Building is not Buying*
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Nonprofit Finance Fund’s work in philanthropic equity is based on the idea that there are two main kinds of funder roles in the social sectors: Buyer and Builder. Individual funders can play both roles (most Builders are also Buyers).
Buyers Provide Regular Revenue
Nonprofits are in the business of turning money into effective program execution. Buyers purchase program execution, often on behalf of others. Buyers buy tickets for museum admission, provide scholarship grants that pay for individual tutoring sessions, give annual grants to help pay the cost of mounting human rights campaigns or pay for foster care services on behalf of government, to name four straightforward examples.
Without buyers, programs don’t happen: even an all-volunteer program requires that people give their time, “buying” the program operations by, in essence, paying for labor. Buying doesn’t pay for growth, trial and error, shifts in strategy, or changing what an organization is capable of doing. It’s about asking the organization to continue to do what it already does, year in and year out.
Buyers choose to buy for many reasons: performance vs. the competition, personal experience (or self-interest), price, convenience, loyalty, sentimentality—all familiar to buyers in any sector. Satisfied buyers continue to purchase products and services they like.
All the flavors of “buy” money—including everything from earned revenue to annual grants to endowment income and more—are what sustains a healthy nonprofit by reliably covering the full cost of operations as long as there is demand for services.
Builders Provide “Change” Capital
What if a nonprofit needs to change what it can offer to the public? What if it needs to modify its operations, or strengthen its reputation, or improve its efficiency? What if it is bursting at the seams and satisfied buyers are urging it to expand? This is where builders come in. They provide philanthropic equity. The equity can be used for any purpose, and a builder pays for deficits incurred ahead of a rebuilt business model. The equity provider’s aim is to build an improved mission factory that is not only better at executing mission-focused programs, but also attracts even more reliable buyers for the foreseeable future.
Building requires time, close stewardship, and a patient process of trial and error. It has a high risk of failure and often requires major shifts in strategic direction and personnel. Importantly, it is an episodic process – once an enterprise is built, the builders can exit. Indeed, it is by dismantling their growth capital “scaffolding” that builders can be sure the growth capital has been successful, and prove they have built an enterprise that can stand on its own.
The Sustainable Enhancement Grant (SEGUE) methodology makes a clear distinction between the Builder and Buyer roles. SEGUE investments are for Builders. The SEGUE methodology enables multiple philanthropic funders to leverage each other by pooling their resources into a single, strategically-aligned investment of growth capital. And it ensures that investors will be provided with a clear and auditable record of the organization's progress towards self-sustaining operations, along with a clear record of how much growth capital is consumed along the way.
*For more information, see George Overholser's seminal piece "Building is not Buying."