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Building Better Technology

Investors are pouring new money and ideas into fund-raising software

By Nicole Wallace

In the 1990s, many venture capitalists believed that they could make plenty of money by investing in companies that made it easy for donors to give online.

Millions of dollars poured into such companies, as well as Web sites that allowed shoppers to designate a portion of their spending for good causes and other Internet businesses that promised to revolutionize the way donors give. But when the technology boom collapsed, many of those ventures disappeared overnight.

Investors, however, haven't given up on nonprofit technology. Instead, a growing number are putting their energy -- and their money -- into building software for fund raisers. Several large corporations have bought companies that produce fund-raising software, and two companies that focus entirely on producing software for nonprofit organizations have gone public in the past year -- Kintera in December and Blackbaud in July.

"The fund-raising software industry has been discovered," says Chuck Longfield, chief executive officer of Target Software, a Cambridge, Mass., company he founded in 1992. "It's not this sleepy little industry. It's out there now."

Mr. Longfield's company produces Team Approach, a software system that helps large charities, especially those with multiple affiliates, keep track of information about their donors. For a long time, he says, he would receive one or two calls a year from business people who wanted to invest in or even buy his company, but now, he says, he fields five such calls a month.

Changing Needs at Charities

The influx of deep-pocketed players into the field of fund-raising software has provoked debate on what the net effect will be for nonprofit organizations. Some nonprofit technology experts believe the new money will spur more research and development and better products, and that competition will lead to lower prices. Others worry that the demands of shareholders and quarterly earnings reports will stunt innovation and lead to cutbacks in customer service and support.

But at the same time that the industry is changing, the way fund raisers use technology is also shifting. Organizations are looking for ways to integrate the information about their supporters that they possess but store in different places. For example, the Salvation Army's Western territory, which encompasses 13 states, is searching for a database that can bring together information on all of its constituents -- whether they are direct-mail contributors, prospective planned-giving donors, disaster-relief volunteers, or major donors.

Such a system could help the charity build stronger relationships with its donors, and do a better job of soliciting gifts, says Nicci Noble, Internet development director at the Golden State Division of the Salvation Army, who is helping to lead the search for a new database. For instance, she says, fund raisers might have better odds of success soliciting a bequest if they knew the donor had given regularly through direct mail and had been a longtime volunteer. Says Ms. Noble: "If you don't put all of your giving history in one place for your development officers to have as a reference, they're going in blind to a call."

Several big software companies are responding to the demand for greater integration by adding new features to their products, with the ultimate goal of offering a comprehensive system that can handle all of a charity's needs. Other companies are taking a partnership approach, working together to make sure that information can flow easily from one software program to another. But the ambitions of the larger companies make collaboration more difficult as software companies wonder whether the businesses they are collaborating with today might be gobbled up by one of their large competitors tomorrow.

Growing Investments

The entrance of large public companies and investment capital into the nonprofit-software field started in the late 1990s, and the phenomenon has been gaining steadily ever since.

In 1999, SunGard, a Wayne, Pa., company with $3-billion in annual revenue, bought BSR, a company whose fund-raising system is widely used by colleges and universities.
Since its founding in 1999, Convio, an Austin, Tex., company that offers Web-based software to help charities raise money online, has raised $37-million in venture capital.
Intuit, a Mountain View, Calif., company, acquired American Fundware, a company that made accounting software designed for charities and government agencies, in 2002.
Before it went public in December 2003, Kintera, a San Diego company that provides Web-based fund-raising software to nonprofit organizations, raised more than $32-million in venture capital. Its initial public offering netted $36.1-million, and a July sale of stock brought in an additional $18.8-million.

In 2001, Best Software, in Irvine, Calif., bought Micro Information Products, a company that produced accounting software for nonprofit organizations. A year later, it purchased the company that made the Millennium and Paradigm donor databases, and then in 2003, the company that produced the fund-raising software packages GT Pro and Rainbow Software.

Best Software believed the nonprofit market had strong growth potential because so many of the players already in the field were small, niche companies that don't have a lot of capital, says Jim Foster, an executive vice president at Best Software.

"We felt that we could be one of the consolidating agents," says Mr. Foster. "We could make these acquisitions -- which I'm sure you'll be seeing us do more of in the future -- that will allow us to consolidate that marketplace so that nonprofit customers can rely on a large software vendor for the support and the services that are necessary once they've made a commitment to a software product."

