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Oct 15, 2014

Can Investment in Performing Arts Organizations Work?

Many social enterprise investment ideas involve selling goods or services.  This is understandable because the majority of nonprofit revenue already comes from selling goods and services, not from charitable contributions.

A major exception to this profile are our performing arts organizations, who largely sell events or performances.  They also are one of only two subsectors of the nonprofit world that are primarily dependent on charitable contributions for their revenues.

This prompts the question of whether the concept of investing for a return can apply to performing arts organizations.  To address this question, in 2007 the Doris Duke Charitable Foundation and Nonprofit Finance Fund ran a five-year experiment to see if ten cultural organizations could use investment funds to produce new earned revenues.  They published their results in 2013 in a report “Change Capital in Action: Lessons from Leading Organizations.”

It wasn’t a perfect experiment.  The amount of investment was the same, regardless of the size of the organization or the scope of the proposal.  It was structured as a “grant” more than an investment, so we don’t know whether the new revenues that resulted from the investments were sufficient to repay the investments over a reasonable period of time.

Overall, the experiment successfully demonstrated the ability of performing arts organizations to produce a positive financial return from investment.  Despite the severe economic disruptions in 2008 in the early stages of the investment period, by 2012 the majority of investments were profitable.

This experiment confirms that the factors necessary for successful investment are no different for performing arts organizations.

1.     Investment capital is not rescue capital.  The organization must be financially healthy and the board and staff need to understand the concept and appropriate uses of investment capital versus operating support.
2.    The initiative is sufficiently capitalized to absorb inevitable setbacks and the management needs to be stable, collaborative, and flexible in adapting the business plan to evolving circumstances.  In the angel investment world this is called being “coachable” and open to “pivots.”
3.    The investment must strengthen the entire organization and its ability to support its mission.  “Those that fared best conceived of the business model transformation as essential to the organization’s long-term artistic health.”
4.    The potential to generate reliable recurring revenue needs to be clearly demonstrated.  The organization must understand that investment capital is not a grant but rather capital that expects a financial return.
5.    Long-term financial planning, monitoring results, and changing course in response to data are essential to success.  “Most nonprofit cultural organization think more about short-term revenue and expense management than about long-term strategies for enhancing reliably revenue….Participants who broke this pattern…realized the greatest returns on…investment.”
6.    Investment capital must change the business model.  Organizations that used the investment to explore new programs or marketing techniques did not generate new revenues.  For such innovative efforts, grant funding is more appropriate.

Investing in performing arts organizations must be realistic.  Not every investment will be successful.  But when approached no differently than any other investment, performing arts organizations can generate returns that will sustain their ability to contribute to the cultural vibrancy of our community.

The Center for Social Enterprise Development and formation of CINCO Fund are new efforts to provide an avenue for Central Ohio cultural and performing arts organizations to apply these principles to use investment to help them to thrive.  Email me at info@cincohio.com to see how you can support these two efforts to make our performing arts organizations, and indeed all our nonprofits, more self-sufficient and financially sustainable.