Venture Firms Spending Millions To Snap-Up Nonprofit Technology
Individuals donated $286 billion to nonprofits during 2017, accounting for some 70 percent of the $410 billion in charitable giving in the United States. By most estimates, about 10 percent of that was donated was via online avenues, and of those online donations, about one in five were made from a mobile device.
A back- of-the-envelope calculation would mean $5.6 billion in donations were made via mobile. That number is expected to grow as tech-savvy Millennials begin to enter their prime earning years.
That could be at least one of the reasons for the interest by private equity firms in the nonprofit technology space in recent years. And it’s not just fundraising technology. It’s also accounting, finance and Web. According to the Urban Institute, the nonprofit sector contributed an estimated $905.9 billion to the U.S. economy in 2013, comprising 5.4 percent of the country’s gross domestic product (GDP). Of the nonprofits registered with the Internal Revenue Service (IRS), 501(c)(3) public charities accounted for more than three-quarters of the sector’s revenue and expenses ($1.73 trillion and $1.62 trillion, respectively) and more than three-fifths of nonprofit assets ($3.22 trillion) in 2013, according to Urban Institute statistics.
Money attracts more money. Private equity firm Accel-KKR acquired Salsa Labs this past April, a year after it sold a majority stake in Abila, formerly Sage Nonprofit Solutions, to Insight Venture Partners (IVP). Abila was consolidated under the umbrella of St. Petersburg, Fla.-based Community Brands, along with Your Membership, Aptify and more than a dozen other nonprofit-related fundraising and technology firms. Accel-KKR originally bought Sage Nonprofit Solutions in 2013 for $101.2 million, rebranding it as Abila.
Backed by a group of investors led by Arsenal Capital Partners, Frontstream has made at least four acquisitions between 2012 and 2015. The provider of back-end merchant solution and front-end payment and donation management products now has positioned itself among the larger players servicing nonprofits.
The largest player, Blackbaud, continues to gobble up companies to add or improve upon a suite of products, spending about a half-billion dollars on acquisitions during the past four years.
Donor behavior is changing, gravitating toward the mobile phone as Millennials come into their own, giving earlier in life, according to Scot Chisholm, CEO of Classy, a cloud-based fundraising platform that launched in 2011 after several years organizing local fundraising events for nonprofits in San Diego, Calif.
“It’s similar to the relationship between e-commerce and retail, and mobile is growing there, too,” he said. For all the talk about online shopping, it still pales in comparison to retail sales, accounting for a fraction of overall consumption.
Classy, based in San Diego Calif., closed on $30 million in Series C financing late last year, its second round of funding within the past 17 months. That brings to $53 million the total funding since 2011 after $23 million in Series A and Series B investment.
The cost of stock trading is a fraction of what it was 20 years ago and the same thing is happening now in the nonprofit sector, Chisholm said. It might be few years behind but the sector is heading in the same direction: empowering the individual with power and data.
Financial technology, or FinTech, also could play a part as innovations make their way into the nonprofit sector. “The categories and types of investors that you can bring to the table are different now,” Chisholm said. “There’s more activity now than there was five to 10 years ago, for sure,” he said.
Part of the difficulty in raising capital in the early years was that there were very few investors, whether venture capital or angels, who were familiar with the social sector and the technology needs of nonprofits. “It didn’t always resonate in the beginning,” Chisholm said. “What we’re seeing now are some real data points and traction in the marketplace, essentially proving the need,” he said.
The rest of the general investor space notices once a few investments occur, he said. “Their view of marketplace has changed as more companies have seen success,” said Chisholm, who’s encouraged by all the companies starting up, whether in fundraising or an ancillary space.
Insight Venture Partners would only provide a statement from Anika Agarwal, managing director, which read, in part: “Software enables nonprofit organizations to focus on their mission of advancing important causes. Technology can help a nonprofit service their communities through better communication, greater transparency, and improved data and analytics. As the sector expands, we believe that investment in next generation technology will continue to drive growth and innovation.”
What’s attractive to investors in fundraising platforms is the growing recurring revenue of monthly donors and the ability to monetize the donation and payment streams, according to Jon Biedermann, vice president, fundraising products, at SofterWare in Fort Washington, Pa., maker of DonorPerfect. Only a small percentage of donations are made online but that area is growing some 12 to 15 percent a year, Biedermann said. That makes the market very enticing.
