ADDventure Capital

A rather widely shared belief within the foundation community holds that philanthropic resources cannot, will not, and perhaps even should not, be expected to keep up with the growing and changing resource needs of the not-for-profit arts industry. This belief has generated lively discussion among arts grantmakers about the future role of foundations in supporting a healthy nonprofit arts sector in this country. Not surprisingly, these grantmakers, like the society more broadly, have focused significant attention on exploring the role of market driven solutions to the needs of not-for-profit arts institutions. This approach perhaps is best exemplified by the growth of interest in the "venture capital" and "social entrepreneurial" models of arts grantmaking that have received so much attention recently.

Robert Crane, president of the Joyce Mertz-Gilmore Foundation, has been an early experimenter in looking for new ways to support nonprofit artistic endeavors. The Joyce Mertz-Gilmore Foundation and the LuEsther T. Mertz Charitable Trust, which the Foundation administers, have been making grants and program related investments for several years now aimed at helping not-for-profit arts institutions gain access to or leverage capital resources that fall outside the traditional philanthropic realm. In a recent interview, Bob and I discussed his thinking and some of the grants that the funding institutions he represents have made recently.
-Alberta Arthurs

A.A. As you think back on the last several years, what led you to become so engaged in this work?

R.C. There was no single factor. Perhaps the most important motivating force for our work in the arts was the assault on public funding of the arts that began in the early 1990s, along with the realization that the small to mid-sized organizations that the Foundation supported would bear the brunt of the public funding cuts. Concurrent with that political shift, changes at the Joyce Mertz-Gilmore Foundation opened us up to thinking differently about some of our grantmaking approaches. By 1993 the Foundation had made a decision to focus its international environmental work on the effort to promote renewable energy in the developing world. The line between not-for-profit work and the for-profit world was increasingly being blurred in this field, and we could not operate effectively in it without broadening our options. Breaching the arbitrary distinction in our renewable energy grantmaking program made it much easier to consider the possibilities in our other program areas as well. At almost the same time, the Foundation was the recipient of a one-time rather substantial increase in resources that could not be added to its endowment. The need to use these resources creatively freed us to think in new ways. The Arts Forward Fund, of which I was one of the early initiators, was our first foray into new ways of looking at cultural grantmaking. So in the end it was a combination of changing public policy and perceptions, opportunity, and an openness to change that started on this journey.

A.A. Would you describe some recent efforts of the Foundation and the Trust to facilitate not-for-profit arts organizations in building bridges to new sources of capital?

R.C. Three recent cases illustrate the range of our approaches in positioning not-for-profits to effectively expand their traditional resource base: 1) a recoverable grant of up to $3 million to The New 42nd Street to complete construction of its mixed use building on 42nd Street; 2) a $100,000 grant to Streb/Ringside to develop a "Box Truss" performance structure; and 3) a $40,000 grant to 3-Legged Dog media and theater group for research and development of a new multi-media software product.

The New 42nd Street
In October 1998, the LuEsther T. Mertz Advised Fund of the New York Community Trust made a commitment to a recoverable grant of up to $3 million to support the final construction costs of a building on 42nd Street to support nonprofit theater and dance institutions. The New 42nd Street already had raised some $18 million towards the anticipated $21 million required to construct the project and sought a bridge loan to complete construction. The bridge loan would be repaid from the proceeds of a commercial mortgage commitment on the completed property. The building, a mixed-use venture with both commercial and nonprofit tenants, will provide much needed subsidized rehearsal spaces, a black box theater, and back office space to a variety of nonprofit theater and dance entities. The cost of servicing the commercial mortgage will be more than covered by the commercial and subsidized nonprofit rental streams.

The bridge loan was sought from the LTM Advised Fund to provide relief from burdensome financial and administrative requirements that would have been imposed by a bank loan during the construction process. The New 42nd Street estimated the costs associated with procuring a bridge loan from a commercial bank to be in excess of $300,000.

After reviewing the possibility of making a low-interest loan to The New 42nd Street, the LTM Trust decided that the better option was a recoverable grant, which in effect was an interest free unsecured loan with a relatively quick approval process and quick turn-around time for payout. The grant, which has yet to be requested by The New 42nd Street, will be made within thirty days of a request from the project that documents the final amount needed for completion taking into account all other financial support available, and that provides written evidence of a commitment for permanent mortgage financing in an amount at least equal to the amount of the recoverable grant request. The recoverable grant will be repayable in full within twenty-four months of its receipt.

