Last year, Nonprofit Finance Fund released a report looking at the performance of the philanthropic equity deals they have done over the past four years. I was remiss in not writing about it at the time, and I thought doing so today would be a good follow up to a post I wrote about the “crowding out” of private donations.

You can get an understanding of what philanthropic equity is via this column I wrote a couple of years ago. In short, “revenue” is earned income or fundraising done from donors who are making the donation so that the nonprofit can deliver their programs to the intended beneficiaries. “Equity” is donated money that is given by donors who are making the donation to support the growth of the nonprofit organization. In the for-profit world, customer money is revenue and investor money is equity.

George Overholser explained this concept in his seminal paper “Building is Not Buying,” in which he termed donors providing revenue as “buyers” and donors providing equity as “builders”.

Four years ago, then president of Nonprofit Finance Fund Clara Miller gave George and Craig Reigel the go ahead to launch NFF Capital Partners. The group offers services to nonprofits that want to raise philanthropic equity. One critical aspect of the service is their Sustainable Enhancement Grant (SEGUE) accounting methodology. Since nonprofit accounting books all money coming into the organization as revenue, the team needed to build an alternate accounting system to track the philanthropic equity.

By 2010, NFF Capital Partners had led 11 philanthropic equity deals, totaling $116 million, and advised on another $196 million.

Their performance report shows that since initiating the deals, the nine nonprofits for which there is multiyear data have grown program delivery at an annual rate of 57 percent and grew revenue (excluding the raised philanthropic equity money, since it was properly accounted for as equity, not revenue) at an annual rate of 36 percent. This growth rate puts the organizations into the top 2 percent of fastest- growing organizations in their cohort (organizations with budgets between $1 and $20 million).

The full report offers a short case study of each deal, of which I’ll highlight two:

  • worked with NFF to raise $14 million in philanthropic equity with Omidyar Network and AIG as lead investors. To-date, DonorsChoose has burned through $6.5 million of their equity on the way to building their fee-supported business model, which is on track to achieving full sustainability. They now spend no time engaged in ongoing fundraising. Program delivery has grown at an annual rate of 58 percent and revenue has grown at a rate of 65 percent.
  • Year Up raised $19.3 million in equity while working with NFF. Lead investors included Jenesis Group, Strategic Grant Partners and New Profit. Year Up depends on a combination of fundraising at the national and local site level as well as revenue from the corporate internships at which they place students. Since raising equity, they have grown students served by an annual rate of 31 percent and revenue at a rate of 18 percent. Year Up views themselves as now being at 74 percent sustainability with sustainability based on the degree to which local fundraising from the public and internship revenues cover total expenses.

The nonprofit sector suffers from a massive inability to scale. Since 1970, only 144 nonprofits have grown to surpass the $50 million a year in revenue mark. During that same time, 46,136 for-profits have cleared the $50 million hurdle. There is nothing fundamental about the nonprofit corporate structure that prevents growth. Yet accounting standards that fail to recognize nonprofit equity strip away the single most important building block to growing an organization. Without equity, an organization is forced to live on the revenue they gather each year and lack the ability to make meaningful investments in growth opportunities.

It is critically important that equity accounting be officially recognized in nonprofit accounting standards.