Nearly every nonprofit faces the challenge of access to capital. How do you find new programs? What if donor support cannot cover a new endeavor completely? A new for-profit company, NPX, claims it has the answer by encouraging pledges to projects along with traditional investments.
NPX works like this: a nonprofit announces a project, and NPX utilizes Impact Security to channel funds to a project. If the project succeeds, and specific impact measures are met, the funds are released to the project. If they’re not achieved, funds deploy to a new project.
If this sounds familiar, it’s because several fund companies have already formed funds to apply your capital to nonprofit projects. Vanguard Charitable, for example, offers donor-advised funds with a similar model. However, NPX’s model aligns more closely with Social Impact Bonds (SIB), but Impact Security is funded by private investment capital rather than through government-backed bonds. It is considered a debt-security “issued by a nonprofit organization, government or supranational entity, featuring variable returns that are contingent on the achievement of pre-determined impact metric.”
Investor-Defined Support for Nonprofits
In the NPX model, three parties are involved: the nonprofit organization, donors, and investors.
- Nonprofit organizations establish projects with clearly-defined metrics and milestones. These metrics provide a yardstick against which the success or failure, and ultimately the payout, of the project derives.
- Donors make impact-based donations to the nonprofit.
- Investors provide seed capital to the nonprofit project upfront to get it started. They may lose their capital or achieve a return on investment if the project succeeds.
NPX offers a case study on their website of The Last Mile, a program for incarcerated individuals that teaches computer coding and website building skills. Inmates learn coding and programming, then use their newly developed skills to build websites and computer apps while they remain in prison. Upon the completion of their sentence, they now have a useful skillset in great demand in the world and can find work more easily.
That’s a clear win for inmates. But what about investors? The Last Mile raised $900,000 in donations and $800,000 in investment capital. The fund repays investors over a four-year period once the program meets the stated impact goal of “inmate hours worked.” The fund deploys the money only when and if the impact goal is met.
What if the goals aren’t met? Then the donor fund’s managers re-deploy the funds to another nonprofit. Investors may lose their money. It’s a gamble for them, but one that if it works out, does good in the world while ensuring they make a profit.
Alternative Funding for Nonprofit Projects
Such programs, as NPX, offers nonprofits the support of a steady funding stream, but at a risk: if the nonprofit doesn’t meet its goals, funds deploy elsewhere. Unlike a grant, which offers a set amount of money to be applied to a nonprofit, funds may or may not be released in the Impact Security model.
For nonprofits considering the Impact Security model, it’s essential to identify a project with clear, measurable metrics. In the case of The Last Mile, the measurement is the number of hours prisoners work. It does not measure something intangible, such as attitudes of inmates, or something difficult to align with the project itself, such as recidivism rates.
Nonprofits love this new model for many reasons. Mostly, it frees them from having to spend hours dreaming up new funding models on their own. There’s less of a need for many events during the year. Time can be spent on their programs instead of holding auctions and other events to raise money. And the funding stream, if released, offers a known metric, unlike an auction or dinner dance which may raise an unpredictable amount of money.
As time goes on, expect to see more creative funding methods for nonprofits. The nonprofit financial world continues to evolve, allowing nonprofits to make a great impact and provide the social benefits the world needs.
Welter Consulting bridges people and technology together for practical solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.