A Bridge Conversation on Innovative Approaches to Linking Nonprofit and For-profit Models

The nonprofit and for-profit sectors are converging. Trends like corporate social responsibility and social entrepreneurship are leading for-profit corporations to engage in activities that have historically been within the purview of the nonprofit sector. Meanwhile, charities must be equipped to respond to an increasingly “results-oriented” environment. Venture philanthropists may provide huge injections of funding for risky projects, but they want a clear way to measure their return on investment. Web sites like Charity Navigator are applying the kind of financial analysis to nonprofits that used to be seen only on Wall Street. In short, we’re being asked to behave like businesses.

I’ve always tried to bring an entrepreneurial, “for-profitish” mindset to Fractured Atlas. But when I founded the organization in 1998, there weren’t a lot of role models. It wasn’t until a year later that Ruby Lerner started Creative Capital, bringing to it a long and successful career in the arts along with some fresh ideas about how entrepreneurial strategies could serve the community.

Creative Capital broke new ground with a business model that was at once a response to these new realities and a strategy for helping their constituent artists adapt to the changing environment. The organization incorporates principles and practices from venture capitalism and social entrepreneurship. Their approach is holistic, recognizing that solving difficult problems always takes more than money alone. Creative Capital has also proven that a service organization needn’t be poor to be authentic, and that wedding meaningful capital to a clear vision of change can have a powerful impact.

I was honored to have a chance to sit down with Ruby and talk through some of these issues.

Adam Forest Huttler: Creative Capital and Fractured Atlas share a reputation for bringing ideas from the for-profit business world into the nonprofit arts industry. The most conventional way to do this is through a focus on earned revenue, which is the approach we’ve taken. Creative Capital, however, gets its reputation from the use of other strategies, while your underlying business model remains dependent on contributed income from traditional sources. Does this apparent dichotomy in any way undermine your reputation as a businesslike nonprofit?

Ruby Lerner: Our organizational business model is completely traditional, and I’m unapologetic about that. In fact it’s going to get even more traditional as we try to raise an endowment to make our work permanent. Why I think we’ve developed that reputation is that we actually help artists see themselves as small business enterprises. And Creative Capital still has a hybrid approach because of our entrepreneurial sensibility, which I don’t think is related solely to earned income. That said, I come out of arts marketing, so earned income is important to me. And we are currently looking at some new entrepreneurial ideas that are based on earned income.

Huttler: Like venture capitalists, Creative Capital seeks out individuals and projects with untapped potential in the belief that you can help maximize that potential through an injection of both cash and knowledge. In the for-profit world, maximizing that potential is quantifiable and defined by return on investment [ROI]. Obviously it’s much harder to measure the ROI of an artist’s creative or career development. Is Creative Capital a form of venture capitalism? If so, how do you measure your ROI?

Lerner: Our payback provision [by which Creative Capital is entitled to a small percentage of any future profits that result from the project] is obviously one measurement, but by that measure we’ve only had three projects that succeeded. But there are other objective criteria… Did they finish the project? Was it well-reviewed? You could even develop a point system to evaluate a project’s success.

The venture philanthropy concept is really interesting, because they look at “social return on investment,” or SROI. How do you translate that to an arts project? “Are you better off now than you were when we first funded you?” is a good place to start. So, we created a self-assessment form that asks people to identify their goals and to figure out what resources they’re putting into their arts practice and what returns they’re getting out of it. We also ask them to rate themselves at things like financial management, networking skills, time management, comfort level at speaking in public. It’s subjective, but it’s the same person answering at the beginning of the project and then again after three or four years. One of the things that we haven’t yet asked about is their annual income when they come in and what is it at the end. We’ve never gotten to a comfort zone on that one, but in theory I’d really like that information.

Huttler: Before you founded Creative Capital, you ran two other arts-service organizations, Alternate ROOTS and AIVF. What about those experiences led you to where you are today?

Lerner: Alternate ROOTS taught me the most, because it was a grassroots organization with a tiny budget. It needed to be a very smart organization to survive. And actually the idea for Creative Capital’s artist retreats came directly out of my experience producing an event like that for ROOTS.

