Investing in Change: Ten Lessons for Cultural Grantmakers

In 2008, ten performing arts organizations embarked on an experiment in capitalization. As participants in Nonprofit Finance Fund’s Leading for the Future (LFF) Initiative, the first program to introduce change capital on a national scale, they set out to develop new program models and operating structures that would respond to shifts in the artistic environment and serve as instructive examples to the field.

While Leading for the Future has concluded, the concept of change capital continues to interest and provoke questions among cultural grantmakers. As the former director of the Nonprofit Finance Fund (NFF) program — which was funded by the Doris Duke Charitable Foundation (DDCF) — I am often asked: What is change capital and how is it different from other kinds of money? What are the characteristics of organizations that plan and manage change successfully? Can a grantmaker with limited resources deploy change capital effectively?

Indeed, all funders, regardless of their asset or portfolio size, have an important role to play in capitalizing and sustaining change. At the request of Grantmakers in the Arts, with whom I have toured the country discussing change capital as part of its Conversations on Capitalization and Community workshop series, I take this opportunity to revisit the central tenets of the LFF initiative and to share some of the most broadly applicable lessons for grantmakers.

The Genesis of Change Capital

The LFF program grew out of a series of conversations sponsored by DDCF in 2007. Performing arts organizations at the time expressed many of the same concerns that they do today. Shifting demographics, changing technology, fickle funding, and rising production costs were all having a seismic impact on their artistic development and financial viability. In response, the foundation invited NFF to design a program that would provide a group of artistically excellent performing arts organizations with the freedom and resources to adapt in ways that would prepare them for a very different future.

In 2007–8, change capital was a new concept in the arts field.¹ Simply defined, change capital is substantial, flexible, and multiyear money intended to support organizations as they adjust their programs and operations in ways that contribute to long-term artistic and financial health. Adaptations made possible by change capital can take many forms: they may be modest adjustments to an organization’s scale or scope, or substantial transformations in how an organization conceives of itself and its work.

Change capital, when invested properly, has a number of distinct benefits:

• It gives organizational leaders the time and space to experiment with new ideas, program models, and capacity configurations, knowing that mistakes and course corrections are par for the course and fully funded.
• It reenergizes and, in some cases, reorients staff around a shared commitment to organization-wide change.
• It enables proactive investment in substantial, enterprise-wide adaptation, as opposed to incremental or project-by-project change.

Change capital differs from other forms of flexible money, such as general operating support or risk capital, in that it is earmarked for investment in the business that makes artistic innovation and risk taking possible. What this means in practice is that change capital is spent on activities and capacities that con- tribute to organizational surpluses more reliably over time. Change capital prepares organizations for the time when their businesses must sustain themselves on earned and contributed revenue alone.

The Change Capital Experiment

The LFF program invested in ten performing arts organizations’ strategic plans for change after a competitive selection process informed by a panel of field experts. The grantees spanned a wide range of aesthetic styles, budget sizes, organizational structures, and geographies. Their change-capital initiatives were similarly diverse. For example, an experimental theater company used the funds to increase the reliability of its earned revenue through longer-term touring partnerships and greater diversity in hometown performing venues. Several dance organizations applied change capital to transform the way they use technology and social media to engage and retain audiences and patrons. A number of groups deployed the money to expand young audiences through new programming, pricing, and space configurations.

Participants in the LFF program benefited from a range of financial and nonfinancial resources:

• Each organization received a planning grant of $75,000 to develop a strategy for change, a financial road map, and annual benchmarks to guide implementation.
• All were eligible for $1 million in change capital to be spent according to the deliverables and timelines outlined in their individual plans.
• Coaching from NFF and its consulting partner, Holly Sidford of Helicon Collaborative, was available in the areas of planning for change, change management, financial planning and reporting, and leadership development.
• Grantees were brought together regularly — both online and in person — to discuss their challenges, progress, and learning and were invited to share their stories periodically with the field through webinars and case studies.²
• Exit grants were awarded to organizations that made the most progress in the program for the purpose of advancing their ongoing change efforts or initiating a new phase of change.

The program’s approach to evaluation was also untraditional. Rather than maintain a wall between program management and evaluation, or wait until the initiative’s conclusion to assess results, NFF engaged its evaluator, WolfBrown, as a thought partner. We adjusted our grantmaking and consultative approach periodically over the course of the initiative and encouraged grantees to adapt their own targets in response to changes in their internal and external environments.

