January 29, 1998 | Read Time: 3 minutes
In an era when small but growing businesses represent the major economic strength of America and the world, many endowed non-profit organizations shy away from investment in entrepreneurial ventures.
Endowment, most charity managers rightly reason, is too precious to jeopardize on potentially profitable start-up businesses. The downside is much too great to bet the seed corn.
While their conclusion is correct, their tendency to equate investment capital only with cash is not.
Most non-profit organizations have vast unused or undervalued stores of “venture capital” for which many start-up businesses are in great need. Are non-profit administrators or board members suitable candidates for a start-up company’s advisory board? Are a university’s students looking for internship opportunities? Can a non-profit group spare a conference room for a three-hour meeting some summer afternoon?
Those are but a sampling of assets that are of only incidental value to a non-profit organization but of great potential value to an entrepreneur looking to add depth and intellectual resources to his new company. And for those assets, many entrepreneurs would be willing to pay — not in cash, of course, but in something that is of little current value to the entrepreneur but of great potential value to the non-profit organization: stock. Indeed, trading its intellectual and other non-cash assets for venture-capital stock is a generally untapped way for a non-profit organization to build its endowment.
Despite popular misconception, many start-up companies do not find investment capital that difficult to find, particularly when a proven entrepreneur promotes a sound idea. More difficult to come upon is professional expertise and applicable experience. That expertise can be purchased, but is there an alternative?
One of the first lessons an entrepreneur masters is the conservation of capital, perfected in the borrowing or begging of at least some of the things that cash would otherwise be used to buy. Many entrepreneurs who need management advice, for example, would first try their local banker: Not only is there no charge, but he or she will often buy lunch. Would a marketing survey help? Most entrepreneurs would be inclined first to ask their local congressman’s office, or to check with the Chamber of Commerce, where information is generally free.
For a non-profit organization looking to increase its endowment, then, a good strategy might be to identify, through board or administrative contacts, a number of well-financed local entrepreneurial ventures and to suggest to the businesses a trade of intellectual capital or other non-cash assets for a sizable gift of stock.
Of course, that strategy is not without risk. A non-profit organization would need to find an average of five or six good opportunities, costing the casual advice of five or six board members or administrators, to expect a significant return.
But the potential is great. In the past year, for example, entrepreneurs have donated more than $1,300,000 in stock to Muhlenberg College, where I currently work, in return for my agreement to serve on their boards. I have raised an additional $400,000 for a social-services organization, a not-for-profit religious organization, and a nationally recognized museum by serving on other entrepreneurial boards in return for donations of stock to those non-profit institutions.
Most non-profit managers would agree that money spent on endowment campaigns is money well spent. Endowments provide succor in a time of shortage, and they also translate directly and indirectly into prestige that can lead to additional sources of support.
Largely because they misunderstand the nature of risk, non-profit managers often fail to take advantage of a relatively cost-effective and risk-free way to increase their endowments. It would be imprudent for a charity to diminish its endowment to invest in a start-up company. But for a non-profit organization, after some careful research, to receive potentially valuable stock in exchange for a highly desired asset it can’t otherwise sell may represent that elusive “win-win” proposition.
Sandy Weinberg is entrepreneur in residence at Muhlenberg College and director of the Muhlenberg Institute of Entrepreneurship.
