About a year ago I left a well-paying, executive, salaried, corporate job to focus on my personal businesses instead.
My interests are quite diversified: I am a self-directed equity investor. I co-founded a tech startup. I own/manage a professional services consulting company. This company guides C-suite executives, small business owners and startup founders with good business strategy; we help them organize for growth, securing financing, create exit strategies, and more. My family and I also manage a 501(c)(3) non-profit, inspiring healthier kids, in healthier communities.
My focus today is all about charity. How we think of charitable organizations, charitable giving, and the nonprofit business sector as a whole. My nonprofit has only been my life for the past four months. Fortunately, I ramp up quite quickly in terms of identifying barriers and obstacles to success.
Donors have two primary objectives: (1) they give because they care, are inspired to support a worthy cause, can afford to give, etc.; and/or (2) they donate to charity to reduce their tax liability to the Federal Government, electing to 'do good' instead of feeding a seemingly bottomless, bureaucratic pit. People, who donate for tax purposes, are also people who can obviously afford to give.
I recently presented a startup workshop for nonprofit founders. They share the same challenges as for-profit founders: finding a good partner(s), struggling with positioning statements, achieving product/market fit, gaining traction, securing funding, and more. Surprise?!
Nonprofit founders start their business with an idea that will move the social needle on whatever their cause is. For-profit startups usually create a solution to an existing problem, primarily for the purpose of selling a product/service... for net, new, profitable revenue.
Both typically invest their heart and soul into the business. And they are equally passionate about their concept and/or idea. Absent the aforesaid, none will survive, let alone flourish. Both usually face considerable challenges trying to secure financing for their ideas, product, program, etc. That is understandable, because financing represents other people’s money.
Financing rounds usually start somewhat informally, e.g. via family and friends. As a startup burns cash, it moves up a proverbial ladder as costs (and successes) escalate, perhaps striving to secure angel or institutional investor funding next.
An angel investor is usually a person, investing his or her own cash, like one sees on the TV show the Shark Tank. Venture Capitalists are institutional investors, and typically best suited for securing larger financing rounds.
Foundations are institutional investors that fund charities. Well-managed charitable foundations are often fabulously wealthy. In my local community, just one, smaller, regional foundation has almost $200 million in Assets Under Management (“AUM”).
During the last financial year, they awarded nearly $9 million in grants and scholarships to deserving recipients. Great job! But, they had also received more than $5 million in gifts. Their charitable giving outflow was therefore only around $4 million, or about 2% of total AUM. Underwhelming?
Foundations invest AUM in much the same manner as other investors. In my example above, the Foundation’s 2014 gains would therefore have been about $20 million because the market returned about 10% to investors last year. Meaning, they only shared about 20% of their total gains.
Now, when nonprofits apply to a foundation for grant funding, they are rightfully, very diligently reviewed and investigated. This entails making sure that they are properly registered and in good standing with the IRS; that they have ongoing engagement in community projects with good social impact, measurable outputs and outcomes; that the nonprofit’s founders/managers/employees/board have the capability to deliver, etc.
Then, assuming all hurdles had been traversed successfully, small grant amounts may be awarded… sometimes $25,000, usually much less.
But, here is the rub: people expect nonprofits to be small. We also expect them to spend all their revenue on projects, rather than any on ongoing operational expenses, like salaries. In fact, some people get upset when charities spend too much of their revenue on their operational expenses.
But, a registered charity is a corporation with an independent board of directors (required), an executive management team, employees and volunteers. And corporations have to generate income to pay expenses, because otherwise it will go out of business. A nonprofit is also at a disadvantage in terms of attracting talented employees, because they cannot be seen paying market-related salaries.
If a nonprofit is very successful, like Wounded Warrior Project, people may not object to $300 million in revenue, but may well object to $220 million in annual expenses. Not to mention $60 million spent annually on media (TV advertising).
You may even think your local school’s bake sale represents a better charitable cause than Wounded Warrior Project. If this were true, it is because you have been programmed to believe that 100% of contributions earmarked for any charitable cause is better than having a charity spend 20% of its income on operational costs.
This, you need to unlearn because it is simply dead wrong! The bake sale may generate $300, while Wounded Warrior Project generates $300 million. The charity can then spend tens of millions of dollars supporting wounded Veterans in many different ways. In addition, they generate enough revenue to support other local, smaller charities in the work they do, e.g. helping Veterans with job placement, housing requirements, family services, etc.
We should applaud Mothers Against Drunk Driving (MADD), annual revenue around $33 million. But, you may proclaim, "They spend so much on building awareness for their cause!" How else should they go about sharing a great message that helps to prevent stupid people from drinking and driving? Oh yeah, and the fact that they supported more than 51,000 victims of drunk/drugged driving crashes in 2013… is a cherry on top of the awesome work they do.
Strong, well-organized, financially sustainable, and well-managed charities step into often thankless roles as the protectors of people in need, where governmental agencies often cannot deliver with similar efficiency, speed and efficacy. If you understand what I am sharing… then find your preferred cause… and donate!
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