VCs aren’t paying attention to nonprofit tech. They should be.

MetroMorphosisIn the News

The need for tech in nonprofits is great. The need for investment in startups that serve them is greater.

By Aisha Counts, Protocol

The odds were stacked against Sevetri Wilson when she set out to raise funding for her startup Resilia. She was living more than 2,000 miles away from Silicon Valley in New Orleans. As a Black woman, she’s part of a demographic that’s consistently underfunded

And there was another obstacle in her way: Wilson’s target customers for Resilia’s software were nonprofits, a category that sent VCs running. Most investors, she said, had the mindset of: “Nonprofits? We don’t want to fund anything in that sector.”

But recently, that’s begun to change. In 2020, Wilson raised $8 million from Cultivation Capital and others. She’s since also raised funding from SoftBank, tripled the size of her startup and is now serving organizations including Oxfam America and the Silicon Valley Community Foundation. 

Wilson’s not the only one. According to Pitchbook data, venture funding in the nonprofit sector is more than double what it was five years ago. Nonprofit-focused tech still only fetched about $189 million compared to the $85.5 billion deployed in mega-rounds alone this year. But there are signs investors are beginning to notice this often overlooked but significant segment of the economy. Classy, another software platform for fundraising that services nonprofits, recently raised $118 million in venture funding.

Chris Himes, the CEO of Classy, who started off as an investor in the company himself, said that with their latest round of funding, investors finally started to understand the opportunity. “I think they also kind of saw it,” Himes said. “Wait a minute – this is the largest multibillion-dollar vertical without a strong leader.”

Before founding Resilia, Wilson worked as a consultant helping nonprofits solve their organizational challenges. For a typical project, they were “paying us anywhere from $10,000 to upwards of $50,000 per organization,” said Wilson. This approach worked for larger, well-funded organizations, but not for family foundations or other nonprofits less flush with cash. Wilson wondered if she could build a software product that would offer nonprofits those same services for less money. Now, Resilia charges about $2,000 per organization for its software, which helps nonprofits with legal filings and tracking funders.

But even with traction, revenue and customers, raising money wasn’t easy for Wilson. “When people talk about networks and relationships, I found out firsthand how important those were,” she said. “Here I was, this Black female founder from New Orleans no one had ever heard of.” 

Then, in 2020, Wilson was introduced to Cultivation Capital, a venture firm that focuses on overlooked communities. “She was passionate about helping the organizations that she serves,” said Cliff Holekamp, the firm’s co-founder and managing partner. “We wanted to help the undercapitalized and underserved entrepreneurs in the middle of the country.”

The attention from Cultivation also coincided with the launch of Softbank’s Opportunity Fund, a fund directed at Black, Latinx and Native American founders. Like Cultivation Capital, the Opportunity Fund was formed to prove that investors can yield outsized returns “if you go to places everyone else ignores,” said Dami Osunsanya, a vice president at SoftBank.

To Holekamp lagging investments in tech companies that serve nonprofits are a missed opportunity, given the size of the industry. In 2017, over 12 million individuals were employed in the nonprofit sector, according to the Bureau of Labor Statistics, which was just over 8% of the total workforce at that time. If you consider organizations that fund nonprofits, a group which includes corporations, donor-advised funds and even municipalities and cities, there’s an even bigger market. In fact, according to a report by the Giving USA Foundation, Americans gave $471 billion to charitable organizations last year alone. 

Given the size of the nonprofit industry, you would think investment activity would be high, “but it wasn’t really obvious to Silicon Valley until very recently,” Classy CEO Himes said. 

For Classy, the road to a $118 million round took more than 10 years. “It was like building blocks with moving up the VC food chain,” said Himes. “Classy took a really long-term approach. Each time it would move deeper into the heart of Silicon Valley and raise more money, but it took a while.” 

There are, of course, some good reasons for investors’ historical wariness around the nonprofit sector. The truth is, while many nonprofit organizations recognize the need for new technology, they face barriers when it comes to purchasing, implementing and sustaining that tech. While some nonprofits have more freedom and unrestricted funding, there are others tied to budgets that don’t include overhead or administrative needs like technology. “If I have to choose between paying my people and getting this brand new database, I’m going to choose my people,” said Sherreta Harrison, who oversees partnerships and programs at MetroMorphosis, a Louisiana-based nonprofit that uses Resilia’s platform. 

Nonprofits like MetroMorphosis also often lack IT teams capable of implementing new tools. “Each one of us wears multiple hats, and that’s standard for nonprofits,” said Terina Washington, the nonprofit’s de-facto IT department. Still, MetroMorphosis recognizes the necessity of investing in new technology, and makes room in their annual budget to do so.

Holekamp suspects other nonprofits are beginning to do the same. “I think that the industry is ready,” he said. “I think we’re at the point now where they’re ready to adopt technology.” And as more nonprofit organizations do, investment in the sector will likely increase. 

Wilson, for one, doesn’t seem fazed by the challenges of working in an underinvested sector, and instead focuses on the opportunities. “I always say, 10-plus years ago we couldn’t be doing what we’re doing,” she said. “The market wouldn’t have responded to it.”