[More thoughts from the Grantmakers in the Arts Conference in Chicago. If you’re really interested in what’s going on, be sure to track the Twitter stream.]
There was some useful and difficult discussion today at the Grantmakers in the Arts conference, much of it surrounding the charge to reframe how arts funders think and talk about capital and capitalization.
Many funders will admit, in private, that their expertise and interest lie on the program side of their work, rather than on balance sheets and income analysis. Others will complain that an emphasis on financial health and performance distracts from the larger purpose of their work — enabling compelling and transformative arts and artists. Still others claim from experience that healthy financials and vibrant artistic work don’t always track together — that, in fact, organizations with the strongest balance sheets are the least innovative and risk-taking.
These are hard questions, and worth wrestling with. Kudos go to GIA and the capitalization team for tee-ing up the ball.
But there are two assumption embedded deeply in the summary report and the resulting conversation that feel like deep and distracting sand traps:
- That arts organizations are under-capitalized, for the most part, and;
- that arts are over-supplied in many communities.
My blogger colleague Arlene Goldbard has already engaged the second point, suggesting that many are willing to claim oversupply, but few are able to suggest which arts groups should be chopped. Many also claim that participation rates are dropping even as nonprofit arts organizations are forming and growing. But, other evidence suggests that arts participation is growing in many ways — it just happens that it’s not growing where we’re looking or where our revenue models require (think amateur arts, community arts, personal practice).
But I’ll take a shot at the first assumption: that arts organizations are, on average, under-capitalized.
The first answer is: perhaps, but so what? Arts organizations are primarily small businesses. And small businesses are predominantly under-capitalized — in any industry, sector, or community, for-profit or nonprofit. Nothing unique to the arts there, and lots of productive ways to make things better.
The second answer is: wait a minute, let’s be sure we’re defining our terms. Capital, writ large, is any asset that enables the production of goods and services — buildings, equipment, cash reserves, and such. We all know many arts organizations that are struggling under the weight of their buildings, their equipment, and their overhead — especially as income sources constrain. These organizations aren’t under-capitalized, they are mis-capitalized. They’ve got too much capital in one form (buildings, equipment) and not enough capital in another (working capital, accumulated cash). That’s a much more nuanced problem than under-capitalization, and worthy of a much more nuanced response.
The Nonprofit Finance Fund’s Clara Miller made the challenge quite clearly during her presentation this morning. Healthy financial operations are all about relationship, context, and balance. “Too much” or “too little” of any piece means nothing out of context with all the other pieces — mission, revenue, expenses, value, capital, cash.
The same can be said for “over supplied” and “under supplied” arts in any community.
A productive answer requires a productive question. I think our most productive questions when it comes to capital, cash, supply, or demand will avoid such bundled assumptions about what’s “over” and what’s “under” in the current state of the arts.
As ususal the discussion is all about identified or quasi-identified problems, and little discussion of solutions. Has GIA addressed how to create incentives to capitalize, or redirect their capitalization? And/or how to create incentives within local communities to better direct supply toward demand?
I respectfully offer this thought in response to my colleague Jim Undercofler’s comment and the original article. As the person charged with thinking about the arts sector within Nonprofit Finance Fund’s Philadelphia program, and with a lot of pre-finance background in the arts myself, what I’ve found liberating about the discussion related to Capital (writ large as the author mentions) is Clara Miller’s suggestion that we re-think what kind of capital and assets we need to succeed. Thus an organization, such as a ballet, can make the case that a capital investment in a story ballet is the right asset to produce revenue in ticket sales, new supporters for the new show, and rental income on the set and costumes, rather than only thinking in terms of buildings and endowments for capital needs.
In that sense it feels solution oriented to me when we can help arts organizations make a stronger capital case. This is also true in the notion of “building” organizations, or re-capitalizing, not just “buying” goods and services year over year. We see organizations weakened from years of under capitalization who need equity investment and NFF has given me the tools and language to share with the arts sector in this area as well. I’ve found that having a sound basis for investment will gain traction with grant-makers – even as we carry the message in hopes that it takes hold in the field overall.
Are these problems identified or quasi-identified as you suggest, without proffered solutions? Where I am seeing the solutions are in the field, among the artists, and the hope is that the grant-makers will listen and support the innovation that is arising: cost off-sets, bartered services, new creative inventory, shared performance bills, consolidated administrative services, online solutions, fiscal sponsorship instead of creating a new 501c3 – there’s a lot going on out there!
I’d like to propose an additional thought to this interesting and critical discussion: the traditional model of capitalization for traditional arts organizations is upside down from an incentive and operational point of view.
In commercial enterprises, one invests capital to stimulate future revenue, which one assumes (or maybe hopes) will far surpass the original capital invested. Often this investment takes, at least partially, the form of investment in research and development. Such businesses are used to, and have many means to maximize their capital. One mechanism is to increase it through leverage, which is mainly possible because of the expected potential return. As we have all recently seen, some businesses were able to leverage their capital by 100:1, even when not creating anything of tangible value.
Traditional arts organizations can be seen as businesses requiring tremendous research and development to accomplish their core mission. Every new production, dance, film, painting, sculpture, or piece of music is a research and development project that may or may not return any revenue at all.
And yet, the most popular capital that the organization can accumulate, usually in the form of an endowment, is not able to be leveraged. In fact, because the underlying premise is preservation of capital and not research and development, the organization has what I refer to as “negative leveraging,” usually requiring $20 dollars of capital to be able to spend $1 (the prudent draw of 5% on endowment). I would argue that these strictures provide exactly the wrong incentive for these organizations that have high research and development needs and costs. Imagine a pharmaceutical company that has to have $20 in the bank for every dollar it spends on research and development!
Preservation of capital is about preserving the institution and not the mission (at least not directly). Leveraged investment in research and development is about building the future of the organization and directly supporting the mission activities.
I am not advocating we scrap the rules around endowments, but only that a real discussion of the purposes and uses of capital for such businesses, whose mission to create requires great research and development would be very helpful. Perhaps our organizations would be stronger and more importantly, more successful in their core mission to create, with another model to follow.
Completely agree with both of your core points here:
“Arts organizations are primarily small businesses. And small businesses are predominantly under-capitalized”
“These organizations aren’t under-capitalized, they are mis-capitalized. They’ve got too much capital in one form (buildings, equipment) and not enough capital in another (working capital, accumulated cash).”
Neither of those points is being made often enough, though Clara Miller is as you noted at least trying to get across the second one. (I attended her session at the GIA conference.)
Meanwhile the “arts are over-supplied in many communities” argument strikes me as quite superficial. Does the fact that many restaurants struggle financially in dynamic cities lead us to bemoan the “over-supply” of restaurants in Chicago or San Francisco or wherever? Might the constant flow of new arts orgs created by new groups of young artists represent an indicator of the sector’s healthy dynamism? Might it in fact represent new _demand_ (that of young people for a life in the arts) rather than of supply?