THE WHY: Hidden potential in the nonprofit sector

Philanthropic funding is similar (in many ways) to venture capital or private equity. It can be used to launch new organizations, scale promising innovations, or enter new geographies and markets. 

But there is one important difference. Investing can be a zero sum game. Philanthropy is not. 

Investors make money when the valuation of a business at the time they sell is greater than the valuation at the time they bought. As a result, private equity firms are actively in search of undervalued companies with hidden potential.

Conversely, the goal of philanthropic due diligence is not to discover hidden value, but to identify game-changing products and ideas that will impact society. Philanthropic foundations are on the hunt for ideas that have been proven to work.  When they find the right idea, the challenge becomes figuring out a way to scale and dramatically increase impact.

Take a look at the anonymized marketing material on the right. The differences are subtle but clear. While foundations are looking to grow and scale promising, proven ideas, PE firms want to help transform and transition companies to accelerate growth.

As an analogy, consider the difference between the way that the US Men’s Olympic Basketball team and the NY Knicks evaluate talent. The Olympic team wants the best players, period. But, for the Knicks, the insight that Steph Curry is the best player in the NBA is not particularly relevant. Instead, the Knicks are looking for strong players who are also undervalued.

So who is looking for hidden potential within the nonprofit sector?

In the same way that private equity firms are in search of hidden gems, there are non-profit organizations that simply need a capital infusion and a change to their business model to experience significant growth and truly implement their mission.