Ex-Wall Street executives storm nonprofit world

Date: Thursday, August 2, 2007
Author: Stephanie Strom, International Herald Tribune

NEW YORK: An organization founded by two former Goldman Sachs partners is using Wall Street methods to help charities raise money to finance expansion.

"Our goal," said Charles Harris 3rd, "is to create a nationwide donor network of wealthy individuals and family foundations that we can mobilize with other existing sources of funds to provide growth capital for entrepreneurial organizations."

Harris and Robert Steel formed SeaChange Capital Partners, which sounds like a hedge fund but is a nonprofit financing firm.

Steel recently left SeaChange, after being named the Treasury Department's under secretary for domestic finance.

Attracting financing to support growth is one of the biggest challenges nonprofits face.

A study by the Bridgespan Group, a nonprofit consulting firm, found that only 144 of the more than 200,000 nonprofits established since 1970 had grown to $50 million or more in revenue by 2003.

Two organizations, Teach for America and College Summit, have tested the SeaChange concept, and Goldman Sachs has agreed to put up $5 million toward a total goal of $40 million to support SeaChange.

"When we think about corporate engagement, it's not just writing a check but somehow making use of the resources and know-how of Goldman Sachs," said Mark Tercek, the managing director who oversees the firm's corporate responsibility efforts. "If we could help fuel the growth of the nonprofit sector with that know-how, that would be putting both our money and capabilities to good use."

With the help of SeaChange, Teach for America, a nonprofit that recruits recent college graduates to teach in public schools, raised $60 million in $5 million and $10 million increments from about a dozen donors, said Wendy Kopp, its founder and chief executive.

"What we are trying to do is get much bigger and much better," Kopp said. "In the for-profit world, companies raise capital to do that, but it's not as easy in the nonprofit world."

Donors, whether institutional or individual, typically want to support specific programs rather than the expansion of the charities offering those programs, said Doug White, an independent consultant and author of

"Charity on Trial: What You Need to Know Before You Contribute."

"Donors haven't been taught to put money into the infrastructure of an organization, which should be a legitimate fund-raising goal," White said. "You can't have the programs without the organization and its infrastructure."

Harris got a better sense of how donors behave when he stepped in as interim fund-raising director at College Summit, which works to increase the number of public school students who enroll in college.

The organization needed to raise $15 million to expand its program to four new communities but worried that raising the money in a traditional way would take too long and hobble it in various ways.

"Imagine an investor saying, 'I want to buy 1,000 shares of FedEx but I want my money only to go into vans because I think they are the key to success,'?" said J.B. Schramm, College Summit's founder and chief executive. "That's what foundations and donors do to nonprofits; they give out money but with restrictions, like you have to work in Topeka because that's where one of their trustees lives, or you can only use their money for a particular type of teacher training."

Facing that challenge, Harris recommended experimenting with the approach, which is similar to a private placement in which selected donors are invited to help in underwriting an organization.

That is the system that SeaChange is using to raise money for nonprofits.

Nine months later, 10 donors had agreed to supply $15 million - and all on the same terms.

"We did not make a single, special restriction for any donor," Schramm said. "It was the most efficient money we've ever raised."

SeaChange initially will raise money for youth education and youth development organizations like College Summit because Harris and other members of the management team have the most experience in those areas. But it intends to extend its financing to other areas of the nonprofit sector and to provide additional services.

Harris himself is a beneficiary of philanthropy, having gone to Phillips Exeter Academy, one of the most expensive prep schools in the United States, on a full scholarship.

"Everything I am is a result of that experience," he said, "and I'd like to think there's some opportunity like that for every kid in the world."