In 2014, WolfBrown released its final evaluation of the program.³ Among its conclusions was the finding that while grantees experienced a range of outcomes, most applied change capital in ways that secured, enhanced — and in some cases, transformed — the business supporting their artistic work.

Ten Lessons for Cultural Grantmakers

Many grantmakers may want to consider funding change capital initiatives to strengthen the financial and artistic health of organizations they support. Only a few will be able to do so on the scale of the LFF program. However, the lessons from our experience have broad application.

1. Change capital is a means to artistic ends.

Strong capitalization provides organizations with creative freedom; by contrast, weak finances compromise artistic ambitions. Early in the LFF program, we learned that leading with the language of finance was not effective in convincing grantees of the power and potential of a relatively foreign kind of money. While an investment of change capital must go hand in hand with rigorous financial planning and reporting, the relationship of the investment to artistic outcomes is paramount. Funders that make change capital investments, and organizations that deploy these funds must be explicit about the link between business health and artistic development, while accepting that the relationship can take years to materialize.

2. Not every organization is suited for significant change. The number one key to success is strong, collaborative executive and board leadership.

Leadership teams that are strategic about the choices they make, collaborative in their approach, and willing to make tough decisions in the face of new information will be most successful implementing and sustaining organizational change. These leaders tend to look deep within their organizations for ideas and insights, while also seeking expertise from other organizations within and outside of the arts and culture sector. They prioritize stable finances by budgeting and managing to achieve recurring surpluses and by setting aside reasonable amounts of cash savings. As a result, their organizations are in a position to use change capital strategically rather than as a plug to close structural deficits.

3. Change capital is one tool in the capital toolbox. Grantmakers should consider it within the context of an organization’s comprehensive capital needs.

Change capital should not be the first capitalization priority for many cultural organizations. Some may need to stabilize or recover from a period of accumulated debts as a first step in their journey toward financial health. Others may need to rebuild cash savings so they have a relatively secure foundation from which to pursue change. While LFF introduced just one type of capital to the sector, we soon came to see change capital’s placement within a hierarchy of capital need in which basic liquidity always comes first.

Grantmakers putting their toes in the capital waters should consider each grantee’s next and best use of funds before making an investment. In the LFF program, we remained open to restructuring grant disbursements as organizations’ capital needs evolved. When a few grantees experienced significant hardships at the onset of the 2008 recession, for example, we allowed them to divert a portion of their change capital to cash flow management or debt repayment. This then paved the way for their later, more appropriate investment of change capital. In other cases, when organizations made the case for a slower pace of change, we directed funds to risk reserves that would support artistic experimentation.

4. Grantmakers who provide revenue, in the form of general operating support or project grants, are critical to the success of change capital.

Organizations undertaking change need to prioritize efforts that yield reliable revenue and surpluses over time. For some, these efforts may include audience engagement tools and tactics with the potential to produce earned revenue growth. For others, they may include knowledge, systems, and staff that buoy fundraising results. Regardless of the specific strategy, this direct relationship between change capital investment and reliable revenue is fundamental: without it, an organization risks instability once its change capital is spent.

Funders play a crucial role in sustaining change. In fact, arguably, the sector needs more funders who provide reliable revenue to sustain change than funders who make capital investments to initiate it. This should come as good news to cultural supporters of more limited means. Their ability to be a predictable source of ongoing revenue to organizations emerging from change is absolutely critical. If they make project grants, they should cover the activity’s full costs, including a reasonable allocation for critical administrative expenses. If they are able, they should consider general operating support, which provides arts managers with maximum flexibility to run their business.

5. Education and planning should always precede infusions of change capital.

The LFF experience suggests a significant need for education about capitalization practices and deploying capital for change. Such training should extend beyond executives to boards, artistic leaders, and donors. When all stakeholders do not understand the nature of change capital, the temptation to divert these funds to special projects grows.

While knowledge about capitalization principles is critical, it is insufficient. Cultural organizations must also develop the skills to translate their learning into comprehensive plans for implementing and sustaining change. A plan for change capital should marry strategy with financial goal setting and be grounded in an understanding of donors’ and audiences’ willingness to support the organization in its future state. For funders with limited resources, a special grant for financial training and planning can be a cost-efficient way to prepare organizations for the arduous path of change.

6. Change capital is useful for organizations of all budget sizes. But an investment of change capital should be scaled to the size of the change at hand.

