Hey Environmentalists — When Fundraising, Try Thinking Like Capitalists
This blog series focuses on scaling and accelerating the protection of nature. One way environmental non-profit organizations (NGOS) can do this is by raising capital from investors to “lever up” the valuable gifts provided by philanthropists. And of course another way is to just raise more donations. The environmental community — both the users and providers of capital — can learn a lot by studying how this is done on Wall Street.
Let’s take a quick look at how private sector fundraising works. This isn’t a perfect analogy for NGOs. Making profits and doing good are obviously not the same thing. But this exercise will show some key practices that would strengthen the environmental sector.
Consider how great companies raise capital
Think of a fast-growing, for-profit company that you admire. How did the company raise capital over time to fully pursue its business opportunities? In most cases, the company would start with venture capital investments. Here, sophisticated VCs with both the skills to assess early-stage opportunities and the capital to back them are critical to getting the new company off the ground. Later, did your company do an initial public offering? If so, a group of investment bankers would act as the middlemen between providers of capital (mostly institutional investors) and the users of capital (public companies). Post-IPO, an even bigger group of players would work to keep everything on track. Buy-side and sell-side analysts assess the company’s prospects. Market-makers trade the company’s securities and this “price discovery” process keeps valuations updated. CNBC and the Wall Street Journal make sure prospective investors stay informed. Short-sellers step in if valuations seem too high, and so on. You get my point.
Almost all of this is missing when non-profits raise capital. To be sure, there are many worthy institutions working diligently here. The NGOs are always hustling, philanthropists are busily engaged and multilateral banks, impact investors, and family offices are stepping up. But it’s a heavy lift for these groups who don’t yet have all of the experience, financial and social capital, relationships, track records, and tools to make fun-raising and capital allocation happen at the pace and size we need.
So how do we fundraise better and smarter?
To see what’s missing from environmental fundraising, let’s take a closer look at our private company example.
· The pitch: The company markets itself to prospective investors with an exciting overall story to generate as much demand as possible from investors. The story is backed by very detailed projects for operating and financial results. Carefully-determined downside scenarios and other contingencies are addressed very fully. Clear plans are presented to address all risks. Do these forecasts always get everything right? Of course not. But the analysis of both the upside and downside of the scenarios detailed is very thorough and realistic.
· The investors: The institutions considering whether to invest or not are pros. They have experience, track records, and teams of specialists ready to ask all of the tough questions. They compare the company to comparable ones that they know very well. They challenge the company’s plan as best they can to ensure it’s a reasonable one. And, of course, if they decide to invest, they have the capital on hand to provide immediately the funding needed.
· The intermediaries. Bankers are hired to bring users and providers of capital together. They know which investors are likely to do which deals (so companies don’t waste time on dead ends). Likewise, investors know whether bankers have the skills and credibility to get deals closed on time (so investors don’t waste their time). And they make sure the company is fully prepared for all of its dialog with prospective investors.
· The analysts: Wall Street has big teams of research analysts — buy-side (working for investors) and sell-side (banks) — whose job it is to analyze these investment opportunities fully. These analysts all compete with one another and the most able rise to the top. They thoroughly assess “the pitch,” and push back hard when they see projections they don’t believe in. Just as importantly, they monitor and judge the company over time to track results against the original projections and relative to peer companies.
The mini summary above just scratches the surface describing the various players engaged in private-sector capital allocation. But it shows what’s missing in the nonprofit sector. What to do about this? We can’t fix everything overnight but we can encourage NGOs to act more like companies and philanthropists to act more like institutional investors.
Another key benefit from this approach — more time to do the important work of protecting nature
I ran Goldman Sachs’s equity capital markets unit back in the early 2000s. We’d tell CEOs launching their IPOs that they would have to spend two full weeks beforehand on a ‘roadshow”. From morning to night, for two weeks straight, they would have to travel non-stop and meet with and be grilled by prospective investors. The CEOs would always grumble about this and say they were too busy.
I’d say two things back: “First, you’ll enjoy the experience. You’ll learn a lot from these smart prospective investors. And second, you’ll never have to do this again. Your shareholders won’t want you on the road meeting with investors. They’ll want you totally focused on running your company.”
I was therefore surprised when I joined TNC as CEO and learned that for nonprofits, the roadshow is 365 days a year. I spent most of my time at TNC raising money — just like my NGO peers. (In my case, the roadshow lasted 11 years!) This time-sink and travel burden obviously gets in the way of running organizations. If nonprofits — with strong support from donors — could shift to something that more closely resembles the private sector approach, the impact would be huge.
One more great benefit: Funds (unrestricted $) for “general organizational purposes!”
When companies raise capital as described above, they tell investors that the use of proceeds will be put toward “general corporate purposes.” This means the company will choose to spend and invest the money in whatever ways the leadership team thinks makes sense. Sounds obvious.
But this almost never happens for NGOs. Instead, donors want to hand-pick the projects they will support. They even want a say on how the nonprofit designs and executes the project. They often add that no more than say 5 or 10 cents on any dollar they donate can be spent on “overhead.” And, worse, by “overhead,” they mean investments in things like advertising, marketing, fund-raising, recruiting, training, and information systems. You can imagine how frustrating this is for NGOs. It’s why nonprofits treasure the limited amount of funding they’re able to raise that is so-called “unrestricted” — i.e., available for “general organizational purposes.”
Think back to your favorite private sector company again. Could they have succeeded with these constraints? I doubt it. Imagine Steve Jobs trying to build Apple with such stringent limitations.
This really shouldn’t be hard to fix. All it requires is that NGOs and donors try to do what the private sector does when raising capital. Here, I believe donors should take the lead. I often advise, “Pretend that you’re Warren Buffet. He seems to be a pretty good investor. Make your philanthropic investments in the nonprofits you generously support like he makes his investments in companies.”
The comparison isn’t perfect, but the payoff will still be big
To be sure, fundraising for environmental organizations doesn’t compare exactly to the corporate finance example. And I know big changes can’t happen overnight. But I believe there are some key opportunities to borrow from the private sector playbook. In future posts, I’ll say more about how the current big players in the environmental world — NGOs, foundations, and donors — can do more along these lines. The upside here will be huge!
The above blog is the eighth in a series on investing in nature. It was originally published on LinkedIn. Read the first six blogs in this series: Nature Needs Investment Bankers (March 3, 2020); Raising the Capital to Protect and Restore a Forest (March 10, 2020); Environmentalists, Prepare Now for Opportunities in Fiscal Stimulus Programs (April 10, 2020); How to Support the Environment When You’re Stuck Inside During the Pandemic (April 16, 2020); Now Is the Right Moment for Building Inclusive, Diverse, and Non-Partisan Support for Nature (April 23, 2020); Here’s What CEOs Should Do Right Now to Up Their Company’s Environmental Game (April 29, 2020); How to Build a Profitable, Equitable, and Sustainable World (May 10, 2020).
@MarkTercek is an advisor to companies, start-ups, institutional investors and NGOs on environmental strategies, organizational management, and impact investing. He is the former CEO of The Nature Conservancy (July 2008 — June 2019) and former Partner and Managing Director for Goldman Sachs (1984–2008). He believes that business can be a force for good and strives to help organizations realize benefits for both the environment and their bottom line.