This is a response to a blog post by Nell Edgington of Social Velocity, entitled "Can’t Small Nonprofits Raise Capital Too?" which is available here.
Nell, I wanted to offer some comments on your thoughtful post. I hear this lament from small nonprofits all the time: how do we grow if we're too small to raise growth capital? It's a fair question to which the nonprofit capital market does not yet provide a satisfactory answer.
For the vast majority of nonprofits, there's only one kind of money, regardless of the particular source: funding for programs. That money is secured the old fashioned way, by raising it from donors by (1) building relationships and (2) telling engaging stories about the nonprofit's work. It's a costly and time-consuming process that never raises enough money for long enough time. Hence, the nonprofit starvation cycle is the dominant fact of life for small nonprofits.
George Overholser pioneered a new kind of money that he calls "patient capital" or "equity-like capital," and that I call "growth capital" (full disclosure: George disapproves of the way I use that term). The basic idea, as you say, is that investors fund the nonprofit's entire business plan for an extended period (say 3-5 years) rather than some or all of particular programs for a finite period of time. The goal is to enable the nonprofit to permanently grow to a new level of operations that can be sustained by traditional program funding. George observes that it's simply too costly for small nonprofits to make the case for this kind of funding, and he knows whereof he speaks. Small nonprofits are no less deserving than larger ones, but only the larger ones can undertake the kinds of planning and demonstrate the capacity to make effective use of funding designed to enable organizations to grow by factors of 2, 3 or more over the course of several years.
However, I believe there is an intermediate kind of funding between program funding and growth capital that small- and medium-sized nonprofits can raise and that is capacity-building funding. Of course, we all know what capacity-building expenses are -- computers, specialized staffing, professional accounting and fundraising systems, and so on -- and we also that almost no funders, either individuals or foundations, provide this kind of money, which we disparagingly call "overhead" or "administrative" expenses. The failure of the nonprofit capital market to provide capacity-building funding (and not growth capital) is what keeps small nonprofits locked in the Catch-22 of the nonprofit starvation cycle.
The emergence of growth capital is a recent development in the nonprofit sector and it is still very much in its infancy, even though courageous intermediaries like NFF Capital Partners and EMCF are demonstrating its importance for scaling what works. But you're completely correct that a similar effort needs to be made for capacity-building funding. As you might be aware, Ken Berger at Charity Navigator is revising his rating methodology so that effective nonprofits won't be penalized for making reasonable overhead expenditures designed to enhance their organizational capacity and extricate themselves from the starvation cycle. (Another disclosure: I consult with CN.) Hopefully, charities that would lose four-star ratings under the current CN rating system will attract greater funding when the new system goes into effect.
Growth capital is aimed at achieving true scale, but capacity-building funding is aimed simply at producing robust nonprofits that aren't held back by the starvation cycle of program-only funding. Just as small businesses provide most of the jobs in this country, we need the kind of funding that can enable many more small nonprofits to meet the everyday needs of the communities they serve in a reliable and sustainable way.