Why We Need New Ways To Invest in Education Organizations

Callie Riley of Cambiar Education, Ashley Beckner of Lemnis, and Matt Haldeman of DCDO join me to explore the evolving landscape of funding mechanisms for education organizations. Our conversation dove deep into the limitations of traditional nonprofit and for-profit funding pathways, as we highlighted how new, creative financing models can unlock greater impact, sustainability, and innovation. The guests shared insights from their respective organizations and discussed the need to expand the “menu” of capital options, especially for nonprofits navigating growth and scaling challenges. I see this as the beginning of a series of important conversations we need to be having—and hopefully we’ll see more of these folks discussing this in other venues over the next couple years.

Michael Horn

Welcome to the Future of Education. I'm Michael Horn. You're joining the show where we are dedicated to creating a world in which all individuals can build their passions, fulfill their potential, and live lives of purpose, which we are not anywhere close to, sadly. But the folks that we're going to talk to today are dedicated to helping create that world. We're going to hear more about that. But I want to give a little bit more of an intro than I normally do to these conversations because we're going to be talking a lot about the mechanisms for funding education organizations, both for profit and nonprofit. And as I see it, those mechanisms have expanded in some creative ways over the last several years.

Exploring Nonprofit vs. For-Profit Paths

And yet, in my view, there are still too many limitations from the available funding vehicles that exist that sort of constrain or compel these organizations to act in certain ways that either might not be in their interest or frankly, the interest of the positive impact that they hope to ultimately have. I've written about this before (see here). If you subscribe to my substack, you've read it. But I'm also not the only one who feels that way. And our three guests today are all working to offer different forms of financing in the market to really achieve a variety of aims. And our purpose today is to start to unpack how enlarging the pie for these different vehicles and introducing these different types of funding models can help several different groups. One of those is existing nonprofits in the education space. A second would be founders or entrepreneurs who are starting an education organization.

And they feel like they have to debate between non profit on the one hand and for profit, and then feeling like if they go for the for profit route, that that necessarily implies that they're going to have to take VC money at some point. And then the third, of course, is funders themselves, folks looking to deploy capital and get some combination of perhaps market returns and, or impact, whether philanthropically or through some other vehicle. And our purpose in today's conversation is really to unpack at a high level the opportunities for each of these folks, why the work that my three guests are doing could be exciting, why the status quo perhaps is a little too limiting and, and understand if these visions, you know, if, if what they're painting is so exciting, why isn't it happening quicker? What are the barriers to really realizing them? And I will say all of us, all four of us in today's conversation, we hope that if you're tuning in, if you're listening and you get excited by any of this, or you have questions about any of this that you'll reach out so that we can continue and frankly deepen the conversation significantly. Because I think it's fair to say that we all believe that there are some really exciting organizations that exist today that are doing breakthrough work on their teams that would benefit from alternative capital sources or structures and that there's going to be new organizations to come that could benefit from these things as well. And some folks might be very happy also with the status quo. This is not a sort of anti, it's a how do we enlarge the pie conversation. So with that as a longer prelude than usual on the show, let me introduce our guests. We've got Callie Riley.

She's the managing director at Cambiar Education and nonprofit education venture studio that is focused on student success for all. Cambiar has a goal of enabling a life changing impact for 1 million of the most vulnerable youth through their efforts. They do this through both supporting entrepreneurs to develop, pilot and scale their bold ideas, as well as to directly run initiatives that they do that build entrepreneurship, critical partnerships and innovative communities. So, Callie, great to see you. Thanks for joining.

Callie Riley

Thanks for having me, Michael.

Michael Horn

Yeah, you bet. And then our second guest is Ashley Beckner. She's managing director at Lemnis, a public charity that was recently established following the sale of the majority of NWEA's assets to HMH. Lemnis envisions a future of the unlimited learner where every young person can thrive in a time of dramatic change. Certainly describes right now. And they invest in and partner with organizations that share a vision for this future. So Ashley, good to see you.

Ashley Beckner

Thanks Michael. Excited to be here.

Michael Horn

Yeah, no, I'm glad to have you as well. And then our third is Matt Haldeman. He's the founder of DCDO, which stands for Dot Com Dot Org. It's a mission-driven organization that invests exclusively in nonprofits. And DCDO recently partnered with Lumos capital to help 501c3s increase their impact by transitioning into a public benefit corporation or spinning out a separate for profit entity. So Matt, great to see you.

