[Watch] Enterprise Capital: A New Way Forward for Effective Philanthropy

Enterprise Capital is an approach to philanthropic funding that treats long-term, flexible capital as the high-value fuel that empowers nonprofits to fulfill their social and economic missions. Also referenced as “philanthropic equity” or “net asset grants,” Enterprise Capital refers to any form of long-term, unrestricted funding that targets an organization’s balance sheet—allowing investment where it is needed most. 

This webinar presented by the Federal Reserve Bank of San Francisco discusses Enterprise Capital and the ways it can increase the effectiveness of philanthropic and nonprofit efforts to advance racial and economic equity. The work of nonprofit organizations is critical to our nation’s economy as we seek to overcome structural racism, wealth inequality and the consequences of climate change. However, many nonprofits continuously struggle to secure the funding that enables them to build financial strength. Addressing this lack of funding will enable them to meet the challenges of this moment more effectively. This session features practitioners who are employing the Enterprise Capital approach, along with other tools, to shift capital and power to those who are closest to the issues at hand and best positioned to create effective solutions. Watch on demand below and keep reading for the full transcript.

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Transcript

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Matuschka Lindo Briggs

Good afternoon and welcome to Connecting Communities. Today’s webinar is Enterprise Capital, A New Way Forward for Effective Philanthropy. On slide two, I would now like to take the time to introduce our speakers for today. Andrea Levere, Executive Fellow at Yale School of Management and President Emerita at Prosperity Now. Lem White, co-CEO at Possibility Labs. Abigail Suarez, Program Officer of Community Development in Global Philanthropy at JPMorgan Chase & Company. Reverend Cory Anderson, Chief Innovation Officer at Winthrop Rockefeller Foundation. Sarah Simms, Community Development Finance manager at the Federal Reserve Bank of San Francisco. And I’m Matuschka Lindo Briggs, Director of Special Projects and Strategic Support for the Community Development Department at the Federal Reserve Bank of St. Louis. And I will serve as your moderator for our session today. Let’s move to slide three where we can take care of a few housekeeping items before we get started.

For the best webinar experience, we recommend you use the Webstream to consume this live video event through your computer speakers. If you have technical issues, you are welcome to dial into the phone number, post it on the player page, but the video will not sync perfectly with the phone audio. This session will be recorded and the presentation will be available on our Connecting Communities website. Also in connection with this session, you can find a variety of additional resources available at www.fedcommunities.org. We will be taking audience questions during the event and we’d love to hear from you. So to submit a question, use the ask question button located on the webinar player page. That should be like at the left hand side at the bottom of the screen, or you can email us at communities@stls.frb.org. As we move to slide four, I need to go over our legal notice and disclaimer since this is a Fed webinar.

Opinions and statements expressed in this presentation are those of the speakers and are intended only for informational purposes. They do not reflect official positions of the Federal Reserve Bank of St. Louis or the Board of Governors of the Federal Reserve System.

And finally, our mission on slide five, the mission of the Federal Reserve’s community development function is to promote economic growth and financial stability for low to moderate income individuals and communities. You can look at the map to see where your community development team is located. Our work is done through a range of activities from conducting research and identifying emerging issues to developing resources and sharing ideas, as well as fostering collaboration and building partnerships. I would now like to turn the presentation over to my colleague Sarah Simms from the Federal Reserve Bank of San Francisco. Sarah, the floor is yours.

Sarah Simms

Thanks, Matuschka. We’re excited to be with you all today for this conversation about such an important topic. As we’ve seen during the pandemic, nonprofit organizations play a vital role in supporting our communities, particularly in times of uncertainty and economic stress. Nonprofits are key to the Federal Reserve’s mission to promote a healthy and inclusive economy, and they will be critical in rebuilding our post pandemic economy. And yet nonprofits continually struggle to secure sufficient funding for their important work. They’re often forced to allocate limited staff resources to chase dollars and manage burdensome funder requirements. The challenges are even greater for nonprofits led by people of color. The disparity in net assets between non-profits led by people of color and those led by white people are similar to the racial wealth gap that has been documented at the household level. Addressing the weaknesses and how non-profits are funded so that they are truly empowered to meet the many challenges of this moment requires changes to the non-profit capital markets on multiple fronts.

During the conversation today, we’re going to hear from experts in the field who are grappling with these issues and developing tools to shift capital and ultimately power to those who are closest to the problems and therefore best positioned to create effective solutions. I’m going to ask each of the speakers to share a little bit about the work they’re doing in this space, and then we will come together for a panel discussion. And now Andrea is going to get us started by talking about the challenges with the current system and how the concept of enterprise capital can help to address these challenges. Andrea, I am passing the mic to you.

Andrea Levere

Thank you, Sarah. And I want to thank the San Francisco Federal Reserve Bank and connecting communities and all of you who’ve joined us today for being part of this event. So let’s go to slide two and let me start with a thought experiment that I hope demonstrates our core lesson that all money is not equal. So how many of you have ever raised money for a nonprofit or a charitable cause? Give me a virtual shout out if you enjoyed the process. Oh, I just hear quiet. Did your program officer ask you what you needed capital for and how best to structure it to advance your mission and strengthen your financial condition? Did your funder suggest multi-year funding to give you the long term capital that you needed to achieve your mission? And once the funding was committed, did your donor offer to provide whatever technical assistance you needed to strengthen your financial condition and resilience?

No, I am not hallucinating. I just described an alternative model to the standard way that most non-profits have to raise money in order to operate, innovate, and grow. I know that many in the audience and the sector are advancing these alternative practices in how they operate. And the pandemic and the movement for racial equity has basically set forth a whole spirit of innovation and a willingness to change the rules of philanthropy that in many ways seem to come from another century. Restricted brands doled out one year at a time tied to very specific activities with little focus on the overall financial needs of the enterprise doing the work. Next slide. Enterprise Capital aims to disrupt this model. It provides nonprofits which are really enterprises just like for profit companies, but simply with another tax status with flexible capital invested on the balance sheet to support the organization as a whole with the grant team playing the lead role, but not the sole role in determining how these funds are invested.

