Why do nonprofit capital markets so often violate the central principles of finance? How powerful would it be for philanthropists and nonprofit leaders to apply those principles on behalf of scaled and sustainable impact?
On April 1, 2021, the Program on Social Enterprise, Economic Development Club, Net Impact Club, and the Yale Philanthropy Conference partnered to host a webinar featuring Andrea Levere (’83) and Paul Bradley, CEO of ROC USA. Andrea and Paul explored these questions and the role of “enterprise capital” in financing nonprofit organizations in a way that builds, rather than detracts from, organizational capacity and impact. The discussion built on the recently published “Blueprint for Enterprise Capital,” which Levere produced—in collaboration with five SOM research assistants—as part of an Executive Fellowship hosted by the International Center for Finance and the Program on Social Enterprise. The Blueprint features ROC USA as one of four case studies that illustrate the benefits of enterprise capital and the costs of not having this type of financing.
Andrea Levere, President Emerita of Prosperity Now, has spent her career working in the nonprofit sector in pursuit of the mission of building financial security and wealth for low-income households and households of color. She opened the event by defining “enterprise capital” as a paradigm for philanthropic funding that embraces long-term, flexible capital as the high-value fuel necessary for nonprofit organizations to fulfill their social and economic missions. Known also as “philanthropic equity” or “net asset grants,” enterprise capital constitutes any form of long-term, unrestricted funding that targets an organization’s balance sheet rather than its income statement. Levere explained the connection between enterprise capital and the golden rule of finance that she learned at SOM and followed throughout her career: that financial strength comes from the ability to match sources and uses of funds. While time-restricted grants make sense for supporting short-term needs, organizations must also have access to multi-year capital that supports long-term vision and strategy. Yet too many funders rely on short-term, program-restricted grants as their standard product, with larger foundations reporting that they target 72% of their grants for specific purposes.
In addition to the financial component inherent to enterprise capital, Levere explained that realizing the full value requires the delivery of capacity-building services that match the vision, mission, and business model of the recipient. Funders should think about how provide the mentorship and advising that typically accompany for-profit equity investments to maximize the impact achieved by their grantees. Drawing the connection between enterprise capital, the COVID-19 crisis, and deep inequities in the funding of organizations led by and serving people of color, she closed with a call to “meet the moment” and the particular need for MBAs to support the movement to scale the enterprise capital approach.
Levere then passed the virtual stage to Paul Bradley, President and Founder of ROC USA and a pioneer of the sector-defining strategy of resident ownership of manufactured-home communities. Bradley described the need for and the profound impact of a resident-owned cooperative model as the nation’s largest source of naturally affordable homeownership. Resident ownership of the land allows residents to maintain control of their communities and insulates them from economic vulnerability and the risk of displacement that accompany market-driven rent increases. The data support these claims: ROCs increase site fees less than 1% per year compared to the 3.9% industry average and have site fees of $32 per month below market after just five years of ownership, while homes in ROCs also sell for 16% more per square foot than comparable homes in landlord- and investor-owned communities. ROC USA’s business model is grounded in three pillars—find viable for-sale opportunities, provide expert assistance on-site and remotely, and provide access to customized capital—while the organization’s “secret sauce” is the empowerment of residents themselves.
Bradley outlined the role of enterprise capital investments at every stage of ROC USA’s development: launch, stabilization, and scale. He explained how unrestricted net asset investments were used for many purposes, including to support operations, build and scale organizational capacity and infrastructure, and attract additional debt and equity investments. On the strength of these investments and the strong track record the organization has built over time – preserving 13,000 homes in 180 communities in its 12 years of operation – ROC USA is now in a position to tap private markets to increase lending volumes. An exemplar of social entrepreneurship, ROC USA’s story demonstrates the power of enterprise capital to drive financial and social outcomes, thereby meeting the interests of community members and funders alike.
The event closed with Q&A and discussion between Levere and Bradley on topics including the core business skills needed to lead a nonprofit or social enterprise, the distinction between enterprise capital and general operating grants, how a nonprofit can demonstrate readiness for enterprise capital funding, and the future of nonprofit capital markets. (A recording of the webinar can be found here.)
by Corey Baron, MBA 2021