Raising Capital from Private Foundations
For climate startups, philanthropic or concessionary capital from private foundations can be a powerful tool to support early stage product development, growth, and other core efforts. However, this kind of capital presents unique challenges for founders.
We spoke with Gwen Straley for tactical advice on approaching private foundations as a for-profit climate business. Gwen is the Executive Director of 3rd Creek Foundation and Director of Impact Investing & Philanthropy at 3rd Creek Investments, Inc.
Private foundations are generally VERY relationship driven. When funding is controlled by a single individual or family, building rapport with key foundation decision-makers is critical. Here are some tactical tips for establishing and nurturing relationships with private foundations, which are often incredibly difficult to access:
- Look for smaller foundations. While there are a few well-known private foundations in the climate ecosystem, such as Rockefeller, Packard, Hewlett, and Gates, there is great value in looking to lesser-known ones. First, their capital will have a lot less competition given their less prominent brand. Second, the people who run private foundations will be more accessible as well. Seek out foundations with pools of capital in the $5-$50 million range, as they are generally more nimble than larger sized foundations. Since there will be a lot less bureaucracy around investment decisions, these smaller foundations can move a lot faster, both in making a decision and in deploying capital after the fact.
- Don’t cold call. Foundation employees are busy, and will generally not be receptive to a cold call. In fact, you probably won’t get a response. Introductions are key to getting your foot in the door. If you’re considering foundations as a source of capital at all, keep it in your peripheral at all times. The more you’re looking out for them, the more likely you are to come across someone/something that could lead you to a connection.
- Show up everywhere. Organizations like Impact Hub, Founders of Color Showcase, and Toniic are specifically designed to connect entrepreneurs to impact institutions. These groups include wealth managers, high net worth individuals, and people with connections to foundations who are all value-aligned, so leverage them as channel partners to get access. Impact collectives like Toniic and CREO are a particularly good source of connections to private foundations, but present their own unique challenges in terms of access and engagement. To learn more, check out our piece on these groups here.
All the capital
Private foundations can make investments out of 3 pools of capital:
- Program-related investments (PRI): PRIs are investments made primarily for a philanthropic or charitable purpose – the cause taking precedence over the financial return. PRIs are generally deployed as debt, and will typically have lower interest rates than one would otherwise find from private lenders. Foundations treat PRIs as grants for tax and accounting purposes, but generally foundations will at least seek a return of invested capital. Be willing to pitch the PRI angle– don’t be afraid to ask the funder if they’d be willing to run one instead of a grant, especially if demonstrating an ability to repay debt will be valuable for your business at this stage. You can even bring in an accounting firm or advisor to smooth out the process if the foundation has not done one before.
- Mission-related investments (MRI): These are values-aligned investments that foundations make to generate commercial returns for their portfolio. These differ from PRIs in that foundations will seek returns that are commensurate with the risk profile of the investment, similar to what others (VC’s, etc) may also want to see in the market. In terms of tax and reporting for the foundation, MRIs count as private investments. Foundations can deploy MRIs as either debt or equity investments into for-profit companies, generally out of their endowment.
- Grants: Private foundations are allowed to give grants to for-profit companies. The reporting process on their end is similar to a PRI. As long as you have a clear case for your mission-aligned purpose, you should be able to apply for a grant from a foundation.
Telling your story
Pitching to private foundations is very different from pitching to VCs– here are some tips:
- Put impact first. Before getting into any other numbers or metrics surrounding your business, spell out what you’re doing to contribute to your social mission, whether it is related to the environmental crisis or bettering inequity (or something else). There are two parts to this: (a) what your mission actually is, and (b) whether your mission is tenable based on your operating model. If you credibly show that you don’t have to sacrifice impact to make a profit, you’re on the right track. Make sure to include lots of data here, tying quantitative impact to your financial model, so the two can be considered side by side.
- Know who you’re talking to. What separates private foundations from many other capital institutions is that it is private wealth, often controlled by a single family. Decisions at smaller foundations are made by just a few key people– usually three or less. Tell your story in a way that will get the specific individuals you’re talking to excited about your company. Craft your narrative to align with the foundation’s mission and stated goals– you can find these on places like Charity Navigator. Use your research to specifically call out how your business meets their goals. If you can show that you can commit to this mission in a scalable way, you’re golden.
- Build your network around the foundation. As mentioned above, cold outreach is not ideal when it comes to private foundations. Check out what kinds of businesses they have funded in the past. GuideStar is a great source for this information. You can build relationships around key people connected to the foundation– this will be a great source of intel about what they’re looking for. Plus, the connection will give you the upper hand of warm outreach.
- Keep it consistent with how you would pitch others. Other than putting impact first, be sure you’re maintaining all the essential parts of a pitch– this might include content on your team, your operating model, your financial projections, your competitive landscape, etc. Same goes for your data room; make sure to include key company documentation, tax returns, financial statements, pitch decks, etc. The amount of documentation will be commensurate with the stage/age of your organization; plan accordingly and don’t be afraid to ask your point-of-contact to understand what specifics they might be looking for. For some guidance on what makes for a strong data room, check out this piece with Susan Su.
- At the end of the day, humility > grandiosity. Focus on sharing in a way that will lend to your credibility– foundations will be much more open to that. Rather than playing up any potential in your business, be realistic about your impact, and how your experience will allow you to achieve it. This is a key difference from VCs– foundations are not quite as focused on scale, as long as you have the means to create tangible impact. Lead your pitch with concern and stewardship– it will take you a lot further than leading with grandiosity.
Gwen Straley is the Executive Director of 3rd Creek Foundation, as well as an Advisor and Chief Compliance Officer at 3rd Creek Investments Inc. They are an SEC registered investment advisor and provide services for a wide range of clients. She received her BA in Sustainable Development from Hampshire college, and her MBA from the Thunderbird School of Global Management.