The blueprint for Enterprise Capital, which is available on the Connecting Communities website, was written with the support of the International Center for Finance at the Yale School of Management, and with the help of five outstanding MBA students in recognition that it was time to use the lessons of finance to reduce wealth inequality, not to increase it. It takes the lessons that I learned in business school as a small business lender and as a nonprofit CEO, and applies them in ways that enable nonprofits to invest in what they need most, whether it’s infrastructure, research and development, human capital or program innovation or whatever else is essential to achieving their mission and impact. I should say that this is not a new idea. It builds on the legacy of Clara Miller, founder of the Nonprofit Finance Fund and President Emerita of the Heron Foundation and her colleagues to advance and test the idea of philanthropic equity two decades ago in direct service of building the financial strength of nonprofit enterprises.

And it also incorporates many of the elements of the movement for trust based philanthropy in how grantees access and deploy this capital. And finally, it looks explicitly at how enterprise capital can directly target the racial wealth divide in the sector by intentionally building the net assets or equity of organizations led by people of color. Next slide. We make the case for Enterprise Capital in recognition of how the past two years have demonstrated that nonprofits are really serving a role as the essential businesses that are addressing the deep economic and racial disparities in this country. The blueprint illustrates how it can eliminate the practice of reverse engineering, where nonprofits are required to adapt their business models to meet the requirements of funders, usually at a sufficient operational cost and risk. And it recognizes the financial principle that by matching sources of funds to how they’re used, so long-term capital for long-term uses, an enterprise can thrive financially.

And finally, for all of those of you in the audience who are doing impact investing, it also provides and builds the net assets that are necessary to attract the debt that many organizations need. But the piece that closest to my heart is the insight that we realize the full value of enterprise capital when we pair the right capacity building services with this investment. How many nonprofit leaders go into the sector because they love finance? CDFI is excluded from this question. But I know from my own experience what an enormous advantage I had having a finance background to be able to really understand what was our business model and how do we create a financial model that supports that business model in a way that enables us to achieve economic sustainability. Well, providing these kind of services are not the norm, we have ample proof from many of the organizations that are dedicated to delivering on these in our sector of the impact they create for funders and non-profits alike.

Next slide. Finally, the blueprint outlines three basic principles that can help us really create what we call 21st century nonprofit capital markets. And it really begins by simplifying, how do we simplify by making capital flexible and adaptive to the needs of the organization that it’s funded? How do we integrate capital and capacity building in a way that both serve each other? And finally, how do we learn how to collaborate either through a market or less formally, more effectively, both between funders and organizations to create the metrics that work for both and by making the process of applying and receiving funding simpler. So how do we make this change happen? We invest in innovators like Lem White of Possibility Labs, who is reinventing how philanthropists and activists work together. Please join me in welcoming Lem White.

Lem White

Thanks, Andrea. And thank you to the San Francisco Fed and also all of you who are on this call. Really excited to be here with you today and to be talking about some of the applications of Enterprise Capital and some of the ways that we can transform our systems to be able to move it more easily. So just to give you a little bit on Possibility Labs, in slide one, we came about to solve two really distinct problems. One was the need for infrastructure for moving integrated capital. So that’s grants, loans, investments, sort of the stack of capital that non-profits and particularly black and brown led non-profits and businesses and co-ops and land trusts, those that have really powerful economic interventions towards a new economy, the infrastructure to move the capital that they need. And that really centers the capital moving in the ways that the organizations need the capital to move.

So that is flexible, fast, at scale and in catalytic ways. So some of the things that we found that folks were hearing from funders or that funders were saying within themselves is that maybe organizations were too small, hadn’t been around long enough, didn’t have the capacity to take the capital, all these different kinds of things. And so Possibility Labs really wanted to be a platform for donors, investors, funders to come together and be able to think about new ways to move capital in ways that fund the enterprise and fund in ways that the leaders of organizations really need capital to work. The second is that black and brown led organizations as leaders in our communities, were thinking about what does it mean to build political power? What does it mean to build economic power? What does it mean to govern our own resources? Launch things like community loan funds, CDFIs, acquire land, build co-ops, really build towards an economy that’s non extractive, not from the environment, not from people. And that supports us.

And what do we need in terms of infrastructure to govern our own resources and seeing these sort of two needs Possibility Labs came to be. And so moving on to the next slide, we are a community wealth building platform. We work, like I said, with donors and philanthropy. We work with impact investors, community loan funds, and on the other side, working with practitioners in the field to build power, specifically economic power to build towards a new economy. And to do it in a ways that, to use a word that Andrea has used before to liberate capital so that it’s going into black and brown communities, it’s staying in black and brown communities. It’s resourcing both non-profits and nonprofit adjacent organizations in ways that allow them to operate how they need and center their community’s needs over a long time to iterate as they need to be in better relationship with their funders, where funders are listening to what the nonprofits need, and to really build out a new economy that’s not extractive on the environment or people in our communities.

Going to the next slide. So thinking about how it works, the traditional models that typically happen between funders and the organizations they fund and specifically in BIPOC communities and how that funding tends to work. Usually there’s one vehicle, it’s grants and it’s going towards nonprofits, and that is an important vehicle. And we would encourage lots and lots of grants to go to those in BIPOC communities that need them. And there are other financial tools, there are other resources that communities need. And so what we’ve built in our platform is the ability to do integrated capital. So loans, grants, recoverable grants, looking at the full stack, not just the 5% that say foundations have or that donors are thinking about maybe that 5 to 20% that is coming out of donor advised funds, but to look at recoverable grants, loan guarantees, multi-year grants, equity investments, all the different financial tools that can leverage other kinds of capital coming out of banks, CDFIs and things like that.

