What Foundations Can Do to Sustain Non-Profits

In the Q&A portion of Brett's presentation, he mentioned that he has not approached venture capitalists a channel for additional funding. Brett claimed that it's difficult for him to obtain funding from VCs because the social mission of a social enterprise often conflict with the bottom-line (i.e. the return on investment). The majority of OnlyInPGH's funding have come from grants, competition winnings, and family/friend contributions.

The reality of social enterprises is grim; you're restrained by current funding and there is no guarantee that you will obtain additional funding to further your venture. The idea of starting a social venture is ambitious and noteworthy, but it's sustainability that makes it worthwhile. What contributes to sustainability? The easy answer is money, but I would argue that money is necessary but not sufficient. Foundations that award social enterprises start-up capital need to invest more than just money. They need to invest in the social enterprise's organizational structure, by being more involved and committed in the development of its people, processes, programs, systems, operations, finances, etc.

The article "Virtuous Capital: What Foundations Can Learn from Venture Capitalists" provides a creative way of merging the social enterprise world with that of the private sector. [1] The article highlights certain venture capital practices which could be helpful in addressing the weaknesses of the current state of foundation funding. Here are some key insights:

• Risk Management: Foundations have significantly less risk than VCs when it comes to assessing the viability of companies. Foundations are considered "free spenders" and lack rigorous evaluative process to measure the performance of grantees. 
• Performance Measures: Unlike VCs (who measure performance based on financial ratios), it is harder for foundations and non-profits to quantify the improvement of their social mission.
• Closeness of Relationships: VCs tend provide extra non-monetary assistance to their companies, such as extensive coaching and mentorship. Additionally, some investors work closely with companies by sitting on the company's board and take an active role in decision-making. In contrast, foundations oversee the management of its companies but do not engage collaboratively.
• Amount of Funding: Both VCs and foundations provide limited funding to the companies they support. However, VCs tend to give out fewer funding to recipients as compared to foundations. The distribution of grants to a high number of recipients forces foundations to give out less than what they would like to any particular non-profit.
• Length of the Relationship: VCs engagements are usually 5-7 years. Foundation engagements are usually 1-2 years, at most.
• The Exit: VCs will normally have an exit strategy in which VCs will sell their stake in a company to investors. This exchange in ownership provides the company with additional funding for it to grow. In contrast, there is often no logical process for one foundation to succeed another foundation.

References:

1. Letts, Christine, et al. Virtuous Capital: What Foundations Can Learn from Venture Capitalists. Mar-Apr 1997. Harvard Business Review.