Making a Difference
Nonprofit 501(c)(3)’s, by their very nature, and name, are creatures of limited capital. Money, nonetheless, makes the world go round, and nonprofit enterprises are no different.
How do 501(c)(3)’s typically raise funds?
The proverbial fundraiser. The uncomfortable ask of friends and family. The silent auction down the street. These are all worthwhile endeavors and tried-and-true means. But is there a better way? Can a nonprofit architect a steady, self-sustaining pipeline of capital? In short, yes.
AdvanceNet Labs (“ANL”), an NGO client of the firm that maintains non-profit status, addressed this challenge in an innovative and thoughtful manner that, we believe, provides important lessons learned for other non-profit/NGO entities. As a developer of technology platforms that unlock the private sector’s capacity to profitably engage in the social sector, ANL’s mission is to help unpack human potential in millions of disadvantaged people – enabling them to contribute to their communities. They have done so principally through a non-profit model that – as noted above – has historically depended on individual and corporate donors to fund its important work. For example, incubation funding for ANL came from the United Way’s GroundFloor social innovation fund and they received additional grant funding from Accenture and AT&T. And, if one visits the ANL website today, there is a dedicated giving page for individuals and corporations.
This philanthropic model is inspiring, to be sure, but it’s also a variable and unpredictable source of revenue that makes planning and operations challenging. For instance, how can nonprofit employers recruit and retain top talent without the ability to pay competitive salaries? This was precisely the problem for ANL.
To address this challenge, ANL developed a novel approach to sustained, predictable revenue that – importantly – did not compromise its status as an NGO. Specifically, ANL created a commercial, for-profit subsidiary – AndvanceNet Technologies (“ANTS”). Through ANTS, ANL was able to effectuate a capital raise through a private offering. Investors contributed directly to the for profit entity, thereby gaining an equity position. In addition, some made a direct contribution to ANL, thereby making a tax-deductible donation to a worthy cause.
The key to this structure, which otherwise might sound ‘too good to be true,’ is that the technology marketed and sold by and through ANTS was directly related to the mission of ANL – to improve the use of technology by other nonprofits. Why does that matter? It makes all the difference because ANTS did not encounter limitations from unrelated business taxable income. UBTI is income regularly generated by a tax-exempt entity by means of taxable activities. To avoid this onerous tax implication, a for-profit subsidiary’s work must be germane to that of the nonprofit parent.
AdvanceNet Labs successfully raised sufficient capital through the creation of a for-profit subsidiary and is making a difference in its community every day.
Please check out the great work of AndvanceNet Labs at www.advancenetlabs.org.