What nonprofits need to understand about technology and private equity

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"I'm selling the company."

The year was 2018 and I was standing in the convention center in downtown New Orleans in front of Jeff Gordy, the founder of z2systems. That was the name of the company on the paychecks I've been receiving since 2011. It was in the middle of AFP ICON and I had just walked out of the vendor expo area and ran into Jeff. He pulled me aside to give me the news.

Founded in 2004 by two developers looking to take the idea of constituent relationship management into the cloud, they were shortly joined by Jeff to help establish a company that aimed to centralize many of the technical aspects of fundraising under one system. They called what they created NEON - Nonprofit Enterprise Online Network.

When I joined the company, it had a handful of staff in a small converted doctor's office at 651 W. Washington Blvd. in downtown Chicago. I was basically the first salesperson who didn't get fired; a big reason is that I had a history of understanding the struggles of nonprofits instead of focusing on sales. In my interview, I was told that the company was looking for people who knew sales, fundraising, and technology. I said I knew fundraising and technology and that fundraising is harder than sales.

I obviously got the job. Here's my business card from back then, I stumbled on this when I was going through some old papers in my basement.

So when Jeff told a handful of trusted staff his plan for the company, I didn't honestly know what to think. And from there, I was properly introduced to the world of private equity, venture capital, and what is quickly becoming a critical part of the nonprofit sector that many folks do not know about or do not understand.

What I'm going to do today is drill into three areas:

• What exactly is private equity?
• How does this impact nonprofits?
• What concerns do I have about its role?

What this will not be is a generalized attack on private equity. I will not be drilling deep into the economics of it, primarily because I need to understand the nuances. And I will not be airing any dirty laundry or "juicy stories" about what I've witnessed both internally and in the numerous conversations, I have had with others in the sector also working for private equity-funded firms.

What I will be doing is to help educate the average fundraiser on something that is very much outside of their control and how to think about the long-term implications this has on a nonprofit's ability to manage its operations. The genie is out of the bottle when it comes to this, so you might as well understand what the heck is going on with the companies that you do business with.

What exactly is private equity?

Private equity describes investment partnerships that buy and manage companies before selling them. Private equity firms operate these?investment funds?on behalf of?institutional?and?accredited investors.

Here's a short video that unpacks the basics here (yes, it's from an association that represents PE but is a short TLDR) and I'm including a few key takeaways from an Investopedia article that does a good job of overviewing things. You may also hear the term venture capital and the primary differences between the two are whether they are focusing on mature companies versus startup companies.

• Private equity firms buy companies and overhaul them to earn a profit when the business is sold again.
• Capital for the acquisitions comes from outside investors in the private equity funds the firms establish and manage, usually supplemented by debt.
• The private equity industry has grown rapidly; it tends to be most popular when stock prices are high and interest rates low.
• An acquisition by private equity can make a company more competitive or saddle it with unsustainable debt, depending on the private equity firm's skills and objectives.?

How does this impact nonprofits?

Outside investments have been around the nonprofit space, specifically the nonprofit technology space, for a while now. Most often nonprofits will hear about something like private equity when they see a press release or email from their current vendor announcing that they have been acquired.

Many times, these new acquisitions are funded by private equity. A solid historical recap is found in this early 2022 article by The Nonprofit Times that outlines some context and some perspectives from thought leaders like Whole Whale's George Weiner and NTEN's Amy Sample Ward.

Where the narrative started to change in our sector when Convio was acquired in 2012, with Blackbaud paying $275 million, which translates to $415 million in today's money. However, Blackbaud is a publicly traded company that operates on different rules than private equity.

And for the finance nerds out there, I am aware I'm loosely using PE and VC in the same context, cut me some slack here.

