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Slate Magazine is running a series this week on non-profit philanthropy and they are presenting some interesting ideas about how non-profits can benefit from common activities of the for-profit world.

One article talks about how Venture Philanthropists are using the venture capitalist model to help non-profits by providing support and guidance for increasing organizational capacity rather than operating funding.

The involvement of venture philanthropists seems rather recent. Venture Philanthrophy Partners, which the article identifies as a leader in the field, was founded in June 2000. They are apparently still in the process of figuring out how the whole VP-Non-Profit relationship should work.

From their website:

We originally applied a venture capital model for investing in nonprofits, and have refined this approach by blending it with time-proven lessons from foundations and nonprofits. We invest to build institutional strength, providing large amounts of scarce growth capital.

VPP is strategic, highly engaged, and works to become a trusted advisor to the nonprofits in which we invest-it’s much more than writing a check.

Some may balk at the idea of being responsible to both a VP group and a board of directors for their performance. However, unlike a board of directors, a VP group will research a non-profit’s industry and business environment extensively before proffering advice and guidance.

Another article from Slate proposed an idea for a stock market for non-profits called Dynamic Deductions. You have to read the whole article to figure out exactly how it would work. But simply, a person would buy X amount worth of shares but doesn’t take a deduction until he sells the shares. If the share value goes up, you take a bigger deduction than you would have had you donated directly. If not, you take a smaller deduction.

The big way this would differ from the stock market is that under this proposal, a non-profit would get money everytime the stock changed hands rather than the one time infusion a for-profit gets at its initial public offering. (Excluding the times they purchase and resell their stock, of course.)

This option doesn’t exist as yet because there are no laws creating or governing such transactions. I also don’t claim to be a master of finance, but the concept as laid out here seems generally sound. Large businesses would probably be interested in participating in the markets because they could potentially increase the value of their tax deduction by buying low and selling high.

The one hitch that will probably emerge for most arts organizations is that they are so small that buying their dynamic deduction shares may not be attractive to most people due to the small volume traded and thus the small appreciation in deduction value.

A solution might be that all the arts organizations in a region or city might offer shares as the Minneapolis Arts Collective, for example and then split the proceeds. Such a relationship could be beneficial for all members of the regional collective since it would behoove each member to promote and collaborate with the others as a way of driving up the share price. The region or municipality benefits by gaining the reputation of being a cultural hot spot hopefully leading to the attraction of new businesses and residents (but hopefully not leading to gentrification and skyrocketing rents.)

A couple pitfalls though that I can see immediately. First, such a relationship might also serve to create pressure among the members to program for the least common denominator in order to keep the share price high. The large Broadway touring house that has always programmed to wide appeal and gotten large donations might fret now that they are financially grouped with the small experimental theatre or art museum whose offensive show is making national headlines weakening confidence in the collective and its share price.

If dynamic deductions or something similar emerges as the way to fund arts organizations and displaces donations by individuals, corporations and foundations, there is a danger that divergent voices may never be heard. People wanting to do edgy stuff in a small space would have to self-fund if direct donations fell out of practice.

Some might say there is a danger that such a scheme would cause non-profits to act like their for-profit kin and hide bad news even more than they do so now for fear of undermining share price and overstate number of people served (vs overstating earnings). The former is a distinct possibility. The latter not as much given many arts organizations are doing so on their final grant reports now.

The other pitfall that occurred to me is that Little Arts Organization reluctantly agrees that Big Art House will get a bigger cut of the share proceeds based on the argument that their prominence in the community will be the main driver of trading in their shares. Ten years down the road, having benefitted from the infusion of cash, Little Arts Organization has grown in prestige while Big Art House has waned a little. Little Arts demands a larger cut now that their reputation is a factor in the share price too. Bitter in-fighting wracks the collective causing members to withdraw and dissolve the relationship.

On the other hand, a real large organization might feel there is nothing to be gained by joining with smaller ones in this manner. The arts collectives may initially be comprised of equals sharing as such. If one grows larger than the others and demands a larger share, it is at least easier to argue they deserve it based on merit since they all started from the same general point. (Or who knows, the market these shares trade on on may classify non-profits like the NCAA sports teams and the burgeoning org might get moved up to Class II-B trading by analysts.)