Matt Haldeman

Thanks, Michael. Looking forward to the conversation.

Michael Horn

Yeah. And hopefully you all feel that way at the end of it as well. So let's, let's dive in. I actually want, like I said, a bunch of words, but I'd love you to deepen what I just said and in the introductions of each of you and talk really about the models that you've set up or are in the process of setting up and really the mechanics of how they work, who they're for, and so forth. Why don't we go in order of how I just introduced you, Callie, Ashley, and then Matt.

Student Success Through Nonprofit Investment

Callie Riley

Thanks Michael. I'll try to make this as short as I possibly can without all of my normal slides. So Michael gave a great introduction overview of Cambiar and my portfolio at Cambiar is focused on enabling 20 million students to experience directly or indirectly nonprofit-developed, high-quality instructional materials leading to increased positive student outcomes, particularly at the margins. So we're doing this by investing in key nonprofit HQIM developers to demonstrate the impact and increase the scale of their products and services as well as strengthening the sustainability of their organizations overall because we believe they're critical to keeping the sea level of quality high in the curriculum ecosystem. So critical to this has been the development of our Impact First HQIM Accelerator Fund officially launched this year, which has a range of investment vehicles that we can stack to provide long-term, patient, cost-effective, flexible capital to support scaling and sustainability of the nonprofits we support and incentivize key behavior and business shifts. So these vehicles include that we are able to stack operating grants, which use more flexible catalytic dollars to build capacity for newer but essential business operations, exploratory efforts such as early R and D for new products, convertible grants—so used primarily to drive shorter-term revenue, profit growth like new product development, new strategies essential to high growth opportunities, core operational shifts in their business models but with near-term metrics to drive innovation on time delivery and budget efficiencies and then two vehicles to support longer-term plans and strategic initiatives that are essential to impact scale and sustainability. The first is low-interest term loans never above half the market rate with very favorable repayment terms used primarily to fund organizations within their risk adjusted debt capacity. And the second is a recoverable loan so used primarily to fund organizations beyond their debt capacity.

And again, we combine those together. We engage in a pretty intensive strategy —operational financial diligence—with organizations that meet our pipeline criteria. So nonprofit core HQIM is starting an ELA in science right now to assess their long term plans, corresponding to the need debt capacity to create that package that we believe will help them reach their long term goals. And I'd be remiss that I didn't mention, too, that as part of the way we think about our investment package, we're also providing support in the way of complementary research and evaluation investments for all those who we invest in so they can help them demonstrate their impact and efficacy of their products and services as well as technical assistance and capacity building for the duration of our multi year partnership.

Michael Horn

Awesome. Actually before Ashley, you get in just two quick follow-ups there.

I think it's interesting the research piece because that's a huge hole we always hear is right like entrepreneurs, they want to show the impact but they can't. So I'd love you just to quickly double click on what that looks like and then the second one is on the loans that you're offering. You said long-term planning. Long term. Right. Sustainability. Like what are the timelines of those loans typically?

Callie Riley

Yeah, so I'll take it from the loan. And so those are looking at five year loans but not with principal repayment until after that five year mark. And so I think that's critical when we talk about this idea of favorable terms too and below market rate. So right now we're pegging that at 3%. And then on research and evaluation we just think having a strong, incredible evidence base to demonstrate impact of products is so incredibly important and needed in the field. We're hearing more and more of that from systems leaders. And so we are about to actually contract with a common evaluation partner that will work with every single organization that we have in our portfolio to design those research studies hand in hand. We'll have intensive co design, there'll be multi year studies and also allow us to think about trends across the portfolio and what we're learning to share out with the field about what we're learning, what we see and hopefully to really galvanize additional funders to invest more in R and D in the long term.

Michael Horn

Fascinating. All right, Ashley, sorry to jump in there before you get your answer, but I'd love to hear what you all are doing.

