part I


Money, baby!

So here’s the deal: there are wealthy people and institutions out there in the world right now who are willing to give your nonprofit a lot of money.  As a matter of fact, that number appears to be growing.  It’s getting to be such a hot topic that even stodgy Forbes is talking about it, KMPG is staking its claim in the Social Impact Bond market, and David Cameron is all up in the G8’s business.  You know that when the Harvard Business Review says that Social Impact Investing Will Be the New Venture Capital, well, it’s all over but the crying.

There’s just one problem:  the sector needs deals.  Badly.  And they really want nonprofits to take the lead on proposing and structuring those deals.  That’s right, you.

So, what if someone gave you $5 million, and then asked for it back?  What would you use it for?  How would you advance your organization’s mission?  How would you insure repayment?  Perhaps most importantly, how could you use this opportunity to grow?

Well, I have some ideas for you.  

Screen Shot 2013-05-26 at 9.30.01 AM

Types of Capital

Let’s start with the basics.  Special thanks goes out to the good people at the Nonprofit Finance Fund (AntonyKristinRodney!) whose report “Change Capital in Action” I’m about to shamelessly cadge.  There’s this lovely little chart on page 6 that lays out various types of capital nonprofits tend to access.  Now, bear in mind that we’re not talking about the holy trinity of income streams for most nonprofits (grants, contracts, and earned revenues) – what we’re talking about here are the range of investment capital foodstuffs the sector typically uses to do things like cover cash flow, clean up a mess, and develop new infrastructure.  These aren’t exactly stages of capital, but they do relate to each other and have sequential applications.  We’ll come back to this in my next post.

What I’m trying to impress upon you is that only you know what kind of capital you need.  It’s highly unlikely that some jolly banker or earnest foundation program officer or munificent moneybags is going to show up on your doorstep and say: not only do I have a giant wad of cash that I want you to borrow at low cost with incredibly friendly terms, but I’m going to help you figure our where to, well, stick it.  No my friend, you have to look at your operations, at the problems you are trying to solve, and ask yourself three questions:

  1. Is there an earned revenue stream from fees, sales or contracts that I can use to pay this back at some point in the future?
  2. Is there a take out source such as another piece of financing that will repay the first lender in due course?
  3. Are there operating efficiencies I can achieve through this investment that will yield costs savings substantial enough to return principal?

Babies with money. Who doesn’t like babies with money?

So, are you developing an alternative health care treatment plan that managed care will contract you to provide?  Or a fee-based property management business that also provides social services supports in buildings with high concentrations of the elderly?  Or purchasing a hunk of land that you will eventually build a community center on?  Or investing in a new, integrated data management and accounting system that streamlines your operations?  Any of these might be a candidate for social impact capital.  You just need to know how to structure it – another thing I will talk about in my next post.

For those of you who missed the Services for the UnderServed Social Impact Investment Conference, well, I’m sorry.  You missed it, and it was really good.  I should know, I organized it.  But one of the key takeaways from the day was keynote speaker Clara Miller’s observation that all investments are social impact investments. This has two important implications:

  1. Any time we invest we affect the world around us, and the real question is how much good is generated by our investment, and for whom?
  2. We need to look beyond the artificial distinction between traditional commercial capital and social impact capital to see how all forms of investment must work side-by-side, particularly if we are to succeed in addressing the world’s most challenging problems.

It’s party time in the world of social impact investing: but it’s a potluck.

In your own organization, you need to look at your strategies and plans, including how you intend to use the various forms of capital to achieve your objectives, and find ways to draw new linkages between your existing capital plans.

What does that mean?  Oh, great question!  You are smart!  But I’m going to talk about that in my next post.  That next post is sounding better and better all the time, right?

So, yes, it’s party time in the world of social impact investing.  But it’s a potluck my friends, and you’d better know what dish your bringing.  Stay tuned.  

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