Swift and immediate response from philanthropy: “What are nonprofit capital markets?”

 

Thus began a Twitter exchange last month, with my good friend and former client, Rick Moyers.

Rick had just written a thought-provoking piece for the Center for Effective Philanthropy’s blog entitled, “We Need More Checkbook Philanthropy.” He argued that “strategic philanthropy”—charitable giving directed toward a specific and defined impact—has supplanted the idea of finding great organizations and giving them money to do more great work. He wrote:

“Checkbook philanthropist” has become a pejorative, and that’s a shame. Simply writing checks to effective organizations doing important work can be an honorable approach to philanthropy and doesn’t have to be mindless, haphazard, or ineffectual.

Rick’s critique is spot on, and I would go a step further. You need to understand where your giving fits into the nonprofit capital market in the region and the social issue to which you’re giving to determine whether checkbook or strategic philanthropy is called for.

I said as much in a tweet responding to Rick’s article, and his tongue-in-cheek comeback hit on an inescapable truth. Many philanthropies have no idea what a nonprofit capital market is. And to be fair, the idea of a nonprofit capital market may represent a bit of aspirational thinking on my part. If you Google “capital market,” you’ll get something like this—debt instruments, equity capital, etc.

There is not really an equivalent in the nonprofit world. When you start and grow a business in the for-profit world, you move from highly speculative capital sources (Visa cards) to more established forms of capital such as angel investors, small cap funds, and the like. In the nonprofit world, it can be much easier to find startup funds for a relatively unproven idea than to find the resources to take an idea that has evidence of success and take it to scale.

So what is a nonprofit capital market? Here’s my working definition:

The breakdown of resources available from institutional philanthropy, individual philanthropy and government to address a specific social issue in a specific region.

The fact is, we know bits and pieces of the puzzle that make up the nonprofit capital market. For example, here’s a breakdown of institutional philanthropy by social issue for the Washington, DC region based on our mining of Foundation Center data:

But the devil is in the details. We can tell you that only a third of foundations incorporated in the DC area actually make grants to nonprofits in the region. A stunning 68% of philanthropy in DC goes to charities somewhere else. So the institutional capital market for education in DC region is about $103 million, not $323 million. Most of that education funding is going to higher education, so if you’re funding K-12 education reform, the capital market in DC is smaller still—about 10% of that $103 million. Just like that, your $250k in funding for, say, parent engagement  initiatives went from .24% of the capital market to 2.4%.

The individual giving market is murkier. One can find statistics on individual giving by state, which suggest that states with concentrations of religious donors (Utah and the Bible Belt) are more generous than relatively secular states like Massachusetts. But if you factor out religious giving, then what? We know that in D.C., the poor give at higher rates than the rich, while in Boston, the opposite is true. But we have little visibility into how much of the giving by DC or Boston donors actually stays in the region and how much gets sent elsewhere, which is likely higher in urban areas with high resident turnover.

Why does all of this matter? Well, if you’re working for a foundation, understanding whether your philanthropy makes up 1% or 10% of the local market is material. To put it another way, would a shift in your giving strategy leave a hole in the market for that social issue that represents 1% of giving, 10% of giving, or more? And if you’re asking your grantees to tell you what their sustainability plan is, it would be good to understand what alternatives, if any, they have to seeking your ongoing support.

I’m all for big, hairy, audacious thinking when it comes to social change. After all, very little innovation has come from anywhere else. What I’m not so enamored of is magical thinking—whether from nonprofits seeking grants or funders making grants. You have to know where you are if you have any expectation of getting somewhere else.

 

Where do we take this? In a blog post to be named later, we’re going to take a deeper dive into two nonprofit capital markets—Boston and DC—and see how regions of similar size and income demographics can look quite different from a philanthropic perspective. We’ll also be convening conversations with nonprofit leaders and philanthropies to explore how the nonprofit capital market in which you find yourself can drive and constrain your strategy—and what to do about it.