Philanthropic equity

The nonprofit organization has always had at least one missing hammer in its toolbox, both by design and by definition. That missing tool is equity capital, the kind of investment and investor that provides economic resources in exchange for ownership.

In a capitalist system, driven to a large degree by private capital and private ownership, nonprofit organizations are designed to do a different kind of work. To promote and preserve that kind of work, equity capital is off the table. The vast majority of tax-exempt cultural organizations are structured as non-stock corporations, which means they are not owned by anyone, but held in the public trust.

From many angles, the lack of equity capital is a feature, not a flaw. But from certain angles, it’s a structural barrier to nonprofit health, vitality, scale, and scope. In recent posts, both Clara Miller and Diane Ragsdale explore that barrier in elegant and insightful ways.

Clara Miller attacks the issue head-on, by naming and describing the hole in some detail.

Planning for, raising, and deploying equity-like capital in a nonprofit fulfills three needs that are universal for a growing or changing enterprise, regardless of tax status: 1) capital investment—separate and distinct from regular income, or revenue—when growth or change occurs; 2) the benefits of shared “ownership” and shared risk by a concerted, expanded group of investors and, potentially, supporters; and 3) the adoption of a protective rather than an exploitative role for these stakeholders (aka the equity holders ethic).

Diane Ragsdale reflects on some of the symptoms of the problem, in the struggle of foundation program officers to decide how much, how long, and how consistently they should fund a worthy nonprofit in the face of broad and complex needs.

While at [the Andrew W. Mellon Foundation] I found myself continually questioning whether it was better to provide stable support to a few over a very long period of time (forsaking all others) or to “cycle out” grantees after a reasonable period of time in order to make room for new entrants. No matter the choice, the questions that ensued were maddening: If “fewer but larger” which few given that so many worthy organizations needed support? If “spreading the wealth” then what was a “reasonable” timeline for ending support given that organizations and their projects were chronically underfunded?

Foundations are, essentially, one of many proxy investors available to support and grow public-trust organizations. But unlike equity investors, they don’t own the long-term success of the organization. They care deeply about it, of course. They want it to succeed. But their role and control around equity-like investment is fuzzy both for the donor and the recipient.

This is not to suggest that there should be traditional equity capital in nonprofits. But it does suggest we need a more specific, responsive, and intentional approach to ‘capital’ in the nonprofit world. And that capital-focused donors understand the outcomes and attributes of their work.