Should grantmakers act more like venture capitalists?

Should philanthropic foundation board members and staff act more like the venture capitalists who fund internet startups?

That’s the question our good friend Jon Stahl posed a few weeks ago. Jon’s focus was on the high level of involvement that venture capitalists often have with the companies they invest in. Lead investors typically have a seat on the board and often participate actively in the company, at least at the strategic level. Jon points out that foundation program officers, with portfolios that often run in the dozens, simply don’t have the bandwidth to engage much with their grantees.

I think it’s a great point; maybe there are ways we could refine the philanthropy model to offer grantees more support from their funders.

But the venture capital investment model has some other qualities that may or may not fit our social sector goals very well. For one thing, the VC model is designed to foster blowout success at the expense of everything else. In financial terms, a 2x ($2 returned for every 1$ invested) or even 5x return isn’t very interesting; the VC model is designed to produce 10x and 100x or even larger returns.

In fact, VCs have a lot of incentive to actually kill companies in their portfolio that don’t knock it out of the park. You probably won’t get funded in the first place unless you’ve got a great idea, a great team, and a great market, but if you don’t show aggressive growth in users or revenue pretty quickly, and then sustain that growth, the odds are decent that your VC will actually be part of shutting you down. A typical venture fund might see half or more of its companies fail outright, thirty percent performing modestly enough that the fund can get its investment back or perhaps make a small return, and only twenty percent doing really well. (The actual numbers are tough to come by, and there’s a lot of disagreement about exactly what they are, but we know that the huge hits are pretty rare and that lots of venture capital funds actually lose money).

The model might make sense on issues where our most desperate need is for a few blowout successes (and where we are comfortable killing off the groups that don’t achieve this level of success). For example, it might be perfectly reasonable for the Gates Foundation to fund malaria eradication programs using a VC-style approach, hoping that one of their high-risk-high-reward investments comes up with the solution we’ve all been waiting for.

But on lots of social sector issues, activists and funders are happy – and reasonably so – with moderate, sustained success. If a VC-style approach on malaria eradication comes at the cost of stable, sustained funding for effective malaria prevention efforts, it’s probably a much less appealing strategy. In fact, those “moderate” successes only look modest by comparison to absurdly high Google-style returns.

And on many issues there probably just isn’t a knockout punch waiting to be uncovered through high-risk entrepreneurial style investment by philanthropic donors. Preventing extinction and recovering endangered species is just hard work, politically and ecologically; there almost certainly isn’t a fantastically successful strategy just waiting to be discovered. We ought to have more sophisticated ways of measuring outcomes, and more effective ways of rewarding nonprofits that craft and implement successful strategies, but success across lots of fields won’t look like the 1,000x return that early Facebook investors walked away with. There may be some radical advocacy innovations waiting to be uncovered, but odds are good that most of our success will come through philanthropic investments with returns that look more like the equivalent of 2x, 5x, and 10x outcomes in the investment world. And even though these numbers look small compared to the superhits, they are still huge success: anytime a foundation invests $50,000 in a nonprofit and gets $100,000 or $250,000 worth of social change value out of the deal we all ought to celebrate.

The VC model also shifts enormous control over the company itself to the investors. It’s one thing for a social sector funder to have detailed expectations about how their grant will be spent, and perhaps to use the size of their grants to influence organizational decisions about staffing and strategy (which itself is enough to make many nonprofits very uncomfortable). It’s something altogether different when the funders actually control the organization itself.

Finally, the idea that funders might play a more active role in managing the organizations they fund carries as many risks as it does benefits. The best program officers offer real expertise about the issues they fund, they can draw on wide experience working with the nonprofits they fund, and can offer a higher-level strategic vantage precisely because they aren’t in the trenches on a day-to-day basis. But even the best are still at a distance from the day-to-day work, they often don’t have much experience on the other side of the funding equation, and they can be very prone to a favorable results bias.

In fact, while investors and entrepreneurs may not (and often don’t) share the same long-term vision, they measure results in a very consistent way: how much money is this company earning and how much is it worth. Philanthropic funders and the nonprofits they support may tend to have better alignment on long-term vision, but they rarely share a consistent and unambiguous approach to measuring outcomes. And this problem is only amplified by the strange power dynamics that characterize most grantmaker-grantee relationship. Deeper involvement by program officers in the nonprofits they fund comes with some real challenges.

I’m guessing the appeal of the VC model for Jon is mostly around the opportunities for nonprofit folks to learn from the experience and vantage of the funders they work with (not to mention the potential for funders to provide other kinds of resources to their grantees), and given how weak nonprofits usually are mentoring and professional development this makes a lot of sense. The trick, as is usually the case when drawing from outside models, is making sure we understand what those external models are designed to do and adjust the ways we mimic and poach from them accordingly.

