First Step Staffing and the power of catalytic capital

The charitable giving model has been: Make money. Give it away. Repeat.

Charitable donations are vital to the social sector. Making money and giving it away so that nonprofits can accomplish critical work is an essential tool. However, many of us are learning that grants and donations are not the only tools for social change. We are finding that certain projects require different tools. And in many cases, we need both a hammer and a drill.

You may have read about the current success of First Step Staffing (FSS). Their model takes for-profit staffing agencies and converts them into nonprofits to serve a gap in the workforce development system and provide rapid reattachment to work for individuals transitioning from homelessness, returning citizens, veterans, and those with other barriers to employment.

In 2017, various players (individuals, foundations, and Community Development Financial Institutions, aka CDFIs) brought different kinds of capital together (grants and low-interest rate loans) to help launch FSS. The origin story of FSS is one example of how we can:

1. Come together in a local deal
2. Use capital creatively to de-risk an investment
3. Spark longer-term, more durable change

Founder Greg Block knew FSS could generate revenue, and eventually be less dependent on donations. However, to purchase a staffing agency and get this enterprise off the ground in Philly, he recognized it would take early-stage, risk-tolerant capital. He needed a combination of grants and below-market-rate loans from early investors to acquire the staffing company. To make this social enterprise work, they needed to leverage both grants AND investments. They needed a hammer and a drill.

In this case, Barra and Samuel L. Fels Fund made grants, which helped to de-risk the deal, additionally, the Patricia Kind Foundation and the Scattergood Foundation both made a program-related loans all to help mitigate financial risk so that investors could follow on with investment capital (debt at reasonable rates). Initial investors included: a consortium of socially minded members of Investors Circle and a senior acquisition loan from four CDFIs, including Nonprofit Finance Fund, Reinvestment Fund, Local Initiatives Support Corporation (aka LISC), and Philadelphia Industrial Development Corporation (aka PIDC).

For the typical investor, taking on early-stage risk often means the promise of outsized financial returns. In the FSS example, individuals and foundations took on early-stage financial risk because of the promise of outsized social impact return combined with some financial return. And FSS has delivered. The 2017 creative collaboration of $7 million in debt and $300,000 in grants has leveraged:

• $62 million in wages to workers who have experienced homelessness or incarceration
• In 2018, FSS’s first year in Philadelphia, it employed 2,664 people and paid $14.5 million in wages
• In 2021, Philadelphia was FSS’s busiest branch, employing over 3,100 local men and women
• The Philly branch now employs upwards of 400 people per week and paid out $18 million in total wages last year; almost 70% of those individuals were previously homeless
• In 2021, FSS received 6.8% of its revenue from charitable contributions, while the remaining 93.2% came from earned revenue. It produces revenue from job placement fees and employment partnerships

FSS combined grants and catalytic investment capital to make the deal work. According to The MacArthur Foundation’s Catalytic Capital Consortium, catalytic capital is a subset of the full continuum of capital—investments that are more patient, risk-tolerant, concessionary and flexible than conventional capital. Catalytic Capital fills capital gaps for impact enterprises and facilitates additional investment. It is an essential tool to bridge capital gaps and achieve breadth and depth of positive impact. As seasoned impact investor and former Ben and Jerry’s President Chuck Lacy says, this kind of catalytic capital can “take the scare out” for other investors.

FSS is just one example of how a combination of grants and catalytic capital can de-risk projects to attract other investors. Philadelphia’s Ujima Developers and Kensington Corridor Trust are also employing different kinds of capital to spark more equitable, local, long-term social change.

We have been lamenting for years that there aren’t enough dollars to support our community’s needs, particularly in a city like Philadelphia with a 26% poverty rate — the highest rate of the 10 largest cities. However, as we recognize the systemic challenges facing cities like ours — including historic disinvestment, the racial wealth gap, and financial exclusion — we need to see and do things differently to get different results. We need all the tools in our toolbox.

Motivational speaker Wayne Dyer had an expression: “When you change the way you look at things, the things you look at change.”

Let’s change the way we look at capital. Let’s be creative and more holistic in thinking about the resources we already have — both grants and investments. Let’s use catalytic capital to reimagine change in our region.