And then also to look at reporting metrics that tend to be very funder driven and really focus on community driven metrics and community oriented metrics that are better measure, what it’s going to take to build the power of self-determination in the communities themselves and our communities themselves. And so what that looks like in practice in terms of, and I’ll step back a little bit. Possibility Labs has a couple of different tools. So we do fiscal sponsorship for nonprofits. We do back office support for loan funds, which looks like data management, integrated systems, a platform for folks to really have real time access to the data. And then we have a donor advised fund program, which is where donors can donate a large amount of capital up front and give that out over time. And then we have a couple of other tools where we can support people that are funders that want to have pooled funds or want to have community governed funds where they’re sort of making, it might be that they have $7 million that they want to hand over to the community to decide what to do with.

And so we are a vehicle where we can hold those funds. In traditional philanthropy, and this is the next slide, in traditional philanthropy, it typically looks like foundations giving out 5% of their assets distributed in grants. 95% of those assets are going to be invested in traditional financial markets. For donor advised programs, most donor advised funds, and I would say, I don’t think there’s an donor advised fund yet that has a payout requirement. So there’s a zero payout requirement. Somewhere between 4 and 20% of the lots and lots of money that sitting inside of donor advised funds get paid out every year. And so we want to shake that model up a little bit and really deploy as much money for impact as possible that sitting inside of Possibility Labs. So in our donor advised fund program, we would have a 10% payout requirement.

We incentivize through our fee structure and through some other mechanisms, 40% deployment. And that could be that the donor advised fund is doing loan guarantees or impact investing, or that’s, I should say, impact investing that’s really sustainable and we’re building wealth in the communities, giving out loans, et cetera. But that 40% of it is deployed for impact and then the remaining 60 to 90% is invested in BIPOC led community wealth building initiatives. So whether it’s in black, native, Latino banks, whether it’s in loan guarantee pools, whether it’s direct investments, the money that we’re managing, we really want to deploy all of that for impact. And so that’s a little bit from the practitioner perspective. And now I’m going to turn it over to Abi Suarez, who’s at JPMorgan Chase to give a little bit of the more philanthropic perspective.

Abi Suarez

Thank you, Lem. I’m really excited to be here. Let me start by saying that it was a total pleasure to work with Andrea as she was starting to think and develop the blueprint. I’m a bit of a finance/capital geek having spent the majority of my professional career structuring capital at a CDFI. And I’ve always been fascinated by capital and how it’s structured. As part of the reason why I was really interested in becoming a funder, I thought my background as a practitioner would be very helpful. I was also really interested in working with what I think is the most flexible type of capital out there, the grants. It didn’t take me though that long to realize that although grants are pretty flexible, if you’re the funder or the program officer, grantees might not always see the benefit of that flexibility. And so I wanted to talk a little bit about that journey, acknowledge that we’re just getting started.

We haven’t figured everything out. We don’t have all the answers, but we’re making some changes that I think are interesting. Starting with the pandemic, the first thing we did was to reach out to all of our grantees, gave everyone no cost extensions who needed it. We also restructure a lot of our grants to be as flexible as possible to meet the moment. Then last year we did a deep dive on our grant making with a particular focus on equity. So who we are funding and how we are funding them. Through this process, we tested and adopted some of the principles of Enterprise Capital. If you really were to ask me or us, we’re all about testing and scaling innovation. We would say that most of our investments fall under the launch and growth capital, but we needed to make sure it is really structured that way.

And this is both for our grant making arm and our impact investing tools. So we started to provide multi-year investments that had more flexibility, less restrictions. We took a hard look at our metrics, streamlining them as much as possible. Another thing we did was to increase indirect rates to around 15 to 20% particular for PoC-Led organizations. Just a quick definition on indirect rates for those that are not familiar, these rates are meant to capture the cost associated with the program for the nonprofits. They’re not tied to a particular activity. They’re extremely flexible. I think most funders have indirect rates between 5 and 10%. However, we know the actual cost to the nonprofit are more around 15 and 20% range. Some of the guarantees that takes these programmatic challenges and grants understand that they might have to subsidize them. So we wanted to make sure we’re rectifying that problem internally.

We also decided to make big bets. And for us, this meant larger multi grants to organizations that were led by people of color or proximate to the communities we wanted to serve. I will say that we still have some work to do specifically on unrestricted grant making, but I’m excited because we are testing this strategy with a new partner this year, New Profit. They are a national venture philanthropic organization created by and for entrepreneurs. We’re excited to work with them because they provide a mix of unrestricted capital and strategic support. Their model is fund and built. The interesting thing about their strategic support is that it is very similar to the Enterprise Capital Cabinet concept outline in the blueprint where they bring external advisors with different competencies that will help the organization build its capacity and more effectively leverage the unrestricted funding. In my opinion, it takes a combination of multi-year flexible funding and the right type of expertise to support and maximize the impact of your investments. Thank you so much for your time. And now for another funder’s perspective, I’d like to pass it over to Cory.

Cory Anderson

I thank you, Abi. And thank you to the Fed and to Andrea and all those folks for having us here today. I’m Cory. I work at the Winthrop Rockefeller Foundation in Little Rock, Arkansas. It may be just me, but I affectionately refer to us as the Little Rockefeller Foundation because we’re in Little Rock and we’re in Arkansas and we are the smaller of the various things that the Rockefeller Wealth is funded over time. Arkansas had the benefit of having Winthrop Rockefeller, one of the Rockefeller brothers make his home here in Arkansas, in politics and in business. And when he passed away, like many of them, he left lots of his resources to establish a few things, one of which is the foundation. We consider ourselves an equity funder. You can see our mission there, a relentless pursuit of economic equity, educational equity, social ethic, and racial equity for all Arkansans.