There are other models worth exploring, as well. Angel investors often contribute much smaller amounts but expect much lower returns, which means that a moderate success can still be a success, and the angel investment model includes a lot of room for investor involvement and support. Crowdsourced funding models, with Kickstarter as a marquee example, might offer some insights. In many ways these models look a lot like traditional membership-oriented fundraising in the nonprofit world, but as federal law expands accessibility to true crowdsourced investment we can expect to see rapid evolution in the mechanics and structure.

I agree with Jon’s basic point that we should look at the venture capital model for ideas about improving philanthropic funding. I do think, however, that the VC model in particular has some significant limitations in a social sector context. The nonprofit world, at times, goes overboard when it pulls from other sectors, missing the nuance and context and overdeveloping some particular element that seems important. But we can learn a lot, too, by paying attention to other sectors, and we’ve got a lot to gain by poaching, adapting, and testing whatever we think might help.

The Board Of Directors: Guest Post From Matt Blumberg

Photo by Flickr user EMSL.

This is a cross-post of a guest post originally written by Matt Blumberg for Brad Feld’s blog but re-posted on Fred Wilson’s terrific A VC blog (with thanks to Fred for permission to run it here on the brightplus3 blog).

Did you follow that? The blog post (despite its complicated journey) is a great read. It’s focused on what makes for a terrific board of directors member, and while it’s written in the context of a private company, most of what Matt writes here is very applicable to nonprofit boards.

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In last week’s guest post Scott Kurnit advised entrepreneurs to put a friend on the Board and keep co-founders off. This week we’ll continue the theme of “who should be on your Board?” with a re-run of a post that Matt Blumberg wrote for Brad Feld earlier this year. The topic is “what makes an awesome Board Member.” I am the person who made the point about firing executives. Brad Feld is the person who downed two shakes in one meeting.

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I’ve written a bunch of posts over the years about how I manage my Board at Return Path.  And I think part of having awesome Board members is managing them well – giving transparent information, well organized, with enough lead time before a meeting; running great and engaging meetings; mixing social time with business time; and being a Board member yourself at some other organization so you see the other side of the equation.  All those topics are covered in more detail in the following posts:  Why I Love My Board, Part IIThe Good, The Board, and The Ugly, and Powerpointless.

But by far the best way to make sure you have an awesome board is to start by having awesome Board members.  I’ve had about 15 Board members over the years, some far better than others.  Here are my top 5 things that make an awesome Board member, and my interview/vetting process for Board members.

Top 5 things that make an awesome Board member:

  • They are prepared and keep commitments: They show up to all meetings.  They show up on time and don’t leave early.  They do their homework.  The are fully present and don’t do email during meetings.
  • They speak their minds: They have no fear of bringing up an uncomfortable topic during a meeting, even if it impacts someone in the room.  They do not come up to you after a meeting and tell you what they really think.  I had a Board member once tell my entire management team that he thought I needed to be better at firing executives more quickly!
  • They build independent relationships: They get to know each other and see each other outside of your meetings.  They get to know individuals on your management team and talk to them on occasion as well.  None of this communication goes through you.
  • They are resource rich: I’ve had some directors who are one-trick or two-trick ponies with their advice.  After their third or fourth meeting, they have nothing new to add.  Board members should be able to pull from years of experience and adapt that experience to your situations on a flexible and dynamic basis.
  • They are strategically engaged but operationally distant: This may vary by stage of company and the needs of your own team, but I find that even Board members who are talented operators have a hard time parachuting into any given situation and being super useful.  Getting their operational help requires a lot of regular engagement on a specific issue or area.  But they must be strategically engaged and understand the fundamental dynamics and drivers of your business – economics, competition, ecosystem, and the like.

My interview/vetting process for Board members:

  • Take the process as seriously as you take building your executive team – both in terms of your time and in terms of how you think about the overall composition of the Board, not just a given Board member.
  • Source broadly, get a lot of referrals from disparate sources, reach high.
  • Interview many people, always face to face and usually multiple times for finalists.  Also for finalists, have a few other Board members conduct interviews as well.
  • Check references thoroughly and across a few different vectors.
  • Have a finalist or two attend a Board meeting so you and they can examine the fit firsthand.  Give the prospective Board member extra time to read materials and offer your time to answer questions before the meeting.  You’ll get a good first-hand sense of a lot of the above Top 5 items this way.
  • Have no fear of rejecting them.  Even if you like them.  Even if they are a stretch and someone you consider to be a business hero or mentor.  Even after you’ve already put them on the Board (and yes, even if they’re a VC).  This is your inner circle, and getting this group right is one of the most important things you can do for your company.

