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Nov 16, 2011

Angel Investing in Nonprofits: A topic to consider

I have been very impressed with the success of the Ohio TechAngels Fund. It has attracted hundreds of individuals statewide who are willing to put $25,000 each into a series of funds with no expectation of return. Of course, some start-ups hit it big, but the motivation of the investors has been to work with like-minded individuals to help advance the economy of Ohio.

This got me to thinking that, if investors don’t anticipate a large return, this model may translate into the nonprofit arena. As my readers should know by now, the successful nonprofit business model REQUIRES profitable activities to support its key mission, which cannot be done well profitably. The foundation world has invested in nonprofits through Impact Investing and Program Related Investments (PRIs). These have taken the form of senior loans at very low interest rates. The Calvert Social Investment Foundation formally issues registered Investment Notes that allow investors to choose the term (1-5 years) and interest rate (0% to 2%) they wish to receive. It also solicits corporations and foundations to make subordinated investments in the fund.  Default experience on the loans is less than 2 percent.

In this investing environment, interest rates of 1% to 2% for 1 to 5 years with virtually no default risk is an appealing investment to many people and institutions.

So, would an angel investor who is willing to put money into the for-profit arena with a low expectation of return even of principal be willing to put money into a fund that was very likely to return principal and a 2% return? I think this is worth investigating.  In addition, there is an emerging corporate structure called the low-profit limited liability company (L3C) which allows both debt and equity investments. Right now nonprofits cannot issue equity. The L3C is a structure that has the potential to expand the potential investment structures for nonprofit to use to expand profitable activities. My website has a link to some resources to get you started on researching L3Cs.

I am in the process of evaluating the potential for a pipeline of statewide “nonprofit” investment opportunities and a pool of interested investors.

I am doing this because the nonprofit sector is starved of capital. Fundraising and grants are not sufficient to provide growth capital. And episodic capital campaigns are a very disruptive way to acquire investment capital because of the sheer time, scope,  and cost of developing and executing a campaign. If we can expand the pool of corporations, foundations, and individuals that are willing to provide capital to profitable nonprofit ventures, we will go a long way toward enhancing the sustainability of the sector.

If you know of resources in this area, I’d love to hear from you. Projects, investors, examples of successful angel funding of nonprofits, articles, clippings, and any useful people to contact are most welcome.