investment capital: the new challenge for american...

EXECUTIVE SUMMARY

Once considered fundamentally labor-intensive institu-tions, nonprofit organizations are increasingly confrontingexpanded needs for “investment capital” to finance thefacilities, technology, and innovations required to remainviable in an increasingly competitive environment.Because of their relatively small scale and their non-prof-it character, which makes it impossible for them to issuestock, however, nonprofits confront special difficulties inaccessing investment capital. Regrettably, though, pre-cious little is known about the special challenges nonprof-it organizations face in generating such capital or thedegree of success they have had in overcoming them.

To help fill this gap, the Johns Hopkins NonprofitListening Post Project took a preliminary “Sounding” ofits nationwide sample of nonprofit organizations in fivebroad fields of nonprofit action (children and family ser-vices, community and economic development, elderlyhousing and services, museums, and theaters) to learnabout the capital needs of these organizations and the easeor difficulty they face in meeting these needs.

Based on the results of this Sounding, the followingmajor conclusions emerge:

1. Nonprofits in these core human service, communitydevelopment, and arts fields have significant invest-ment capital needs.

2. These needs extend well beyond the traditional areasof physical capital to embrace program development,staff upgrading, and strategic planning. This likelyreflects the growing competition in many of thesefields and the substantial infusion of entrepreneurialspirit into the nonprofit sector in recent years.

3. Despite these needs, nonprofits have encountered sig-nificant difficulty accessing the major pools of invest-ment capital in our country, such as insurance compa-nies and pension funds. Many nonprofits have limit-ed knowledge of these capital resources, and thosethat do have knowledge report substantial difficulty inaccessing them.

4. Although other sources, such as commercial banks,government, foundations, and individual donors, aremore familiar to nonprofits, some (e.g., government)are quite difficult to access for investment capital pur-poses and others (e.g., commercial banks, founda-tions, and individual donors) are limited in their areasof interest.

5. Although some variations exist in the applicability ofthese findings among the different types of nonprofitorganizations surveyed and between organizationsaffiliated with national intermediary organizationsand those not so unaffiliated, what is most striking ishow uniform they seem to be, at least among the typesof organizations examined here.

6. While it is impossible to say for certain whether theseresults apply equally to other types of nonprofit orga-nizations, they certainly suggest the need forincreased attention to the investment capital needs ofnonprofit organizations and possible policy actions tolevel the playing field for nonprofit access to capital.

The full text of this Communiqué is available for down-loading at: www.jhu.edu/listeningpost/news

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A joint project of the Center for Civil Society Studies at the Johns Hopkins Institute for Policy Studies in cooperation with theAlliance for Children and Families, the Alliance for Nonprofit Management, the American Association of Homes and Servicesfor the Aging, the American Association of Museums, the National Congress for Community Economic Development, theNational Council of Nonprofit Associations, and Theatre Communications Group

COMMUNIQUÉ NO. 5

Investment Capital: The New Challenge for American NonprofitsLester M. Salamon with the assistance of Stephanie L. GellerJohns Hopkins University

Copyright © 2006, Lester M. Salamon

BackgroundRecent years have witnessed a growing need for “invest-ment capital” on the part of nonprofit organizations tofinance new facilities, respond to growing demand, andinvest in new technologies and new program strategies.Regrettably, however, nonprofits do not enjoy a levelplaying field so far as access to investment capital is con-cerned. Their nonprofit status makes them unable toaccess the equity markets since they cannot distribute theirprofits and hence cannot issue stock. Similarly, their gen-erally small scale reduces their attractiveness to commer-cial lenders, who incur higher transaction costs making alarge number of small loans than a small number of largeones.

While these considerations may have made less dif-ference in an earlier era when expansions in demand weregradual and nonprofits were heavily labor intensive, theyhave become highly important in the current era of rapidexpansions in demand for human services, often fueled bynew government programs, and growing penetration oftechnology into the health and human services field.Indeed, they may help explain a troubling loss of marketshare by nonprofits in a growing number of fields duringthe past several decades. Between 1982 and 1997, forexample, the nonprofit share of employment in the homehealth field declined by 53 percent, from 60 percent of alljobs to 28 percent. During the same period, the nonprofitshare of rehabilitation hospitals declined by 50 percent, ofhealth maintenance organizations by 60 percent, and ofchild day care jobs by 27 percent.1

Regrettably, however, while much has been writtenabout the challenges nonprofits face in generating operat-ing revenue,2 precious little attention has been paid to

nonprofit access to investment capital.3 To help fill thisgap, the Johns Hopkins Listening Post Project took a pre-liminary “Sounding” of its nationwide sample of nonprof-it organizations in five key fields (children and family ser-vices, community and economic development, elderlyhousing and services, museums, and theaters) to learnabout the capital needs of nonprofit organizations and theease or difficulty they face in meeting these needs. Morespecifically, the survey, or Sounding, focused on three keyaspects of nonprofit experience in generating investmentcapital: (1) the nonprofit need for investment capital; (2)the degree of success organizations experienced in secur-ing such capital; and (3) the perceived reasons for the gen-erally limited success responding organizations reported.

The present Communiqué reports the results of thisSounding. Against this backdrop, it then suggests somepossible steps that could usefully be taken to level theplaying field for nonprofit access to investment capital.

Defining Investment CapitalBefore turning to the results of this Sounding, it is impor-tant to clarify what “investment capital” is and how it dif-fers from other forms of revenue that nonprofit organiza-tions might use. For this purpose, it is useful to differen-tiate two major forms of revenue: (i) operating revenueand (ii) investment capital. Operating revenue is basicallythe income that organizations need to finance their annu-al operations—e.g., their space charges, utilities, wages,supplies, and other items expected to be consumed andused in a given year. Investment capital, by contrast, is therevenue they need to finance items intended to last morethan a year.

