Archive for the ‘Investment’ Category

Translation Services: What Does Venture Philanthropy Really Provide?

January 10, 2013

The Nonprofiteer threw a bit of a bomb at a meeting today.  (“Now, dere’s a bolt from da blue,” as Andy Sipowicz would say.)  Perhaps she should be sorry—but she’s not.

After a group of young “venture philanthropists” described their efforts to help expand a small number of poverty-fighting nonprofits and to attract other philanthropists to support them, she had a few thoughts which she generously shared.

  • Their analysis of Return On Investment in this context was very exciting, comparing the dollars spent to the dollars added to the projected lifetime earnings of program participants as a result of whatever intervention the nonprofits provided.
  • Their goal of “Scaling Up What Works,” while admirable, had challenged many other institutions.  Did they have a template for determining which nonprofits would continue to succeed after significant expansion?  (Not really: they look for leadership and give it management support; but management support can’t clone inspired leaders.)
  • Their main achievement was to have assembled a group of white people (staff and Board) to whom other white people would give money.  White people are reluctant to give money to black and brown people (she observed).  But this group, by virtue of its comfortingly familiar MBA-speak upper-middle-class front, is able to overcome that reluctance. 

Afterward, the meeting’s host suggested to the Nonprofiteer that her last comment had been both off-putting and dismissive.  On reflection, she concluded that, while she was sorry to have embarrassed her host in front of his guests, she was glad to have given voice to the Subject That Dare Not Speak Its Name: the gap between the resources available to white people and those available to nonwhites.  We’d like to think that philanthropy responds to need, but most donors actually respond to being asked by those who look a lot like they do.

If these people can level that tilted playing field, more power to them.  And if some of them can make a career out of doing so, mazel tov.  But while the advice and management training and analysis and for-profit perspective on nonprofit problems are all very well, let’s not fool ourselves about what’s really useful in this model: the ability to look and sound like the sort of people who should be entrusted with a lot of money.     

That’s not a critique of pale people who want to help.  It’s just a plea for frankness about how racism plays out in our sector.

A remarkably clear statement of what’s wrong with L3Cs. . .

November 29, 2011

for which the Nonprofiteer can take no credit.  Rather, thanks to her friend, Baltimore tax lawyer Stuart Levine, for laying out so clearly the problem with low-profit limited-liability companies, the latest fad in efforts to do well by doing good.  Stuart’s argument appears in response to, among other things, a recent New York Times report that foundations have increased the proportion of their “grants” which are actually program-related investments, that is, grants for which repayment is expected to a greater or lesser degree.

Words from the wise:

Look, there are numerous “good cases” where one can see that infusion of capital that doesn’t really have to be repaid at market rates makes good sense.  (Actually, government loan guarantees of, say, solar power start-ups falls into this category.)  The problem with allowing 501(c)(3)’s to make these sorts of investments is that the process is subject to abuse.

Say that I want to create “Stuart Levine’s Good Works Foundation.”  The Foundation attracts $10M in tax deductible contributions.  The Foundation uses the cash to “invest” in projects operated either by me or my Aunt Minnie.  While Minnie and I invest our own funds in these businesses, our capital position is ahead of the Foundation’s and gets a higher return, so that the first profit out goes to pay us and, if the deal craters, the biggest part of the hit will fall on the foundation.  (Did I mention the $250K a year consulting fee paid to me by the investment entity?)

I don’t for a minute believe that the Bill and Melinda Gates Foundation is engaged in double-dealing of the sort that I described.  I have less faith in the “Stuart Levine’s Good Works Foundation.”   Has everyone forgotten the Pallottine Fathers?  See here:

http://tvnews.vanderbilt.edu/program.pl?ID=254962

Or, as one might say, everything old is new again.

The burden of proof rests on those who believe L3Cs are essential.  They must demonstrate that the entities’ potential for abuse is outweighed by their capacity to meet needs that are otherwise unmet.  But all that’s unmet so far is that burden of proof.

The Joyce Foundation, the Independent Sector and the facts

November 2, 2011

Ellen Alberding’s interview with the Chicago Tribune in advance of the Independent Sector‘s meeting in Chicago earlier this week pressed nearly every one of the Nonprofiteer’s buttons.  Ms. Alberding, head of the Joyce Foundation, described the Foundation’s approach to what even she characterizes as a perfect storm of increased need and reduced resources in the nonprofit sector:

We do what any good business person would do when faced with reduced resources. We have become very focused on first maintaining support of our core grantees. Foundations are required to spend a minimum amount — 5 percent of our assets. On occasion, we will overspend that in order to keep our grantees whole.

