This article comes from the summer 2013 edition of the Nonprofit Quarterly, “New Gatekeepers of Philanthropy.” It was first published online on August 16, 2013.

The F. B. Heron Foundation is an investor—a capital investor—in enterprises where we see opportunity for mutually productive social and financial gain. As is the case with most foundations, our work includes nonprofits but is not exclusive to them: we invest across the spectrum of legal forms of organization, in public and private for-profits, governments, cooperatives, nonprofits, and hybrids. Our approach differs from that of most foundations in that all our investing is done to further our mission—the typical approach being that only grants to nonprofits are mission focused. We look for opportunities to make a positive difference through the power of finance and enterprise, skillfully deployed. Lately, we have been encouraged that a growing number of our foundation colleagues are finding ways to make the powerful combination of financial tools (debt, equity, grants, performance contracts, and more), enterprises (nonprofits, for-profits, and others), and program savvy work together to further their philanthropic agenda.

There is one particular need, however, that gets little attention, and it falls under the category of grants—and that is a nonprofit equivalent of for-profit equity capital, especially that subdivision of equity that focuses on mid-stage enterprise growth and change. While there exist some notable exceptions—the Edna McConnell Clark Foundation (EMCF), Omidyar Network, New Profit Inc., Venture Philanthropy Partners (VPP), and Nonprofit Finance Fund have done pioneering work in this area—both this kind of capital investing and the analysis, modeling, and structuring of a multi-party “grant deal” that gives the concept integrity are rare.

But this is not for lack of conversation about capital. In fact, for a while now I’ve been hearing a lot of loose talk about capital in the nonprofit sector—loose, in the sense that we use the word “capital” interchangeably with words like “money,” “income,” “debt,” and even “buildings.” Hand-wringing about our sector-wide need for “capital”—or even “access to capital”—is invariably accompanied by vigorous head-nodding from all sides. “Lack of capital” is reflexively cited as the sector’s final barrier to rapid scaling (of the nirvanic “hockey-stick trajectory” variety). And it has become axiomatic that unleashing untold trillions of dollars from the global capital markets (most of which are evidently panting for nonprofit action) will fix all manner of social ills.

But in our experience, “revenue,” or “income,” is far more fundamental to enterprise and mission success than capital—preferably reliable, repeatable net revenue. We’re talking proceeds of government contracts, reimbursements by third-party payors, sales, net interest, tuition, bingo receipts, dues, ticket sales, annual appeal fundraising, investment earnings, and more. Without it, all bets are off: revenue pays for the operations that deliver goods and services day in and day out. Most businesses—including nonprofits—rely on revenue, not capital, to deliver every day. It’s revenue, not capital, that we need to pay rent, salaries, the electric bill, and similar expenses—and without it, we don’t have a sustainable business. Capital cannot make up for a permanent lack of net revenue.

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So why the flap about capital?

The widely miscast and misunderstood “capital” (particularly “enterprise capital”), while less fundamental than revenue, cradles a growing star performer and takes it to the next level of performance. Lack of capital can sink an enterprise just as it seems to be taking off, even when revenue is pouring in the door.

Planning for, raising, and deploying equity-like capital in a nonprofit fulfills three needs that are universal for a growing or changing enterprise, regardless of tax status: 1) capital investment—separate and distinct from regular income, or revenue—when growth or change occurs; 2) the benefits of shared “ownership” and shared risk by a concerted, expanded group of investors and, potentially, supporters; and 3) the adoption of a protective rather than an exploitative role for these stakeholders (aka the equity holders ethic).1

Without equity-like behaviors and significant amounts of capital in the form of equity-like capital grants, significant long-term growth in nonprofits is painfully slow, often unsustainable, and frequently accompanied by a reduction in program effectiveness. With this capital, while risk is never absent, it is planned for, managed, and mitigated. The benefits go to the ultimate beneficiaries of the enterprise—where the greatest risk in the nonprofit sector resides—and the Shangri-La of sustainability is at last attainable (or at least understood by all parties, whether attainable or not).

Here’s how it works in operation. When any enterprise starts up or grows, it needs both revenue and capital, and, as noted above, the former takes precedence. Beyond regular revenue, owners or managers need at least a bit of capital to set up (or expand, refresh, or improve) the facilities, processes, departments, skill sets, programs, cash reserves, and more that it takes to produce those goods and services in the first place. Capital investment can be as simple and small as a pitcher filled with lemonade, or as complicated and large as oil rigs and barges. And while the platforms built by capital are very different among enterprises, the cash from selling lemonade or selling oil is just the same. Cash is a little like air—everyone breathes the same air, billionaire or foundling, regardless of wealth, body size, planes owned, or trophies accumulated. And when there isn’t enough air—or cash—the consequences are the same for all, great and small.

Entrepreneurs get capital to build that “platform” from a variety of sources: at the beginning it may be friends and family, or the well-known approach of “sweat equity” (unpaid labor) bolstered by personal credit cards. Founders of start-ups in both the nonprofit and the for-profit worlds typically use these methods, often combining them with profound resourcefulness.

Later on, when an organization grows, getting financing to build a larger production platform becomes more complicated, and the process of managing growth itself is challenging. At several stages of growth, the enterprise requires additional capital to expand the original setup to meet expanded demand, to make operations more efficient, or to create new or improved product or program offerings (or all three!). There is a period—sometimes relatively short, sometimes over years and years—when the enterprise needs to spend capital on expansion before t