Financing Nonprofit Growth, Part 3: Playing Catchup

This is part 3 of our series on Financing Nonprofit Growth.  Click here for part one and here for part two.

We left off our last post with Fun Finance struggling and Kite Drones taking off (pun intended).  Let's now take a look at where they are five years later.

Despite the odds, Fun Finance has perservered.  Though they only raised $30,000 in their first year, their revenues have increased year after year, reaching $390,000 in 2013.  They have maintained a 93% repayment on their loan portfolio; garnered national attention for the quality of their products and services; secured a US Treasury designation; built a robust network of community partners, funders, supporters and clients; and refined their business model to the point that they are ready to scale--exponentially, in fact.

So what's Fun Finance, a nonprofit, to do?  After running the numbers, they realize that they need at least $1.5 million in funding for operations for the first year of their scaling plan, as well as an additional $500,000 in funds for lending.  Bob's first instinct is to raise the $2 million through traditional philanthropy, though he quickly realizes the infeasibility of this approach: since their founding, Fun Finance has only raised $1.6 million.  The chances of raising more than that in a reasonable time frame seem infinitesimal.

Financing Nonprofit Growth, Part 2: The Menu Of Options

How Companies Grow
This is part two of our series on Financing Nonprofit Growth.  You can read part 1 by clicking here.

Joe The Entrepreneur
Let's start with the model with which most of us are familiar: Joe the Entrepreneur in his proverbial garage, ready to change the world.  Joe, you see, has invented something amazing--let's call it a combination kite and predatory drone, the Kite Drone--that he thinks is going to sell like chocolate in the desert (dessert in the desert, anyone?).  He puts together a business plan showing how he is going to take 1% market share in two large markets: military drones and, well, children's kites.  The financial projections are solid, the team is experienced, and now it's time to get investors; all he needs to do raise is $250,000 for a first round of funding.

As an entrepreneur, at this stage your biggest challenge is that your company is, at present, worthless: it has no assets, no revenue streams, no customers; it is just an idea, all potential energy.  Your pitch is based entirely on the promise of future earnings, and the investment is therefore inherently risky.  Lenders, such as banks, don't like risk; sure, they may make a loan to a new Pinkberry franchise or a restaurant--these are, in a sense, "cookie cutter" businesses in that the banks have seem them time and again--but they aren't going to want to touch the Kite Drone with an, um, remote control.

So what is Joe the Entrepreneur to do?  The answer: venture capital!  Venture capitalists do like risk; their business model is all about making bets on good ideas and good companies, in the hopes that they will break even on some, make a little profit on a few, and hit the jackpot with one or two.  As a result, they are less afraid of failure; if they think the Kite Drone has a reasonable chance of growing to the point that it's purchased--by either Hasbro or Raytheon, I guess--they will probably invest.

Financing Nonprofit Growth, Part 1: Why Growth?

The issue of sustainable nonprofit growth is so central to my thinking--and, I believe, so crucial to the well being of our planet and the people and plants upon it--that I want to devote a series of posts to the topic.  Specifically, I'm going to look at how a nonprofit finances its growth as compared to a for profit; the unique barriers we face; potential solutions; and other things to consider, such as what point should one reconsider the tax status of one's social venture, or any regulatory or policy changes that might spur more growth in the social sector.

Why Growth
First, let me get the obvious question out of the way: why worry so much about growth?  Look, this debate has been hashed and rehashed ad nauseam. Some people argue that small organizations are better attuned to local needs, or that large nonprofits are too corporate, inefficient and bureaucratic to be effective; others argue that there are simply too many nonprofits with overlapping services.

 Here's where I stand: no matter what you think and no matter how you look at it, the nonprofit sector is neither succeeding quickly enough, nor on a grand enough scale, to warrant self-congratulation.  Whether it's poverty, hunger, environmental degradation, homelessness, domestic violence, cancer research or education reform, our space is littered with lots of small, localized success stories and weighed down by national statistics that belie the optimism contained within our glossy brochures and annual reports.

Optimism

Today was a good day.  Early this afternoon I hopped on my bike for the 8 mile ride from our office in downtown Providence to the Elizabeth Buffum Chace Center in Warwick.  It was one of those rides where you want to just open your arms and embrace the soft breeze; where you can't help but smile and feel optimistic about the world and good about life.

I was at the Chace Center, an agency that serves women affected by domestic violence and other forms of abuse, to talk about our products and services and ways in which we can collaborate.  In attendance were a group of court advocates and other case managers, all of whom immediately recognized the relevance of our work: so many of the women they serve face severe financial barriers as they overcome their circumstances.  For instance, the legal costs of divorce, custody disputes and eviction--costs that many domestic violence survivors must incur to move on with their lives--can be prohibitive; women are left with the choice to take out predatory debt or forgo the expense.