Capital benefits organizations of every type — small or large, emerging or mature, community-based or institutional — during pivotal moments of change. However, the LFF program taught us that change capital should be sized in proportion to grantees’ intended adaptation, as spelled out in their plans for change. If the capital amount is too large (or deployed too quickly), it can destabilize an organization by leading to cost expansion ahead of revenue growth. If it is too small, its intended impact may be muted. To mitigate this risk, the LFF program encouraged larger organizations to focus their investments on specific areas where the money could make a meaningful difference. Smaller organizations were encouraged to take a gradual approach to change, by either stretching out their timeline or implementing their priorities in phases.

7. Change capital should not signal growth but rather a progression to the appropriate next phase of development.

It is the rare cultural organization that sees its future in “steady state.” Far fewer are willing to conceive of themselves as smaller in scale. And yet, several grantees in the LFF program pursued plans that did not grow their organizations; they saw the investments as opportunities to reconfigure staff, reconceive fundraising, or reshape programs.

Change capital can also help orchestrate end-of-life transitions. The story of how it enabled the Cunningham Dance Foundation to close in a responsible and elegant way — while transferring Cunningham’s most important archival assets to a new trust and providing transition funds to dancers and staff — is a textbook case of how to use change capital to wind down an organization while preserving its legacy.⁴

8. Investing in change is risky. Grantmakers can mitigate this risk by encouraging data-informed decision making.

No plan for change ever goes according to plan. The LFF program understood that some grantees would stumble occasionally during the change process, while others might fail altogether to realize their original goals. Several grantees experienced significant hardship as a result of the economic slowdown and scaled back or phased their plans accordingly. A few were confronted with changes in executive or board leadership that derailed elements of their strategy.

Performance measurement was a central tenet of the LFF program. We asked grantees to set program and financial metrics, track them over time, and explain variances to plan. We made this requirement not for the purpose of compliance but as a way to inform discussions with grantees about their performance, progress, and course corrections. The grantees that were most successful were rigorous about data collection and monitoring. They were also willing to use data to make difficult decisions about what to do — and what not to do.

The larger and riskier the change capital investment, the greater the need to hold grantees accountable for setting milestones and making progress toward them. Given the reluctance of many cultural leaders to engage in data-informed practices, funders (or the consultants they engage) will need to take an active role in encouraging grantees to embrace the use of benchmarks.

9. Change doesn’t happen overnight. Change capital must be patient.

Investors of change capital embark on multiyear journeys with their grantees. Efforts to engage new audiences, build new technologies, cultivate new donors, and test new program models take time to pay off. Some grantees in the LFF program achieved their goals fully by the end of the six years; for others, goal attainment remained some years off. When circumstances change, grantmakers must be willing to reconsider their investment timelines or work with organizations to rescope their change efforts to fit the grant period. Meeting every milestone is less important than making continual progress toward a realistic set of ambitions.

10. Cultural funders need to coordinate their efforts to build adaptable organizations.

The dialogue about capitalization in the arts and culture sector has expanded in recent years, thanks to efforts by Grantmakers in the Arts, Doris Duke Charitable Foundation, Nonprofit Finance Fund, and many others. However, change capital remains underappreciated as a critical tool for strengthening the long-term health and vitality of the sector. Grantees in the LFF program and other cultural organizations with whom I have worked report receiving little, if any, support for sustained business model adaptation. Few are willing to broach the need for this kind of money with other supporters, choosing instead to package their change efforts as a series of piecemeal projects.

Because enterprise-level change can be expensive and time intensive, building a groundswell of support for change capital will require increased collaboration among existing and emerging capital grantmakers. New institutional and individual donors must come to the table — as both catalysts of change and stewards of the newly changed. Moving change capital to the mainstream is not just a worthy goal. Given the challenges that lie ahead for the sector, it is imperative.

NOTES

1. 1. Capital for change is common in the for-profit sector and has been applied successfully in other nonprofit fields, typically to support plans for growth.
2. 2. A series of written and video materials, published by Nonprofit Finance Fund, conveys stories and lessons learned from LFF: http://nonprofitfinancefund.org/case-change-capital-arts.
3. 3. “Lessons Learned about Change Capital in the Arts,” an evaluation by Alan Brown and Arthur Nacht, is available at: http://nonprofitfinancefund.org/files/lessons_learned_about_change_capital_in_the_arts-rev.pdf.
4. 4. Cunningham Dance Foundation, The Legacy Plan: A Case Study, 2012, http://www.mercecunningham.org/history/case-study/.