Money to Grow On

By William Foster In the for-profit world, the term investment has clear meaning and investors have sophisticated techniques for spotting and growing the most promising companies. Yet foundations and other nonprofit donors have not developed similar clarity or approaches. As a result, the nonprofit sector’s greatest gems often languish well below their full potential. By better translating for-profit concepts, donors can learn how to scout out and grow the best nonprofits. Likewise, certain nonprofits can take a page from business’s playbook and learn how to attract cash for expansion. Over the past decade, the nonprofit sector has been increasingly abuzz with talk of strategic philanthropy, venture philanthropy, growth capital, and other forms of nonprofit investing. Among the Web sites of the 100 largest U.S. foundations, for example, 77 tout that they are involved in some type of investment, leverage, or venture activity. As entrepreneurs turn into philanthropists, they want to have the same outsized impact with their giving as they did with their business ventures. At the same time, institutional foundations want to leverage their dollars to do the most good. Although many nonprofit donors are talking about strategic investing, few are actually putting these ideas into practice. Most make grants that are too small to have a big impact. In 2005, for example, the 100 largest U.S. foundations made (usually multiyear) grants whose average was approximately $200,000. These same foundations’ assets, meanwhile, average some $2 billion. In addition, outside of gifts to universities, hospitals, and foundations, all U.S. individual donors and foundations made fewer than 150 grants of $5 million or more to the nonprofit sector in 2005. Only 25 of these went to human service organizations. By contrast, in 2005, U.S. venture capitalists alone made 3,100 investments averaging $7.2 million each. What’s more, most philanthropic donors restrict their gifts to specific programs, so grantees cannot use the money to grow their organizations as a whole. In 2006, only 19 percent of U.S. grants were either unrestricted or for general support. The rest of the grants-81 percent-could be spent only on designated activities, such as tutoring services for youth in a particular high school or for the construction of a particular building. By contrast, most venture capital investments are not restricted to a specific product, department, or program. Instead, companies can use the money to grow-for example, opening offices in new locations, expanding the company’s information technology system, and hiring sales and marketing staff. To read the full article, download the PDF below.