To Biedermann, the current scene is similar to what happened in the 2000s, with the rise of Convio, Kintera, GetActive and other firms. “What clearly is happening is a resurgence,” he said.“Venture capital is seeing the market as an opportunity to be a gatekeeper.”
The consolidation during the early 2000s essentially ended with Blackbaud’s acquisition of eTapestry in 2007. “Everything went quiet after the recession,” he said. The pace ramped back up in 2013 when FrontStream started to enter the space through its acquisition of GiftWorks and Artez Interactive.
Of course, like some sectors, it could all just be cyclical. Blackbaud was acquired by private equity during the late 1990s and then went public a few years later and now has a market cap of more than $5 billion and reporting it has 35,000 customers worldwide.
There’s always been a certain degree of private equity in the space and has played a key part, according to Steve MacLaughlin, vice president, data and analytics, at Charleston, S.C.-based Blackbaud. More outside investors have looked into this area during the past few years as an opportunity, he said.
“Maybe this sector has gotten to a level of maturity, particularly in crowdfunding,” said MacLaughlin, pointing to Crowdrise, the firm backed by actor Edward Norton that secured outside funding before being acquired for an undisclosed sum by GoFundMe in January 2017.
When Justin Wheeler first began going to investors, half of them saw the money to be made but the other half didn’t even realize nonprofits use software. The co-founder and CEO of Funraise started out in grassroots and fundraising roles at nonprofits like Invisible Children and Liberty in North Korea (LiNK). Beyond friends, family and angel investors in the first round of funding, there was very little appetite for a company whose customers were mostly nonprofit, he said.
The two-year-old start-up in Long Beach, Calif., announced this past January Series A financing of $9.3 million led by Toba Capital, bringing its total funding to $13 million. There were 20 funders interested when Funraise sought capital. “Investor appetite is growing,” as more headlines bring more attention, he said, noting the $30 million Classy raised last year.
“The market is starting to get a lot of validation that it is a big market.
There’s room for a lot of players,” Wheeler said, pointing to the attention on Ministry Brands (which is part of Community Brands) and Crowdrise that drew investors the past three years. With some 1.8 million nonprofits registered in the United States, there are hundreds of thousands of nonprofits that are not using more than basic software tools and medium and large organizations that could be priced out of other options.
The nonprofit sector still has room to innovate when it comes to fundraising and donors. Big challenges for charities, such as massive donor churn, could be eventually addressed through machine learning and smarter algorithms, Wheeler said. The advent of many payment methods, such as PayPal, Square and Venmo, provide compelling ways to incorporate into the donor experience.
Blockchain technology also will play a role in finance, payments and fundraising, according to Chisholm. “The questions are when and how,” he said.
In the current social climate, people are being energized by grassroots causes, said Meagan Kirkpatrick, head of partnership and communication at Funraise. That’s raising pressure on smaller organizations, not just to be mobile but keep track of donors and data.
“All these entrepreneurs in the world and where they want to their spend time is really a huge positive for the social sector, that more people are wanting to get into it and solve problems to help nonprofit organizations. I’m hopeful that people will start to innovate in different ways, not just make things better incrementally,” Chisholm said.
Corporations are embracing a broader mandate than just pursuing profit and as social impact becomes a more compelling value proposition, that’s making its way to a more senior level of companies and creating some attention, said Brian de Lottinville, president and CEO of Benevity, a B corporation headquartered in Calgary, Alberta, with offices in Canada and San Mateo, Calif.
There’s a lot of money on the sidelines at private equity firms, according to de Lottinville, and all are looking for opportunities, but interest in private equity as investment vehicle is also increasing over time.
Most successful organizations whether for-profit or nonprofit are looking to fill a gap or constructively disrupt something, with greater efficiency and scale, he said.
Just as Benevity is a happy place for people with a social mission, he said it’s also attracted private equity partners that want to invest in doing well by doing good. “It’s a good sign for society frankly that public equity is embracing companies like ours,” said de Lottinville, who came from the private sector because he wanted to “do something with a little more impact.”