We take a systems approach to that. So what we’re always trying to do is figure out how we can turn public resources, how we can change the systems that are producing inequitable outcomes into systems that produce equitable outcomes for everyone in our state. And if there are other, they’re funders and nonprofits on the line, you can imagine that the way that we do this mostly is by investing in the folks, organizers, advocacy organizations, communities that are seeking to change the circumstances in their own communities, but by investing in those folks to do that work. I’ve been in philanthropy, gosh, probably 20 years. So if Abi is a finance geek, I’m a philanthropy geek. But the previous 10 years before that, two decades in philanthropy, I worked in nonprofits. And so when I got into philanthropy, I came to the other side of that magic curtain that I had previously spent all of that time trying to figure out how to get resources and how to get as much as we need and how to please funders.

And over the last couple of years here with the Rockefeller Foundation, we’ve really found ourselves working hard to not just better understand the needs of the partners that we have, but to figure out how we can, and Lem mentioned it, Abi mentioned it a little bit, but how we can use the full range of investment opportunities that we have, grants, program related investments, technical assistance to meet those needs. And so reading the Enterprise Capital blueprint actually opened up for us this idea that all the things that we had been doing, pushing ourselves to use general operating support grants as the default, as opposed to that being special, creating capacity building cores for our grantees where we were able to support grantees that needed back office support or communication support. We put together consultants that could do all of that work. But what the Enterprise Capital Blueprint really did for us was really push us to think about, well, what if we were just providing enough resources to our partners where maybe they didn’t necessarily need our technical assistance, right?

Like most funders, we think about things like, “Oh gosh, the partner has turned in the report later, maybe the financials are wrong.” And we say, “Oh, we need to help them do that.” Well, what if we just gave them enough money so that they could have a robust back office that’s just theirs? And the Enterprise Capital blueprint really opened that up for us. So over the last couple of months, we’ve been working with Andrea to really provide, to really build a case study for us on how we might do that work in the future. She’s helped us analyze a small cohort of our grantees, looked at their financials. She’s helped us look at the way that we organize the technical assistance that we provide grantees. And we’re thinking about how do we create right here in Arkansas, an enterprise capital fund, that would be us and other partners that where we are sharing common grantees and common partners.

And all of us have the opportunity to invest in them in ways that are both long-term but that are also comprehensive. What we’re doing now, because we’re just like every other philanthropy, right? Like we want to push the edge and we’re always looking for other folks that have done it. We’re always looking for models. But hopefully what we’re doing with Andrea is, we’re creating a model that other philanthropies that are our size, we give away 5 or $6 billion a year. We’re not huge, we’re place bound. But being an example for other foundations that are similar to us in how they might use this strategy as a way to continue to support their grantees.

You heard in the intro, there’s a reverend on the front of my title. And what I say to people is, we’re an equity funder. This enterprise capital work actually helps us move closer to that aspiration. And it’s kind of like there’s a line in the Bible that says, I believe, but help me with my belief. So the Enterprise Capital blueprint and the work that we’re doing with Andrea to help us understand it is the help us with our belief part of this. We really believe in doing the things that are going to not just help our partners have more impact right now, but actually help them be stronger in the future. And we feel like looking at the work from this lens, using an enterprise capital lens is actually going to help us move that way. I know we’re about to move into the full panel discussion, so I’ll stop there. But I wanted to invite Sarah back on and as she’s coming, and I think other folks are going to come join us too, but I’ll stop there.

Sarah Simms

Thank you Cory. And thank you all for sharing a little bit about how you are incorporating Enterprise Capital concepts into your work. I’m going to ask everyone else to join us on screen so we can dig into this together. So I want to start by better understanding the impact on a nonprofit when philanthropy takes an enterprise capital approach to funding versus when it doesn’t. What does this look like in practice? Lem, do you want to give us some thoughts on that?

Lem White

Sure, yeah, I can pick that off and then others can join in. So I’ll give two examples. One is Possibility Labs, which started in September of 2020. And we started with a very catalytic grant from the Kataly Foundation, which is a newer foundation. And it was both very catalytic and very flexible in terms of, it didn’t have a lot of programmatic focus. There was a general concept that we talked about and agreed on, but there was a lot of flexibility. And it was also catalytic in that, it was a relatively large scale grant for a concept in a small team. That did a couple of different things. One, it unlocked a whole lot of other kinds of capital. So when people heard of the size of the grant that was given, it unlocked huge size grants from other foundations that really supported us.

Two, it gave us a lot of flexibility to experiment. So we started with some hypotheses, but the key was to learn from the folks that we were working with, what the field really needed. And so we were able to be very responsive and very agile because we weren’t boxed in. And I think that kind of investment that we got, and we’ve seen that investment go to other non-profits, particularly black and brown led non-profits. And each time that happens, the ability of the organization to really experiment and understand, like we’re starting with a hypothesis. We’re starting with what we think our problem is.

And as we learn and learn and learn and learn and learn, we’re able to iterate, we’re able to grow, we’re able to make decisions on the fly. We’re able to negotiate and go back to our funders and say, “Here’s what we started with, here’s what we’re learning.” People invest more capital in that. And what comes at the end is actually the impact that funders wanted to make on the front end anyway. When grants are restricted or they’re very program limited or they’re not long term or they’re not big enough, usually the funders don’t accomplish what they’re trying to accomplish anyways because they’re not trusting the leadership of the people that are closest to the problems that they’re trying to solve. So I think that’s one example. I will kick it over to Andrea because I think there may be some more examples of groups.

Andrea Levere

Great. Lem, thank you so much. And I want to take an example of an organization that I’ve been working with called Build Wealth Minnesota. And it is a Black-led CDFI that has been working to build sustainable wealth and to help bridge the racial wealth divide in home ownership in the Twin Cities and Minnesota since 2004. Despite a solid track record in building financial capability and savings and doing some initial lending, they came right up against a brick wall when they tried to start a loan portfolio of their own. And as the CEO says, the response he kept getting was, “Oh, you’re too small, you can’t do this. You don’t have the base and the financial strength to be able to do it.” So they’d get a lot of small grants to do training. They were able to help with some down payment assistance, but they could never really realize their dream.