A joint project of the Center for Civil Society Studies at the Johns Hopkins Institute for Policy Studies in cooperation with theAlliance for Children and Families, the Alliance for Nonprofit Management, the American Association of Homes and Servicesfor the Aging, the American Association of Museums, the National Congress for Community Economic Development, theNational Council of Nonprofit Associations, and Theatre Communications Group

COMMUNIQUÉ NO. 5

Investment Capital: The New Challenge for American NonprofitsLester M. Salamon with the assistance of Stephanie L. GellerJohns Hopkins University

1Copyright © 2006, Lester M. Salamon

Investment capital is the revenue needed to financeitems intended to last more than a year.

Investment capital itself is a varied phenomenon,however. At its core, it consists of the capital needed topurchase tangible assets such as land, buildings, physicalfacilities, and equipment with a useful life of a year ormore. We can think of these as hard investment capitalneeds. But investment capital is increasingly for otherpurposes as well—to allow organizations to develop theirbasic programs and strategies, and to improve the skillsand capabilities of their staff. We can refer to these as softinvestment capital needs. The present report focuses onboth of these broad types of investment capital.

Hard investment capital is the revenue used tofinance buildings, equipment, and other tangible

property expected to last more than a year.

Soft investment capital is the revenue used to devel-op new programs, prepare strategic plans, and

improve staff capabilities.

Caveats

While every attempt has been made to provide a fair andunbiased picture of recent nonprofit experience in gener-ating investment capital, certain key features of the datareported here should be borne in mind in interpreting theresults.

First, the data focus on only a portion of the entireuniverse of nonprofit organizations. In particular, weexamine nonprofit experience in only the five fields ofnonprofit activity indicated above. While we chose thesefields because they provide a broad overview of nonprof-it activity spanning core human service, communitydevelopment, and cultural areas, we make no claim thatthe findings will apply equally to all fields of nonprofitendeavor.

Second, within these fields, the core of our sampleconsists of organizations affiliated with national interme-diary organizations.4 We chose this sampling framebecause of the known shortcomings of the other available

sampling frames in this field (chiefly the IRS ExemptOrganization Master File and the lists of organizations fil-ing the required annual Form 990 with the InternalRevenue Service)5 and because of our desire to secure ahigher return rate than has generally been possible in thenonprofit field, which we hoped would be achieved byenlisting the aid of the key intermediary organizations inencouraging responses. What is more, an important objec-tive of our project is to identify promising innovationsbeing pursued by nonprofit organizations, and we expect-ed that organizations affiliated with national intermediaryorganizations might be more likely to exhibit such innova-tive responses. If anything, therefore, the results reportedhere may understate the degree of difficulty that nonprof-it organizations in these fields may be experiencing ingenerating investment capital.

Third, to provide some way to check on any possibledistortion that this sampling strategy may have intro-duced, we supplemented our sample of affiliated organiza-tions with a random sample of unaffiliated organizationsin the same basic fields selected from IRS listings of agen-cies or more complete listings provided by the intermedi-ary organizations where they were available.6 Althoughthe affiliated organizations comprise the majority of oursample and therefore dominate the overall responses, wereport on the unaffiliated random sample separatelythroughout this discussion to identify any differences thatexist between the two groups.

Finally, as with any survey of busy nonprofit man-agers, we had to make difficult choices about the level ofdetail to pursue. While we would have liked to examineparticular cases of capital generation in detail, we decidedto restrict ourselves in this initial inquiry to a broaderoverview of experience with different funding sources anddifferent types of capital investments in order to provide amore general introduction to the topic. We see this, there-fore, as an exploratory inquiry but by no means the lastword on the subject.

Despite these limitations, we believe the resultsreported here shed important new light on an overlookedrange of nonprofit experience that is crucial for the non-profit sector’s future development. For further detail onthe sampling approach used here, see www.jhu.edu/listen-ingpost/news

Nonprofit Investment Capital NeedsHistorically, nonprofit organizations have been thought ofas labor-intensive, instead of capital-intensive, institu-tions. This is so because many of them are engaged in ser-vice activities, which tend to depend on personal contact.

Increasingly, however, technology is penetrating ser-vice fields as well. What is more, demographic changes

The Johns Hopkins Nonprofit Listening Post Project, Communiqué #5

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and shifts in government policy have been increasing thedemand for many of the services that nonprofit organiza-tions have traditionally provided,7 creating sometimesrapid expansions in the need for equipment and facilitiesto meet the demand and hence in the need for capital tofinance it. This is what happened, for example, whenMedicare made home health care eligible for reimburse-ment in the early 1980s. From the evidence at hand, for-profit firms were better able to generate the capital need-ed to respond to this surge, with the result that an industrypioneered by the nonprofit sector became, almostovernight, one dominated by for-profit providers.

To what extent is this phenomenon of growing capitalneeds evident more broadly in the nonprofit field? Toanswer this question, we asked our Listening Post organi-zations whether they had needed funds for any of a seriesof both hard and soft capital investment purposes over theprevious three years.

Extensive Capital Needs

The responses, recorded in Figure 1, indicate that non-profit capital needs are quite extensive. In particular, vir-tually all (98 percent) of the respondents reported someneed for investment capital over the previous three years,and the rate was as high among the unaffiliated sample asit was among the affiliated sample (see Figure 1). In fact,over half of the surveyed groups noted that they neededcapital for at least five separate purposes during this period.

