Suppose I told you that in first half of 2017 Capital Good Fund had experienced a net loss of over $798 million, yet for a brief time our stock was worth more than that of Bank of America, and this despite the fact that we had financed 25,000 loans relative to their 690,000 in the first quarter? It would be reasonable for you to be concerned about our financial health and confused by how the markets were valuing us.
But all this is true of Tesla, whose stock is soaring on the expectation–or, more accurately, hope–that it has a path to profitability, a path that is rather narrow and requires a lot of things to fall into place. These include: a massive increase in vehicle production and decrease in manufacturing costs; not losing market share to other manufacturers, such as Chevy (which now has an affordable electric car, the Bolt), as they get into the electric vehicle game; and the ability to maintain quality control and customer service during a period of such rapid growth.
Now don’t get me wrong, I love Tesla. In fact, I own a Model S, and couldn’t be happier with it. But if you think about it, Tesla is presently a nonprofit more than a for profit (in fact, by losing money, you could argue that it would be more accurate to call it a negative profit!), and no one cares because they believe that, in the future, they will be profitable. I find this frustrating because Capital Good Fund is treated quite differently. Consider our 2015 financials. That year, we had income of $419,2012 and expenses of $609,885, for a loss of $190,683. However, we also served record numbers of families with financial coaching and lending, maintained phenomenal loan repayment rates, and made significant investments in systems development and personnel–the investments needed to achieve our ambitious growth goals.
Looked at one way, in other words, we aren’t dissimilar to Tesla. We are both investing in growth, have a path to profitability that is doable but ambitious (for us, we need to make 17,000 loans over five years, compared to 2,000 in our first eight), are doing things in an innovative way, and are presently losing money. However unlike Tesla, we were haunted by this small operating loss throughout 2016, to the point that every time I shared our financials externally I had to append a letter from our board of directors explaining the loss and how we would avoid it in 2016.
Before going any further, I should note a few key differences between Tesla and Capital Good Fund. For starters, at the end of 2015 we had only $200,000 of cash on hand and assets of just $629,000; in contrast, as of July 2017, Tesla had over $3 billion in cash and over $22 billion in assets. Even more importantly, Tesla has the ability to raise billions of dollars quickly and fairly easily, by raising debt and / or issuing more stock. Capital Good Fund, on the other hand, can only raise money by borrowing–which is hard to do because our creditors, unlike those buying Tesla stock, are put off by our operating loss–or by raising grants and donations. It should go without saying that getting grants and donations is hard and time-consuming and highly competitive, which means that, when push comes to shove, it is far more difficult for us to raise the money we need to lend and grow than it is for Tesla.
The ease with which Tesla can raise money is perhaps the greatest difference between for profits and nonprofits. The expectation of double-digit returns on investment seems to outweigh the unlikelihood of that return, making it possible for investors to overlook warning signs that they would never overlook with a nonprofit. Now obviously investors in Capital Good Fund will never achieve the same rates of return by lending to us (we only pay up to 7.5%), and we are a riskier investment than Tesla, but I strongly believe that our social mission and social impact warrant taking more risk in exchange for lower returns. At the very least, it should make investors treat us similarly to how they treat other potential investments.
To be clear, Tesla is not the only example of a for profit that is not profitable despite being publicly traded. Snapchat, Twitter, Amazon, Salesforce.com, and dozens more companies are in the same boat. Some of these have dubious business models (hello, Snapchat), while others, like Amazon, are clearly reinvesting profits in growth so that they will be even more profitable in the future. And many of these companies, including Twitter, are seeing their stock price decrease over time because of investor concerns about profitability. Nevertheless, firms like Twitter are not at risk of running out of money to spend; for the foreseeable future they will be able to raise the capital they need to make up for ongoing operating losses.
Nonprofits should be treated the same way. So long as we have a path to social impact and self-sufficiency (we don’t need to make a profit, and in fact can’t do that, but we do need to be able to cover our operating expenses), those interested in donating or lending to us should be willing to accept short-term losses for long-term gains. How else will we fulfill our collective social and environmental missions? It’s impossible to change lives without staff, marketing, systems, professional services, and all the other expenses one incurs when operating a business. Yet funders only want to fund “programs”–as though the cost of a secretary and rent could be separated from the cost of a loan officer that directly serves people–and they only want to donate or lend to organizations that always bring in more money than they spend.
These are impossible expectations. We cannot simultaneously solve difficult social and environmental problems while struggling to raise money and facing the expectation of growth, social impact, and flawless financials. Either we invest in growth and grow, or we don’t and don’t. A $10,000 grant for 25% of a person’s salary, coupled with quarterly reporting requirements, is an onerous drop in the bucket relative to our needs. Capital Good Fund currently spends $165,000, and only 10% of that is covered by interest and other earned income. The balance comes from grants, donations and investments. Moreover, it’s going to take $15 to $20 million in new operating money for us to get to a place where all operating costs are covered by interest income.
Remember, Tesla has the ability to raise billions of dollars, practically at the drop of a hat, to build new factories, hire talent, etc. Capital Good Fund needs just $20 million to hire 60 people and do the other things needed to be self-sufficient, but that is going to be one hell of a struggle; more specifically, it will require about 80% of my time for five years, time that I could instead be spending on product design and development, innovation, partnership building, and the other things that are directly related to our success. (How much of Elon Musk’s time do you think is spent on raising money versus writing algorithms, analyzing data, building products, and dreaming up new ideas? It would be a waste of his time, talent, and energy to run around change small amounts of money all day, but that is exactly what I do.)
It’s time for us to radically rethink what we expect of nonprofits. Investors are willing to bet billions of dollars on dubious business plans and unrealistic paths to profitability, whereas funders are extremely reluctant to give nonprofits money in order to make the world a better place. Not only that, but even when they do give money, they put so many restrictions on it that simply spending the funds is a nightmare. If we are going to enable nonprofits with good business models and demonstrated social impact to scale, it is imperative that we give them the money needed to invest in growth, allow them the freedom to use the money as they see fit, and recognize that investing in growth means spending money, which may very well mean short-term operating losses.
I know that in the case of Capital Good Fund, it is very difficult for us to triple our loan volume, maintain a healthy net asset ratio (calculated by subtracting liabilities from assets, and then dividing that number by assets)1, and show positive cash flow year after year, unless funders pony up more significantly more money and give us flexibility in how we use it. Otherwise, we will in essence continue to face the expectation of “profitability” while for profits will be allowed, in practice, to be nonprofits.
(1) Fun fact. Tesla has about $19 billion in liabilities and $26 billion in assets, which gives a net asset ratio of 27% (26 – 16 / 26) . CDFIs like Capital Good Fund are expected to maintain a ratio of at least 25%, which means that Tesla would barely meet that standard, and would likely be warned to not let it fall any further!