As more and more large, well-financed companies focus on the needs of nonprofit organizations, the chances increase that software capabilities will improve significantly, says Jeff Patrick, president of Common Knowledge, a technology consulting company in San Francisco. Mr. Patrick is also the author of "The Online Solutions Market Review," a report that draws on interviews with 15 executives at software companies that serve the nonprofit world.

"There's this underlying acceptance that the nonprofit industry is three, four, five years behind the for-profit world in terms of its use of technology," he says, "but the reality is that that doesn't have to be true."

Nonprofit organizations may also stand to benefit when it comes time to pay for new technology, says Sheeraz Haji, chief executive officer of GetActive, a Berkeley, Calif., software company that helps charities raise money and conduct activism online. "In markets that are highly competitive, there's a lot more pressure to innovate and a lot more pressure to compete on cost," he says.

Who Benefits?

Some charity officials are also pleased by the growing number of large, well-financed companies offering services.

George V. Morfessis, technology director at the Fresh Air Fund, in New York, says that given the choice he would be more inclined to purchase software from a public company.

Several times, he says, the Fresh Air Fund has had to scramble when a small, privately held technology company from which it had purchased software was bought by another company or went out of business. At the beginning of this year, the company that had developed the software the organization uses to track the children in its summer programs was sold.

"The new company said that they're there for us," says Mr. Morfessis, "but it's been a pretty rocky road with them."

But some in the nonprofit world worry that charities won't necessarily benefit from the movement of big players into the fund-raising software field. They worry that the concerns of Wall Street will trump those of customers.

As soon as a company goes public, it answers to its shareholders and what's best for them might not be best for customers, says Lynn Labieniec, chief executive officer of Beaconfire Consulting, a company that provides technology assistance to nonprofit groups. For example, if a company doesn't reach its revenue goals, eventually it will have to cut expenses, and Ms. Labieniec says that in her experience of working for software companies, customer service is the first thing to be cut.

"Customer support is often the stepchild who suddenly isn't getting that new pair of shoes," she says.

Comprehensive Systems

But what nonprofit customers are demanding is certainly changing the way technology companies do business.

"The days of having a fund-raising software company or having an accounting software company are changing," says Charles T. Cumbaa, vice president for products and services at Blackbaud. "Nonprofit organizations are looking for a broader-based solution that helps them better manage their business, and do it without the expense and complexity and, frankly, the hassle of trying to manage systems that are silos."

With 12,500 customers and annual revenue of $118.1-million, Blackbaud is the leading provider of software to help charities manage donor records. Over the last five years, the company has been steadily adding products and services designed to work in conjunction with the company's fund-raising database, the Raiser's Edge, and expand the ways that charities can use it. For instance, Blackbaud bought a company that specialized in providing tools that allow charities to identify contributors who might be able to make major gifts, and now Blackbaud offers that service to its customers. Other new products help organizations raise money and communicate with supporters online, and manage ticket sales.

While a much newer company than Blackbaud, Kintera has signaled that it too wants to create a comprehensive software system for nonprofit organizations that includes a full-fledged donor-management database and more. The majority of Kintera's customers use the system to raise money and communicate with constituents over the Internet. But since its inception in 2000, the San Diego company has acquired more than a dozen small technology companies that serve charities. Among the acquisitions are companies that offered software and services that help charities run their Web sites, do online advocacy, conduct on-the-job giving campaigns, identify wealthy potential donors, and even manage their facilities.

Effects of Buyouts

As Blackbaud, Kintera, and others have bought smaller companies, the big companies may be better equipped to provide tightly integrated products. But when a small specialty company is bought by a bigger one, its customers -- and potential customers -- worry about whether the company's product will continue to be offered. In cases where the product is continued, organizations wonder whether much more will be done to improve the product.

Smaller software companies, however, do not have the money to develop products that offer the full array of software that charities need. What's more, they say, it doesn't make sense to try to be all things to all people. Instead, they choose to focus on their areas of expertise, and then collaborate with other companies to make sure that information can flow between their systems.

Like Kintera, Convio offers software tools that allow charities to communicate with their constituents via e-mail, manage their Web sites, and accept online contributions. Unlike Kintera, the company doesn't aspire to help charities manage their donor records and doesn't wish to compete with traditional fund-raising software companies, says Convio's founder, Vinay Bhagat.