The commitment of the recoverable grant has greatly leveraged The New 42nd Street's bargaining position with regard to a mortgage:

1. The organization has avoided substantial additional financial, professional, and administrative costs associated with a traditional construction loan. Those costs would either have had to be raised from private funders or somehow built into the construction loan package.
2. It no longer has to think about the construction loan and permanent loan as a package deal, but simply can seek out the best terms with a commercial bank for a permanent loan on the completed property.
3. The recoverable grant commitment has bought the organization time to raise additional funds for the final construction costs from philanthropic sources. As a result it will likely not need the full $3 million committed by the LTM Trust. A lower long-term permanent mortgage means a more stable rental income base to support the organization into the future.

Streb/Ringside
In November 1998 the Joyce Mertz-Gilmore Foundation approved a $100,000 grant to Streb/Ringside to build a self-contained structure (the "Box Truss") in which all its performances would take place. Streb/Ringside's mission is to market itself within the popular culture so that its work can be seen as easily as an athletic event, circus, or other popular culture event. Because of the nature of the staging and sets required for the work, the company was facing economic and social barriers to presenting its work to a wide array of audiences in a wide array of venues. The cost of producing or presenting the company had become prohibitive for all but large performing venues, limiting both income potential and the types of audiences who could see the work.

The Box Truss was designed to permit the work to be presented anywhere and at anytime, cost-effectively and without compromise to artistic vision. Based on projections in the business plan developed for the project, earned income would be increased through more touring, fewer crew hours to set up the stage, significantly reduced technical costs for presenters, and lower freight costs to move from site to site. After a very well received New York premiere at the Joyce Theater in December 1998, the Box Truss went on to exceed the expectations of the plan in its first year of use. In the first year of operating with the Box Truss, Streb/Ringside almost doubled its budget (from $450,000 to $800,000) by greatly increasing touring. The company also cut the "load in" time for the show from two days to six hours.

The Box Truss has had a significant impact on the Streb/Ringside's bottom line both in terms of its mission to serve broader audiences and the economics of presenting. By reducing presenting costs and creating its own traveling stage, the company has opened up new marketing opportunities both in the commercial and not-for-profit realms. Streb/Ringside increasingly supports itself through its earned income. It is exploring new commercial marketing initiatives with the Box Truss that are consistent with the company's mission and goals. Streb/Ringside now is positioning itself to be what some commercial presenters and agents would call an "attraction" rather than a dance company. That transition, if successful, will have a very significant impact on how the company operates and supports itself.

3-Legged Dog
In April of this year the Joyce Mertz-Gilmore Foundation approved a $40,000 seed grant to 3-Legged Dog to underwrite the initial research and development work of an intellectual property initiative. 3-Legged Dog is creating the software for an integrated, single platform multi-media control system for performances (both theater and events). It will be operated by one computer, making the technology accessible to small and mid-sized not-for-profits and commercial event presenters. Because the system requires fewer operators and is more flexible than existing jerry-rigged systems, it should lower production costs and make touring significantly simpler.

Although originally conceived as an independent for-profit company that would seek out venture capital (after initial prototype development costs of about $75,000), the project has now been reshaped to make the start-up company a wholly owned subsidiary of 3-Legged Dog. As a result of the tax and governance issues related to this structural decision, the company will not be able to accept outside investments until it is fully established, and only then if a decision is made to spin it off. Start-up funds will come from philanthropic sources. Since the JMG Foundation's initial kick-start of the idea, 3-Legged Dog has received an additional commitment of $35,000 from the Robert Sterling Clark Foundation as well as $75,000 from the Rockefeller Foundation. Rockefeller has also offered to help 3-Legged Dog raise the additional $330,000 needed to undertake the first phase of the project.

From the beginning, the project sought and received advice from a strong team of technical, financial, and legal advisors. The decision to keep this endeavor within the not-for-profit realm was made in order to maintain the mission of the theater group, protect the individual artists and technicians, and insure that the originating inventors remain the primary owners and beneficiaries of their ideas. As a subsidiary of 3-Legged Dog the new company hopes to function as a bridge between the nonprofit goals of its members and associates and the world of intellectual property markets. Over time, if successful, the company will also provide an earned revenue stream for 3-Legged Dog.

