[Today’s post is from guest blogger Steve Goldberg, who is a consultant to Charity Navigator.]
“Nonprofit capital market” is one of the emerging trends in the social sector.  So what is it and what does it have to do with IT?
As I use the term, a nonprofit capital market is a way for donors to “invest in what works” and for nonprofits to secure additional funding by “moving money” rather than traditional means of raising money.  The objective is to create a virtuous cycle in which nonprofits publicize the results they achieve in order to attract greater funding, and greater funding enables nonprofits to further improve their performance.  (Moving money and raising money aren’t mutually exclusive or even, I contend, competitive.  But fundraising will remain the dominant means of generating nonprofit revenue for a good long while.)
How does this relate to IT?  Two ways:  funding for IT capacity development and building the capital market itself.
Like most forms of nonprofit capacity building, fundraising for IT expenditures is extremely difficult (even before the roof caved in on the economy).  Fundraising is based primarily on developing personal relationships with prospective donors and telling engaging stories about the nonprofit’s work.  Results don’t matter much:  effective nonprofits can’t raise funding without cultivating and engaging donors, and ineffective ones don’t lose funding if they’re good at marketing themselves.  (As a result, there’s no incentive for nonprofits to collect or produce performance data; more about that shortly.)
Now, IT can facilitate donor engagement and storytelling through such tools as direct marketing and social networking, but today’s fundraising market penalizes IT spending because it’s overhead.  So nonprofits face a Catch-22:  IT can enhance fundraising, but fundraising limits IT expenditures.  As a result, most nonprofits, especially the more than 90% that raise less than $1 million annually, have underperforming IT systems, with homegrown applications and poorly-designed and poorly-maintained databases.
The social sector and some donors are starting to realize that focusing too much on reducing overhead prevents well-run nonprofits from developing the organizational capacity they need to help more people.  While there’s still quite a long way to go on that front, a more robust nonprofit capital market might help the cause.
Building a functioning nonprofit capital market will require (1) nonprofits that are willing to be judged on their performance (2) to publish useful information about their results and (3) donors who want to maximize the impact of their philanthropy to use that information to influence their giving decisions.  To be useful to donors, the information must be reliable, available and understandable.  If the information is hard to find, confusing or unconvincing, donors won’t care and nonprofits won’t benefit.
Supplementing traditional fundraising with capital-market funding will require significant behavioral and cultural changes for both donors and nonprofits.  As already noted, few donors use performance data to inform their philanthropic decision-making, and it will take time, money and expertise to develop information that donors will find useful.  Moreover, nonprofits are understandably concerned about the risks inherent in performance-based funding, including the expense and effort that will be required to develop robust reporting systems.
This is where IT comes in.  First and foremost, an effective nonprofit capital market needs to produce and distribute meaningful data that convincingly shows donors how their financial support will improve people’s lives.  Nonprofits need systems to collect and disseminate that information at reasonable cost and without disruption of ongoing operations.  They also must be able to show donors how they use metrics to improve performance.  If nonprofits want to grow – and who doesn’t? – they will have to demonstrate not only that they have sound plans for serving more people who need their help, but also that they have the organizational capacity to execute growth plans and manage performance at higher levels of output.
So a nonprofit capital market could help solve the Catch-22 of funding the development of IT capacity.  Many nonprofits would welcome the opportunity to compete for funding based on the results they achieve rather than (or, really, in addition to) cultivating donors.  If technology providers can offer cost-effective, straightforward and reliable applications and systems to measure performance against defined metrics, and help their nonprofit customers distribute that information in user-friendly ways, donors just might look back a few years from now and say, “Can you believe we used to make donations without having any idea of what the nonprofits actually accomplished?”
Steve Goldberg is a consultant to Charity Navigator and the author of Billions of Drops in Millions of Buckets:  Why Philanthropy Doesn’t Advance Social Progress (Wiley 2009).