Variations among Types of Purposes

Investment capital was more commonly needed for somepurposes than for others. In particular:

l Reflecting the enormous telecommunications revolu-tion of the past decade, technology—includingtelecommunications, computers, and software—easi-ly led the list of investment capital needs reported byour responding organizations. As shown in Figure 1,just over 90 percent of all surveyed organizationsreported a need for investment capital for this pur-pose.

l Interestingly, “program development,” a “soft” formof investment capital, edged out purchase or renova-tion of buildings or land as the second most commonneed for investment capital among sampled organiza-tions. This suggests the considerable effort nonprofitorganizations are attempting to make to upgrade theirprogram offerings in response to new demands andnew opportunities.

l Also interesting was the fact that the two other “soft”forms of investment capital needs also ranked rela-tively high. Thus, two-thirds of the organizationsidentified a need for capital to develop staff, and overhalf identified a need for capital to undertake strategicplanning.

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Figure 1Nonprofit Need for Investment Capital,

Past Three Years

44%

44%

50%

58%

79%

85%

59%

98%

53%

67%

77%

80%

91%

51%

98%

52%

0% 25% 50% 75% 100%

Vehicles orother equipment

Strategic planning

Staff development

Acquisition/renovationof buildings or land

Program development

Technology

Five or morepurposes

Any purpose

Percent of organizations

All Organizations

Unaffiliated Organizations

n=291SOURCE: Johns Hopkins Nonprofit Listening Post Project, Nonprofit Investment Capital Sounding, 2006


Affiliated vs. Unaffiliated Organizations

Although the unaffiliated organizations were as likely asthe affiliated organizations to identify a need for invest-ment capital, the composition of this need varied some-what between the two groups. In particular:

l For both groups, technology and program develop-ment ranked first among the capital needs identified,with close to 80 percent or more of the organizationsindicating a need for capital for these purposes.

l Far fewer of the unaffiliated organizations identified aneed for capital to purchase or renovate land or abuilding, however. This very likely reflects the factthat they are smaller organizations with fewer optionsto acquire buildings or land.

l The unaffiliated organizations were also less likely toreport a need for capital for staff development. Thismay reflect the substantial presence of theaters amongthe unaffiliated group, and theaters generally reportless extensive capital needs for staff development.Also at work, however, is very likely the greater ten-dency of affiliated organizations to engage in capaci-ty building efforts such as staff development.

Variations by Size and Field of Activity

Although the overall picture of capital needs outlinedabove held fairly consistently across program fields,moreover, some revealing differences were also evident.In particular, as shown in Appendix Table 2:

l Except for one notable exception, technology headedthe list of capital needs for nonprofits in all fields andof all sizes. Even among the small and medium-sizedorganizations, 84 percent reported a need for capitalto finance new technology, and among museums andtheaters it reached 95 percent of the responding orga-nizations.

l The one notable exception was community and eco-nomic development organizations, which identifiedsoft capital in the form of staff training as the mostcommon capital need. Nearly 90 percent of the com-munity and economic development organizationscited a need for capital for this purpose, more than the84 percent that identified technology as a capital need.Community and economic development organizationswere also more likely than other types of organiza-

tions to identify other soft capital needs such as strate-gic planning. Among other types of organizations, theproportion of organizations citing a need for capitalfor staff training ranged from 56 percent for theatersto 74 percent for children and family services organi-zations.

l The elderly housing and services and the children andfamily services organizations tended to identify aneed for hard investment capital more frequently thanother types of groups. Thus, 84 percent of the elderlyhousing and services organizations and 87 percent ofthe children and family services organizations report-ed a need for capital for buildings or land—signifi-cantly higher than for other types of organizations.Elderly housing and services groups were also muchmore likely than other organizations to identify a needfor capital for vehicles/equipment (75 percent vs. 52percent for all organizations).

l Substantial majorities of organizations in all fieldsidentified program development as a capital need.This was particularly marked among museums, 89percent of which reported a need for capital for pro-gram development. This likely reflects the continuingdemand for designing special programs to attractmuseum patrons. But close to 80 percent of organiza-tions in other fields also identified program develop-ment as a capital need. This underscores again theentrepreneurial spirit within the nonprofit sector andthe significant re-engineering of programs in responseto new demands and new competition that nonprofitsare attempting to undertake.

l Interestingly, nonprofit elderly housing and servicesgroups reported needing funds for a larger number ofpurposes than others, with close to half of these orga-nizations (42 percent) needing capital for at least 6separate purposes. By contrast, just a quarter of allrespondents indicated needing capital for at least 6different purposes.

How Much Success?Needing capital is not, of course, the same as receiving it.How successful, then, were the nonprofits we surveyed insecuring the capital that they needed?

Overall Limited Success

The answer revealed by our Sounding is: “not very.”Indeed, as shown in Figure 2, for the easiest category of

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capital needs that responding organizations identified—vehicles and equipment—no more than 42 percent of theorganizations reported success in raising the capital theyneeded. To be sure, another 29 percent reported “partialsuccess,” but it is not possible to determine how partialthis was. Interestingly, the unaffiliated organizations actu-ally reported somewhat higher success than the affiliatedones raising capital for this purpose (48 percent vs. 41 per-cent).

