As a leader at the groundbreaking Capital One and a successful Route 128 Venture Capitalist, George Overholser made his mark on the private sector early. Now, for the last 10 years he´s been having an even bigger impact on creating innovative financial tools designed to increase the impact and sustainability of high performing nonprofits. When I had the chance to interview George last fall in Boston for Compromiso Empresarial, we were only interrupted once.. for a call inviting him to join a panel on Social Finance at the White House. (The conclusions of that session are here.)
Here´s what George had to say about how donors and investors can use new tools to accomplish more social good with their funding. (The interview was originally published in Spanish in Compromiso Empresarial here.)
In 2006 George Overholser founded NFF Capital Partners, an investment bank that has helped 16 high performing nonprofits to secure over $300 million in strategic growth capital. He is now Co-founder of Third Sector Capital Partners, a nonprofit boutique investment bank that helps capital flow into the social sector in healthy ways. Third Sector Capital´s focus is on the fledgling Pay for Success/Social Impact Bond industry.
Prior to turning to the social sector, George founded North Hill Ventures, a Boston-based venture capital firm with $125 million under management, focused on early-stage financial and marketing technology firms. Previously, he was a member of Capital One’s founding management team. George’s thoughts on innovation in nonprofit sector finance have been covered in the Wall Street Journal, the Economist, Business Week and New York Times.
The nonprofits that received “philanthropic equity investments” from the NFF Capital Partners more than tripled their program delivery and doubled their revenues in 3 years. What is “philanthropic equity”? It takes money to build any firm, nonprofit or for-profit. Philanthropic equity plays the same role for nonprofits that equity plays for for-profits. Carefully structured grants help pay the bills while an organization learns how to be compelling. By compelling, I mean 1) donors, clients, government contractors, etc. “buy” from you again and again and 2) the money you receive from those “purchases”, actually covers the costs of what you give them in return, in the case of nonprofits, the social good you provide.
The Goal: Done right, philanthropic equity will help align funders with nonprofits’ missions and strategies. Investors will be incentivized to act together, co-investing under shared equity structures. Everyone will be able to determine whether or not their investments are successful and be able to answer “Has my money, and others, made a difference? Has the organization achieved sustainability under its chosen business model? How much philanthropic equity is left?”
The components of a NFF Capital Partners deal:
- Funds are raised to transform a nonprofit in ways that will stick
- Individual and foundation funders direct their capital gifts to a single enterprise level business plans and the funding’s use is unrestricted
- Amount needed is based on rigorous financial and program planning
- Success is measured in terms of “perpetuities of good” and is connected to the capital investment
- Tracking of progress on the way to a “steady state” of operations where no more growth capital funds are required and equity funders can “exit”
- New accounting techniques which document the specific role equity plays through the life-cycle of the enterprise
You use the terms “Builder” vs “Buyer” to categorize philanthropists? “Buying” is giving money in exchange for a certain amount of program execution. A very interesting question to ask nonprofits is “what is your unit of service delivery?” “How many units of service is a donor buying with a $10,000 donation or contract?”. Better yet, make a connection between that service and some unit of impact. For example, “How many units of kids going to college who weren´t otherwise going to college would you like to buy?” (Of course, only the most sophisticated philanthropists will fail to have sticker shock when they hear the true cost of impact!) Impact is expensive to achieve. [Outcomes are what happened. Impact is what happened that would not otherwise have happened.]
“Builders” are philanthropists who support organizations on their path to becoming strong and creating healthy business models that generate the money the organization needs to execute its programs. Builders’s funding takes the nonprofit to the stage where it is supporting its work through ongoing revenues from donors, beneficiaries, etc. Builders fund the mistakes, the trial and error, the shifts in strategy that every organization must go through.
“Buyers” ask nonprofits ”Did you or did you not execute the program I paid for?” In a builder relationship, however, the organization is accountable to the plan for reaching a viable business model, not to each donor individually. It’s just like the profit world where you have investor agreements and classes of investors, Class A shares, Class B shares. Whole classes of investors are represented in the board room and the CEO reports to the Board on a single set of results, not on results that tailored to satisfy each funder.
In fact, many builders are also buyers….they want to buy great program results and build more great programs.
Why would a philanthropist want to be a “builder”? Like other capital campaigns where funds are destined to build a building or create an endowment, with philanthropic equity you’ve make a gift with a known price tag that keeps on giving.
If you fund an organization’s operating budget, the next year it’s gone. In contrast, providing philanthropic equity gets you a perpetual interest in the ongoing social benefits of this work. It’s permanent You don’t get ownership, instead call it “bragging rights”. Plus, the nonprofit raises a finite amount of capital, just the philanthropic equity it will need to make a step change in its model. The donors know what percentage of this funding they’ve put in and aren’t worried they are creating dependency with their grant. Over time the nonprofit’s business model revenues go up and the use of growth capital goes down.
All of these donors are funding a single goal, so you also avoid the “Copernicus” issue that plagues so many nonprofits. Too often nonprofits orbit around one funder after another, trying to please them, instead of funders remembering that what should be at the center of the universe is the nonprofit fulfilling its mission.
