Profiting from Non-Profits

Have you heard about the controversial practice of private equity firms buying residential real estate in the United States? It turns out something similar is happening in the non-profit sector.

The donation platform Friends of Kijabe has used for years, Kindful, a Bloomerang Product , was acquired by a larger company, Bloomerang , in 2021. Kindful was a small privately-held company, had a great product, and played nicely with other platforms like Intuit QuickBooks and Intuit Mailchimp , so I wasn't surprised that a larger company would want access to its tools and resources.

What I didn't realize was why, and who was behind it. Why is a non-profit acquisition listed in Business Wire? And why is parent company of Kindful sending me marketing emails asking me to transition to Bloomerang? Aren't they the same company? What gives?

The Business Wire article lists JMI Investments as the private equity firm behind the acquisition. According to then-CEO of Bloomerang, “We’ve always focused on elevating the effectiveness of nonprofits and now we’ll be able to scale it at a much faster pace.”

What is "it" that needs to be scaled at a faster pace? Is it the ability of Kindful to help non-profit charities to serve donors and do good in communities around the world? Or is it the ability of a private equity firm to collect profit from donor transaction fees and annual subscriptions.

Three years later, a new Bloomerang CEO announces a new private equity partner, Warburg Pincus funded the purchase of QGiv, another small, privately-held company similar to Kindful.

Apparently this private equity consolidation is a trend within the industry. Bonterra (Good Earth) was created through the consolidation of Network for Good (the vehicle behind Facebook fundraising), Every Action, Salsa and multiple other smaller companies funded by private equity firm Apax Partners to create what they call the "second largest social good software company in the world."

GoFundMe Charity recently acquired Classy in an "all-equity deal," taking one of the best fundraising tools into the venture-backed ecosystem including Accel, TCV, Greylock and others. Supposedly, accredited investors can buy GoFundMe stock through EquityZen.

While private equity and non-profit mission aren't inherently at odds, it is a strange development.

A proponent might say that Bloomerang and Bonterra make more money if non-profits raise more money, so incentives are aligned.

A skeptic might say the aligned incentives are dubious. Increasing profits can come only from increased fees or from ponzi-like perpetual expansion.

Historically, software companies like Intuit QuickBooks , Google , and PayPal offered non-profit discounts to social good organizations who used their services.

Now new private-equity-backed software startups are doing the exact opposite from their predecessors, creating platforms that profit from non-profits.

How concerned am I about software companies profiting from non-profits like the one I run? The trend is worrying in that options are limited and more costly with each passing year and with each acquisition. I wish I didn't have to trust donor money and data to organizations I don't completely trust.

I see as a huge counter-acting force, the Donor Advised Fund, which provides an antidote to the rising cost of software programs. DAF's are old-school in that they either send funds to a charity by paper-check or wire transfer, which have little to no cost to the charity and circumvent the fees charged by software fundraising companies.

Donor Advised Funds have their own issues, of course, foremost of which, they do not have payout requirements. If a donor contributes $100,000 this year, they receive a charitable tax deduction on the whole amount, but they may actually direct whatever amount they please to charitable causes.

The National Philanthropic Trust says that payout rate was 23% in 2022. So only $23,000 of every $100,000 contribution went to charities. . .yikes! That makes software company fees look miniscule!

Over time the entire balance in a Donor Advised Fund must go to organizations working for social good and legislation may eventually expedite payout timelines.

For the foreseeable future, the largest gift-receiving options for charities both have major drawbacks. I'll continue to use both, but with a healthy dose of concern.

Cover Photo by Carlos Muza on Unsplash