Success Varies by Type of Capital Need

The level of success that responding organizationsachieved in generating needed capital varied substantiallyby the purpose for which capital was needed. In no case,however, did more than half of the organizations reportsuccess in raising the capital they needed. What is more,the success did not correspond very closely with the pat-tern of need. To the contrary, the two top ranked needs—technology and program development—ranked third andlast in terms of success. Thus, while 91 percent of organi-zations indicated a need for capital to acquire new tech-nology, only 37 percent reported success in raising suchcapital. Similarly, while 80 percent indicated a need forcapital for “program development,” only 25 percent wereable to report success in raising the capital they needed forthis purpose.

Generally speaking, success levels were significantlyhigher for the hard capital needs than the “soft” capitalneeds related to strategic planning, staff development, andprogram development. This suggests the important chal-lenge that nonprofit organizations face in trying to inno-vate and respond to new opportunities and threats.

Affiliated vs. Random Sample

No consistent pattern was found in the relative success ofaffiliated and unaffiliated organizations in generating thecapital they needed. Thus, as already noted, the unaffili-ated organizations reported greater success in generatingcapital for vehicles and equipment but less success in gen-erating capital for strategic planning and staff develop-ment. With regard to technology and program develop-ment, both affiliated and unaffiliated organizations report-ed virtually identical, relatively bleak, records of success.

Variations by Field

Some significant variations were apparent in the successrates that organizations in different fields achieved in rais-ing capital. In particular, as Appendix Table 3 shows inmore detail:

l Elderly housing and services organizations espe-cially successful. Elderly housing and services orga-nizations were significantly more successful thanorganizations in all other fields in generating theinvestment capital they needed, and this was true forall capital needs. Thus:

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Figure 2Nonprofit Capital Needs vs. Success Securing Capital,by Purpose, Total Sample

42%

31%

26%

39%

25%

37%

52%

53%

67%

77%

80%

91%

0% 20% 40% 60% 80% 100%

Vehicles/equipment

Strategic planning

Staff development


Program development

Technology


Organizations Needing CapitalOrganizations Securing Needed Capital

Organizations Securing Needed Capital: n=286Organizations Needing Capital: n=291

SOURCE: Johns Hopkins Nonprofit Listening Post Project, Nonprofit Investment Capital Sounding, 2006

– 63 percent of these organizations reported suc-cess in generating capital for property acquisitionor renovation vs. 39 percent of all organizations.

– Similarly, 60 percent of the elderly housing andservices organizations reported success in gener-ating capital needed for vehicles and equipmentvs. 42 percent of all organizations.

– Even among the “soft” capital needs, the elderlyhousing and services organizations achievedhigher success rates.

One reason for this more successful record may bethat elderly housing and services organizations aremore likely than the others covered here to own hardassets that can serve as collateral for capital financing.In addition, nursing homes often have access to bondfinancing that is unavailable to other types of non-profit organizations.

l Children and family services organizations espe-cially unsuccessful. In contrast to the elderly hous-ing and services organizations, the children and fami-ly services organizations were especially unsuccessfulin filling their investment capital needs. Thus:

– Only 38 percent of these organizations reportedsuccess in filling even their vehicle and equip-ment investment needs, and only 30 percent theirbuildings or land investment needs.

– When it came to the “soft” capital needs—strate-gic planning, program development, and stafftraining—these organizations reported evenlower levels of success.

l Community development and culture organiza-tions register mixed success records. The othertypes of organizations we examined fell in betweenthese two service-oriented groups of organizationswith respect to their success in generating capital,with theaters and museums somewhat closer to thechildren and family services organizations and com-munity development organizations somewhat closerto the elderly housing and services organizations. Thefact that the community development organizationsalso control important physical structures may play arole in this.

Variations by Size of Organization

Some important variations were also apparent in the lev-els of success that organizations of different sizesachieved in raising needed capital, though the results herewere far from consistent. Thus, as shown in AppendixTable 3:

l Large organizations were more successful than smalland medium-sized organizations in generating capitalfor property acquisition and for program develop-ment.

l However, small and medium-sized organizationswere more successful in raising capital for equipmentpurchase and technology.

l Elsewhere, both groups of organizations were rela-tively equally unsuccessful.

Explaining Limited Nonprofit Success inGenerating Investment Capital

How can we explain this relatively limited success of non-profit organizations in generating investment capital?

Widespread Obstacles to Investment Capital Access

Based on the results of our Sounding, nonprofit organiza-tions report widespread obstacles to accessing investmentcapital, and these obstacles do not seem to vary much bythe purpose for which capital is sought. In particular, asnoted in Figure 3:

l An overwhelming majority (70 percent) of respond-ing organizations consider limited access to invest-ment capital to be a “significant barrier” to organiza-tions like theirs.

l Only two out of five of these organizations feel thatnonprofits are on a level playing field with for-profitswith regard to access to investment capital.

l Similarly, only two out of five organizations feel thattheir type of organization is on a level playing fieldwith other types of nonprofits in seeking investmentcapital.

l Concerns about lack of equal access to capital by non-profits are shared fairly evenly by affiliated and unaf-filiated organizations, though the unaffiliated ones


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feel more disadvantaged in relation to other nonprof-its.

l Reflecting these general opinions, substantial majori-ties of responding organizations report substantial orextreme difficulty in raising needed capital.

l Somewhat surprisingly, a larger proportion of organi-zations report extensive difficulty in raising capitalfor buildings and property (66 percent) than for thesoft capital needs such as program development andstrategic planning, though the differences are notoverwhelming.

l Interestingly, fewer unaffiliated than affiliated organi-zations reported extensive difficulties in raisinginvestment capital for most investment capital pur-poses.

l As shown in Appendix Table 4, these findings applyfairly consistently among the different types of orga-nizations, except that elderly housing and servicesorganizations are consistently less likely to reportsubstantial difficulties, and museums are less likely toreport difficulty in raising capital for program devel-opment.