Ashley Beckner

All good, all good. I liked hearing it as well. Well, as you mentioned in my intro, Lemnis is a public charity that invests in mission aligned organizations dedicated to supporting this future where every learner can thrive in a time of dramatic change. And our approach in general was formed out of our board and our leadership team's experience running this large-scale nonprofit and thinking about kind of the type of capital that would have been helpful to them over the years to expand their impact. So I lead our Lemnis Collective, which is a specific area of the organization that brings those mission aligned organizations, both for profits and nonprofits, wholly under the Lemnis umbrella through mergers and acquisitions. Our goal is really to provide patient capital, long term stability, operational and strategic support and really allow organizations to focus on their mission, growth, impact and innovation and just be kind of an alternative capital source for orgs that may not fit with or may not want something that, that you talked about up front. The more traditional sources of capital. We're generally looking for partners with between 10 and 100 million in annual revenue, I know that's a pretty wide range.

Nonprofit Growth and Community Impact

Ashley Beckner

And when we're talking about nonprofits, we're really talking about earned revenue and thinking about business models where they want to leverage our capital for investments in growth and R and D. Right. So we're really looking for sustainable impact that we can supercharge with growth and innovation capital. And then from an impact perspective, as we think about the future of the unlimited learner, our team and our board has put a ton of thought and just kind of what we believe the world needs for that future. And one of the key things that we keep coming back to is really an emphasis on belonging and community, really creating that foundational component of holistic sense of well being that learners can build from in order to thrive and then helping learners build kind of those durable skills that stick over the long term as we enter this, well, I don't know if we're entering, if we're in it, but this time of dramatic change.

Michael Horn

Yeah. Again, I'll Matt, before you jump in, just a couple of follow ups. Ashley. One—so the 10 million to 100 million, like just so people are clear, that means not that you fundraised that last year, but that you have like a recurring model that charges customers, in other words, and is bringing that in. Is that right?

Ashley Beckner

Correct? Correct. Recurring revenue. Yes.

Michael Horn

Okay. And then the second question is when you talk about belonging, community, durable skills, is that across the education ecosystem, is that like, like as opposed to HQIM, which is K12 focused, are you looking at a K12, higher ed, workforce, like where do you draw those boundaries?

Ashley Beckner

Yeah, thinking about it pretty expansively. So definitely across K12, higher ed and workforce, when we think about belonging and community and the kinds of experiences and opportunities that we want to support learners with, a lot of where we think we can add value there, starts more in adolescence. So we talk about learners ages 10 to 26. But we know that, you know, many companies and organizations who operate in K12 don't decide that their work starts at the age of 10. So we're really open across that spectrum.

Michael Horn

Perfect. All right, Matt, dive in. Your turn to talk about what you are up to.

Matt Haldeman

Great. So 20 years ago, I'm a classroom teacher in the Bronx and I'm teaching a 14 year old how to read and we're sitting side by side and we're reading Hop on Pop. And he takes the book and he slams it on the ground and he says, Mr. Haldeman, this is a book for babies. And I totally understood why this teenager didn't want to read Dr. Seuss, but it was the only book I had in my whole classroom library that was at his level. And two years ago, I was introduced to this amazing nonprofit organization called Story Shares that had a library of books to solve the problem. Basically beginning decodable readers, but with themes and protagonists that would appeal to older students.

And I fell in love with the organization. And the founder of this nonprofit had a million great ideas, but she needed capital to make them happen. And so at the end of 2023, we made a deal. I invested in the company and we transitioned to a public benefit corporation, a mission driven for profit. It was about 18 months ago, and today we're about 50 times larger than we were at that time. It's simultaneously probably the best investment I've ever made. And then the impact that we've had, I'm extraordinarily passionate about. And it was such a great experience that I recently partnered with Lumos Capital.

And if you don't know, Lumos, they're a well respected investment firm. And they focus on education, learning, and workforce development. And together we're looking for investment opportunities exclusively in the nonprofit sector. So we're in search of nonprofit organizations that need some unrestricted capital to dramatically scale their impact. So perhaps leadership wants to go after some new products or develop a new product suite. Perhaps they're looking for additional support with distribution, marketing, or to compete with for profit competitors. Whatever the opportunity, we're looking for those investment opportunities, and then our goal is to both invest and then support the organization as it scales its impact.