AIVF was a national membership organization, so one of the most important things I learned there is that what you can do yourself is quite limited, but what you can facilitate is much more extensive. There’s a tendency to feel like things aren’t happening and that the only way to solve the problem is to do it yourself. You can’t solve every problem yourself, but you can help to facilitate solutions. At Creative Capital we do this by creating relationships for the artist and by publicizing the artist’s work. We take ourselves out of the middleman position and become an information broker. In that role, we’re creating opportunities for someone to contact the artist directly.

I think this idea of facilitating rather than doing is a secret to success.

Huttler: At Fractured Atlas, we encounter a lot of skepticism from the Old Guard. The industry leaders who rose to prominence in the ‘70s and ‘80s had a particular paradigm for how a nonprofit arts-service organization should function, and much of what we do at Fractured Atlas is at odds with that vision. Part of what I find so interesting about you, Ruby, is that you are from that generation and yet you’ve developed a model that could only exist today and wouldn’t have seemed possible just 15 years ago. Do you encounter any of that skepticism yourself, or does your 30-year track record inoculate you against such criticism?

Lerner: Absolutely I’ve encountered skepticism. When we launched, I had friends who bet that we wouldn’t get any applications because they thought the model was too interventionist. At most, they thought we’d maybe get 80 proposals. We got 1,800. This is a community that historically has been very skeptical about business and about business language. When I first got to AIVF we had a meeting with a consultant and I kept talking about marketing, since that’s what my background was. Well, eventually the consultant stopped me and said, “In this community, marketing is a dirty word.”

It’s important for you to understand the cultural moment that these organizations grew out of. They came from the nonmaterialistic ‘60s. The ‘80s came, then the ‘90s came, and the business ethos had replaced the nonprofit ethos, but it seems like a lot of people didn’t notice. You have to look at your environment. You can’t found the same organization in 1999, when I founded Creative Capital, as you could in 1976.

But my track record did work in my favor. That I was well-networked in the field before I got to Creative Capital definitely didn’t hurt. I also felt it was very important to articulate the conceptual framework for the work from the very start, and in a way that established the legitimacy of the model. I talked about a system of support — a system that is integrated, multifaceted, and sequential — that combines money with services throughout the life of an artist’s project. There’s not one business word in there that could freak people out. That’s very calculated.

The language you use is so important. So, today we talk about bringing nonprofit values forward by helping artists to use specialized tools and techniques to achieve their goals. You can proceed from your own definition of mission and values to your own definition of success. That is kind of mind-blowing for people when they realize that is possible. We have a wonderful strategic-planning consultant who always says, “You can use these tools if you’re a capitalist; you can use these tools if you’re a communist; you can use these tools if you’re a criminal.” She neutralizes the tools, so that you can apply them in your own way.

As far as people being skeptical of Fractured Atlas’s earned-revenue model… AIVF had an earned-revenue model, but it was founded by the community. Fractured Atlas was founded by a creative entrepreneur who saw a vacuum and came in to fill it. I suspect a lot of the skepticism you encounter stems from that. It’s ironic, though, because you constantly hear people talk about how important it is that we find new models for the nonprofit sector, and here’s one that’s very successful, but it makes some people uncomfortable. I do think eventually your generation will take over and they’ll be a lot more comfortable with Fractured Atlas’ business model.

Huttler: I’m glad you mentioned all this industry chatter about a “new model” for arts organizations. As far as I can tell, most of the proponents of this idea are envisioning some kind of hybrid structure that incorporates ideas and principles from both nonprofit and for-profit corporations. Some have even suggested that we need a new type of legal entity to accommodate this approach. Is this a discussion that you’re participating in, and if so what are your thoughts on the subject?

Lerner: We need a multiplicity of models. There’s not one right model. The way Creative Capital is structured wouldn’t necessarily work for anyone else. You have to understand what your money formula is. If you’re a theater company that does musical revivals, you’re obviously going to be supported almost entirely by earned revenue. But that formula doesn’t make any sense for The Wooster Group. We need to understand that, and then the next step is to start developing typologies around different money formulas that can bring clarity to the field.

I will say that the nonprofit capitalization model is absolutely screwed up. When I look back on the success that we’ve had and try to understand it, I realize that the fact that we were adequately capitalized from day one was hugely important. We were founded with a venture-capital model. First you raise the money, then you start looking for projects to invest in. You don’t identify your investments and then scramble to raise the money you need to invest in them. In the nonprofit sector we really need a radically new approach to capitalization.

Original CAN/API publication: April 2008