Access to Investment Capital by Source

To understand the basis for these judgments, we askedresponding organizations to rate the difficulty they per-ceived in securing investment capital from a number oflikely capital sources. Significantly, substantial numbersof respondents reported a complete lack of knowledgeabout many of the most significant sources of investmentcapital, such as pension funds and insurance companies.When combined with the proportions reporting a fairdegree or extreme difficulty in generating investment cap-ital from these sources, the result is a fairly narrow win-dow of capital sources perceived to be open to nonprofitorganizations. More specifically:

l Overwhelming proportions (94-99 percent) ofresponding organizations reported either completelack of knowledge or a fair or extreme degree of dif-ficulty securing investment capital from pensionfunds and insurance companies. This is highly sig-nificant in view of the fact that these are probably thelargest pools of investment capital in the Americaneconomy.

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Figure 3Perceived Nonprofit Difficulty in Generating Investment Capital,

Overall and by Purpose

40%

44%

44%

46%

48%

71%

25%

39%

67%

52%

56%

53%

57%

61%

66%

40%

38%

70%

0% 20% 40% 60% 80%

Strategic planning

Program development

Vehicles/equipment

Staff development

Technology


Nonprofits in my field can access investment

capital as easily asnonprofits in other fields

Nonprofits can accessinvestment capital aseasily as for-profits

Limited accessto investment capital isa significant barrier to

organizations like mine


All OrganizationsUnaffiliated Organizations

Percent of organizations reporting it is fairly or extremely difficult to raise capital for (n=291):

Percent of organizations agreeing (n=291):

SOURCE: Johns Hopkins Nonprofit Listening Post Project,Nonprofit Investment Capital Sounding, 2006

l Large proportions of respondents (87-91 percent)reported a similar lack of knowledge or considerabledifficulty accessing investment capital from creditunions and venture philanthropists.

l Government and commercial banks were betterknown by responding organizations but were per-ceived as fairly or extremely difficult sources toaccess for investment capital by well over half of allrespondents.

l Not until we get to foundations and individualdonors does the proportion of responding organiza-tions reporting lack of knowledge or fair or extremedifficulty in accessing capital drop below half.

Types of Capital Needs Funded by Familiar Sources

With most of the largest capital sources essentially “out ofbounds” for most nonprofits either because of lack ofknowledge or experience suggesting inaccessibility, itbecomes important to understand what needs the better-known sources are most willing to finance.

Table 1 reports the results of this analysis, showing theproportions of nonprofits that rate these four sources as “fair-ly or extremely difficult” to access for various types of invest-ment capital needs. As this table makes clear:

l Foundations and individual donors are the mostaccessible sources of investment capital for respond-ing nonprofit organizations. However, neither is


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Figure 4Difficulty of Accessing Investment

Capital, by Source

46%

55%

55%

55%

58%

53%

36%

41%

53%

39%

36%

32%

5%

9%

4%

3%

58%

35%

52%

52%

54%

58%

42%

33%

44%

65%

33%

35%

10%

13%

6%

4%

0% 20% 40% 60% 80% 100%

Individual donors

Foundations

Commercial banks

Government

Venture philanthropists

Credit Unions/S&Ls

Insurance companies

Pension funds


Fairly or Extremely Difficult

Don’t Know

Fairly or Extremely Difficult

Don’t Know

Govt. Commercial Banks

Foundations Individual Donors

Any purpose 58% 53% 41% 36%

Buildings/ land 63% 49% 49% 44%

Technology 66% 57% 50% 52%

Staffdevelopment

60% 59% 50% 58%

Program development

55% 56% 34% 40%

Strategicplanning

59% 55% 41% 54%

% of Organizations Reporting “Fairly or Extremely Difficult” to Raise Capital from:

Table 1: Degree of Difficulty Generating Investment Capital from “Familiar Sources,” by Type of Capital Need

Type of Investment Capital Need

n=291SOURCE: Johns Hopkins Nonprofit Listening Post Project,Nonprofit Investment Capital Sounding, 2006

99%

100%

94%

91%

91%

96%

87%

87%

63%

64%

62%

71%

45%

48%

39%

37%

n=291SOURCE: Johns Hopkins Nonprofit Listening Post Project,Nonprofit Investment Capital Sounding, 2006

All Organizations

Unaffiliated Organizations


available to fund the full range of investment capitalneeds. Foundations tend to support program develop-ment and strategic planning, but to be less accessiblefor facilities, technology, and even staff development.This is consistent with widespread critiques that faultfoundations for supporting new program initiativesbut not being available to support core organizationaloperations. Individual donors follow a similar pattern,though they appear more accessible for propertyinvestments and less so for strategic planning.

l Government, by contrast, while supporting the oper-ating revenue of nonprofit organizations, is generallynot perceived as an accessible source of investmentcapital. The one area where government is perceivedas being moderately accessible for investment purpos-es is new program development, but 55 percent ofrespondents considered government to be fairly orextremely difficult to access even for this purpose.

l Commercial banks are similarly constrained in theirinvestment capital focus. Majorities of respondingorganizations found this source to be fairly orextremely difficult to access for anything but tradi-tional property acquisition or renovation purposes,where a tangible asset is available to secure a loan.