The genesis of this enterprise, from its initial conception as an independent for-profit company to its current structure, speaks to the complicated terrain that not-for-profits must traverse when considering how best to undertake potential for-profit ventures. Although the Foundation made its grant based on different structural premises, the reasons we found the project attractive have not changed. If 3-Legged Dog is able to raise the additional seed capital from the philanthropic community, the company will serve as a strong example of a way to safeguard the intellectual property of its artist-inventors in the context of remaining true to its nonprofit mission and interests. The Joyce Mertz-Gilmore Foundation's early interest in the idea provided 3-Legged Dog with enough credibility and resources to encourage additional support from other foundations.

A.A. What do you look for when you consider projects for funding?

R.C. My entry point to this work has been long-term institution building. In this context I look for ideas that have clearly framed goals consistent with the organization's artistic mission, a solid plan of action for getting from point A to point B, and strong leadership and commitment from the principals involved. The efforts that I find the most promising revolve around helping organizations make transitions — by creating new earned income streams for their work, leveraging new philanthropic and/or commercial resources, or creating a more powerful negotiating position from which to compete in the market place. Although quite different in the specifics, each of the projects I've described closely reflect this approach.

A.A. What characteristics of your grantmaking do you consider most important to this work?

R.C. As a general rule, we strive to draw on whatever it takes to get the job done in a given situation. Because this work has few precedents, the projects tend to be fluid and idiosyncratic. In this environment it is not a good idea to get fixed on a particular way of doing business. I tend to be opportunistic and pragmatic, keeping in mind my overall approach. In my lighter moments I consider what we do “ADD-venture Capital” since it combines some of the best features of traditional grantmaking with a serious business intent and approach (not to mention the “adventure” of presenting these ideas at board or trust meetings). Having said that, Several characteristics of our process allow us to act when good opportunities arise.

1. Flexibility — If we have learned one thing in this work, it is how fluid it can be. Because these grants typically are not “typical” we often need to tinker around the edges after the undertaking is initiated. We have structured our efforts to avoid getting too fixed on how resources should be used so as not to undermine potential success with a predetermined notion of how to get there. The case of 3-Legged Dog points to the importance of flexibility. The structure of the undertaking was still being worked out when the Foundation approved its grant. We decided not to wait for all the “i”s to be dotted and “t”s to be crossed, since we did not believe doing so was in the best interest of moving the project forward.

2. Quick response — Making grant decisions quickly is difficult for most foundations, since grantmaking is usually built into a structure with deadlines defined by board meeting dates. Many opportunities, however, do not coincide neatly with that kind of decision-making structure. Making exceptions, when possible, has been critical. The Streb/Ringside Box Truss was brought to our attention after the Foundation's deadline for fall grants had passed, but the project's critical timing required us to act outside of our “box.” The Box Truss had to be ready in time to take full advantage of the publicity and exposure of a New York season. Not premiering the Box Truss at the Joyce Theater could have set the company's plan back by at least a year and greatly changed its opportunities both financially and artistically.

3. Early leadership — Putting the first, and often the only, resources on the table has been a reality of doing this work. While in principle I always prefer to partner with other grantmakers, there is not always sufficient time or interest to do so in this arena. Becoming comfortable with this way of doing business has been an important part of our ability to make things happen.

4. Sufficient funding — Perhaps more so than in other aspects of grantmaking, insuring that the funding is adequate to the task is critical. In the case of the Box Truss, we had to be prepared to fully fund the construction costs if the effort was to be successfully mounted in time for the New York season. On the other hand, the timing of The New 42nd Street undertaking allowed us to make a recoverable grant with a cap on the amount, letting it be more like a line of credit.

5. Risk and return — The Joyce Mertz-Gilmore Foundation and LuEsther T. Mertz Charitable Trust have engaged in this work reinforced by a mission to support the institutional development of cultural organizations. We consider risk and return on investment in this context rather than from a purely business perspective. While we are moving into areas that have potential to engage the for-profit community and even to make a profit, our primary role has been to facilitate that potential rather than to benefit from it financially. With this in mind, we view our grants and PRIs as “leveraged buy-ins” to the mission and future of the organization, rather than as deal making per se. This perspective frees us to work in a niche that potentially has very high returns given our mission. It is also an area in which not-for-profit groups often have great difficulty raising money.

A.A. Could you say a little more about the specific niche your work fills?

R.C. I tend to see the work we are doing as falling somewhere between traditional grantmaking and traditional business investing. From my perspective the grants described here represent a very fertile approach for foundations. Our approach uses grants or PRI dollars to strengthen an organization's position, particularly vis-à-vis long term resource development. It puts the responsibility for moving an agenda forward on the organization, but strengthens the effort through a level and type of support that greatly increases the odds of success.