One of the problems with the institutional investment industry is many of the firms who help oversee the assets for nonprofits are too focused on the markets and not focused enough on the unique challenges and opportunities these organizations face. A lot of consultants forget that the assets they are managing are earmarked to do good in the world. This is why I enjoy working with small and mid-sized nonprofits in this space because so many of them are doing really interesting things and making a real impact in the lives of others. This originally appeared at A Wealth of Common Sense.
Fractured Atlas is a nonprofit based in NYC that I’m currently working with and I love their story because they’re very entrepreneurial and are trying to solve problems for organizations and individuals working in the arts –performing, visual, literary, design, media, and everything in between. Adam Huttler founded the organization almost 20 years ago in his studio apartment and has since grown it into a national organization.
I asked Adam some questions about running a smaller nonprofit, his new angel investment program and much more. This is an interesting discussion on business, nonprofits, technology and more. Enjoy!
Ben: What are some of the challenges of running a smaller nonprofit and what are some of the advantages?
Adam: The challenges are akin to those of any small business, except that they’re exaggerated by the fact that your business model is almost always going to be unsustainable without outside subsidy (i.e. donations). A typical business can generally trust that if its customers are happy and it is serving them efficiently, then it’ll be okay. A non-profit has an additional dimension to worry about, which is finding the money to pay for those services.
The main advantages I see are relative to larger nonprofits. If you’re small, then hopefully you’re also nimble. That makes it easier to respond to changes in the external environment, or to take advantage of unexpected opportunities. It’s also easier to maintain a strong and consistent organizational culture with 10 employees than with 100.
B: Do you ever have trouble convincing people in the arts and culture sector to monetize their talents or are most people in this space fairly business-minded?
A: To pursue a career as an artist, you’ve got to be creative, risk-tolerant, and driven to bring something new and special into the world. That sounds a lot like a typical entrepreneur to me! Moreover, artists are more entrepreneurial today than ever before, since new technologies and business models have radically lowered barriers to entry in our field. And while I’m not a fan of the “starving artist” romantic ideal, it’s true that most artists are practiced at making things happen on shoestring budgets, which requires a certain kind of business savvy.
Arts organizations are different, especially those that were founded a long time ago. There was a time when arts institutions were more insulated from market forces, thanks largely to support from major donors. That’s less true today, but many organizations have either struggled to adapt or sincerely believe that their missions are incompatible with market-responsiveness. These folks are going to struggle to survive in the coming decades.
B: Impact investing is a popular topic in the investment world these days. What does the term mean to you and your organization?
A: For Fractured Atlas, impact investing just means that we care about mission-related ROI as much as we do financial returns. Neither is superior to the other, and both are necessary for an investment to be considered a success. On a practical level, we tend to think of mission criteria as a kind of filter on the sorts of investments we’ll consider. We do that assessment first and don’t even bother considering the financial potential unless we believe it could advance our mission goals.
B: Do entrepreneurs approach things differently in your field or is the start-up world fairly similar in this space?
A: Most of the entrepreneurs we work with have some kind of meaningful background in the arts. Their technology innovations grow out of attempts to solve their own problems. That’s a great place to start as an entrepreneur; finding product/market fit is a lot easier if you have a deeply personal understanding of the market.
At the same time, many (though certainly not all) of these startups are less sophisticated financially and/or technically than their Silicon Valley, engineering-culture peers. That’s not ideal, but in general, I’d rather work with deficits in this area than have to coach some soulless MBA on why you can’t treat artists like commodity inputs and expect them to be grateful for the “exposure”.
B: How will you measure the success of your new angel investment program?
A: We have to hit on both mission and financial returns. The financial returns are essential if we’re ever going to raise another fund in the future. Fortunately, there are widely accepted ways of measuring those results (e.g., ROI, IRR, etc.) The mission impact is just as important, but harder to assess. We try to have as many clear, quantitative metrics as possible, but there’s always going to be some subjectivity involved. Hopefully, we’re intellectually honest enough not to trick ourselves into overestimating our impact, which happens more often in the nonprofit sector than most of us care to admit.