Defining Funding Model Challenges

Michael Horn

Very cool. Okay, super helpful. Let's dive in. We did a much longer prelude up front than I'm used to, but I think it was really valuable for folks to start to, like, envision what this can look like. But I want to get a little bit into the problem like you, you know, you're all taking slightly different approaches, right, to these questions of different sources of capital, different structures for organizations. And I'd love us to start to like, define what is the problem that in your mind we're trying to solve. I talked a little bit about limitations of existing funding models, but like, let's sharpen that. What barriers do those actually create? And what is the status quo as you all see it, and why is it important to start to change that? In specific, Matt, maybe you lead off on this and we'll work backwards.

Matt Haldeman

Sure, sure. So the way I think about the status quo is the following. I bet somewhere there's a non profit leadership team right now. And let's imagine they're gathered in front of a whiteboard and they know what they're doing is working. And they say, all right, what are our strategies to scale this, significantly scale this? So they get out the whiteboard and they write sources of capital on the top and they write two things. So number one, they write earned revenue, and number two, they write philanthropy and they're done. They're like, all right, those are the two levers we have to really, to really raise capital.

And I think those are two great options. But really, maybe there are 10 options. And included in that list should be debt, joint ventures, mergers, IP licenses, revenue sharing, partnerships, and transitioning to a public benefit corporate operation. For my ultimate goal is to see that list of levers grow from 2 to 7, 8, 9, 10, that kind of thing. And when you talk, you asked about limitations, and when I tell people what I do around non profit investment, they usually expect me to say something like, oh yeah, the for profit model is just better. It's more nimble, something like that. And let me say really unequivocally, it's not. I've seen great performing non profits and great performing for profits, and I've also seen low performing on both sides.

But there are trade offs to both and there are limitations to both. And let me just talk, I'll just name three limitations to the nonprofit model. So number one, unless they have huge amounts of cash in the bank, most non profits can't operate at a loss over multiple years. For example, if you're in a really crowded space and you're trying to offer uber competitive pricing to build out market share, that can be a challenge. So that's limitation number one. Limitation number two is that most of the time nonprofits can't raise large amounts. I'm talking about seven or eight figures of unrestricted capital to finance a pivot or enter a new market or something like that. And then the third limitation is that nonprofits by definition can't give employees a chance to be owners in their own organization.

So at the end of the day, that's what we're looking for. We're looking for non profits where one or more of those limitations is getting in the way of them scaling their own mission.

Michael Horn

Super interesting. And it occurs to me as you're going through those, at least the first two, Callie, you're also like tackling that. So maybe you jump in next and then Ashley come in after that.

Callie Riley

Yeah, I was going to say I feel like what Matt named is also part of what we're trying to solve for. So obviously we're starting with high quality instructional materials, but really we're thinking about nonprofit financial sustainability overall. So we believe that sustainability and scalability, at least in the HQIM industry, requires patient long term growth capital that nonprofits don't typically have access to as Matt named. And it makes competing at scale really challenging. And we see those challenges as coming in really about four forms. One is that growth capital there's nowhere limited access to growth capital or equity like investments to support scale. Typical growth capital has meaningful potential returns to offset risk. Long term patient capital is not readily available to fund the investments needed to successfully scale an HQIM.

The second is access to debt. We think debt is really important. Existing standard market debt instruments beyond working capital lines are just not an optimal fit for most nonprofits in HQIM or I would argue most of the education ecosystem because there's limited ability to generate returns on capital over a short term period. Standard payback periods are too short, market interest rates are too high. I mentioned how we're trying to peg our terms too. The third is around innovation. The ability to drive impact through innovation and timely reinvestment we see as muted like limiting many organizations ability to compete with for profit counterparts.

So that means resource allocation decisions are made without the benefit of long term planning. This one is really key is that we want them to be able to make great decisions with enough time. Right. And creating and scaling HQIM requires a long investment cycle infrastructure. We're talking several years and then finally is around philanthropy. So philanthropy has historically funded projects versus business plans and funding for projects that include innovative product development are absolutely critical. However it doesn't associate or cover the costs associated with scaling and building the infrastructure like sales, marketing, partnerships requires significant capital and time to operationalize and succeed. So I feel like Matt is, we're kind of overlapping here in terms of the problems we're trying to solve from slightly different vantage points.

Michael Horn

Yeah, super interesting. I could go deeper but let's like Ashley, I want to get your voice in this as well.

