A foundation may be able
to fund your business -- if you qualify
By Jennie L. Phipps • Bankrate.com

If your dream business is a company that hopes to do well by doing good, then you may be able to get startup funding from a charitable foundation that shares your worldview.

Program-Related Investments -- PRIs -- are a method by which foundations and other charitable agencies can accomplish their goals by investments, rather than outright grants.

PRIs have been around since 1969, when the IRS changed regulations to allow nonprofit foundations to lend money or make equity investments to both nonprofit and profit-making businesses whose mission furthers the goals of the foundation.

Use of this tool has been further encouraged by the Financial Services Act, which gave more lending powers to nonbanking entities.

PRIs have many uses
PRIs can be high-tech, as when the Markle Foundation recently announced a $4.5 million investment in a profit-making limited partnership with Oxygen Media, an Internet startup firm. Markle and Oxygen will team up to create what they call the definitive source of publicity available about women.

Caroline Williams, president of Grey Seal Capital, an investment bank that focuses on socially responsible investing, is currently trying to facilitate a foundation's equity investment in a for-profit organic chocolate company. The investment will help the company's suppliers, small-scale farmers, get organic certification and provide them with other technical assistance. At the same time, it will help the chocolate maker stabilize its supply of cocoa and improve its quality. Williams is still ironing out details, but she thinks this is the perfect example of the way a small manufacturing company can benefit substantially from a PRI.

Usually, though, PRIs are more down to earth. For instance, the San Francisco Foundation gave Sizzler Restaurants a loan for about $200,000 to train employees with no work experience. They also have been used to build homes in low-income areas, shore up arts groups and support businesses in neglected neighborhoods.

The PRI can be in the form of a loan at below-market rates, an equity investment or what amounts to an outright grant. In general, though, the foundations expect to get some return on a PRI.

That return is what makes them attractive to even well-heeled foundations. Grants may do good work once, but a successful PRI can do good many times because the money is returned to be invested again and again.

How do you get a PRI?
So you have a company and an admirable mission. How do you get a PRI?

Karen Seabury, who handles PRIs for the MacArthur Foundation, and Julia Moffitt, vice president of the Markle Foundation, both offer essentially the same advice:

• Study up on foundations until you find one whose mission might complement yours.
• Read, talk to people, etc., until you really understand the organization's goals.
• Follow the foundation's specific directions but, in general, to make initial contact you'll be asked to prepare a two- to three-page letter of inquiry describing your project. Send it on letterhead, including the project's purpose and how it supports the foundation's program areas. Explain your plan of action, estimate the amount of money you need and describe the potential outcome.
• Don't expect immediate action. Many foundations accept proposals constantly, but don't act on them more than two or three times a year.

Extra bookkeeping required
Once you do land a PRI, be prepared for demanding financial responsibility requirements, including an independent audit and a contractual relationship that contains very specific terms. The foundation will not lend you money and then go away. It has an interest in seeing the money repaid, so it can use the money again.

The foundation also has obligations to the IRS to prove that the money is being used to support its charitable mission, so it is required to maintain some oversight. The IRS rules for PRIs dictate that PRIs must clearly further the foundation's goals; the money can't be further invested by the recipient to directly produce income, and the purpose of the investment can't be to carry on propaganda or encourage legislation. So be willing to accept the foundation staff and board as an active adviser, if not a partner.

Jennie L. Phipps is a contributing editor based in Michigan

-- Posted: Aug. 26, 1999