Variations by Type and Size of Organization

This general pattern of perceptions of the difficulty ofraising investment capital from different sources does notvary much by type or size of organization. At the sametime, however, a few notable variations are apparent. Inparticular, as reflected in Appendix Table 5:

l Community and economic development organizationsreport considerably less difficulty accessing invest-ment capital from government than do the other typesof organizations, and considerably more difficultyaccessing capital from individual donors.

l Elderly housing and services organizations report lessdifficulty in accessing capital from commercial banksand slightly more difficulty in accessing it from indi-vidual donors. The former may be because these orga-nizations have tangible assets that can secure bankloans, but the latter is more difficult to comprehendsince individual donors tend to be advanced in ageand therefore potentially more inclined to supportelderly housing and services. Evidently, individualdonors are more inclined to support children and fam-ilies and the arts.

Implications and Conclusions

Summary

The data reported here thus suggest a rather challengingpicture of access to investment capital for nonprofit orga-nizations. From the evidence presented here, it appearsthat:

1. Nonprofits have significant investment capital needs.

2. These needs extend well beyond the traditional areasof hard capital to embrace program development, staffupgrading, and strategic planning. This reflects thesubstantial infusion of entrepreneurial spirit into thenonprofit sector in recent years.

3. Despite these needs, nonprofits have encountered sig-nificant difficulty accessing the major pools of invest-ment capital in our country. Many nonprofits havelimited knowledge of these capital resources, andthose that do have knowledge report substantial diffi-culty in accessing them.

4. Although other sources, such as commercial banks,government, foundations, and individual donors, aremore familiar to nonprofits, some (e.g., government)are quite difficult to access for investment capital pur-poses and others (e.g., commercial banks, founda-tions, and individual donors) are limited in their areasof interest.

5. Although some variations exist in the applicability ofthese findings among types of nonprofit organizationsand between affiliated and unaffiliated organizations,what is most striking is how uniform they seem to be,at least among the types of organizations examinedhere.

Implications

Given the growing importance of investment capital forthe nonprofit sector, these findings have significant impli-cations for the ability of nonprofit America to fend offgrowing for-profit competition and to respond to changingsocietal needs and opportunities.

What, then, can be done about this?Clearly, a full answer to this question would take us well

beyond the parameters of this report and of this project.Nevertheless, some possible follow-up steps might usefullybe identified. Four of these in particular seem especiallyworth consideration:

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1. Assemble additional information. In the first place,basic information about the investment capital experi-ence of nonprofit organizations remains sparse to saythe least. Little is known concretely about the actualsuccess rates of nonprofit organizations in generatinginvestment capital or about their experiences with dif-ferent capital sources. Most of the research attentionhas focused so far on the operating revenues of non-profit organizations, leaving a giant gap in our knowl-edge about how nonprofits cope with the increasinglyimportant investment capital challenges they face.

The data reported here provide a start towardclosing this gap, but they could be usefully supple-mented with additional information. According to therespondents to our Listening Post Sounding, mostcritically needed is information on:

– Nonprofit experience with various fundingsources (banks, insurance companies, pensionfunds)—identified as needed by 87 percent of therespondents;

– Experiences with different types of capital—identified as needed by 77 percent of respon-dents; and

– The costs of accessing capital from varioussources—identified as needed by 61 percent ofthe organizations.

2. Launch educational efforts aimed at nonprofitsand investors. Generating additional information isnot sufficient, however. Considerable effort alsoseems needed to get information on the capital needsand access to capital sources of nonprofits out morebroadly. What is more, such dissemination workneeds to focus on two different groups: first, the non-profit executives who need the investment capital;and second, the providers of investment capital. Bothgroups, it seems, are insufficiently informed.

Nonprofit practitioners seem largely unaware ofthe major pools of investment capital in the Americaneconomy, or at least of the ways to access this capitalfor their endeavors. As a consequence, they remaintied to a very limited, and limiting, range of capitalresources, constraining their efforts to implement theentrepreneurial impulses increasingly animating theirwork.

Aside from commercial banks, the providers ofinvestment capital, for their part, seem equally out oftouch with the investment capital needs of the coun-try’s vast nonprofit sector, or at least that portion of it

composed of the core human service, communitydevelopment, and cultural institutions that we haveexamined here. At a minimum, the investment com-munity does not seem to have managed to convey tononprofit executives an openness to their needs and awillingness to respond.

To close this information gap, better communica-tion between providers and nonprofit users of invest-ment capital seems in order. This could be achievedthrough special roundtable sessions, through invita-tions to capital providers to participate in the meetingsof nonprofit intermediary organizations, and throughspecial educational programs aimed at both groups.

3. Foster financial intermediaries for the nonprofitsector. In addition to improved information and moreactive information dissemination, solving the invest-ment capital gap facing nonprofit organizations mayalso require a broader set of financial intermediariesthat can link the larger pools of investment capitalwith the nonprofit organizations that need it.

This financial intermediation role has provedenormously important in the low-income housingfield, where it has helped channel hundreds of mil-lions of dollars of private capital from insurance com-panies and pension funds to small nonprofit housingagencies that formerly had no access to it.8 TheEnterprise Foundation and the Local InitiativesSupport Corporation (LISC), the two major organiza-tions performing this intermediation role in the low-income housing field, assemble the relatively smallinvestment packages of individual low-income hous-ing producers into sizable blocks that can then bemore easily marketed to large-scale investment houses.

What the data reported here strongly suggest isthat similar institutions are needed in other segmentsof the nonprofit sector as well, such as children andfamily services. This suggests a useful role for foun-dations to foster in the core human service compo-nents of the nonprofit sector the same kind of interme-diary organizations they usefully fostered in the low-income housing field.