Ashley Beckner

Yeah, I agree with everything that has been said so far and we'll touch on nonprofits for a minute but since the other folks have shared also we'll dig more into what the challenges I see around the for profit business model as well.

Michael Horn

Yep.

Expanding Creative Funding Solutions

Ashley Beckner

So similar to other folks I don't think there's any like specific problem with the capital tools that exist today. It's more that it's not a universe that is expansive enough for the sector in which we operate. That requires just more creative thinking and in terms of how we fund. Michael, like you shared up top too. I've had more conversations than I can count with impact driven entrepreneurs who ask the question like, here's what I want to achieve. Should I be a non-profit or should I be a for-profit? And that essentially means should I raise grant funding or should I raise venture capital funding? And I think to the things that Callie just shared, right? If you're talking about philanthropic funding, there are some incredible philanthropic funders that write big checks and stay around for the long term. But that really is completely dependent on just the people that are there desiring to do that. There's no mechanism that makes term nature happen. On the flip side, venture, you know, there's, there's companies out there that have raised, you know, maybe a round or two from venture.

They've gotten to a certain point and just the nature of the education sector has driven the growth to stagnate. Certain things to happen that create a condition where they're no longer able to access that additional funding. And so they have options on the table. Yes, there's strategic acquisition, but maybe there's more innovation and growth that's possible there with an alternative capital source. And that's really who we want to be. We want to say that if there's still impact there, like we're willing to get behind it and see what's possible with the next phase following this kind of point of growth or inflection that these organizations are reaching.

Michael Horn

And it's interesting off that, like a couple of thoughts occur to me, but one of them, Ashley, is like there's an implication that like there's something untapped in what they're doing or that they could be doing that's apart from the growth question. But they can't access it because the limited growth and you might even say, hey, it's cool if you stay at the 40, $50 million revenue. But what we're really interested in is unlocking this new thing that you could be doing or something with R and D or something like that. Is that the right way to think about why they would get exciting to you?

Ashley Beckner

Exactly. I mean, I think we're thinking about impact and I don't think that impact only comes in the form of a billion dollar company. Right. Like, let's keep those smaller solutions alive in the places where they make sense. And we can do that. And unlike forms of cap, other forms of capital, our commitment isn't time bound.

Michael Horn

It's super interesting. And Callie, it seems to me like your answer to some of that is, well, we're giving the, for the nonprofits that want to stay as nonprofits, we're giving you an avenue to fruitfully do that. It's not that the for profit structure might be wrong for you, but if you go through the trade offs and you feel like no nonprofit's still where it's at, we're at least creating a vehicle that. Is that the right way to think about like the three of you almost as a menu?

Callie Riley

Yeah, for me, I mean, Michael, I think that's a really good observation and just like kind of stringing us together because we want them to be able to have the right capital to make those decisions and what's right for them ultimately in the long run too. And so we'd love for these nonprofits to stay nonprofit. We think they have incredible value. But if they need to move in a different direction eventually after we, you know, kind of end our very long term, multi year investment, that's up to them. But we want them to be able to make those decisions in the right way.

Michael Horn

And from positions of strength, I guess so

Callie Riley

100% yeah.

Michael Horn

Yeah. So let's talk about what this could start to enable then. And like, so that's the problem space we're living in. We started to allude to some of what this could unlock for these teams. Ashley, why don't you lead us off? Like what, where do you see this could go if we have these different menus on the table for organizations, what could it start to enable that perhaps is not being enabled right now?

Ashley Beckner

Yeah, I don't think we really know yet because the options haven't been there. So I'm excited to see what's possible with these new forms of capital coming to fruition. I think maybe some choices that have been made historically again where companies have either sold to a strategic or the choices that have been made inside nonprofits for how they get to their next step or haven't been made because they haven't had the capital to do it, that if we start to see new access to capital, I don't know that we know what's possible with that kind of shift.

Michael Horn

Matt, let's get you in here. What do you think this could enable? What's your view of it?