What does becoming a builder rather than a buyer, imply for families who want to be effective in their giving but do not have the dollars of the Gates Foundation? Conceptually any funder can use this approach. There will likely be a small number of builders writing a big checks, so there won´t be much room for small funders. That being said, if you´re supporting an early phase start-up, you can absolutely do it with smaller amounts of money. I would just say funder restraint… remember the nonprofit is accountable first to their plan, not to you.
Can you give us an example from NFF Capital’s portfolio? Ashoka Changemakers connects individuals and organizations committed to making positive social change through online communities, forums and competitions. Thus far Changemakers has leveraged $3 million of philanthropic equity to attract $75 million in social projects championed and vetted through its online competitions. Earned revenues are targeted to cover operating expenses in 2011.
|Metric||Baseline 2007||Current 2009|
|Innovation Funds Seeded||$7 M||$39 M|
|Visitors to Changemakers.com||.5 M||1.4 M|
|Business Model Revenue||.9 M||3.9 M|
What kind of a nonprofit makes an ideal candidate for philanthropic equity? Any nonprofit that aspires to reach a compelling business model or make a step change in its impact is fair game.
Why don’t you like the term “sustainability”? You’ll notice I say a compelling business model, not a sustainable one. Too often “sustainability” for nonprofits means literally, barely surviving year after year. We don’t have a sustainability problem. We have a thriving problem. Traditional fundraising teaches nonprofits to live hand to mouth. Imagine if the company that tutors your kids said “you should send your kids here because we’re about to go bankrupt.” But that’s what we’re doing to nonprofits that provide tutoring to other people’s kids (who happen to be low-income.) They ask donors for money and we say, ‘you’re not on brink of collapse, you don’t really need our money, call us when you’re really desperate’. You’re sending a message that those kids should only be served by an organization that’s on the brink of going under!
In the venture community the first question you ask is “what’s your business model?” Many nonprofits are on life-support because they don’t have business models. You need a robust business model to thrive.
You describe both NFF Capital Partners and Third Sector Capital Partners as “investment banks for the nonprofit sector.” Could you explain what that means to you? The idea is to be a market maker, to be an intermediary who helps the parties come together in a constructive fashion. That´s what investment banks do. They package and market products.
You recently founded Third Sector Capital Partners to develop Pay for Success/Social Impact Bonds. Why is this opportunity so important? The important innovation in this is “pay for success”. Instead of reimbursing for expenses, you’re paying for outcomes! It’s something we’ve talked about for 30 years but we didn’t have the information technology to do it. Now we do.
Who defines the outcomes? It’s a dialogue. It’s like a venn diagram between 3 parties, government, providers and philanthropists. You can always go out further into the future, but what you’re looking for is the tangible measure that everyone will believe is important.
The “Bond” concept, the idea of private investors, rather than governments, taking on the risk of social programs is attractive for the government and the nonprofits get their funding upfront. What’s in it for potential private funders? The most fundamental thing is that it’s all tied to the evidence. Funders will know if what they funded worked or not. Right now they don’t know! Through the Social Impact Bond they find out what actually happened
Of course, donors also get to see their money recycled…. There’s an evergreen feel to it. I actually believe we’re not even going to need to give the money back to the philanthropists. Instead funders are going to see their money recycled over and over and over again…the gift that keeps giving. Most philanthropists don’t want the money back. Their response is more likely to be, “Hey, I’ve got too much money, I’m trying to share it, not get it back!”
You’ve said “Pay for Success/Social Impact Bonds need to be about reallocations of government resources, not just infusions of private capital.” Why? Some philanthropists are funding this new vehicle because the real story about social impact bonds isn’t about philanthropy. It’s about government.
We don’t have a shortage of money. We have a misallocation of money and government spending dwarfs everything else. The Social Impact bond shines a spotlight on what works. Pay for Success, turbocharged by Social Impact Bonds is really a story about the reallocation of funds, mainly public funds, to fund results. Magically we may end of spending less money but getting more good stuff happening.
What prompted you to focus on the social sector? You were still quite young and had been very successful in the private sector. I kind of stumbled into it. I felt like giving back and I found it was intellectually very interesting. And I did go to a very progressive school growing up!
The kinds of changes philanthropy needs were crystallized for me in a single day. In the morning I went to venture capital meeting. We had just written a $10M investment and everyone was high fiving. Then I saw the entrepreneur with a bead sweat on his forehead. “Don´t get me wrong,” he said,” I´m really glad you guys invested us. But I´m looking at our revenues and they´re still zero and now I´m on the hook to deliver. “
That afternoon we had a venture philanthropy meeting and celebrated a $1M deal. This time the Executive Director was high fiving most of all. “Thanks for the million dollars,” he said “now we´re done for the year. If I were to go out and fundraise tomorrow everyone would say you have more than you need. Next year I´ll have a problem but I´ll worry about that later because I will have a huge surplus. In the meantime, I´m going to put my fundraising team to work on the program side.” I finally understood why people don´t write big checks they don’t want to make a nonprofit dependent on them. We had just caused this nonprofit to double its cost structure and dismantle its fundraising mechanism when we were trying to help it reach a workable business model. That´s an accounting problem. By distinguishing between interim growth capital needs and ongoing revenue streams we’re fixing that problem.
What advice would you give others from the world of finance as they look to contribute to the social sector? If you come from a business background those skills are sorely needed. As a sector, we’re not constrained by money, we’re constrained by talent. Give your time, not just your money.