So the organization went through a program that Prosperity Now had launched called Building High Impact Nonprofits of Color. And I began working with them and they reimagined their work in a initiative called 9000 Equities, which was the number of new homeowners of color that it would take to take the racial wealth divide and home ownership down by 15%. This required raising about 10 million. And of that 2.5 had to be enterprise capital. And it really brought a whole new attitude of we’re achieving these outcomes, come be part of us and invest in us. And the other piece about this, which I think is key, which will be a theme we’ll also talk about, is there’s now an unprecedented amount of federal money coming into states and cities. And so a part of that enterprise capital they were able to get from municipalities and then the rest from foundations who have understood that without the net assets, an organization like this can’t grow.

So we’ve just raised the initial 10 million, it’s launching this month, and you’ll see in an article that just got posted on Bridgespan’s website that the story is continuing to move on to build a $100 million loan portfolio to really achieve this major goal. And I think the CEO speaks to the fact that his experience is not unique and that imagining this kind of capital and the ambition it enables is what we all need to solve our problems. So with that, I’d like to hand it over to Abi to share an experience that she has.

Abi Suarez

Thank you, Andrea. It’s really exciting to see that article and all the cases you included in the enterprise blueprint. I think I’ll share, I’ll expand a little bit on the work with New Profit. So that for us is really exciting because sometimes you don’t have the complete buy-in of doing complete unrestricted capital. And so that partnership is giving us an opportunity to test that out, to really see how it works. And the fact that they’re very well known, very established, was also helpful in terms of getting all the approvals internally to do that work. So we’re really excited to do that. We just got started, I think they signed the papers at the end of 2021. So more to come on that. I’ll give you another example in terms of, a lot of the times in while I was speaking around taking big bets.

And really what that meant for us is larger multi-year grants, and I mean like a million plus in organizations that we thought were extremely innovative and were led by people of color or people that were approximate to the communities we wanted to serve. So we have the pleasure to, again, just starting to embark on a partnership with Parity Homes, a pretty innovative women led organization in Baltimore that is trying to close the appraisal and evaluation gaps.

And one of the things that I did was to have a conversation around what were big bets and what it meant to provide this type of funding at this level for an organization that might have been previously seen before as too small and would not be at the capacity of absorbing that capital. That also meant that we had a lot of conversations with the funder, the CEO or with us I should say, and the founder and CEO to just make sure that we were structuring the right way so she would actually not have issues with absorbing that capital. So we’re just getting started, but those are two examples and I’ll turn it over to Cory to see if he has anything else to share?

Cory Anderson

Not specifically, but from what all three of you have said, again, we’re in to the audience, this group of folks, we’ve talked a couple times, but I’m actually hearing new stuff now. But Abi, I appreciate your example. Really thinking about how Enterprise Capital opens up our ability to be innovative, like our as in grant makers ability to be innovative and how we do investments. Lem, I loved your example because we traditionally, funders don’t give non-profits, partners the ability to iterate work, right? We say, “Hey, you said you were going to do X up, 12 months is up, what happened?” And then I’m using hyperbole, but then if we don’t like it, we move on to the next thing, right? But we didn’t get these iPhones, like Steve Jobs didn’t say to his engineers, “Oh, you failed the first time, first model. Nope, that’s not going to work. So we’re not going to do that.” Right?

He made the investment that allowed them to iterate again and again and again and again. And to your point, he got what he was looking for after 13, 14, 20 iterations and lots of investment. But he knew if he continued to invest, right, long-term, flexible that, whatever he invested, he’d get back a million times over. And then Andrea, your story about impact, right? About folks that know what they’re doing, actually having the resources to scale the impact that they know they can have, right? I think one anyway, that to me, putting those three things together, this idea about innovation, the ability for folks to iterate and the ability to scale impact maybe a really sort of good, for folks who say, “If you don’t remember anything else that we’re saying today, like Enterprise Capital is going to help you in those three areas.” That we’re always talking about all the time in philanthropy.

Sarah Simms

Thank you. So just hearing you all talk about this, the positive impacts of the enterprise capital approach seem fairly clear. I’d love to hear a little bit about why you think there’s not broader adoption of these concepts. What are some of the barriers across the philanthropic sector? Cory, you want to start us off on that?

Cory Anderson

Sure. And Andrea has done some of this work. There’s this unnecessary aversion to risk in philanthropy. When you layer what seemed like these huge amounts of money that we’re talking about, when in reality there’s so much more money in the public sector. But when you layer on these huge amounts of money that we’re talking about with ideas like fiduciary responsibility and the professionalism of philanthropy, those things make us really averse to risk. So the easiest way to, in our 19th century minds, Andrea, you said it’s like we developed this way of doing this a 100 years ago, but the easiest way to reduce that risk in our minds is to say, and I’m using hyperbole, but not really, but we’re going to give you just a little bit to do one specific thing. And if you do that specific thing well then we’ll give you just a little bit more resources, right?

And if you do that well, we’ll do, we’ll give you just a little bit more. And then what happens is the organizations that they kind of do one thing well and that they end up being these huge organizations, and then we say to those organizations, “Oh, we’ll give you a lot of money because you’re already a big organization.” So because you’re big, you’ve proven that you can handle the money that you can have impact, which leaves behind honestly all the folks that we’re talking about that work in communities that are led by leaders of color. So you get this negative feedback loop in the way that philanthropy works, that in my opinion, is mostly based on risk aversion, which I don’t think we need to be risk averse. We can make mistakes and people will continue to take our money. So there’s no reason to worry about that so much in my mind.

Sarah Simms

And I’m also curious to hear a little bit about the process inside organizations for this kind of changing the way we think about these things. So Abi, I don’t know if you have anything to share on what that has looked like at JPMorgan as you’ve moved the direction that you just talked about.

