A. Counts and G. Hattem, Board Members, Deutsche Bank Microcredit Development Fu...
Global, July, 21 2020 -
A nonprofit that finds itself in a position of strength amid a rapidly changing world may do more for social change by handing its assets to another organization better equipped to navigate the future.
In 2017, the board of directors of the Deutsche Bank Microcredit Development Fund (DB MDF) came to a surprising conclusion. Despite DB MDF having a two-decade track record of impact, a lean cost structure, substantial market knowledge, and nearly $4 million in assets, the board decided to close down the fund and transfer its assets to another nonprofit to be selected through a competitive process.
Deciding to wind down a nonprofit organization while it still has substantial assets in order to help another organization is not a path often chosen in the philanthropic world. Since nonprofit mergers and other combinations are likely in the aftermath of the COVID-19 pandemic, we wanted to explore how we arrived at that point and the lessons we learned along the way as two of the board members involved with the process.
A Changed World
Between 1998 and 2018, DB MDF made 124 loans totaling $18.2 million to 89 microfinance institutions (MFIs). In its first decade, every dollar it lent led to more than $10 in new financing for MFIs, which allowed them to expand lending to low-income people in developing countries. As it achieved this success, the world had changed: Microfinance had gone mainstream in many countries, and commercial lending to well-run MFIs had become much more common. Furthermore, many mainstream MFIs needed foreign equity rather than debt, while those grassroots organizations requiring debt, such as agricultural cooperatives, were structured very differently from the MFIs that we had come to understand so well.
The DB MDF board concluded that it did not have the capacity to reinvent its strategy to be relevant in such a different landscape. As a result, the board decided that all of DB MDF's outstanding loans to anti-poverty MFIs—which had helped the groups access commercial loans that reduced their dependency on donations—would not be redeployed after they were paid back. Instead, we accumulated a multi-million dollar cash reserve.
As this process unfolded, the board sought another organization with the energy, ideas, network, and values to put those financial resources to work for the benefit of credit-starved microentrepreneurs and small businesses in developing countries. Today, DB MDF’s assets are being used by MCE Social Capital to expand its small and growing business portfolio, a recent outgrowth of the organization’s success in lending to MFIs since 2006.
This decision in some ways was an attempt to get ahead of the creative destruction that is commonly seen (and often criticized) in the marketplace, such as the upheaval in the digital advertising business caused by Google and Facebook. We knew things were changing and that we needed an organization that understood this new world better than we could. The process of finding that team is difficult. Here are some insights for others considering doing the same:
1. Before You Start | When a nonprofit or philanthropic venture is launched to solve a specific problem, consider the possibility that the landscape will change over the following decade in ways that will make its approach less relevant. This might be, at least in part, because the initial strategy (when combined with the efforts of others, including the public sector and market forces) achieves the desired solutions. For start-ups, it may make more sense to define a new initiative with a specific lifespan. In rapidly emerging sectors it may be wise to think differently about the need to build a permanent institution with all the accompanying baggage of a board of directors and compliance obligations. One alternative would be to join forces with another organization with a similar mission.
2. Account for Losses | Anticipate the possibility that a major source of an organization’s stability and resources may come to an end. In the case of DB MDF, that meant pro-bono support from Deutsche Bank to ensure high-quality deal structuring. For others, it might be the death of a major benefactor, the depletion of an endowment, or the ending of a lucrative government contract. Such developments can threaten long-term sustainability. Rather than gloss over this possibility, consider scenarios for dealing with it, which can include liquidating all organizational assets and granting them to a peer institution before they are spent down in what might be fruitless attempts to stay afloat.
3. Due Diligence | Choosing an organization to bequeath your resources involves complex searches, assessments, and negotiations. We made a formal request for proposals and spent countless hours reviewing and scoring those proposals. However, other processes can be used as long as they are rigorous and fair. And while we used an external consultant, this work cannot be entirely outsourced or done on autopilot. Board and staff members familiar with the history and network of relationships of the organization being closed must do the hard work of vetting potential successor organizations and setting up the one they choose for success.
4. Keep an Eye on the Clock | When soliciting proposals from nonprofits to take over your operation, respect their time, since they may have little to spare given the severe limit on resources that many mission-driven organizations face. Ensure that the request for proposals is clear and make yourself available to provide clarifications in a timely manner. Require brief letters of intent at first, rather than full proposals. Finally, meaningfully compensate as many of the organizations as possible that go through the entire process. That could include a grant, publicity, or both. In our case, we provided the seven finalist organizations with $50,000 each.
5. Treat Endings Seriously | Responsibly closing down a nonprofit requires the same energy and diligence that it takes to launch something in the first place. It calls for an active and committed board of directors, despite the tendency of volunteers in such situations to scale back their involvement and focus their time on organizations that intend to remain in operation. The work doesn't stop with the selection of an organization. There are myriad compliance issues to be dealt with, as well as the responsibility to communicate the decision (and the lessons learned) to the wider philanthropic community. Finally, there may be an opportunity to transfer some of the talent and intellectual property of the organization that is winding down. In our case, both of us joined an MCE advisory committee, in part to ensure a degree of cultural continuity between the two organizations.
6. Celebrate | Highlight the achievements of the nonprofit that is being wound down as well as the organization that won the right to carry the mission forward. Doing so can reduce stigma around being part of a closing nonprofit, while also enhancing the brand of the surviving institution. This can be achieved through events, articles, press releases, and blog posts.
Much attention has been paid to managing the life of nonprofits. Far less if any analysis has gone into creatively managing their deaths. This is an oversight that allows some organizations to continue long past the time when they are at the cutting edge of social change. It may siphon resources away from better-equipped groups. The work of creating a more just and sustainable world is constantly evolving. It is important that organizations keep up—or, while they remain strong, find those who can.