I asked my exec team for their own take on what makes an awesome Board member.  Here are some quick snippets from them where they didn’t overlap with mine:

  • Ethical and high integrity in their own jobs and lives
  • Comes with an opinion
  • Thinking about what will happen next in the business and getting management to think ahead
  • Call out your blind spots
  • Remembering to thank you and calling out what’s right
  • Role modeling for your expectations of your own management team
  • Do your prep, show up, be fully engaged, be brilliant/transparent/critical/constructive and creative.  Then get out of our way
  • Offer tough love…Unfettered, constructive guidance – not just what we want to hear
  • Pattern matching: they have an ability to map a situation we have to a problem/solution at other companies that they’ve been involved in – we learn from their experience…but ability and willingness to do more than just pattern matching. To really get into the essence of the issues and help give strategic guidance and suggestions
  • Ability to down 2 Shake Shack milkshakes in one sitting
  • Colorful and unique metaphors

Disclaimer – I run a private company.  While I’m sure a lot of these things are true for other types of organizations (public companies, non-profits, associations, etc.), the answers may vary.  And even within the realm of private companies, you need to have a Board that fits your style as a CEO and your company’s culture.  That said, the formula above has worked well for me, and if nothing else, is somewhat time tested at this point!

Our First Book Launch: The Nimble Nonprofit Hits the Streets (and Barnes & Noble)

The Nimble Nonprofit is now available at Barnes & Noble ($4.99)!
Yesterday Trey and I launched our first book, The Nimble Nonprofit: An Unconventional Guide to Sustaining and Growing Your Nonprofit, with a ton of help from our Bright+3 colleague Ted Fickes.

We’re only a day into it, but it’s been great fun so far: a ton of awesome reviews on Amazon, a bunch of great Twitter traffic, and even an unsolicited and really favorable full-on book review (thanks Bonnie Cranmer!).

In addition, I now have a “Jacob Smith” author page on Amazon. I wasn’t expecting much when I logged in to set it up, but I must not have paid author pages much attention previously because it turns out they’re actually set up pretty well. In addition to what you’d expect (profile, photo, etc.), they also allow you to bring in a Twitter feed and an RSS feed, which is a nice touch.

And great news if you are a Nook fan: The Nimble Nonprofit is now available at Barnes & Noble!

The book is in review at Apple, and as soon as it launches there we’ll announce it.

We’re thrilled to sent our little book out into the world, and we welcome your comments, critiques, and thoughts … send them our way:

  • email: authors@nimblenonprofit.com
  • Twitter: #nimblenpo
  • web: http://brightplus3.com/

The First Bright+3 Book Launch: The Nimble Nonprofit

I am thrilled to announce the launch of The Nimble Nonprofit: An Unconventional Guide to Sustaining and Growing Your Nonprofit.

The nonprofit world truly is in a state of flux. Much of what used to work doesn’t anymore. The need to invest in growing ass-kicking staff and to develop sustained organizational capacity has never been greater, yet the difficulties of doing so are growing as quickly as the need. In The Nimble Nonprofit we cover a wide range of what we believe are critical challenges facing the nonprofit sector:

  • cultivating a high-impact innovative organizational culture;
  • building and sustaining a great team;
  • staying focused and productive;
  • optimizing your board of directors;
  • creating lasting relationships with foundations, donors, and members;
  • remaining agile and open; and
  • growing and sustaining a nimble, impactful organization.

We mean for The Nimble Nonprofit to be a guide – an unconventional irreverent, and pragmatic guide – to succeeding in a nonprofit leadership role, and to tackling this incredibly challenging nonprofit environment. We aimed for a conversational, practical, candid, and quick read instead of a deep dive. If you want to immerse yourself in building a great membership program, or recruiting board members, or writing by-laws, there are plenty of books that cover the terrain (and some of them are quite good).

But if you want the no-nonsense, convention-challenging, clutter-cutting guide to the info you really, really need to know about sustaining and growing a nonprofit, well, we hope you’ll check out The Nimble Nonprofit.

This is our first book, and the publishing industry is a state of disarray, so – following the spirit in which we wrote the book – we are taking an unconventional path. We decided to publish strictly as an e-book, and we decided to self-published (with a bunch of help from Ted here at Bright+3). We are offering the book through the big three e-bookstores (Amazon, Apple, and Barnes & Noble, and we might add a few more to the mix), and we’ve priced the book at $4.99, which is much less expensive than the vast array of other nonprofit books.

As of right now, the book is available on Amazon (and it’ll hit the other two stores shortly). If you’d like to score a copy of The Nimble Nonprofit and enjoy reading it on your Kindle, iPad, or another tablet, jump on Amazon and grab it (did I mention it’s only $4.99?).

And, because our main goal is contributing to the conversations around these critical questions, we are also making a .pdf version of the book available for free.

