Chuck Harris of the Edna McConnell Clark Foundation on Aggegrating Growth Capital for Scale

Chuck Harris is one of the nation’s leading thinkers and doers working to grow the impact of high performing nonprofits. He currently serves as a portfolio manager and as director of capital aggregation for the Edna McConnell Clark Foundation. Prior to thatHarris co-founded SeaChange Capital Partners, a financial intermediary designed to enhance the flow of capital to outstanding nonprofits serving children and youth in low-income communities in the United States. Eric Antebi, Senior Vice President at Fenton Communications, a leading public interest communications firm, spoke with Harris about the practice of aggregating growth capital and the potential it has to propel the nonprofit sector forward.

How did you arrive at the issue of scaling? What told you this was an issue that needed more attention? 

I spent 23 years working in corporate finance at Goldman Sachs, participating in moving billions of dollars in investment capital to what were often fairly mundane businesses, of course motivated by profit opportunities. When I retired from that work and began to focus on my own personal philanthropy, I was struck with how different the flow of capital was from the business to the nonprofit world.

When companies need to raise capital, they don’t fundraise every week or every day. Nonprofits spend a much larger portion of their time trying to raise money for their organizations. I thought that the best nonprofits ought to be able to attract capital in advance — capital that was flexible and available over multiple years so organizations could execute their plans with some financial certainty.

How did you take this theory about growth capital for nonprofits and turn it into practice?

I started by helping design and lead a small capital campaign for College Summit, which works to increase the college enrollment rates of youth from low-income communities. We raised $15 million for the organization. Having the capital to grow fundamentally changed what was possible for that organization. Wendy Kopp had a similar experience when in 2000 she raised $25 million in capital for Teach for America, followed by several successive investment rounds of increasing magnitude.

I came away really encouraged, and co-founded and ran SeaChange Capital Partners for five years. We saw firsthand that folks would make equity-like investments in high performing, well-managed education reform nonprofits focusing on low-income kids. We would put up some of our own money and invite other investors to join us. The nonprofits would raise funds from a group, but they would have aligned performance objectives and a single reporting regimen. Our timing was unfortunate because of the economic downturn, but we were nonetheless able to play a positive, catalytic role in several organizations’ growth and impact.

How would you rate the field of philanthropy on its ability to help bring great ideas to scale?

Philanthropy is voluntary, so what people want out of it is different depending on who the person is. If my philanthropy is an expression of my personal values and creativity, then I am going to do it my way. That mentality drives philanthropists to do things individually rather than collaboratively.

Compare that to what happens on Wall Street. There, firms like Goldman Sachs take the lead, and others regularly participate. But they participate because of the profit opportunity and because they’ve developed very longstanding, trusting business relationships with one another. This self-expressive nature of philanthropy makes it less efficient, and the lead investor/intermediary role is less common and far less codified.

What are you are doing at the Edna McConnell Clark Foundation to address the issue?

In 2007, the Edna McConnell Clark Foundation launched an initiative called the Growth Capital Aggregation Pilot, or GCAP. The Foundation selected three of its highest-performing grantees and made significant commitments to those grantees. It then went out with its grantees to other funders to raise more growth capital.

The Foundation has recently evaluated the pros and cons of that approach. The results were quite positive. These organizations grew robustly through one of the most difficult economic periods, in part because they had money pre-committed.

The experience followed a shift by the Foundation in 2000 to concentrate its grants into fewer, larger, longer-term commitments to organizations serving the country’s most vulnerable youth — a more targeted, to my mind “equity-like” approach.

You talked before about the individual nature of philanthropy and the need for more collaboration. How has your foundation addressed that challenge?

We realized that the roughly $40 million we could give each year wouldn’t make a big enough dent in the social problems we were trying to address. So we started to engage other funders and leverage our own work more substantially and more aggressively. And we’ve been very successful at that. We have 49 co-investors in our various projects. Most of them are other foundations, but many are individuals and family foundations. We are very committed to building that practice.

The latest version is a program that we are doing with the federal government through the Social Innovation Fund. In this case, the SIF has granted us $30 million — specifically, $10 million a year for three years. Our foundation matches that amount. Then we conduct an open competition to select the recipients. The operating nonprofits that are selected have to then match the money they receive, and we help them to actually raise most of their matching dollars. So our original $30 million investment becomes $120 million on the ground.

What needs to happen on the funder side for an efficient growth capital marketplace to develop in the social sector?

If we take a step back and our goal is to solve our big problems, we should have at least part of what we do be more coordinated and ensure that more of our money flows to those organizations that can make the biggest difference. It would be a better world if all funders had good information about high performing nonprofits, and they could gang up and go make a bigger difference. The hard work that folks are doing in terms of due diligence on these organizations should be shared with others.

The S&I 100 is one such effort to shine a spotlight on organizations that have been vetted by a group of professional grantmakers and evaluators. It offers an array of programs at varying levels of organizational development and with differing degrees of third-party evidence of effectiveness. It’s a great place to start for any donor or foundation that wants to make a difference and take advantage of others’ insights. And the Social Impact Exchange makes the underlying performance and evaluation data transparently available so that a funder can make informed choices that suit his or her criteria.

What is the single biggest way to accelerate the development of a growth capital marketplace for the social sector?

Federal, state and local government are far and away the biggest funders of nonprofits. More of that government money should be allocated to evidence-based nonprofits. If we could move the needle on how government funding is allocated, it would make a huge difference.

That is not to say that there isn’t an important role for philanthropy. One of the roles for philanthropy is to demonstrate what you can accomplish by adopting applicable practices from other sectors.

How hopeful are you that things will change for the better?

If you look back over the last 15 years, we have made a lot of progress. When Pew Charitable Trust converted from a private to public foundation, they began to aggregate funding from different sources to go after projects. New Schools Venture Fund, Charter School Growth Fund, Venture Philanthropy Partners and New Profit are all good examples of funders pooling resources to address a problem and maximize impact.

Also, something on the order of $135 million of government funding through the social innovation fund has attracted another $350 million of private money over a three-year period to support high-performing nonprofits. When you consider that we are really starting from scratch, that’s a big deal. It’s quite an accomplishment.

Do you have any parting thoughts?

The reason that I care is that the social problems we are trying to address with our philanthropy are crucial and enormous. They won’t be solved with siloed, inefficient and restrictive funding mechanisms. The role of capital is to enable you to build something. Nonprofit status is a tax designation, but the practice of creating results is no different from the for-profit sector. Capital is still about creating the financial wherewithal to get something done.