SAN FRANCISCO — Looking for a way to raise the growth capital her nonprofit needed for scale, Rebecca Masisak wanted to explore her options beyond grants, which tend to be dictated by donors.
She thought back to her time raising $240 million for a startup in the for-profit world, and wondered how she might take a similar approach in the fundraising efforts for TechSoup, an organization that connects nonprofits from around the world with technology and technical support. So the TechSoup CEO started asking herself and others: “Would we be a story of interest to impact investors?”
“An investment with a return gives a different stake to your stakeholders and gives you freedom to move beyond programmatic funding.”— Rebecca Masisak, CEO, TechSoup
The answer was “yes.” A direct public offering, or DPO, which allows organizations to raise money directly from the public, emerged as a compelling model for TechSoup.
On Wednesday, TechSoup announced that Microsoft Philanthropies has invested $1 million, becoming the lead impact investor in its $11.5 million DPO. But Masisak said one of the most promising aspects of the model is the way individuals and organizations based in the United States can invest as little as $50. The DPO allows TechSoup to offer debt as an impact investment not just to institutional funders, but to individuals including those at the nonprofits and technology companies it serves.
What appeals to Masisak about the DPO model is the idea of democratizing impact investment, she told Devex: “One of the reasons I really liked models that combined crowdfunding and impact investing was the opportunity for engagement with the community.”
It took about two years for the DPO to go from a conversation to a reality, as TechSoup leaders took steps that included getting approval from the Securities and Exchange Commission, and making sure it was in a position to pay investors back.
TechSoup is pitching five strategic initiatives to potential investors, which include scaling its core nonprofit technology marketplace business; expanding its Apps for Good offerings; and testing, building, and refining new processes and systems in order to grow. Cutting Edge Capital, which helps social enterprises raise capital by setting up DPOs, advised TechSoup to build three tiers of debt securities investments.
The increases in earned revenue and reductions in transaction costs will generate the cash flow necessary to repay investors both their principal and interest over five years, Masisak said.
Beyond programmatic funding
The average number of employees working full-time on impact investing for international NGOs has nearly doubled since 2016, according to a new report.
TechSoup’s growth capital campaign builds on a number of NGOs exploring fundraising options beyond grants, said Tom Dente, president and CEO of Humentum, who served as an editor for a recent report on international NGOs and impact investing.
But this DPO could hold several lessons for other nonprofits, he said.
First, the growth capital campaign is closely aligned with the organization’s mission, since it will allow TechSoup to grow the reach and therefore the impact of the technology it makes available to nonprofits. Second, the DPO provides clear and measurable benefits, not only for TechSoup’s mission but also for investors who can expect the return of their principal and interest, Dente said. And third, by growing its community of users, TechSoup has access to more potential investors.
“It also provides the opportunity for stakeholders of all types to become shareholders in the mission’s success,” he said.
In order to initiate a growth capital campaign, a nonprofit must have a business plan in place, and ideally a financial history that supports the growth projected in its financial model.
TechSoup has generated $273.3 million in earned revenue in addition to the $44 million in grant funding it has raised. For the past 15 years, the organization has covered 100 percent of its operations, research and development, and investment in new programs with this cash flow. And TechSoup has retained $6.33 million in cumulative surplus for further investment in operations and innovation.
“Nonprofits should think about how they begin to show that what they do is worth enough that they can bring in revenue.”— John Katovich, principal, SVX.US
“We knew we had a good track record of developing innovative businesses that had a mission supported by revenue generation, and we felt we would be able to offer a return,” Masisak said.
The DPO is being offered on SVX.US, a new platform that presents debt and equity investment opportunities in high impact organizations. John Katovich, principal at SVX.US, acknowledged that not every nonprofit has the revenue flows to support this. But he said revenue-generating nonprofits should think more creatively about fundraising options beyond grants.
“First of all you’re constantly in fundraising mode. You’re filling out grant applications. You’re doing whatever you can to ask for the money,” he said. “Nonprofits should think about how they begin to show that what they do is worth enough that they can bring in revenue and keep it going that way.”
In addition to the DPO, TechSoup anticipates that much of the growth capital campaign will be loans from institutions that specialize in nonprofit lending, as well as program-related investments from foundations. But one of the appealing aspects of this DPO is the flexibility it provides, Masisak explained.
While TechSoup estimates it can leverage the $1 million investment from Microsoft to distribute more than $470 million in resources to the nonprofit sector, it will have more of a say in how to do that work than it would if accepting a grant from Microsoft.
“An investment with a return gives a different stake to your stakeholders and gives you freedom to move beyond programmatic funding,” she said.
Update Feb. 7: The headline of this story was updated to clarify that stakeholders can become investors.