Matt Haldeman

Yeah, I think the really unfortunate thing is that, you know, whether it's business or politics or education, the best stuff doesn't always win. Like typically oftentimes it's this question of how much did you fundraise? And that's how we determine who the winners and losers are. Which means that there's all of this awesome under the radar stuff that kind of gets left by the wayside. Like I'll give you an example. I'm talking to a charter management organization and here's what happened. So a school leader noticed an issue in her school and worked with her team to design a solution within those four walls. It works so well that they spread it throughout the entire school network. Now they have this great battle tested idea.

They know it works and the question is how do we really expand it? How do we, how do we really broaden it? And I love what you said about menu. I really like that we did this as a panel. And one of the things, one of the things I live in fear of is that someone is going to hear about what I'm doing and saying that. I'm saying, well, you know, this is better than what Ashley and Callie are doing or better than traditional philanthropy or traditional venture capital. No, it's a menu. You get to decide what's right for you. But at the end of the day, it really is all about mission amplification. Lumos and I haven't really talked a lot about what we're doing publicly, but internally when we talk about what we're doing, we call it Project Echo.

And the idea is that you take something that works, that under the radar solution and it just kind of reverberates out and out now.

Michael Horn

Very cool. All right, Callie, get in there.

Innovative Nonprofit Financing Model

Callie Riley

Yeah. So I think Matt and Ashley have had great answers so far and I guess I'm just going to double down on the idea that like we're really hoping to continue and start this conversation or continue this conversation about what we do around the messy middle right between grants and traditional debt, especially around nonprofit financing. We're starting an HQIM, but we know that these are pervasive issues around any products and service focused organization that are in critical growth stages where they're building earned revenue, they're building new models that will lead them towards sustainability, but they're not there yet. And so the way that we're functioning is similar to an equity investor. We're investing in an organization's long term vision and plan and sustainability versus those specific projects with targeted outcomes. And so we're just excited about this idea that we're a fund that can provide layered, patient, flexible funding options that address current gaps in the capital markets and allow for that long term planning that we were speaking about earlier and to what Ashley was saying too. Ultimately with the fund, the way that our model is, we're willing to share in the risk with our investment organizations. And I think that's really necessary as we're exploring these innovative financing models is knowing that there is risk there.

But it's the exciting kind. Right. Where we're learning a lot along the way with these organizations about what's working, what do they need in order to really reach sustainability and scale of their products and services in their organizations overall.

Michael Horn

Yeah. And it strikes me on the high quality instructional material space that you've chosen in particular, there's been sort of, I don't want to say consensus, but like growing excitement around that space over the last call it five years and maybe a little bit longer, but without probably you all there and some other funders, it's not clear that the organizations would be, would, would be there to match sort of this burgeoning demand that we see for this space. That's sort of my outside perspective.

Callie Riley

Yeah, I mean I've been really lucky to be in a traditional philanthropic organization where HQIM was one of the big portfolios And I spent many years doing that. But we can see that there was something that was needed beyond. And I think there's a really key part here where it's, we ask a lot of times brilliant academic leaders with these wonderful ideas to become brilliant business leaders at the same time they're trying to grow the organizations without the necessary long term capital and other types of technical assistance and capacity building support. And so I'd like to challenge us all too to continue to think, and I think Ashley and Matt are doing this as well. But like, what does it look like when we think about comprehensive support? It's not just the funding. Right. It really is things like coaching, TA, access to other networks that I think the research evaluation work that I mentioned that make all these investments sing ultimately for the organizations we're supporting.

Michael Horn

Yeah. And I'm excited about what you'll learn from that also. Like, where are the limitations in our current understanding and how can we sharpen that as well as we forward? And it strikes me, Matt, like you've started to like answer some of those questions even in the Story Shares, right? Like in terms of like limitations of the existing structure and then like what you learn as you fund that organization, right, to have started to grow a little bit that may have been missing in the traditional landscape. It strikes me from the outside. Let me ask this question, which is as we start to wrap up this conversation, why hasn't this menu existed historically? Like why have we always defaulted into these couple, two, three categories that y' all named at the beginning? Like why isn't the invisible hand working, if you will, and why do you three need to be there to sort of create this? Or are there certain structural barriers that you all feel like you might be fighting against? I don't know who wants to take that first, but I'm really curious to learn on this one.

Ashley Beckner

I'm happy to. Yeah, yeah. I mean, I think there's a longer podcast about whether any part of the education sector really functions with an invisible hand. But setting that piece aside.

