or…All You Need is Cash
Ages ago, I took economic development finance and nonprofit finance classes. I now can’t run a detailed pro forma if you stuck a loaded spreadsheet to my head. But the basic concepts have been tugging at my brain as I’ve followed news about three issues.
First, the United Way of the National Capital Area recently decided to restrict grants to nonprofits with budgets of more than $50,000. (The National Center for Family Philanthropy summarized some of the reactions here.) Many people argued that the decision would diminish innovation, crowd out small nonprofits, and increase the gaps between the haves and have-nots. Others argued that the decision made sense given the United Way’s roles as a community problem-solver and an intermediary for big donors’ money.
Second, blog posts by Alexandre Lange, architecture and design critic, and Ethan Zuckerman, director of the MIT Center for Civic Media, questioned the use of crowdfunding sites to fund community development and public improvements projects. Lange called it “Kickstarter Urbanism.” They and others worried about letting government off the hook for its responsibilities and also worried about the crowdfunding process leaving poor communities behind. The same arguments have been used for Donors Choose.
Last, a Chronicle of Philanthropy article described how Denver area nonprofits honorably turned away unneeded donations sent in sympathy for victims of wildfires and the mass shooting at the movie theater. The coalition National Voluntary Organizations Active in Disaster (NVOAD – someone get them a snappier brand) has started a marketing push to educate donors on the most helpful and cost-effective giving after disasters.
The articles and blogs are describing situations in which donors, funders, and nonprofits didn’t think through two basic concepts in finance:
1. Cash is King. The King loves sitting on big piles of unrestricted, flexible cash. The King also loves covering the true, full cost of delivering a product or service plus profit. (OK, technically the King loved peanut butter and nanner sandwiches, but I digress.)
2. Right Money, Right Time, Right Terms. Foundation folks sometimes substitute “right terms” with “right purpose.” The most effective money fits all of these criteria. Basic economics defines “right” as the type of money, timing, and terms eventually negotiated by both parties or by the market as a whole.
Janis Foster Richardson, executive director of Grassroots Grantmakers, had an alternate take on the “right terms” concept in her blog post Giftmaking vs. Grantmaking. She wrote about the problematic confusion in philanthropy between giftmaking (an act of generosity with no strings attached) and grantmaking (a deal struck with expectations attached).
In the case of the United Way decision, were the terms of its grants and follow-up reporting really right for small nonprofits? Did its process deliver money in a timely way? Did its grants inspire other donors to give or crowd them out? Is United Way really the right money to spur and support innovation? Just because the money was available, it doesn’t mean it was right for the nonprofits. But I’m guessing the United Way’s critics were wishing its money was more like gifts and less like grants.
In the case of Kickstarter Urbanism, crowdfunding may indeed deliver cash at quicker and easier terms than a municipal government can. But are small gifts always the right money to build and maintain public spaces and amenities? With rare exceptions, crowdfunding sites don’t produce “Cash is King” situations for project sponsors, so who ensures there’s money for cost overruns and maintenance? And, does it matter if the terms of the cash are truly altruistic or come with hopes for tangible, personal returns (e.g. a nicer park next door or iGizmos for my grandkids’ classroom)?
In the case of disasters, donors often send gifts that are heartfelt (bottles of water and used clothes in the first week or two) but they’re the wrong money and wrong timing for the nonprofits. An NVOAD representative put it simply in the Chronicle article: “Cash is best.”
Blurrier Roles for Cash
Figuring out “right money, right time, right terms” often enough to produce consistent net King Cash has never been easy for any enterprise (business, nonprofit, or the hybrids in between). But communities tended to have patterns of where to look for support. A certain foundation was a stalwart supporter of afterschool programs. A well-known donor couple sought out edgy artwork. A certain bank had friendlier lending terms for nonprofit facilities. There were the three congregations that would help pull the rest along around a social service issue.
It’s not that easy now. Recent changes in grantmaking, giftmaking, and investing seem to be creating an ongoing culture of anxiety in people trying to do good work in their communities.
The near-term culture of downsized government and the agonizingly slow crawl out of the recession are forcing tough choices for donors and donees. Will they step in to fill the gaps in direct services, or will they instead direct cash to advocacy efforts that push for re-instituting government support?
Also, the line between “giftmaking” and grantmaking is blurrier. When a nonprofit approaches a donor for a gift, it more and more often is receiving a check through a donor-advised fund or family foundation. Now strings are attached, even if unintentionally. And, more wealthy donors are protecting their interests through restrictions on their large gifts and hiring consultants to write detailed gift agreements. Nonprofits may have to start running scenarios for “right money, right time, right terms” before they even make an ask.
And, the market for funding sources is downright confusing. In the “olden days” (maybe 5 years ago), the nonprofit CEO or social entrepreneur looked for charitable donations, grants, and earned income opportunities, sometimes taking loans. Now she has a rapidly evolving set of other options – crowdfunding, microgiving, social giving, impact investing, social innovation bonds, and more. If she truly understood them all, she’d have no time to manage her mission. She’ll also find that individuals and informal groups use many of the options to do good on their own, bypassing her nonprofit or social enterprise entirely.
The Big Question
How do communities develop new maps of how they choose to finance social good* – how financial resources are used for community benefit?
I know, I know, the idea of mapping how money is spent to benefit the community sounds wonky, boring, and difficult. But, the real-life consequences aren’t.
- If your community’s United Way stops funding small organizations, will family foundations pick up the slack or should the nonprofits try to turn out donors through social media campaigns? Or do the small groups just die in a sort of natural selection process?
- If creative citizens choose to launch their own public art projects, will the arts council and wealthy arts patrons support that grassroots momentum or squash it because it doesn’t match their own long-standing priorities?
- Can intermediaries like United Ways and arts councils still add value? In the face of expanded and blurry cash sources, can they still create valid community plans for services or organize around the currently-popular collective impact model?
- Foundations and banks often manage their giving and investing in community development projects based on assumptions about government investment in infrastructure and public safety. When government limits that investment, what should the foundations and banks do?
- Crowdfunding sites, Awesome Foundation chapters, and other grassroots giving efforts can launch dozens of cool ideas. Some ideas could even be remarkable innovations or healthy signs of renewed civic activism that need nurturing. Will the idea sponsors be able to find the right money at the right time and terms to replicate and expand?
There will never be a unified vision or master plan for financing social good in a community – there never was. Communities will always be wonderful messes of people, organizations, and money committed to good intentions. But, given the increased blurriness of financing options, I think communities would benefit from honest and open discussions about their values and aspirations for “right money, right time, right terms.”
Sometime, soon I hope, a bright person or consulting group that will develop an effective way to facilitate answers to those questions and more – to develop 21st century answers to the right King Cash for social good. When you find that person or group, send them my way. I know at least my adopted hometown of Pittsburgh could use them.
*Thanks to Lucy Bernholz for the first reference I saw to the term “financing social good”