Paperwork and bureaucracy aren’t just pains in the backside of everyone working at every small business or smaller nonprofit. They’re also barriers to entry — for new people, new ideas and even new sources of capital.
Crowdfunding might help level the playing field, but even that has a new set of challenges and limitations. When it comes to improving our cities, who knows how many opportunities to try out new approaches or scale up existing models are falling through the cracks?
Small foundations aren’t a panacea for all that society faces, but they might be ideally positioned to reduce or eliminate some of those barriers to entry, according to the new guide, “Essentials of Impact Investing: A Guide for Small-Staffed Foundations.” Produced by Arabella Advisors, Mission Investors Exchange and Exponent Philanthropy, it aggregates experiences and highlights the best of the estimated one in 10 small foundations that participate in some form of impact investing.
“The market is really moving [toward impact investing],” says Stephanie Fuerstner Gillis, managing director at Arabella and lead of their philanthropy management team. “The data is showing it moving, you feel the momentum in a way that was mostly talk before. There’s more action now.”
Small foundation staff have a great sense of the type of capital that their partners need and are able to structure that in a responsible way. A blend of grant capital and investment capital structures is often one of the results of the hyper-local connections these small foundations have.Catherine Toner, Arabella Advisors
Impact investing has grown dramatically in both scale and diversity over the past decade. The Rockefeller Foundation typically gets credit for coining the phrase in 2007, but the core concept is much older, from patient capital in the early ’00s, to triple- or double-bottom-line investing in the 1990s, to the work of community development financial institutions going back to the 1960s.
Today, when many people think “investing” and “America’s cities,” social impact bonds and public-private partnerships come to mind. But when it comes to matching small foundations to those working to overcome urban challenges, there’s a certain poetry in the funding. Hyper-local connections typically mean fewer strings attached when it comes to money, whether through grants or impact investments.
“Family philanthropy in particular is really good about giving general operating support,” Fuerstner Gillis says. “It outperforms institutional philanthropy there.”
Typically staffed only by volunteer directors or part-time employees and advisers, small foundations have been understandably slow to pick up on impact investing. Yet those small foundations that have often take on the most creative and riskiest projects of them all.
Take the Triple EEE Foundation, one of the case examples cited in the new guide.
Based in the Chicago area, in the midst of the home mortgage crisis that led to the Great Recession, EEE purchased some of the very same collateralized mortgage obligations (CMOs) that were at the heart of the crisis itself. They managed to identify a few CMOs whose mortgages were in their target markets in Chicago, and purchased them with the expressed intent of helping homeowners renegotiate terms to stay in their homes instead of going into foreclosure, as so many millions of homeowners did during the early days of the recession.
“It’s really fun to see the peer leaders stepping up and sharing their stories, building a community that brings others in,” says Fuerstner Gillis.
Much of small and family foundation work already positions them well to move into impact investing.
“I think impact investing [is] such a great tool for these small-staffed foundations,” Fuerstner Gillis says. “It gives them another way to deepen their relationships with organizations they already support. I think core support restrictions have less presence as a barrier in the family foundation realm.”
In some cases, small foundations are even using those relationships to move grantees into impact investing pools.
“What small foundations are doing particularly well is blending their strategies,” says Fuerstner Gillis.
The Dakota Foundation, another case example from the guide, uses grants to establish working relationships with nonprofits they like, getting to know them and hopefully figuring out a sustainable, mission-compatible business model that creates an opportunity to invest in the nonprofit with a loan or equity.
“Small foundation staff have a great sense of the type of capital that their partners need and are able to structure that in a responsible way,” says Catherine Toner, associate director in Arabella’s impact investing practice. “A blend of grant capital and investment capital structures is often one of the results of the hyper-local connections these small foundations have.”
Small foundations also tend to have smaller boards. It allows them to be more nimble and responsive in decision-making. Who wouldn’t want that in a funder or investor?
“We have a small board,” says Bart Holaday, founder and CEO of the Dakota Foundation. “We have the ability to make an assessment quickly and make a commitment quickly. We don’t have any bureaucratic rigmarole for people to go through.”
The well for impact investing is deeper than you might expect. For the one in 10 small foundations participating in impact investing of any kind, the average portfolio share of impact investments is 40 percent, according to Exponent Philanthropy’s semi-annual survey of its small foundation membership. Extrapolate that across their 2,300 members with a cumulative $87.8 billion in assets, and you get about $35 billion in impact investments.
But that amount has the potential be much higher. The median portfolio share of impact investments is only 13 percent. Essentially, there are a few outlier small foundations with a huge share of their portfolios in impact investing, and a ton of others with their toes barely in the pool.
“Some of the mind-shift is a better understanding of the role an entire foundation’s portfolio can play in producing the social impact the foundation wants to achieve,” Toner says.
Another way that small foundations are playing a role in impact investing is by planting their flags at the margins and attracting others to their cause. The Dakota Foundation was part of a 1999 deal in which the Seattle-based social enterprise Pioneer Human Services created a venture fund to expand the businesses Pioneer owns and uses as job-training facilities for the former inmates, former drug rehab patients and mental health patients with whom they work. The fund ultimately attracted $4.4 million, pulling in a variety of larger players including Wells Fargo and the Rockefeller Foundation.
“In some sense I feel like you can’t lose,” says Holaday. “Worst-case scenario, you just made a grant.”