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Don’t Expect an Equity Investor For Your Non-Profit

 

Angel investors and venture capitalists don’t invest in non-profits. The simple reason is that it’s impossible to make money for investors when the goal of the company is not to make money. Yet I still get this question on a regular basis, so I’ll try to outline the considerations in common-sense terms.

A non-profit organization is generally defined as an organization that does not distribute its surplus funds to owners or shareholders, but instead uses them to help pursue its goals. Examples include charitable organizations, trade unions, and public arts organizations. In the US, a non-profit is technically any company who qualifies as tax exempt through IRS Section 501(c).

Obviously, these companies still need money to get started or finance growth, just like a for-profit company. What options do they have available to them, since they can’t sell a share of the company (no equity investment)?

  • Individual and institutional donations. For a non-profit, bootstrapping is self-funding from donations and fund-raising. The advantage is no time and effort is spent searching and preparing for the other alternatives, and no repayment terms or collateral are required. There is no discussion of equity or return on investment.
  • Loans from a bank or other financial institution. Non-profits can apply for a bank loan or line of credit, just like any other individual or company. However, like anyone else, they will first need some collateral, or someone to guarantee the loan, and some evidence of a viable business, like receivables and inventory.
  • Personal loans from individuals, employees and board members. Personal loans are certainly an option, but they should be avoided if possible. As in any company, they can lead to employee problems, or messy legal issues. A non-profit can also issue bonds to board members and others as a way of borrowing funds from those same people.
  • Government grants. This grant source often gets overlooked, but it should be a major focus (when relevant) due to the Obama Administration’s initiatives on alternative energy and healthcare. The down side here is that real work is required to put in a winning application, and the award may be a long time
  • Private endowments. This is a funding source for non-profits that is made up of gifts and bequests subject to a requirement that the principal be maintained intact and invested to create a source of income for an organization. Endowments are usually limited to a specific area of interest by a philanthropist and have many qualifications, so be careful.
  • Bartering services. Bartering occurs when you exchange goods or services without exchanging money. An example would be getting free office space by agreeing to be the property manager for the owner. This could work to get you legal or accounting services, but it won’t get you cash to pay employee salaries.

Hopefully you can see from this list that the people and processes involved in financing a non-profit have little in common with angel investors or the venture capital process. You still start the process with a business plan, but then you look for a philanthropist rather than an investor.

Some non-profit entrepreneurs think they can skip the whole plan, rather than just the sections on valuation, equity offered, and exit strategy. All other sections, starting with a definition of the problem and the solution, opportunity sizing, business model, competition, executive team, and financial projections, are just as critical for non-profits as for-profits.

A non-profit is still a business, maybe even tougher than for-profit to run successfully, so the best angel is a great entrepreneur at the helm for fund-raising as well as operations. In addition, the best non-profits turn out to be the angel, rather than require one. That’s a higher calling.

 


 

Reprinted by permission.

Image credit: CC by Social Traders.

About the author: Martin Zwilling

Martin is the CEO & Founder of Startup Professionals, Inc., a consultancy focused on assisting entrepreneurs with mentoring, business strategy and planning, and networking.

Martin for years has provided entrepreneurs with first-hand advice, mentoring and business plan assistance as a startup consultant. He has a unique combination of business and high-tech experience, and executive mentoring and connecting startups with potential investors, board members, and service providers.

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