Abi Suarez

Sure. First off, cosign to everything that Cory said. I think that’s pretty spot on. I would also say that there’s also a little bit of education and realization to be made. I think the enterprise capital document helps because it just, it’s informative and it’s a different way to presenting a concept. A lot of funder, for example, I would say I were to come in and say, “I want to just give unrestricted funding to everybody.” I would get a lot of resistance. “But why? What about metrics? What about our mission?” But when you present it as Enterprise Capital and us investing in scaling and launching organizations and growing their mission, which is aligning to yours, right? Because that’s why you’re funding them. I think it’s a different conversation. And so it is for sure will take longer for some of the more radical, I would say, more, yeah, more radical changes in terms of structuring funding.

But there are a lot of things that are also up to a program officer, like metrics, what we measure, the length of the term, the amount of the grant, the example I gave on the direct rates. I just made that there. I said, I want to do this. I didn’t have any resistance and have been preaching about this across the foundation just to make sure everybody understands. This was really up to me. And so I think it’s a little bit of education. And also, again, everything that Cory said, and some organizations move faster than others. And again, some things are easier to change than others.

Sarah Simms

Excuse me. Anybody have anything else to add on that?

Lem White

Yeah, I would say so building on both of those, but one of the things that Cory said about risk is that in the nonprofit sector, for some reason there’s this move to constantly mitigate risk. Like foundations are very focused on, we’ve got to narrowly fund this, in some the risk is multifaceted. We had a program officer that we were working with that said we had to change a proposal from a program grant to a general operating grant because actually what you put in the grant proposal was too risky for our financiers and lawyers, which is, that was very creative of the program officer to have that foresight and change the grant. So I recommend that, but in the for-profit sector, risk is seen as necessary for innovation. In fact, venture capital, when you’re looking at a business plan as a banker, what you’re looking for is does this company, you’re looking for a solid business model in some ways, but the other thing you’re looking for is like, is there enough risk here to transform how things are done?

Can we get 10x or a 100x in terms of impact or industry change or innovation? And when we see that, when we see risk rise to the level that’s going to be transformative, then we put in big money. But for some reason nonprofit, philanthropy takes almost the opposite approach. And so I think one of the barriers is to think about what’s at the basis of the risk model. Is it a scarcity of resources? Is it whatever that is, whatever’s at the base of the risk model, that thing has to be transformed so that we can look at particularly new catalytic innovation as transforming industries and then match that with the creative finance that’s necessary to get that done. And so, yeah, that’s one of the things I’d add there.

Andrea Levere

Sarah, I’d love to add to that. So as we think about how do we use finance, and Lem said this incredibly eloquently for nonprofit enterprises, the way they think about it in the for-profit sector, I want to add the issue that nonprofits are solving problems that the market itself has not solved. So if we need to change our view about risk urgently, because otherwise they can’t do that, right? If the market could solve this problem, we would not be dealing with all these issues, which brings one of my favorite conversations, a leading philanthropist in Silicon Valley who had really transformed her processes during COVID, was asked how she would keep it going in the days we thought COVID would end, right? And she said, “Well, I go to all my investors,” most of whom are venture capitalists, just like Lem described and said, “Think about what we’re doing like you think about how you invest in your companies.” And so as I said earlier, let’s figure out how we use these financial principles to flip the game about addressing inequality and absolutely thinking about how do we need to reframe risk.

Sarah Simms

I think that is a perfect point to pause on. I know we have a lot more that we wanted to dig into as part of this conversation, but I want to make sure we have time to hear from the audience. So Matuschka, can we see if there are any questions for audience Q&A?

Matuschka Lindo Briggs

Yes. Thanks, Sarah. So as a reminder, we are taking questions from our participants today. Please submit them using the ask a question button on the bottom left hand of your screen. And a reminder you can also email us at communities@stls.frb.org. So one of our first questions, I’m going to, is aimed to Andrea and Cory, what percentage of current philanthropic giving is structured as enterprise capital?

Andrea Levere

Thank you for asking that question. So when we were writing the blueprint for Enterprise Capital, we contacted every trade association and organization that collected data on philanthropy. Nobody collects this data. And if we all know that you do what you measure, I think one of the things we have to think about, what a fantastic job for the Fed, right, is how do we start collecting this kind of information, both to inform practice, but also to create a metric that’s meaningful. Then I’ll hand it over to Cory.

Cory Anderson

Well, so yes, I would agree. Well, right. I think maybe the leading metric that we have, and I don’t have a number for it, but I think the way that folks might think about it now is how much more general operating support folks are doing, right? And again, I don’t have a number, but my sense is that, and maybe it’s just the people I know, right? So maybe it’s like 1% of philanthropy in general, but it’s a bigger percentage of the folks in philanthropy that I spend time hanging out with, right, which is probably more true. But for the folks that I know, doing general operating support, trust-based philanthropy, all those sort of things, other folks have said it, really over the last two years, particularly during the COVID pandemic, those things have gotten to be higher on the lists of the ways that, again, the folks that I know are doing work, admittedly, again, the folks that, I’m using words that I use, that are in sort of progressive strategic philanthropy circles is unfortunately actually a small percentage of philanthropy in general, so.

Matuschka Lindo Briggs

Okay, this next question is not directed to any particular person, but the question is, how has this model benefited CDCs and other community development focused organizations? Does anybody want to take a stab at that?

Andrea Levere

Abi, do you want to go first and then I can follow? Abi?

Abi Suarez

I couldn’t hear who you were passing it to.

Andrea Levere

Yeah.

