This year Next Street has worked extensively with CDFI leaders to discuss the state of the industry and where it is heading. At the start of the year, I interviewed eight leaders from some of the largest organizations in community development, challenging them to answer questions on everything from how they measure impact to what types of innovation are needed to take CDFIs into the future. In September, Next Street and Deutsche Bank’s Community Development Banking Group convened eighteen CDFIs for a discussion titled Beyond the Balance Sheet. The all-day event was a step towards developing solutions and capabilities among CDFIs to more fully leverage their balance sheets by connecting them to experts from Wall Street, ratings agencies, and the FinTech industry.

Here are a few reflections on what we’ve learned through our conversations and relationships with these leaders and their organizations.

The Tides of Leadership are Turning

The next generation of CDFI leaders have arrived and they are increasingly prevalent in the industry. Of the eight leaders interviewed, only one was a founder. This is a big change from even five years ago. This new group of leaders are often experienced managers and operators, sometimes from different industries, and consequently bring different perspectives to their organizations. Without exception, all are still visionaries and strong leaders with a passion for providing access to communities and individuals that otherwise would be left behind. In that sense they don’t differ as much from the founders. However, the urgency and comfort with change is great. They are acutely aware that, as CDFIs they need to evolve if they are going to be successful in a landscape where much of their historical funding, particularly bank and government, is at risk or at a minimum changing. They are also less likely to be personally attached to the history or origins of the CDFI they lead. My hope is that this will lead to faster and more audacious change in pursuit of their visions.

All are visionaries and strong leaders with a passion for providing access to communities and individuals that otherwise would be left behind.

CDFIs still haven’t cracked the code to their business model

Boston Community Capital (BCC) is the only CDFI interviewed that has been self-sustaining on a consistent basis – in this case the last twenty years. It took years of discipline to instill a culture of breaking even without philanthropic support that is often readily available and a drive to continuously explore new areas through which to advance its mission. The importance of self-sufficiency is not lost on the others. All leaders expressed a focus on increasing their institutions’ earned revenue. The question is will or should CDFIs ever be fully self-sustained? Several that I spoke with would argue no; many core programs that are both key drivers of their mission and part of the differentiated value proposition of a nonprofit financial institution will perpetually require subsidy from philanthropic capital.

No one wants to be a bank

No one interviewed thinks they are like a bank. They acknowledge that at the end of the day they are lenders and therefore may be risk averse. Frank Altman, CEO of Community Reinvestment Fund (CRF), said it best: “I do think that CDFIs have become more risk averse than they were earlier in the evolution of CDFIs. They’ve become more risk averse in part because they are heavily relying on bank loans and investments to capitalize their balance sheets. That being said, they still take more risks than banks. But do they take enough risk?”

There are benefits to being more like the banks. Capital Impact Partners (CIP), LISC and CRF have been able to attain ratings from S&P, which has allowed them to issue bonds that have been purchased by traditional investors who historically have not participated in the community investment markets. CDFIs should resist the pressure to become more bank like because of pressure from their current funders. The key premise behind CDFIs is that they “fill a gap” and provide both capital and services that mainstream institutions such as the banks either cannot or are not prepared to do.

Money matters, but so do people

Capital is very much a focus for these CDFI leaders. Everyone is concerned about what may happen to the New Markets Tax Credit Program, the grant budget of the CDFI Fund, and CRA legislation. Many spoke about the need to seek alternative sources of capital, including from impact investors. Most see themselves as the original impact investors, best positioned to help investors seeking both financial and social return.

Most see themselves as the original impact investors, best positioned to help investors seeking both financial and social return.

Capital is essential not just as a funding source, but as their product portfolio. Some, such as Coastal Enterprise, Inc. (CEI) and BCC, already can offer a “continuum of capital” (from equity through traditional debt) to their investees. Expanding that continuum came up in several conversations. It will be a challenging but groundbreaking journey if CDFIs are able to evolve from lenders into equity investors.

Financial capital is not all that mattered in our conversations. All were mindful that their success is heavily dependent on the talent they can retain and attract. Many of the leaders are conscious that their staff need to reflect the communities that they serve and are increasingly focused on diversity, equity and inclusion as a core value. CDFI boards are often more reflective of this than the staff.  Obtaining high quality talent will necessitate rethinking compensation and, just as importantly, strategies to attract the millennial generation – many of whom are seeking to work at the intersection of doing well and doing good. This is easier said than done and requires intentionality in recruiting and retention strategies.

The cutting edge is sharper than you think

Many observers of the CDFI industry see it as staid and conservative. I was blown away by the amount of innovation taking place within all the organizations interviewed. Here are some of the examples of that innovation:

  • Capital Impact announced a joint venture last year with the large REIT firm Annaly Capital Management that is putting $20 million of equity into a vehicle to allow Capital Impact to make transformative investments in the communities they serve.
  • LISC was selected by Facebook to lead a hyper local initiative to develop affordable housing in Silicon Valley which bodes well for CEO Maurice Jones’ desire for tapping more of the technology corporates as sources of capital to support their work.
  • IFF is building a market making function to connect opportunities in their markets with investors and have renamed their community focused activities a Social Impact Accelerator.
  • BCC developed an innovative program in response to the foreclosure crisis called Stabilizing Urban Neighborhood (SUN) that is now being extended to other states.
  • Opportunity Fund, with its innovative loan product to low income truck operators, created a triple bottom line impact utilizing the CalCap program in California.
  • CRF has launched an innovative technology platform known as Connect2Capital that will allow second look loans to be available from banks to CDFIs in the geographic footprint they are most interested in.
  • CEI has continued to develop its continuum of capital with the recent launch of a solar energy fund, Bright Community Capital.

All of these observations point to one thing: change. The CDFI industry is mature, and mature industries need self-reflection, new and strong leadership, and innovation to continue to grow. Each of the leaders we interviewed are at the forefront of the next phase for CDFIs and they are actively seeking change. They are not only thinking ahead but also acting now to push their organizations and the industry forward.

Tim Ferguson is Next Street’s Founder and Chairman