B: How much opportunity is available in this segment of your market to invest in?
A: I believe there are enormous (and increasing) opportunities. The major underlying driver is innovation in exponential technologies. Film editing software that cost $10,000 in 1995 now comes for free on your phone, and that’s just one of 1,001 examples. Artistic production, financing, and distribution have been radically disintermediated. This creates fertile ground for entrepreneurship in the same way that, for example, cloud computing has made it easier to launch and scale web startups.
At the same time (and unlocked by many of the same forces), we’re seeing an explosion in the number of people who don’t necessarily identify as artists and who don’t aspire to earn a living from their art, but for whom some kind of creative practice is an essential part of their identity and sense of self. The maker movement, the resurgence of tabletop gaming, wine and painting clubs, even cosplay are all manifestations of this phenomenon.
On both of these fronts, I’m confident we’re closer to the beginning than the end of the growth curve, especially when you consider that half the world still needs to be connected to the internet. The Exponential Creativity Fund is all about riding that wave while doing our best to nudge the path of progress in a positive direction.
B: What are your criteria for making investments and how much of an active role will you play in managing those investments?
A: Fractured Atlas’s mission is about empowering creativity and giving people agency over their creative practice in the marketplace. That serves as a filter for the kinds of investments we’ll consider. We’re looking for entrepreneurs with meaningful backgrounds in the arts who are using technologies to democratize access to the tools of artistic production, financing, or distribution.
Once something has cleared that filter, then we’ll consider it purely in terms of its potential for investment returns. That analysis is similar to what most conventional VCs do. We’ll look at the strength of the management team, the size of the market, the strength of competition, etc.
As for how active we expect to be… In my admittedly limited experience, VCs tend to think the advice and mentoring they bring is much more valuable than the dollars. Entrepreneurs, meanwhile, view accepting that advice as the cost of doing business if they want the VC’s money! So it’s important to be honest and humble about how active an entrepreneur wants or needs you to be.
Having said that, the Exponential Creativity Fund is never going to be competitive based on the depth of its pockets. If we meet all of our fundraising targets ($10-20 million), we’ll still be tiny by Sand Hill Road standards. We’ve got to play to our strengths. That means attracting entrepreneurs who (1) appreciate that we bring non-duplicative resources and networks to their cap tables, (2) value Fractured Atlas’s reputation and reach in the arts and cultural sector, and (3) want our help beyond our ability to write a check. That suggests a fairly active role. Hopefully, we can engage in ways that are genuinely supportive and helpful to the entrepreneurs in our portfolio.
B: How is technology shaping your industry and what will things look like in the future if you had to make a guess?
A: I’ve already talked about the ways that technology is democratizing the field. Artists are able to engage directly with their audiences in ways that were never possible before. The days are long gone when 5 old white guys at media conglomerates got to decide whose voices were heard and whose were silenced.
This is a fantastic development! It has led to a proliferation and diversification of the voices in our cultural landscape and unlocked the ability to self-curate one’s media consumption.
It does mean, however, that our industry’s traditional intermediaries and gatekeepers are steadily becoming obsolete. That’s true of corporate record labels, broadcast TV networks, and newspaper critics. It’s also true of many arts organizations. In particular, mid-sized arts organizations (i.e. those with budgets in the $1-10 million range) are likely to become an endangered species. They lack the nimbleness of independent artists and small organizations, but they’re also missing the endowments and distribution machines of the mega-institutions. Those that make it will be the ones that have clear and compelling artistic brands and a deep understanding of and respect for their audiences.
Aside from that, we’re currently witnessing the birth of several new artistic media. That’s not something that happens every day or even every century. Mainly I’m thinking of virtual reality and augmented reality. But artists are also using tools like 3D-printing to make physical objects or even musical instruments that were previously impossible. In each of these cases, we’re watching artists develop new aesthetic techniques and conventions that rely on the new possibilities afforded by these media. Here, too, we’re in the earliest stages of the revolution — think “The Jazz Singer” or Elvis Presley. As these developments unfold, the implications – both artistic and financial – will be profound.
B: Thanks for your time, Adam.