Abi Suarez

Thanks for repeating. Yeah, I actually think that, well, I would say we’re yet to see the results of some of the grant making we have done this year. I’m really excited though about how the portfolios growing and the activities that these organizations are going to focus on. And I will also say, I was actually going to say, Andrea, that I had the benefit of listening to the Growth Minnesota Organization come and talk about their work. And I was incredibly impressed about their pitch, the sophisticated materials they put together, the audacity of what they were asking. They knew exactly how much they wanted on brands, they knew how much they wanted on PRI. So I thought that was a perfect example of also like in the process of getting there, the change that some of those organizations are seeing already.

Andrea Levere

And I’ll just add, which I mentioned before, is that all of us who worked with CDFIs, with CDCs, I chair two CDFIs and I vice chair another. Without net assets, you can’t leverage debt. And without being able to do that, you can’t grow. We are in this extraordinary moment of investment in CDFIs and minority depositories and minority banks through the treasury. And that is opening up markets in ways that have never been opened before. But at the same time, if you are large enough to get that, then you can get that. But we are incubating a whole set of CDFIs led by people of color serving native communities and others where this kind of initial equity capital is essential to everything else that they can do.

Matuschka Lindo Briggs

So how does this model directly address the power dynamic that persists between non-profits and funders, regardless of the capital structure? And it’s an open question for anybody.

Lem White

I can start that. So I think the biggest thing is that, we’ve talked a little bit about trust-based philanthropy and thinking about the metrics that, well, I’ll step back a little bit. Philanthropy tends to set its own metrics. So usually people gather in a room in a city, 23 stories above what’s happening on the ground with people who are not necessarily practitioners and set metrics about how a bucket of money is going to be spent. And then they deploy that money with the metrics and then expect grantees to give those metrics back to them and exactly how they want them.

I think what Enterprise Capital does is flip that on its head and actually the metrics get set from the ground. If you’re trying to figure out how to address housing crisis in your community, or if you have, the air in your community is not serving people well and you have high rates of asthma, or if you’re trying to build community wealth, like these are issues that you’re going to be the closest to when you’re most impacted, which means that you’re going to know that the needle is moving when you stop feeling the impact of that. And so Enterprise Capital says, Well, let’s listen to those metrics. Let’s let those metrics drive what we see as success, and also let those metrics drive how much investment is needed. The scale of investment that’s needed, the kinds of organizations that we need to invest in, all those different kinds of things.

And so I think it changes the, it is up to the funder to say, “We’re going to give up power when we are in these relationships. We’re going to give up power when we write this check. We’re not going to take a million dollars and put it in a fund and break it out into $50,000 grants. We’re going to take a $100 million and put it in a fund and hand it over to the community to decide what to do with it.” Those are the kinds of things that Enterprise Capital tells us to do, and I think it really, really has the potential to change the dynamics.

Abi Suarez

If that can add to that, I think you’re spot on them. I also think that it takes sort of the funder giving powers also takes the empowerment of the grantee to come with a clear ask and clear parameters. I personally, this past year sent back a budget and said, “You left your indirect rate as zero.” And grantees were actually, “Oh yeah, yeah, yeah.” As if it was a good thing because they weren’t absorbing that capital for themselves. And I said, “No, I want you to tell me what your actual indirect costs are. Like how much is it going to cost you as an organization to implement this grant and program?”

And so it’s a little bit of both. And if I may go back a little bit to the prior question, and my apologies, Andrew’s comments reminded me that even though this is a new aspect for JPMorgan Chase we’re starting, we have an incredible track record of applying these concepts with CDFIs and our pro neighborhoods winners. We just had a progress report that was published, and you just can see the amount of skill and growth that has happened to all those CDCs and CDFIs through these investments. And so I just want to quickly plug that in before I let others chime in around power dynamics.

Andrea Levere

So I just want to add to both of those terrific comments with a couple of things. The one sentence that sends a chill through every non-profit CEO’s heart is when the funder says, “Oh, we need some time to develop our strategy.” And then you think, “Oh my God, when will the money ever come again?” And in contrast, one of the most important lessons I learned as CEO is the rule, Nothing about us without us. And all the work we did came out of deep work in communities and with the trusted leaders in these communities that told us what they needed. And to me, what I’m hoping Enterprise Capital can do is change that equation, just like Lem said, right?

In a way, it will increase the impact on both sides. And I just want to share one other story, which was, I used the phrase, which actually I got from Dan Nissenbaum, who folks may know of Reverse Engineering. And I watched a video with Bryan Stevenson, what nonprofit CEO has more gravitas on the planet than him. And he described how one of his funders said, “Oh, I want you to change your business model so you can have my funding.” And I thought, “Oh my God.” And he said, “I turned it down.” But I thought, “if that happens to him, that happens to everyone.” So I think that really speaks to the benefits on both sides of changing how the power moves.

Cory Anderson

And I’ll just add to, and this is for philanthropy. If you could in May, June, July, August, September of 2020, like if you could move money quickly, if you could do general operating support to respond to the immediate needs of all those things that were happening, if you could trust folks during those four or five or six months where it was sort of all hands on deck, then those are the types of things we need to hold onto, right? There’s no reason to go back to taking a year to decide. There’s no reason to go back. All of those things that we were able to set aside to meet the moment in what turned out to be really wonderful, impactful ways, if you can do that, then we ought to be able to hold onto some of those things and continue to push those ways of being in philanthropy.

Matuschka Lindo Briggs

Such great advice. Thank you all. So I’m going to combine two questions here because basically both of them are asking how to attract this type of capital. The first one is, how do marginalized communities and organizations led by people of color find philanthropists willing to invest enterprise capital? Or how do philanthropies find them? Then the other question is from Appalachia, I’m looking here. So they are in the eastern Kentucky region, the poorest subregion of Central Appalachia. And the question is, we still desperately need access to enterprise capital for our operations and to build capacity for the community foundation and our region in general. What is your advice for helping us attract this kind of capital and funding partners to a rural and often misunderstood region? So we have several questions here asking how do we get, how do they get the attraction for this type of capital?