Some of it I think is inertia. And, and what we're accustomed to, right there are tools that have been brought into the sector by people who have brought their own experience into that tool from other sectors. And you know, we're coming from the education sector, but we're similarly bringing our experience to the tool that we want to deploy. And I just think in education that there is often a mismatch between long term impact goals and short term investor expectations, like the time horizons just don't match up. And so we're, we're just really emphasizing like thinking about the long term here and, and really thinking about the long game.

Michael Horn

I think that long game is a really important thing because I was reading something else the other day about like divergence, right, in life outcomes and test scores where they don't predict perfectly. And you're like, what's, what's going on there in the divergence? Short term versus long term indicators. We don't have all the things we would like to know. So super exciting. Matt, dive in on, on this. Why isn't it naturally happening?

Private Capital Barriers in Nonprofits

Matt Haldeman

Yeah, so if I think of my specific use case, right. Private capital investment in non profit organizations. If you think about barriers, you got to think about it on both sides. So you know, what is the barrier for non profit organizations that would be open to private capital investment? And then conversely, you know, why are investors who might be interested in investing nonprofits sort of hesitant? So let's talk about the first one. So in the last year I bet I've talked to hundreds of nonprofit leaders and the big issue is that they're worried they can't find investors who are really good stewards of their mission. So imagine a nonprofit founder probably spent decades on a particular mission. That founder doesn't see a penny of any sale or any exit. And so their big question is, you know, are you mission aligned to what we're doing right now? Loomis and I are, we're talking to a non profit organization and we are not the first organization to approach them about an investment.

But the other offers that they received, they just, they didn't have a problem with the valuation, but they did have a problem saying, hey, is this investor going to care as much about the mission as we do? Then on the other side, the reality is, and Ashley, I bet this resonates with you, the space just actually isn't that large. Right. So there are 2 million nonprofits in the U.S., sounds like a huge number. But then you're looking for nonprofits at a certain scale that have a healthy earned revenue percentage and that also are open to this sort of investment. And the space gets pretty narrow pretty quickly. And then the final barrier, which is true to both, is just complexity of the deal. Right.

A conversion from a nonprofit to a public benefit corporation requires substantially more legal and financial oversight in order to really do it properly.

Michael Horn

Yeah, and that's actually what you just said there also the supporting structures you bring to bear to help those nonprofits. I was thinking that with story shares, particularly in light of what Callie, you were saying, like what else can we bring to the table that would help these orgs? But I want your voice in this as well. Why isn't it happening naturally?

Callie Riley

Yeah. So I'm trying to figure out if I start with my agreement with Ashley or my agreement with Matt. So first I'm going to start with my agreement with Ashley, which is just we're in this for the long run, five plus years with the organizations we fund. So patience is key and it requires focusing on the long game. At the end of the day, that's not typically how a lot of grant making cycles work. You know, kind of long typically is like two to three years. Right. And so this is a very different type of situation that we're entering into with these organizations.

Second, it's just really hard work. And what we found when we were developing the fund was that there weren't clear models in the education nonprofit space that combined the various instrument vehicles that we were wanting to use with success based features to utilize. So we built our own. We keyed off of learnings and insights from other smart people in the for profit nonprofit financing space. We identified ways our funding could help mitigate challenges the growth stage nonprofit leaders are typically facing. But that took a long time to build that model and a ton of pressure testing too. To say is this going to work? And then finally deploying these type of stackable investments requires a lot more extensive diligence, especially in the finance side, and frequent ongoing progress monitoring to know how the organizations are progressing against their long term goals. And that's a lot of capacity that's needed.

Philanthropies typically may have capacity on their investments team, but may not actually be structured that way on their program teams. And so introducing something beyond and especially thinking about the kind of the combination of the vehicles is just really complex to do.

Michael Horn

Really interesting. All right, you guys have shed a bunch of light on this. I'm going to throw a curve ball as we just asked this last question, which is actually anything that you want to comment on or make sure we highlight like closing thoughts, sort of choose your own adventure or if in a next conversation so someone wants to take this farther, ask more questions, put more of these vehicles into action. What are, you know, you can tease something that we didn't talk about that you would love to talk about in a future conversation. Take it anywhere you want. Matt, you look least flummoxed by this, so I'm going to ask you to go first and then Callie or Ashley, you can go, you can go back to clean up, if you will.

