Nonprofit Law Prof Blog

Accelerating Nonprofit Start-Ups

From Monday's The Wall Street Journal comes this story on the acceptance of a nonprofit start-up into the accelerator program of Y Combinator out of California.

Wait, this is a nonprofit blog!  Accelerator programs??

Accelerator and incubator programs are all the rage in the entreprenurial business world.   In general, they are places where an entreprenur with a good idea - but not much more - can find support and advice in growing a new business.   In the case of incubators, that typically means a hub for shared space, networking, and professional resources.  An accelerator program, essentially, is an incubator on steroids.  An accelerator often provides a structured program that is designed to help in a concrete way the limited number of businesses that are accepted into the program.  The goal is for those participants to be market-ready on an expedited basis (think three to six months).  The program often concludes with an event that brings together the participant startups and local equity investors ("Demo Day" in the article).  In return for this assistance, the accelerator typically takes a small equity stake in the business.  The growth of the business obviously rewards the startup's founders and the outside investors that come to the table, but also it also funds the operations and future investments of the accelerator itself through its equity stake.  Y Combinator is one of the most innovative accelerator programs out there, the former home of success stories Scribd, Reddit, and DropBox.

Wait, this a nonprofit blog!  What is this equity investing of which you speak??

That's what makes the notion of Y Combinator accepting a nonprofit so interesting!  As we know from Prof. Hansmann and others, one of the hallmarks of a nonprofit is the "nondistribution contstraint."  Under both state law and federal tax law, a nonprofit can't have equity investors.  The net earnings of the organization don't get distributed as income; rather, they are retained by the nonprofit to be devoted to its mission.   At the end of the day, neither the local investors nor the accelerator program itself can take a cut of the accelerated nonprofit's earnings - by definition!

I curious about how the admission of nonprofits to an accelerator impacts the accelerator's business model.  Undoubtedly, even with only for-profits involved, the accelerator assumes that for every Reddit, there are a handful of organizations that don't provide any meaningful return on the accelerator's investment.    As the accelerator can't take an equity interest in a nonprofit participant, does it just assume that the nonprofit is one of the losers (with an internal rate of return of, well, zero) and hope the others will balance out accordingly?  (That is what I gather from the article, by the way.)  Or could it mitigate this risk by essentially charging an alternative fee schedule - for example, providing mentoring and facilities at cost, which means nothing out-of-pocket for the accelerator other than the opportunity cost of admitting an additional for-profit startup.

I'm also curious about this as yet another manifestation of the social entreprenuership movement.  In the article, Paul Graham, the founder of Y Combinator, says:

I was talking to a friend who wanted to do a nonprofit project and I realized that i was giving exactly the same advice I'd be giving to a startup.

To some degree, that has to be undoubtly true and right.  Every new venture, for-profit or not, has similar concerns: where do I get my money?  what space am I going to use (if any)?  how many employees will I have.   And yet, there are fundamental differences in goals and methods of the organization - as much as nonprofits can (and to some degree should) adopt business ideas for the purpose of serving the organization's mission more efficiently, a nonprofit is, at its core, a very different animal with a very different mission.  Can a nonprofit successfully co-exist in a private equity environment driven by return?

We shall see - certainly, something to follow!

EWW

 

 

 

Nonprofit Converts to "B Corporation" Status to Take Investment Funds

Forbes reports that nonprofit CouchSurfing.org has become a "B" or "Benefit" Corporation in order to receive $7.6 million in funding from Benchmark Capital and the Omidyar Network.  The now former nonprofit connects global travelers with locals throughout the world and has a user base of three million people in 81,000 cities.  The B Corporation is an invention of the nonprofit B Lab, which certifies for-profit corporations as B corporations if they meet social, environmental performance, and legal accountability standards and "build business constituency for good business" according to the Certified B Corporation website.  B Lab is also working to enact B Corporation legislation in at least three states (California, Michigan, and New York). 

Hat Tip: Tactical Philanthropy

LHM

Seattle Foundation Connects Nonprofits and Donors with Information

The Seattle Times reports (a related piece is in The New York Times) on The Seattle Foundation's new program, launched on Wednesday, that provides financial data and other information on approximately 700 local nonprofits groups to potential donors.  Previously, the information was only available to clients who maintained accounts, or donor-advised funds, with the Foundation.  The Foundation seeks to more fully engage both present and potential donors with information that will aid them in making their charitable giving decisions.  As discussed in the New York Times article, such programs can offer more alternatives to donors who would otherwise default to a larger, national charity, instead of a lesser known local charity.  Although other databases exist that provide information on charities in an effort to connect them with donors, what makes the Seattle Foundation's program unique is that it offers "snapshot evaluations" based on the Foundation's own research.  As the Seattle Times article concludes, the Foundation's efforts reflect "the importance of connecting donors and recipients, and allowing philanthropy to be more personalized, transparent and direct."

NAM

Multilateral Development Banks (MDBs) Collaborate to Fight Corruption

Last week, the leading Multilateral Development Banks (MDBs) signed an Agreement for Mutual Enforcement of Debarment Decisions designed to fight fraud and corruption.  The MDBs signing the new agreement include the African Development Bank Group, the Asian Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank Group and the World Bank Group. 

The agreement has a direct impact on cooperation between the sanctioning mechanisms of MDBs.  Typically, MDBs sanction entities via reprimand, conditions on future contracting, or debarment.  Debarment is a declaration that an entity is no longer eligible to bid on projects funded by financing flowing from an MDB for a period of time.  The new agreement only applies to instances of debarment for a period of more than one year and only where they are made public by the sanctioning MDB.

Under the new agreement, when any one of the signatories publically debars an entity for more than one year, all  the other signatories will do the same.  For instance, if a contractor fraudulently diverts money from a World Bank project resulting in debarment, all of the other signatories will blacklist that contractor from bidding on future projects funded by them for a period of time.  In addition to abiding by the agreement, all of the signatories will continue to manage their own independent strategies to prevent fraud and corruption.

This agreement is a validation of the MDBs’ commitment to a 2006 agreement as part of the International Financial Institutions Anti-Corruption Task Force.  The parties to the 2006 agreement promised to harmonize their definitions of practices that are subject to sanctions and to share information to combat fraud and corruption.

The World Bank reported this cross-debarment agreement in a Press Release and a News Article.

SS

Intelligent Giving Comes Back Online

Intelligent Giving (IG) is set to come back online this April.  IG is a charity whose primary purpose is maintaining a website with information for donors about charitable organizations.  The website’s purpose is to increase transparency through dissemination of data and to train and encourage other charities to become more transparent.  To that end, IG maintains profiles on a number of charities.

Third Sector reports that IG closed and deregistered as a charity in August 2009.  The charity think tank New Philanthropy Capital (NPC) has acquired IG and is scheduled to have it working again in the spring.  NPC intends to give IG a tronger focus on how well, and to what extent, charities are keeping the general public informed about meeting targets and effectiveness.

The new site isexpected to launch inApril 2010.

SS