We suspect that most readers will agree with some of what we argue and disagree with other parts, and because we challenge much of the conventional wisdom about building strong nonprofits, we’re pretty sure that some folks will disagree with a lot of what we write. And we look forward to the conversations. Please send us your thoughts, critiques, comments, and ideas

  • email: authors@nimblenonprofit.com
  • Twitter: #nimblenpo
  • web: http://brightplus3.com/

Tell us where you think we’re wrong and where we’ve hit the nail on the head, and please share with us other examples of nonprofits doing a great job of tackling these challenges and where they are just getting it wrong.

Happy reading –

Jacob

(P.S. The Nimble Nonprofit is available right now on Amazon.)

Surviving a Cash Flow Crisis

What to do when the cash runs out? (Photo by Flickr user NoHoDamon).

One of the most difficult challenges of running a nonprofit, but one of the least discussed, is surviving a cash flow crisis. If you’re really lucky, you may never encounter the “crap, we’re going to run out of money before the end of the month” moment, but most folks who work for small or mid-sized nonprofits have experienced that moment at least once or twice. After you negotiate the immediate crisis you’ll need to buy yourself some breathing room and then tackle whatever systemic failure led to the cash crunch in the first place, and if happens more than once in a while you’ll need to grapple with the possibility that your organization simply doesn’t have a viable business model. But first you have to survive the crisis.

Some tips for surviving to fight another day:

  • Stop all of your discretionary spending. All of it. No computers, cameras, pencils, hotel reservations, coffee, or anything else. If it’s something your organization truly can’t live without, then do whatever you can to beg, borrow, or steal it.
  • Figure out what bills you can ignore. Some accounts payable won’t notice you haven’t paid them for a cycle or two. Others might notice but not care. Ignore (for now) any expense you can get away with ignoring.
  • Identify every automatic subscription expense. Cancel any you can get away with, and where canceling will cause you to lose critical data or severely hamper your organization’s ability to do its work, downgrade to the cheapest possible service level.
  • Identify every vendor to whom you owe money or will soon owe money. You may be able to directly approach some of them about your predicament to work out a payment plan. In many cases, for instance, a landlord would rather work out a deferred payment arrangement with you than kick you out (especially if you don’t have a habit of coming up short on the rent). For other vendors, you may need to take a more aggressive approach, and simply pay them a lot less than you owe them, perhaps with an explanatory note. As one of my favorite CFOs points out, a vendor is very unlikely to sue you if you are paying them something, even if it’s modest.
  • Talk to your staff about delaying payroll or in some other way reducing what you pay them in the short term. It’s a tough conversation to have, but for many nonprofits payroll represents a very large proportion of the monthly cash burn, so buying some time on payroll obligations can make a big difference in the short-term.
  • Identify any revenue stream you can accelerate. Any accounts receivable that you can get to pay you now instead of in a month? Any foundations who might be willing to cut you a check a little early? Any committed membership donations you can ask for early delivery on?
  • Calmly (but quickly) reach out to all of your mid-size and larger donors and ask them to make a one-time extra donation to help you out of this pinch. Before you start reaching out, arm yourself with at least something that looks like a plan to both stop the hemorrhaging and then recover your longer-term financial health. It’s much easier to ask for help in a crunch if the donor feels you really can solve the crisis and fix the deeper problems as well.
  • Think about donors that might not be directly invested in your organization specifically but might place a lot of value on your role in the community. Some of them might be willing to help on a one-time basis in a crisis if they know you and value your contribution even if your work isn’t part of their normal philanthropic giving.
  • Explore getting a line of credit from a bank. This is expensive money, and of course it’s easier to secure a line of credit before you find yourself in a crisis, but especially if your organization has some real assets, you might be able to come up with some short term cash.
  • Credit card debt is expensive and dangerous, and once you get into a hole it can be difficult to get back out, but in a real cash flow disaster it can be a lifesaver.

The problem with all of these strategies is that they truly are short-term solutions. They won’t generate any additional revenue, for instance, but at best they’ll simply accelerate payments you were already counting on for use in the future. Most of these spending cuts don’t change your organization’s burn rate; they simply push expenses into the future, where they pile up into even more ominous obligations.

Although surviving the cash flow crisis is your first priority, you should tackle this as best you can with the long-term challenge in mind, and you need to turn your attention to solving your long-term problems (whatever it was that led to the cash flow crunch in the first place) as soon as possible. You have to tackle the structural issues – too many staff for the revenue, overly expensive infrastructure investments, or whatever the problems are – or your organization will find itself dealing with the short-term cash crunch over and over again.

A Course They Ought to Teach in Your Nonprofit Management Degree Program

Do any nonprofit degree programs teach this?  They should.

How to Manage Your Board:

  • Guiding your board toward the questions you want them to ask and away from those you don’t want them to touch.
  • How to make sure your board feels like it was their idea.
  • Preventing your board from making really dumb decisions.
  • Enabling your board to push and challenge you.