In other words, business as usual.  Most likely the Joyce Foundation’s governing documents prevent its Board from spending its assets down to zero, but there’s no reason why the Foundation shouldn’t use more than the statutory minimum 5% of its $800 million in assets to sustain the work it exists to support.  Foundations are NOT businesses; they exist to give their money away, and only in some vague theoretical sense is an institution with $800 million facing constraints preventing it from giving away more than $40 million.

If Joyce gave only 6% instead, that would be another $8 million available to nonprofits in its areas of concern—a not-insubstantial 20% increase.   What is stopping the Foundation from doing this, other than a misguided sense that preserving its capital is more important than doing its job?

And then the cherry on the sundae:

It’s the position of the Independent Sector that a cap [on charitable deductions] will reduce charitable contributions across the board and diminish support for nonprofit organizations. I believe it’s the administration’s view that the 28 percent cap might have some impact, but it wouldn’t have a dire impact. (But) I think we have to listen to the organizations themselves, who feel otherwise.

In other words, notwithstanding reality, the prejudices of self-interested parties will dictate the organization’s behavior.    Their minds are made up—don’t confuse them with the facts.  But as President of the organization, doesn’t it behoove Ms. Alberding to make sure her members don’t make their decisions based on fantasy?

Grrrr.

“L3C” spells “caveat emptor”

March 17, 2011

Here’s something strange: a concept thrown around routinely and casually in conversations among nonprofits and philanthropies is simultaneously the subject of fierce debate and sometime disapproval by the Internal Revenue Service, a committee of the American Bar Association, and other experts. What is going on?

The notion of Low Profit Limited Liability Corporations (L3Cs, for short) is that they’re a vehicle for doing well by doing good and therefore an improvement over the typical nonprofit structure. L3Cs are permitted to earn profits but proponents claim that their praiseworthy intentions—to end hunger or provide clean water or whatever—make those who lend to them eligible for the special tax benefits attached to program-related investments. In other words, this is a legal structure presented as a technique for gaining access to capital (always a struggle for nonprofits) by providing a tax benefit to lenders.

Of course, foundations already get a tax benefit for program-related investments in regular nonprofits, so what, exactly, is the appeal? In theory, foundations might be more interested in program-related investments that generate a reliable flow of capital (in the form of profit) than in program-related investments that generate nothing but additional nonprofit programs and services. Likewise in theory, regular venture capitalists outside of foundations will be more interested in making investments in profit-making entities than in pure nonprofits. This—the notion goes—will increase the amount of capital available to support general good-guy behavior.

However, a number of scholars and lawyers (Daniel Kleinberger of William Mitchell College of Law prominent among them) see the L3C as, at best, redundant and, at worst, an invitation to fraud. They point out that regular limited liability corporations can be organized for any purpose, including public-spirited and low-profit ones. They point out that the IRS has not yet issued (and does not seemed inclined to create) a rule awarding automatic program-related investment status to any investment in an L3C. So anyone who invests in an L3C on the basis that it provides a higher return than a regular nonprofit with the same tax benefits will find out to his/her sorrow that this is not the case.

What strikes the Nonprofiteer as peculiar, though, is that in the many discussions she’s heard and read about L3Cs, only one mention (specifically, Professor Kleinberger’s Nonprofit Quarterly article) has ever surfaced of this opposition from the bar and Federal regulators.  Not until her tax lawyer Stuart Levine asked about the [successful] efforts in Illinois to create L3Cs did she realize there was anything controversial about the phenomenon.  After bringing her up to speed Levine wisely said,

L3C’s don’t work unless there is a change in federal tax law.  In other words, L3C’s are a little like Oreo-Tycin-Myacin—the wonder drug for which there is no known disease.

L3C’s raise difficult issues of fiduciary duty and the inherent conflict between “charitable” purposes and “business” purposes.  At the least, these conflicts cannot be dealt with via a quick-fix state statute.

Doubtless the Nonprofiteer spaces out on frequent occasions and misses aspects of what’s said or done in the sector.  But she suspects there’s also a disconnect between what nonprofit executives and L3C promoters expect and describe and what lawyers and regulators understand.

So if you’re considering investment in an L3C, be the aware buyer of whom you’ve heard.

Doings at the Nonprofit Finance Fund

January 26, 2011

The indispensable Nonprofit Finance Fund has just begun its annual survey of the sector for 2011. The Fund’s slicing and dicing of the data will produce a thoughtful report on the state of the sector, of the kind it has already provided for 2009 and 2010. Please help the Fund’s researchers help us: take 15 or 20 minutes and respond to their questions.

