Financing Community Assets Roundtable Friday, May 3, 2002

1
Financing Community Assets Roundtable Friday,
May 3, 2002

• Jack Northrup
• New England Market Research, Inc.
• Julia Sass Rubin
• Harvard Business School

2
Mapping the nonprofit capital markets

• Nonprofit Capital A Review of Problems and
  Strategies
• By Bill Ryan
• Fannie Mae and Rockefeller Foundations
• Sources of Funding for Community Wealth
  Enterprises
• By Ed Barker
• Community Wealth Ventures

3
Mapping the nonprofit capital markets

• Going Mainstream NPOs Accessing the Capital
  Markets
• By Gregory M. Stanton, Jed Emerson, and Marcus
  Weiss
• The first condition is that any meaningful
  financial technical assistance between Wall
  Street professionals and NPO senior management
  can exist only if the NPO has bankable,
  financeable assets. These assets must generate
  predictable and measurable cash flows sufficient
  to service some form of debt or meet investors
  expectations.

4
Mapping the nonprofit capital markets

• The Venture Fund Initiative An Assessment of
  Current Opportunities for Social Purpose Business
  Development and Recommendations for Advancing the
  Field
• Initiated by Jed Emerson, Roberts Enterprise
  Foundation, 1998
• In the specific area of nonprofit enterprise,
  many ventures are significantly
  under-capitalized. They are often funded with
  one-time grants, self-financed by the nonprofit
  or supported with high-cost debt. To have even a
  modest hope of success, the nonprofit must be
  able to access additional financial support to
  adequately cover costs related to growing the
  venture and supporting what are often significant
  cash flow requirements.
• While highly fragmented, the nonprofit capital
  market consists of a continuum of capital
  instruments. These instruments include grants,
  recoverable grants (which function as no interest
  loans), program-related investments (below
  market-rate loans), various forms of commercial
  debt (these would include lines of credit and
  fixed-rate loans) and equity equivalents.

5
QUESTIONS DRIVING THE STUDY

• What are the capital needs of social enterprises?
• Do models exist for addressing those needs?
• If not, can such models be borrowed or developed?

6
STUDY METHODOLOGY

• Phase I
• open ended phone interviews with
• social entrepreneurs
• annual budgets of 123 thousand to 7 million
• 25 to 98 self-sustaining
• advisors/funders to the field
• interviews designed to understand
• capital needs of social enterprises
• models that exist (or can be borrowed/ adapted)
  to address those needs

7
What are the capital needs of social enterprises?

• Patient capital to start new ventures and grow
  existing ones
• Access to straight debt less problematic than to
  equity,
• variable access to unsecured debt (revolving
  lines of credit)
• minimal cash flow and ability to repay even
  below-market rate loans
• no collateral available (except mortgages)
• traditional capital sources may have perception
  of soft business approach

8
What are the capital needs of social enterprises?

• Social enterprises reluctant to take on debt for
  growth or new venture development
• 55 currently have non real-estate debt
• primarily revolving lines of credit from banks
  CD sources
• rates of 3 to 1 point over prime
• Several debt funds closed down due to lack of
  demand
• Urban Enterprise Fund, Chicago
• Keystone Ventures, San Francisco
• Existing ventures primarily funded through grants
  
• Need patient capital with very flexible repayment
  requirements
• recoverable grants
• zero interest loans with subsidized repayments

9
Existing sources of patient capital for social
enterprises

• Foundation PRIs and equity equivalents
• low interest debt
• often seen as forgivable by recipients
• Philanthropic and government grants
• increasingly difficult to obtain
• most not willing/able to fund new business
  creation or working capital needs
• Internally generated cash flow
• limited
• leads to very slow growth
• inaccessible for new business creation

10
Roberts Enterprise Fund

• Focus on workforce development/transitioning
  populations
• True venture philanthropy model utilizing
• intensive technical assistance
• recoverable grants
• none repaid to date
• cash guarantees
• low-interest loans
• revolving credit line
• Businesses competitive in marketplace but low
  margins because of need for high-end service
  provision to employees

11
SEEDCOs Nonprofit Venture Network

• Assists nonprofits starting social-purpose
  businesses began 2001
• currently in NY only
• plans to expand to Tampa and Boston
• Three phase program
• Phase I assessment and capacity building
• 3 free workshops business planning, financing,
  risk mitigation
• apply for up to 15K in grants and find a match
• Phase II intensive planning assistance
• work closely with nonprofits on business planning
  over one year period
• Phase III venture portfolio
• provide introduction to different sources of
  capital, including SEEDCO loan fund
• looking at ways to provide more patient capital

12
LISCs Childcare Facilities Initiative

• Work at national and state levels
• develop sources of public and private capital to
  fund childcare facilities
• financing primarily unsecured projects
• Public sector
• utilize targeted state bond issues to subsidize
  loan repayments
• subsidy includes interest plus 80 to 100 of
  loan amount
• demonstration project in Illinois
• programs in Connecticut and Rhode Island
• Utilize recoverable grants from LISC
• recover close to 90
• Raise operating funds and grants from states,
  foundations and CDFI Fund