Thursday, October 8, 2015

Nonprofits Raising Capital

This excerpt is from my regular column, Culture & Kibbitz, at The Clyde Fitch Report. You can read the entire post here.

A dance company I am involved with is in the midst of a business analysis and planning process. Like most of its nonprofit brethren, the company engages in a constant, exhausting search for capital, which I define as the resources needed to operate in pursuit of the organization’s mission. For any business, capital is essential to the life of the organization and accomplishing its goals. Generally, nonprofits have an ongoing and sometimes overwhelming difficulty in building sufficient revenue to meet their capital needs.

A for-profit company can offer the promise of sharing future profits to motivate people to supply its capital needs (along with the concomitant risk of loss). Nonprofits rely on other, often more intangible, incentives. Sometimes, as with tax deductions for donations, incentives are fostered by the government to achieve policy goals; sometimes institutions offer incentives themselves. All are designed to garner additional capital to subsidize the nonprofit’s insufficient earned income. Putting it in simple terms, we have traditionally relied on philanthropic impulses to support nonprofits, while for-profit companies rely on the potential for personal enrichment.

In addition to traditional fundraising pathways and motivations, there are new and additional opportunities to access capital, which all institutions should consider folding into their fundraising activities. The most common is crowdsource funding (or crowdfunding). Total crowdfunding is predicted to approach $35 billion this year, or more than double the $16.2 billion raised through this method in 2014, of which $2.7 billion –– $1 out of every $6 – was raised in the arts and entertainment area, making crowdfunding a source of capital nobody should ignore. Although this new method may be more in line with younger artists’ approaches — more project-based and freed of historical strategies and practice — it is of such potential value that even those organizations with established ways to generate unearned capital must consider it. While it is not yet clear whether these alternatives will become permanent or significantly impact nonprofit organizations, at the very least they offer one more avenue to generate needed funding.

The new instruments for raising capital that have popped up since the beginning of this century are driven simply by promising greater participation and closeness to the creative process. Kickstarter, the most widely known example, describes the motivation thus:

Backing a project is more than just pledging funds to a creator. It’s pledging your support to a creative idea that you want to see exist in the world (emphasis added).

This motivation could well describe other platforms, such as ArtistShare and IndieGogo, among others.

If properly structured, nonprofits should be able to combine this approach with traditional tax incentives that have proven so appealing and effective, thereby expanding their arsenal of capital-raising tools. As with all fundraising, however, it is essential to appreciate and address the motivation of those providing the capital and to further appreciate that the traditional incentives are largely absent here unless incorporated in some hybrid approach.

There is no doubt that artistic and cultural organizations and individuals will continue to need to raise capital constantly to accomplish their goals. As new capital-raising vehicles arise, organizations that decline to explore and utilize them to their advantage do so at their own peril, particularly those nonprofits that resist considering the accumulation of capital to realize their mission.

Read the entire post in Culture & Kibbitz at The Clyde Fitch Report here.

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