Speaking of indispensable, the Fund’s founding Executive Director Clara Miller has just announced that she’s moving on to a job with the FB Heron Foundation. No doubt she’ll continue to be a leader in her new position, but her tenacity and vision in creating financial systems for nonprofits (including the Community Development Finance Institution, of which the Fund itself became a leading example) and her no-nonsense discussions of what the sector needs and what it lacks will be sorely missed.

We all owe Clara Miller a debt of gratitude. Maybe the Nonprofit Finance Fund’s expertise can help us figure out how to repay it!

What a difference a syllable makes

November 19, 2010

More about the troubles of the do-well-by-doing-good gang, this time in the financial services sector.

Which raises the question: when does “profiting” turn into “profiteering”?

Social Enterprise and Its Discontents

November 17, 2010

A new study—poignantly titled “Social Enterprise: Innovation or Mission Distraction?”—reports that nonprofit agencies which choose to support themselves with for-profit businesses end up serving their clients less and worse.  Moreover, when the businesses thrive the profits go back into the business, while when the businesses falter the losses are taken out of the hide of the agencies.  (So glad to see nonprofits acting like businesses!  This “heads I win, tails you lose” approach is just what the investment bankers did—en route to destroying the economy.)

Gloating is unattractive, and unwarranted.  After all, any friend of the nonprofit sector would be delighted to learn there was a way to strengthen it without having to stretch every penny into a copper wire, or grovel to wealthy people who understand the situation less well than the people they may or may not deign to help.  But a bit of schadenfreude directed at the prophets of social enterprise really can’t be avoided.

It’s always seemed obvious to the Nonprofiteer that if there were money to be made in ending poverty, poverty would long since have been ended.  The challenge is to provide services and alleviate suffering when it isn’t profitable.  It seems equally obvious that any system which must allow for a private person to make money before the clients get served is one that reduces the resources available for those clients.

Now, lots of things that are obvious also happen to be false.  And certainly there’s a reasonable discussion to be had about whether, once you factor in all the costs of raising donations, it would be cheaper or more efficient—even with a profit margin—to organize charities as business enterprises.  But a decade’s worth of experimentation suggests that the answer is “No.”

Are services provided by social entrepreneurs better than no services at all?  Sure, but it demonstrates the poverty of our current mindless anti-tax political discourse that those seem like the only two choices.  The real alternative to entrusting the provision of public services to for-profit groups is having them supplied by the public.  Anyone familiar with the history of the private subway franchises and private lending libraries and private schools of the 19th Century will be grateful that our predecessors decided to eliminate the middleman markup and run subways and libraries and schools as the public goods they are.

Have social enterprises ever succeeded?  Certainly, and more power to them.  But anyone who claims they will supplant philanthropy, charity or social change movements is selling snake-oil.

The most thoroughgoing enthusiasts of the market seem to forget that Adam Smith himself recognized areas in which it would, and did, fail.  Those of us caring for people who can’t make profits for other people are dealing with the consequences of those failures.  So let’s face it: we’re outside the market economy.  Let’s stop contorting ourselves to fit into it, and concentrate on figuring out how to make our own systems function more fairly, transparently and effectively.

Buy land. They’re not making any more of it. But on second thought . . .

May 28, 2010

Everyone in the sector–no kidding, everyone!–should read this Nonprofit Quarterly piece by Clara Miller of the Nonprofit Finance Fund about the practices most likely to make nonprofits vulnerable to financial disaster.  Pay particular attention to Ms. Miller’s skepticism about the value of owning one’s own building.

The Nonprofiteer has argued for years that the likelihood of a building’s being a good investment is significantly smaller than the likelihood of its being a money pit, particularly for arts organizations who make over-optimistic estimates of their likely rental revenue.  But now someone who actually knows what she’s talking about is saying the same thing.

So listen up!  Please.

A modest proposal–that might actually work

October 23, 2009

This is the most innovative idea I’ve heard to date for modifying the nonprofit model to better suit organizations which aren’t properly “charities” but still serve the public interest.  The conversation has been about theater companies–and I salute Stolen Chair‘s leadership for introducing it–but it would work equally well for the newspaper business, where very little else seems to work.  The Nonprofiteer promptly and shamelessly cribbed the idea for a “Whither journalism?” discussion, and intends to do so again.

H/t to Thomas Cott of “You’ve Cott Mail” for passing along the Artful Manager‘s coverage of this intriguing concept–the first notion in many a day to tempt the Nonprofiteer out of her lair.

Formerly Foundation but now Federal Friday: Going where the money is

April 3, 2009

. . . which right now isn’t foundation coffers but the vaults at Fort Knox, as this excellent summary of how to get yours under the Federal economic stimulus package makes clear.



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