Nonprofits are in trouble, big trouble! We depend on nonprofits (charities) for a lot of the world’s Social Good… schools, hospitals, nursing homes, senior centers, legal aid, and more. But recent changes may soon spell the doom of nonprofits as we know them! What’s happening? Can charities fix their problems? Will it all be OK in the end? Let dive right in and see!
Back in the 1950’s tax laws were reformed, making charitable donations tax-deductible. But in 2016, the Standard Income Tax Deduction was doubled, and suddenly fewer Americans could donate enough to charities to itemize their deductions. Without the benefit of a tax deduction, would American’s still donate as much money to charities?
Pundits said that donations would start to dry up, and they were right. Despite stock markets rising to new highs and arguably the best economy in US history, charitable donations fell by 2%. Add to that the decline in government funding for programs for the poor, elderly, and sick. That larger tax deduction has had ripple effects, and now there is talk of a new round of cuts to social good programs, to pay for the bigger deduction.
Grants from private foundations are also shrinking. Partially because of falling donations. Partially because foundations have begun to turn to Impact Investment as a way of funding charities. That shifts foundations from giving out grants to making loans. Loans that must be repaid.
Struggling nonprofits will need to struggle even more as they learn how to work with unfamiliar new forms of funding. With 1.5 million US nonprofits, generating 2 trillion dollars in revenue and expenses, we should all be very concerned about how well nonprofits are doing.
Nonprofits have always been the stepchildren of the business world. Banks are cautious about working with nonprofits. Nonprofits can receive donations from complete strangers. That does not sit well with bankers. After 9/11 new Federal rules to reduce money laundering began to conflict with nonprofit functions, like receiving donations or sending money to poor (and politically unstable) nations. From a banking point of view, donations look too much like illegal money transfers. For bankers, nonprofits raise suspicion and create risk.
Then there’s Wall Street. Stock markets have been the juggernaut of the corporate world! Impact Investors can’t find enough social good deals. Charities and Impact Investors should be a perfect marriage. Apple, Microsoft, Amazon, and countless other for-profits became successful because they had access to capital, and they could sell equity. But our nonprofits? It is illegal for nonprofits to sell equity.
In a world where Impact Investors are actively seeking out social good investments, if nonprofits want to survive they need to structure good ideas as good investments, and de-risk their projects. The Balanced Risk Revenue Model, or BRRM, can address these issues by making social good investments easier for Impact Investors to execute.
Before diving into the model, a bit of truth in advertising. For the last year, I have been working with a group called Nicky’s Gardens of Hope. They are working to open a residence for 150 adults with intellectual and developmental disabilities (IDD). I’ve worked closely with Nicky’s mother, Adriana Piltz, and seen up-close the hurdles facing any organization that wants to create a comprehensive, quality service for IDD adults.
So Adriana and I worked on a solution, BRRM, to make it easier for Impact Investors to fund social good projects. Nonprofits must address their image of risk. Risk, any risk, can be offset. Balanced. In the 1970s Wall Street learned the math behind risk, and used tools like the Black-Scholes model to balance that Risk. Once risk could be controlled, the Dow was able to grow from 1,000 points in the 1970s to nearly 30,000 today.
We don’t need to be rocket scientists to address the risks faced by nonprofits. We just need to understand a few basic elements, be aware of some new innovations, and then fit these pieces together into a functional model. Let’s begin with…
Capital: All businesses need money to operate. How you access money, and how you pay taxes is dependent on the type of corporate entity your business uses. When Adriana was in the early stages of creating Nicky’s I asked a mutual associate, who had an excellent financial and accounting background, what he thought. Since the project required land for the residency, he assured me that our corporation MUST be a REIT (a for-profit, Real Estate Investment Trust).
B Corporations: I asked him if Nicky’s could receive donations and all government grants. He said we would lose both, but a REIT was still the way to go. So I did a bit of research and discovered the Benefit Corporation or B-Corp. This is very similar to a “normal” forprofit corporation, except that the “B” (in this case Nicky’s Gardens of Hope), receives disbursements of profit before the shareholders.
Nearly, but not quite: B-corps have access to capital markets, just like any other corporation. But there would be fewer barriers to bank loans. Transferring profits from the for-profit to the charity would make up for the decline in government funding. But we would still give up the benefits of a nonprofit. Unless… we added a few more steps.
Together @Last: By merging a B-Corp, with a nonprofit, we can gain the benefits of both types of entities. The B-Corp would own and run all assets, and the charity would provide the services (the residency). It requires a bit of proprietary wizardry to merge the functions of the two entities, but it creates a flexible structure that can be used by a wide range of charities, foundations, and non-profits.
Revenue: Investments and loans need to be repaid, with interest. Most nonprofits, have opportunities to build on their core businesses and develop new lines of revenue. But they usually lack the business expertise (and funding) to launch new businesses. But BRRM uses a proprietary Business Incubator to launch new businesses. By working with Investors, funding AND industry expertise can be leveraged to ensure the success of these businesses. And what does the nonprofit provide?
Social Good: Investment funds and the Millenials that fund these funds, want more than just profit from their investments. The “Double Bottom Line”, is just one way of expressing that investors are looking for a profit (often a very modest profit) plus Social Good. CSR (Corporate Social Responsibility) and ESG (Environment, Social, and Governance) are part of the growing vocabulary of social good terminology. Charities need capital markets, bankers, & investors to finance social good, but capital markets, bankers, & investors need charities to develop the projects that do social good.
The bottom line to BRRM is pretty simple. At one end of the business world, nonprofits are under increasing financial pressure, and projects that could do a lot of good are going unfunded. On the other end of the world are Impact Investors that control trillions of dollars in funds, but cannot find enough deals that make financial sense. BRRM can’t fix the world. That’s a job for charities and foundations. But if the problem is getting a project funded, BRRM could be your way to bridge the gap.
Are you an Impact Investor with more money that deals? Want to know more about BRRM? Look me up and we can talk!