Some private equity-related deals announced in the past few years are:

• JMI-backed Bloomerang acquires Kindful
• EveryAction, Social Solutions, and CyberGrants merged by Apax Partners
• GoFundMe acquires Classy
• iWave sells to Incline Equity Partners
• Serent-backed Quorum acquires Capital Canary

There's more but you get the point. When a private equity firm gets involved, a few things tend to happen but ultimately the biggest one is around the firm's strategy to improve the companies they acquire. And this is where we start to run into issues.

What concerns do I have about its role?

I'm going to focus on the perspective of the nonprofit as opposed to the company itself for today. And there's a massive caveat that the strategy of a private equity firm greatly varies between firms so what I've experienced is highly likely not the same for others. There's also a long and storied history of the difficulties of merging companies regardless of their capital investment structures.

With that said, the issue ultimately comes down to understanding the nonprofit market. And the vast majority of the market analysis that ends up being produced that drives decisions that PE-backed firms make fall into the 3% Content Problem.

Much of the acceleration of mergers and acquisitions in our space since March 2020 has been heavily focused on digitizing technology for nonprofits. And this can be a powerful thing when done right.

But it can also have major consequences if the folks in charge need to understand or care about the nuances that become evident when actually looking and listening to nonprofits in our sector, especially the small shops that comprise most of our sector.

This is why we're seeing such an aggressive push for fintech being adopted into our space. For some companies, offering integrated payments is a no-brainer; we did that before receiving our investment. But for other parts of our sector, we're seeing technology being put forward, which strikes me personally as solving problems that do not exist.

The most recent example I can point to is the emergence of a few companies that do Buy Now Pay Later structured payments for small dollar donors. I'd highly suggest reading through the comments in this article that touches on both B Generous and Givezy, but after hearing from both of these companies I'm still trying to figure out WHY this needs to exist. The short payment terms and revenue volume for small shops in particular need to be clarified here where likely just adopting payment options for credit cards, digital wallets, and ACH will suffice. It exemplifies what I feel is the 3% Content Problem when a product is put out to the market.

We do not have deep seeded issues in acquiring donors because of the lack of BNPL-style payment terms. The data is clear that nonprofits have had issues keeping small-dollar donors because we treat them like piggy banks and have executed poor retention strategies and now these types of donors are simply looking elsewhere (and sometimes outside of the sector) to match their dollars with the passion they are feeling.

Solving problems that do not actually exist with technology tends to be a symptom of when private equity gets involved since an investment can be modeled on the Total Addressable Market of the nonprofit sector (which is significant!). And it remains to be seen if it's just what I perceive to be poor marketing versus a bad fit entirely for our market.

But the first rule of Shark Tank is never to lead and model around the TAM. A company needs to have a hyper-specific focus on what TYPE of client that they want to serve best. So whenever I see any announcements or marketing that ends up framing the issue being something that impacts all nonprofits, that is a red flag to me.

In Conclusion

This is a big topic and one that I'm only scratching the surface of. And it should be noted that I've seen the positive and negative impacts of this. With the right leadership and strategy, private equity can actually be a really interesting option for solving the issues of a segment within a market. I'm excited about the work that our team has been doing and our investment partners have done what I think tends not to happen when PE gets involved - listen to the experts and representatives from the market who will be impacted by their strategy.

One of the most impressive things that our current senior leadership did when they came in was to go directly to dozens of small community-centered nonprofits and have discussions with them to hear what was working and not working. We've made a ton of changes by listening to our customer base and if this is a core principle of the PE firm involved then it works out for everyone.

There is no going back on this either. Nonprofits will have to grapple with an ever-changing landscape of ownership of the tools and services that they use. The best thing that a nonprofit can do is continue to utilize the feedback mechanisms that have been put in place to collect information - surveys, support tickets, product development roadmap voting tools, community forums, and if there is a significant impact on the services that you receive or you notice that some of your favorite staff members are leaving then it may mean there's a strategic shift that is occurring.

There are a lot of unknowns here but I hope this has been helpful in demystifying one of the less discussed parts of the nonprofit sector.