4. Create a nonprofit investment tax credit. Finally,the low-income housing experience also suggests thepossible need for a significant policy innovation tohelp overcome the structural disadvantages nonprofitorganizations confront in generating investment capi-tal: the creation of a tax credit for investments in non-profit capital.

In the housing field, this function is performed bythe Low Income Housing Tax Credit (LIHTC), which


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provides incentives for investments in low-incomehousing and thereby offsets the risks that such invest-ments carry with them. The LIHTC has been an enor-mously effective vehicle for sustaining the role ofnonprofit providers in the housing field and ensuringa flow of substantial amounts of private capital intolow-income housing at a time when government fund-ing was being cut. The credits are allocated amongstates and parceled out to low-income housing groupsthrough an application process. Credits are thenassembled by the financial intermediaries and “sold”to investors.

A similar tax credit made available to helpfinance the capital needs of small and mid-sized non-profit organizations (e.g., organizations with annualbudgets of $5 million or less) could open importantnew sources of investment capital for the nation’snonprofit human service and cultural institutions andthereby help put these organizations on a more levelplaying field for coping with the challenges, and seiz-ing the opportunities, they face.

Conclusion

Nonprofit organizations are no longer only labor-intensiveinstitutions. Increasingly, they have come to depend oninvestment capital as well—to finance technology, equipfacilities, and underwrite staff and program development.

Regrettably, however, nonprofits’ need for investmentcapital seems to be far outdistancing their access to it. Atleast for the types of organizations examined here, whichinclude the core of the human service and arts portions ofthe sector, access to investment capital is limited to a fewrather traditional sources, while the largest pools of suchcapital appear to be largely off limits or off the radarscreen. Over time, the resulting mismatch between capitalavailability and capital need can spell serious problems forthe ability of nonprofit organizations to retain theirvibrance and their role in the increasingly competitiveenvironment in which they operate.

To cope with this problem, a variety of steps may beneeded, from the generation of better information to theestablishment of financial incentives for investments innonprofit infrastructure. A first step, however, must be toimprove understanding of the issue. Hopefully this reportwill help achieve this result.

Endnotes

1 Lester M. Salamon, “The Resilient Sector: The State ofNonprofit America,” in Lester M. Salamon, ed., The State ofNonprofit America, (Washington, D.C.: Brookings InstitutionPress, 2003), 15.

2 See, for example, Kirsten Gronbjerg, Understanding NonprofitFunding: Managing Revenues in Social Services andCommunity Development Organizations (San Francisco: Jossey-Bass Publishers, Inc. 1993).

3 A notable exception is Howard P. Tuckman, “How and WhyNonprofit Organizations Obtain Capital,” in David C. Hammackand Dennis Young, editors, Nonprofit Organizations in a MarketEconomy: Understanding New Roles, Issues, and Trends. SanFrancisco: Jossey-Bass Publishers, 1993): 203-32.

4 For this Sounding, this affiliated sample consisted of 436 orga-nizations self-selected from the membership of five nonprofitnational intermediary organizations that are part of the Project’sSteering Committee (the Alliance for Children and Families,American Association of Homes and Services for the Aging,American Association of Museums, National Congress forCommunity Economic Development, and TheatreCommunications Group). A total of 243, or 56 percent of theseaffiliated organizations, responded, quite high for surveys of thissort.

5 Kirsten A. Grønbjerg and Richard M. Clerkin, “Examining theLandscape of Indiana’s Nonprofit Sector: Does What You SeeDepend on Where You Look?” Nonprofit and Voluntary SectorQuarterly 34 (No. 2, June): 232-59.

6 A total of 163 unaffiliated organizations were identified in thisway, of which 48, or 29 percent, responded. Generally speaking,the unaffiliated organizations are smaller than the affiliated ones(56 percent have revenues of under $3 million vs. 14 percent ofthe affiliated organizations). In addition, the unaffiliated respon-dents were skewed more heavily toward theaters. Altogether,therefore, we achieved a response rate of 49 percent from thetwo panels of organizations.

7 Lester M. Salamon, “The Changing Context of AmericanNonprofit Management,” in Robert D. Herman and Associates,The Jossey-Bass Handbook of Nonprofit Leadership andManagement, Second Edition (San Francisco: John Wiley andSons, Inc. 2005), 81-101.

8 See, for example, Avis Vidal, “Housing and CommunityDevelopment,” in Lester M. Salamon, ed., The State ofNonprofit America (Washington, D.C.: The BrookingsInstitution Press, 2003), 228-9.


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Appendix Table 1Respondents by Field and Size of Organization

Field n % n % n %Children and Fam ily Services 54 22.2% - - 54 18.6%Elderly Housing and Services 45 18.5% 12 25.0% 57 19.6%Community and Econom ic Development 29 11.9% 3 6.3% 32 11.0%Museums 46 18.9% 9 18.8% 55 18.9%Theaters 69 28.4% 24 50.0% 93 32.0%TOTAL 243 100.0% 48 100.0% 291 100.0%

SizeSmall/Medium (<$3,000,000) 35 14.4% 27 56.3% 62 21.3%Large (>$3,000,000) 186 76.5% 3 6.3% 189 64.9%Unavailable 22 9.1% 18 37.5% 40 13.7%TOTAL 243 100.0% 48 100.0% 291 100.0%

Affiliated Orgs. Unaffiliated Orgs.Affiliated &

Unaffiliated Orgs.

Appendix Table 2Percent of Nonprofits Needing Capital Over the Past Three Years, by Purpose, by Type andSize of Organization

All orgs.