Despite these potential problems, exploring alternative options like venture philanthropic support and dynamic deductions is absolutely worth doing. The funding environment isn’t getting any better and arts organizations already operate with a slight antagonism and suspicion toward each other. It is too early to tell if these options are even the right ones. Of the two I have mentioned here, one doesn’t exist and the other is still in the refining stages.

The need to discover a way to implement a constructive shift in the support mechanism for arts organization seems imminent. The idea of venture philanthropists excites me because it shows that very smart, very experienced people want to get involved and effect change. I like the general concept of the dynamic deductions more because it promises a degree of independence and pride you don’t get when you have to annually ask people for money.

Yesterday the Artful Manager entry referred to a statement by the board of directors of the Independent Sector calling for a change in the way non-profits were funded. In addition to calling for the support of indirect project costs as Mr. Taylor noted, it also allayed some concerns I have had.

In an earlier entry, I discussed my fears that foundation funding criteria might not recognize the evolving arts environment quickly enough to sustain the organizations they support. The Independent Sector statement urges foundations to move away from short term project support to long term core support of organizations. It also strives to make foundations aware that in many cases, though they may not be aware of it, their support is crucial to the survival of the organization.

“Funders should be responsive to the capitalization needs of organizations, and to the forms of funding necessary to sustain them. Funders should not assume that an organization will become self-sustaining or that others will fund it after they have ceased supporting it….Where possible, a funder planning to exit a high-performing organization should assist the organization in obtaining funding following its exit.”

This concept seems to reflect portions of the “Leverage Lost..” paper oft cited in my entries. Among the things the author wrote were:

“While these gifts were often significant in the life of a given institution, they were rarely associated with a formally constructed plan for that institution’s progression, and even less often with a grand scheme for systemic advancement of the entire arts field.”

“In addition to the already noted strategic goals of the Ford, it is highly significant that the Foundation viewed itself as a catalyst for these major developments, but not as the perpetual funder. ”

“The most obvious, though rarely acknowledged, reason that it could not last indefinitely was that the institutional money supply could not continue to grow. An early assumption of many arts funders, including Ford, was that high leverage funding would stimulate other sources of contributed income for the arts, most notably from government, that would provide a steady and expanding flow of revenues: the so-called “pump priming” or “seed funding” strategy. Meanwhile, government was using the same logic to justify its arts funding.”

In short, the problem seemed to be that everyone was following the Ford model. Everyone was giving short term money with the idea that it would lead to long term support. The problem was, no one was giving long term support.

The IS paper says that “Reliable, predictable, and flexible support is the lifeblood of nonprofit organizations. ” It goes on to suggest that long term support will enable more intelligent institutional growth that is not diverted by the need to constantly reinvent themselves to look appealing to grantors.

“Because project grants, which are often favored by funders, usually have a completion date, it is not surprising that there may not be many renewals. The focus on project grants encourages grantees to continually propose new ideas to funders that possibly might fit narrow grant guidelines instead of focusing on building institutional capacity.”

In another entry last October, Andrew Taylor also touched upon the destructive effects of this funding model:

‘Grow, Grow, Grow’ – The bulk of foundations, throughout history, have funded projects rather than operations, with an additional bias toward NEW projects. To get funding, arts organizations had to add new projects and increase the scope and size of their activities (and their staff, and their budget, etc.). As a result, many nonprofit arts organizations find themselves bigger and more complex than they need to be.

The IS article also suggests that funders of specific institutions cooperate with each other to develop an unified set of reporting criteria with which to evaluate and perform due diligence. The idea, of course, is to relieve organizations of the burden of producing myriad reports for all their funders so they can focus on institutional development.

The paper also mentions a number of barriers that might prevent foundations from shifting to this model. Among them are lack of confidence that their goals will be met via core support rather than project support, mistrust in an organization’s ability to wisely manage the money and lack of interest or approval of all institutional activities.

Naturally, in return, the non-profits are expected to exhibit excellence of product and strategic planning. Long term support does not imply eternal funding at a constant level.