The caseworkers asked phenomenal questions and, I hope, got good answers from me; but what most inspired me--indeed, what gave me chills--was the feeling that here was a group of people committed to serving vulnerable women and their families, coming together to identify their needs and how to meet them.  There wasn't a question of why women need loans, why we charge interest, or why we don't do grants; the focus was entirely on how this will help the women, what they need to apply.  The participants were eager to start referring their clients, and I was equally eager to serve them.

As I stood up to leave I thanked everyone for the work they do.  They reminded me that the six main domestic violence agencies in Rhode Island serve about 10,000 women per year, and that that is but a fraction of the people in need.  For a state of just over 1 million people, well that is simply astonishing.  We have our work cut out for us, to be sure.  And it will take a lot of presentations to caseworkers, a lot of loan referrals and loan applications, a lot of counseling services, court advocacy, education and legal services, and a lot of funds for all of this, but at the end of the day we have to succeed: for the 10,000 women, for the thousands more in need, and for the soul of a nation stained by so much violence and so much pain.

On the ride back my heart was heavy, yes, but again I felt the cool air on my skin, felt the clear sky clearing my thoughts, and despite all the bad news around us I smiled, pedaled and allowed myself to feel optimistic about the world and good about life.

Loan Portfolio Performance--By The Numbers

Following up on my previous post about our revenue growth, I'd like to share some data on our loan portfolio performance (current as of August 25, 2014):

• 129 loans disbursed year to date totaling $129,216.  Of these
• 15 are for energy-efficiency upgrades ($53,969)
• 33 are "standard consumer" loans ($39,273)
• 79 are payday loan alternative, or emergency, loans ($35,974)

* Standard consumer loans range from $700 - $2,000, carry an interest rate of 20% APR (fixed) + 4% closing fee, and can be used for a variety of purposes, including a security deposit, vehicle repair, applying for US Citizenship and paying off high-interest debt

** Emergency loans range from $300 - $500, carry an interest rate of 30% APR (fixed) + a 4% closing fee, and are often used to catch up on rent or utilities, pay off a payday loan and make minor vehicle repairs

Growth--By The Numbers

I was just preparing for a presentation when I came across some interesting numbers vis-a-vis our growth over the past few years.  Specifically, I wanted to generate a report on how much we've raised each year, starting in 2011, as well as what percentage of that has been earned income (e.g., interest on loans and fees we charge for Coaching, as opposed to grants or donations).  Here are the numbers:

2011

• $167,000 in total income
• 6% of that was earned income

2012

• $306,000 in total income
• 13% of that was earned income

2013

• $393,000 in total income
• 13% of that was earned income

2014

• As of July 23rd, we had already raised $368,000
• Of that, 24% was earned income
• Since July 23rd, we have secured over $200,000 in new grants ($125,000 from the US Treasury, $75,000 from Rhode Island Foundation, and others), putting us on track to raise over $600,000 for the year

Our year-over-year growth, then, has been quite good.  From 2011 to 2012, for instance, we grew 83.2%; from 2012 to 2013 we grew 28%; and from 2013 to 2014 we will see growth of 65% (assuming total revenue of $650,000).  Equally importantly, the percentage of our funds coming from interest and fee-for-service income has increased by 18% since 2011.  We are especially proud of this because, in absolute terms, the dollar value of the earned income has gone from a measly $10K in 2011 to a projected $125K this year.

Still, in order to get to our five-year goals of scale, impact and significant earned income, our growth rate will have to remain strong.  In fact, our five-year plan calls for year-over-year growth of 47% next year and 26% by year five; this is compared to growth of about 7% for well-established companies.  And of course, the larger the budget, the harder it is to grow: going from $167K in revenue to $306K is a lot easier than going from $1.5 million to $3 million.

What do you think about these numbers?  What kind of growth are you seeing at your company?

Two More Thoughts On The Ice Bucket Challenge

My last post on the Ice Bucket Challenge focused on what I think is the key question: how do we transform nonprofit giving from a zero sum game (there's only so much money to go around; what I give you I won't give to another org) into one of abundance (total charitable giving, as a percentage of GDP, increases each year).

This morning I read the best article on the subject that I've seen: Why the Ice Bucket Challenge is bad for you (Maclean's).  The author, Scott Gilmore, makes two phenomenal points:

"First, ALS research is not an especially great need in public health. It is classified as a rare disease and, thankfully, only about 600 people die from it every year in Canada. That sounds like a lot, but that is not even close to the top 20 most fatal diseases according to StatsCan (the top three being cancer, at 72,000 deaths per year; heart disease, at 47,000; and cerebrovascular disease, 13,000).