PurposesFamily

ServicesElderly

Services CED** Museums TheatersSmall/

Medium Large

n= 291 54 57 32 55 93 62 189 Technology 91.1% 90.7% 86.0% 84.4% 94.5% 94.6% 83.9% 92.6%Program/service development 80.4% 79.6% 80.7% 78.1% 89.1% 76.3% 82.3% 78.8%Purchase or renovation of buildings, land 77.0% 87.0% 84.2% 65.6% 81.8% 67.7% 66.1% 80.4%Staff training 66.7% 74.1% 71.9% 87.5% 60.0% 55.9% 61.3% 68.8%Strategic planning 53.3% 48.1% 50.9% 71.9% 65.5% 44.1% 51.6% 54.5%Vehicles or other equipment 52.2% 53.7% 75.4% 34.4% 32.7% 54.8% 33.9% 56.6%

Affiliated & Unaffiliated OrganizationsField Size*


* Small/Medium= organizations with annual expenditures of <$3,000,000Large= organizations with annual expenditures of > $3,000,000

** Community and Economic DevelopmentSOURCE: Johns Hopkins Nonprofit Listening Post Project, Nonprofit Investment Capital Sounding, 2006


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Appendix Table 3Percent of Nonprofits Securing Needed Capital Over the Past Three Years, by Purpose, byType and Size of Organization

All orgs.

PurposesFamily

ServicesElderly

Services CED Museums TheatersSmall/

Medium Largen= 286 53 55 31 55 92 61 185

Vehicles or other equipment 42.2% 37.9% 59.5% 21.4% 38.9% 37.9% 54.5% 40.7%Purchase or renovation of buildings , land 39.3% 29.2% 62.5% 54.2% 38.6% 24.6% 35.0% 44.2%Technology 36.8% 30.6% 49.0% 38.5% 35.3% 33.7% 43.1% 37.0%Strategic planning 31.3% 20.7% 45.2% 29.6% 34.3% 27.3% 33.3% 32.7%Staff training 26.0% 12.2% 46.3% 25.0% 17.6% 26.8% 30.0% 26.7%Program /service development 25.1% 20.0% 39.5% 14.8% 28.3% 22.1% 19.1% 28.7%

Affiliated & Unaffiliated OrganizationsField Size

Appendix Table 4Difficulty of Raising Capital, by Purpose, by Type and Size of Organization

All orgs.

PurposesFamily

ServicesElderly


Medium Large

n= 291 54 57 32 55 93 62 189Purchase or renovation of buildings, land 66.3% 66.7% 52.6% 65.6% 69.1% 73.1% 64.5% 65.0%

Technology 61.2% 63.0% 64.9% 62.5% 63.6% 55.9% 50.0% 62.9%Staff training 57.4% 68.5% 47.4% 46.9% 61.8% 58.1% 58.0% 55.0%Vehicles or other equipment 55.7% 53.7% 42.1% 53.1% 63.6% 61.3% 51.0% 59.2%Program/service development 52.6% 63.0% 52.6% 71.9% 41.8% 46.2% 43.5% 54.5%Strategic planning 51.5% 63.0% 42.1% 53.1% 54.5% 48.4% 48.4% 55.5%


(% of organizations reporting it is fairly or extremely difficult to raise capital)





Appendix Table 6Information Needed on Investment Capital, by Type and Size of Organization(% of organizations reporting it would be "most useful" to gain information)

All orgs.

InformationFamily

ServicesElderly


Medium Largen= 281 51 54 31 55 90 61 181

Experiences accessing capital from various sources

86.5% 86.3% 85.2% 80.6% 90.9% 86.7% 83.6% 86.2%

Experiences accessing different types of capital

76.9% 82.4% 83.3% 87.1% 58.2% 77.8% 73.8% 79.0%

Consequences of limited access to capital for the ability of nonprofits to remain competitive/fulfill missions

63.0% 74.5% 46.3% 80.6% 65.5% 58.9% 70.5% 60.8%

Costs of accessing capital 61.2% 72.5% 59.3% 64.5% 50.9% 61.1% 55.7% 63.5%

Types of collateral needed to raise capital

53.4% 58.8% 61.1% 64.5% 34.5% 53.3% 49.2% 56.4%

Types of capital needs 47.7% 52.9% 44.4% 51.6% 49.1% 44.4% 44.3% 46.4%

Affiliated & Unaffiliated Organizations

Field Size



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Appendix Table 5Difficulty of Raising Capital, by Source, by Type and Size of Organization

All orgs.

SourcesFamily

ServicesElderly


Medium Largen= 291 54 57 32 55 93 62 189

Pension funds 99.0% 100.0% 98.2% 100.0% 100.0% 97.8% 100.0% 98.4%Insurance companies 93.1% 98.1% 94.7% 90.6% 89.1% 92.5% 93.5% 92.6%

Credit unions or Savings and Loans 90.7% 90.7% 87.7% 90.6% 89.1% 93.5% 95.2% 88.9%Venture philanthropists 86.9% 88.9% 87.7% 96.9% 87.3% 81.7% 88.7% 86.2%Government 62.9% 61.1% 75.4% 34.4% 69.1% 62.4% 58.1% 64.0%Commerical banks 61.9% 63.0% 42.1% 53.1% 76.4% 67.7% 71.0% 58.2%Foundations 45.0% 40.7% 68.4% 50.0% 41.8% 33.3% 40.3% 45.0%Individual donors 38.8% 38.9% 47.4% 71.9% 34.5% 24.7% 41.9% 36.0%


(% of organizations reporting it is fairly or extremely difficult to raise capital or they have no knowledge of the source)



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