"We don't believe that you can possibly be the best at everything," says Mr. Bhagat. Many donor databases have been around for 15 to 20 years, and have a lot of detailed functions that would be difficult and expensive to recreate, he says. The time, energy, and money it would take to do that is better spent improving Convio's online tools, and in working with companies that produce donor-record systems so the products can work together, he says.

SofterWare, the Fort Washington, Pa., company that produces the DonorPerfect fund-raising database, has long worked with companies like Convio, Kintera, and GetActive. Douglas Schoenberg, chief executive officer of SofterWare, says that his company hopes such collaboration will ensure that information charities collect online can move easily into DonorPerfect and the software can accept the data.

"What the marketplace wants is components and solutions that work well together," says Mr. Schoenberg.

But consolidation by large software companies is making collaboration more difficult "and creating an environment that may push everyone toward less partnership and more proprietary-ness." Mr. Schoenberg adds, "As companies you have worked with move to provide the kind of functionality that you do, they don't make very good partners any longer."

After the Dot-Com Bust

Many in the nonprofit world remember being left in the lurch when numerous technology companies folded in the aftermath of the dot-com bust. As new companies that provide online fund-raising tools raise large amounts of capital, some technology experts question their long-term viability.

GetActive, the smallest of the three major competitors, has taken a far different approach than Kintera and Convio. It has raised only $2-million. But while that is only a fraction of the capital that its competitors have raised, GetActive's 2003 annual revenue was more than $6-million, compared with $8-million for Kintera and $7-million for Convio -- and GetActive has been profitable since 2002.

Mr. Haji, GetActive's chief executive officer, thinks that his competitors are in danger of making the same mistakes that companies made in the late 1990s -- taking on too much capital and then not being able to grow quickly enough to satisfy investors.

He points to Charitableway, a San Carlos, Calif., company that helped businesses run online giving campaigns for their employees. It was headed by a former Microsoft executive and had raised $43-million in venture capital before closing its doors in March 2001. Charitableway's fundamental flaw, says Mr. Haji, was that it raised too much money too soon.

"It didn't matter to any of the investors that there was a decent company that could have been built over 15 years," says Mr. Haji. "When you raise that much capital, the public markets or the private investors are really saying, 'We're on a timeline. There needs to be an exit and a return in a set amount of time.'"

Kintera's stock price has fluctuated since the company went public in December. It started out at $8 per share, got as high as $18 in March, and on September 7 was trading at $7.33.

Mr. Patrick, the president of Common Knowledge, says that he believes Kintera has good products and strong management, but that investors are worried that too much of Kintera's revenue growth has come from the companies it has acquired instead of from new customers and sales.

"The collective opinion from the market is that there is some question as to whether there's really a business there," says Mr. Patrick. "There's a real concern on Wall Street that this company is bundling together acquisitions and trying to convince the world that that's an operating and valuable company."

Many Changes in Industry

Although it is far from clear what nonprofit groups will gain or lose as the fund-raising software industry changes, some say it is worth taking a look back when looking ahead.

In the early 1980s, Jay Love started as national sales manager at Master Software, eventually working his way up to chief executive officer. The company, which produced the Fund Master database, changed hands several times in the 1990s, and about a year after Master Software was eventually sold to Blackbaud, Mr. Love decided to create eTapestry, which provides Web-based donor-record software. In that time, he says, a lot has changed.

"There was no way 20 years ago that a venture-capital firm would have invested millions and millions of dollars to create technology for the nonprofit marketplace," says Mr. Love. "People would have just laughed."

Fund Raising Software: a Sampling of the Best-Financed Providers

Best Software (Irvine, Calif.)

1982

Subsidiary of the Sage Group, a publicly traded company in the United Kingdom.

2,500

GT Pro, Millennium, MIP, Paradigm, and Rainbow

8,000

$407-million

Blackbaud (Charleston, S.C.)

1982

Made its initial public offering on July 22, 2004.

815

Education Edge, Financial Edge, Information Edge, the Patron Edge, ProspectPoint, the Raiser's Edge, WealthPoint

12,500

$118.1-million

Convio (Austin, Tex.)

1999

Privately owned; has raised $37-million in venture capital.

100

Convio

300

$7-million

Kintera (San Diego)

2000

Made its initial public offering on December 18, 2003. Raised more than $32-million in venture capital before the offering.

289

Kintera Sphere

1,900

$8-million

SunGard (Wayne, Pa.)

1983

Public

10,000

SunGard BSR Advance

150

$3-billion