Cory Anderson

I would say one, as the blueprint, this webinar we’re, what we’re working to do now is to create uptake and understanding in the philanthropic sector. So there’s a choir, but it’s a small choir at this point. So we’re singing to the rest of philanthropy about how this might be useful. So there’s going to be some lag. But I think on the other side to help that is to start asking for what you need. And again, I don’t want to be flip about it, but if they’re not giving it to you anyway, the worst they can say is, “No, we can’t do that.” But by asking the question of your philanthropic partner, you might spur them to begin thinking in a different way. And that’s going to, I think, mesh with the work that we’re doing. We’re doing our own little case study. Andrea’s got folks that she’s been working with. Abi and Lem are doing the work to push the field in that direction. But I think asking the question in these same ways from the other side of the conversation is actually going to help this move forward.

Abi Suarez

Yeah, I agree with Cory. I think it’s definitely about asking for what you need. It is definitely also about education and again, building this momentum and choir. I will say though that I think given the past couple of years, I think funders are very aware of the restrictions they’re putting, who they’re funding and how they’re funding those organizations. So I think this is really the moment where organizations that might have not traditionally have access to philanthropy can have the opportunity to have a seat at the table because I think we are looking for you guys. Sometimes we don’t have the right networks to find you and you don’t have the networks to find us. But I think it is an intentional movement that I hope has long-term staying power.

Andrea Levere

Okay, I’ll follow.

Lem White

Okay.

Andrea Levere

Go ahead. Go ahead.

Lem White

Oh, yeah. So I think one of the things that I would say here is that I hope everyone on the call is listening to this particular question because I would echo asking for what you need. I think there’s an element of pushing funders or getting in a dialogue with funders about how they’re approaching their work and challenging. But I would also add that sometimes as a fundraiser, we find ourselves in this position where we do need to ask for what we need. And also there’s a way in which Andrea said that statement. A funder might say something like, “Well, we have to go back to the strategy table or these kinds of things.” And so I think as a fundraiser, there is this dance of if I push the funder too much, will they just say no? How long do I have to cultivate this funder to get what we need?

Those kinds of things. And so some of this question, I think the impetus is on funders to when they hear that this is what the grant team needs, their response is, “How can I do that as opposed to all the barriers.” And I think we have some, Cory and Abi, like really brilliant program officers and leaders in the field, and we need more of that because I think there is sometimes a real resistance when you ask a funder for what you actually need. And I will say as a fundraiser, I’ve had that resistance. So some of it is very strategically and with a lot of finesse trying to push your funders to be able to receive that ask so that you get what you need.

Andrea Levere

So I’ll just add to all those points. That in the same way, we have persistently poor counties in the United States, and we have great disparities where wealth is and where opportunity is, we have the same thing with where philanthropy is. And I know who the questioner is from Appalachia. And part of this, which I thought Lem would say, is that we have to do some organizing and we have to organize. And in this case, I think this is where the new federal funding for a host of issues, whether it’s broadband or other things, I have a dear friend who works at the FCC who called me up. She said, “I’ve just been given millions of dollars to grant and I’ve never given a grant in my life. So what do I do?”

So there are new sources of capital that we need to think about and we have to think about this in the same way. We have addressed disparities of cross a range of issues. How do we think about, which is why I think Cory’s experience is so relevant because he is in a state with large pockets that have been profoundly underserved. So how do we think about organizing and addressing this gap?

Matuschka Lindo Briggs

Okay, I want to be respectful of people’s times, but we have so many questions. I’m going to try to fit two more in here. The next one is, I am interested in an explanation of recoverable grants, what they are or resources to learn about them. Abi or Andrea?

Abi Suarez

I know we were all looking at each other. I personally think there’s not a true definition of recoverable grants. So this is why we’re all doing this stair match and it’s really is about how a funder looks at it. We actually tested recoverable grants this past year. It was interesting because a lot of our grant making before had been to support capital sources. And as we expanded our tools, we included PRI like capital, equity like capital. We saw there was still a pretty big gap for what you think a PRI, what it takes to underwrite a PRI and what a normal grant takes to underwrite or structure.

And we thought that recoverable grants was a pretty good bridge between those two. And so we tested them, but we really defined it ourselves. We created our own grant agreement. We did a little bit of landscaping and found there wasn’t a lot of consistency around it. But I would say that one of the things that was important to me as a program officer testing this new tool is that recoverability was tied to impact. So all the recoverable grants that we tested this year had a schedule where a portion will be forgiven and a portion will be recovered and the more impact you had, the bigger forgiveness versus recovered. And so we sort did a little schedule trying to match that. But that’s been my experience. I don’t know, Andrea and Lem, if you have anything else to add.

Lem White

Yeah, I would say that’s not a super clear definition of what a recoverable grant is. And so that creates a lot of opportunity and also creates a lot of creativity in terms of the terms of recoverability. So Abi, you shared one. It could be more like if you meet certain financial metrics, then the grant gets or can be recovered. One important thing is that it’s a grant, so it doesn’t go on the books as a loan, on anybody’s books as a loan. It doesn’t stay on a fund’s book as an asset or anything like that. And that way it can be a very strong tool and a catalytic tool to give us a kind of loan or a kind of investment without burdening the books of a grantee.

Matuschka Lindo Briggs

Okay. Well, I think we have run out of time for questions and like I said, we had so many questions. I definitely would like to thank all of our speakers today for sharing their time with us, as well as all the participants that join today for our discussion on Enterprise Capital, A new way forward for Effective Philanthropy. A few reminders, we will have a video recording available of today’s session on the Connecting Communities website, and you can find a variety of additional resources available on the Fed Communities website. We also welcome ideas for future recordings. We just shared a survey link if you joined us in the webinar. And this same link will be distributed via email in a few minutes. We’d appreciate your feedback about today’s session. Thank you for joining us. This concludes today’s Connecting Communities webinar. Enjoy the rest of your day.