Matt Haldeman

Sure. So the for profit space is littered with examples of successful pivots, right? Like Microsoft, YouTube, Yelp. These are all very different organizations than the day they were founded. My favorite example is Slack. If you don't know, that company was a video game company that came up with a great internal tool to communicate. The video game failed, but they had this amazing tool and they circulated it and that's now Slack. And here's my question. I can't think of, maybe other

People can, but why aren't there more stories of successful pivots in the nonprofit space? I find that really fascinating and, and a little concerning. Right. And, and that for me is sort of one of my hopes that what, what all three of us are doing, right? A little bit of capital, a little bit of support that allows a nonprofit leader to make a few mistakes, try a couple things, and really hone in on fantastic product market fit.

Michael Horn

That is a good tease. Who wants to go next?

Callie Riley

I'm happy to go next. A little bit more think time. So first of all, I'm just excited to say, like we're on track to finalize our first two investments and so more to come on that. But that's a big deal for us this year. And so while they're not public yet, I just wanted to share a couple of key learnings so far is that not surprisingly, there's a strong appetite for patient and flexible capital in the nonprofit space. And the key is that pre diligence, relationship building, diligence, risk identification, all those things should ultimately all lead to short term and long term metrics that align with the organization's overall long term vision and plan. And we've just learned that the metrics you land on to determine success and will monitor shouldn't feel like a surprise to the organization's leadership.

Boosting Nonprofit Growth and Sustainability

Callie Riley

At the end of the day, it should feel like business and behavioral changes that they also see as good and welcome pushes and driving them towards what we hope are really aspirational goals around demonstrating impact, increasing scale, increasing sustainability. And another thing that I think just came up earlier is that really strongly believe that providing early support to growing and scaling nonprofits, especially in building comprehensive, multi year integrated financial models, is huge. And I'm not sure that's done enough. This is just really important given that most organizations that are nonprofits are primarily relying on grants in the early years. But as earned revenue models, other things come online it gets more complex and it's just a different level of sophistication and planning that needs to happen. So I guess this is my push for any funders that are in our audience around capacity building. This is a really great place to start and a little bit of money can go a long way in setting them up for long term success. And then finally my plug, I guess.

Michael, love to continue this conversation with anybody. It's really great being here with Ashley and Matt and I think we just want to expand the tent of people who are really excited about this kind of work.

Michael Horn

Love it. Ashley, you get to have the final word.

Ashley Beckner

Yeah, great. Three things I'll hit. One, just want to reiterate what came up in this conversation around capacity or capital plus support. So capital alone isn't enough and really we need to bring a lot of support to the table. Two, I don't want people to listen to this and think like, isn't there already a robust set of actors that describe themselves as patient capital? What I would push on as we're talking about the long game is that the patient capital that exists today isn't patient enough for this sector and we need to figure out a way to get even more patient about what's possible while still emphasizing the importance of sustainable impact and then teasing. What I'd love to talk about in the future is just who else is in this messy middle today? I'm sure they're out there, we'd love to talk to them. And how do we bring more people into it because we all have three really exciting models and we're not going to get it done alone. Right.

Like we're going to need a lot more people around this table thinking about what's possible in this messy middle.

Michael Horn

I think that's an excellent couple points to end on. Right. Like having a broader ecosystem that you all can pair up with and braid funding and et cetera. Right. Will help strengthen the sets of options that we're talking about as opposed to one funder doing this thing and or sort of the status quo for a given organization. And the patience piece I think is really important as well because my observation is people love to talk about disruptive innovation. I love it as well. But then like their example is like the Apple iPhone or something like that as opposed to steel which took like 40 years or something like that for disruption to play out.

And I think we should be thinking in like, you know, many decades for education as well. These are not short term structural challenges, these are long term, embedded systems in the fabric of our communities that were there for good reasons at one time. And as they get rethought like that just takes a lot of work and a lot of time and a lot of learnings throughout. So huge thanks. A lot of appetite on my end to continue this conversation. Keep learning and pulling more folks in. But Ashley, Callie, Matt, thank you all for the work you're doing and for all of you tuning in.

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