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Nonprofits and the Emerging Social Capital Market

By Nell Edgington



Socap ImageLast week’s Social Capital Markets Conference was an amazing experience.  You really felt as though you were at the beginning of something pretty innovative.

The financial market collapse of the last year has given the emerging social capital markets, where social impact and money converge, a voice and credibility.  Indeed some social investments, like those in the microfinance arena, have actually far outperformed the financial returns of the traditional capital markets in the past year.

Will it last?  And will money begin to flow more readily to organizations and projects that promise a social return?  Will, as some at SoCap forecasted (or perhaps hoped), impact investing become a significant part of a normal investor portfolio in the next five years? Will social impact become a necessary and prevalent part of the traditional capital marketplace? Who knows.   This whole space is evolving, and it is much too soon to understand how it will all play out.

One thing, however, that was lacking in last week’s conversations, and is worth a larger discussion, is how nonprofits, those organizations that have been creating “social impact” since before it was cool, fit into this emerging market. As I mentioned in earlier post, attendees to the session I moderated, “Growth Capital for Nonprofit Social Entrepreneurs,” appeared hungry for information, tools, advice, insight about how their organizations could play in this emerging space.

If you think of the overall market as a continuum with traditional charities on one end and traditional businesses on the other, the social capital marketplace, then, is everything in between.  It most certainly includes social businesses–businesses that not only make a profit, but also contribute some sort of social impact (like wind farms or organic groceries).  And there are emerging investment vehicles that can provide investors a financial return (sometimes equivalent to a traditional market rate return) in addition to a social impact return.

But the social capital market must also include new financial vehicles for nonprofit organizations. In order to effectively provide the public goods that for profit businesses (both traditional and social businesses) can’t or won’t provide, nonprofit organizations require seed funding, growth capital, capacity capital, loans, equity, grants, operating revenue and so on.

Although there was some discussion of these financial needs, the nonprofit side of the social capital market discussion was not as prevalent last week. And indeed some at the conference, including conference co-f0under, Kevin Jones, refer to nonprofits as “our cousins” in this space.  Indeed, the keynoter at the first SoCap conference  last year encouraged the audience to “set aside” nonprofit organizations because they were not what that conference was about.  And I have had a few conversations with leaders in the social business space who have told me: “Innovation will never come from the nonprofit side.  It must come from the social business side.”

But nonprofit organizations are very much part of this conversation and this emerging market. Social impact is not a new thing.  As much as those of us assembled at SoCap last week would like to believe that we are pioneers in all things, we are not.   Many of the financial vehicles emerging in this new space are exciting and new.  But creating social impact through entrepreneurial efforts is not new.

Nonprofit organizations have been around for a long time.  And their reason for being has always been to create some sort of public good that was not addressed by the market.  That is not to say that it has been done right.  Many would agree that the nonprofit sector and the philanthropy that funds it are dysfunctional, even broken.  And I think most of us would agree the government sector is fairly broken as well.

But we cannot discount and dismiss either sector.  In the true spirit of the social innovation space, we must recycle and reuse the nonprofit and government sectors, just as we are refashioning the private sector.  We must reconfigure the assets of all three sectors to turn them into more effective, more productive, higher functioning sectors that can work with, not separate from, each other to create solutions.

What does that look like?  It means that venture philanthropy funds are sharing investor prospects with social venture funds and vice versa.  It means that investors interested in a social return have portfolios that include not only social businesses, but also nonprofit deals.  It means that foundations are investing in both for profit and nonprofit social impact organizations.  It means that the SoCap conference list of attendees and speakers come equally  from all three sectors (public, private, nonprofit).  It means that the majority of nonprofit organizations that have an interest in and capacity for growth have access to growth capital and management expertise to scale.  It means that a nonprofit that is solving social problems is just as sexy and gets just as many resources, respect and mind-share as a social business that is doing the same. It means that those working on changing laws to help social entrepreneurs look at both for profit and nonprofit structures, incentives and restrictions.

The creation of the social capital market is a bold, chaotic, possibly insane, but potentially game-changing endeavor that has the power to completely rework how money flows through the market to shape society. Let’s not get bogged down in dichotomies and factions, rather let’s take a bigger picture view of the essence of what we are attempting to do.  And that is to completely reconfigure, and create a productive convergence among, the three sectors. Now that would be innovative.


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About the Author: Nell Edgington is President of Social Velocity (www.socialvelocity.net), a management consulting firm leading nonprofits to greater social impact and financial sustainability. Social Velocity helps nonprofits grow their programs, bring more money in the door, and use resources more effectively. For more information, check out Social Velocity consulting services and clients.


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19 Comments to Nonprofits and the Emerging Social Capital Market

Jonathan Wade
September 9, 2009

I applaud your assertion that the social capital world needs to include the non-profit cousins.

Charities and other non-profit entities have indeed been working to address social problems for a century, taking over from where the church left off in many cases. Admittedly, as with business, some non-profits are better at meeting their goals. Virtually all of them operate on a shoestring (at least when compared to most successful businesses, and many of them suffer from overthinking and paralytic consultation on strategic planning and theoretical issues. However, they are as committed to social change as the best of the social capitalists.

Non-profits suffer from financial challenges. This is both a result of the conservative (read: risk averse) nature of charities, and the legislation that governs their structures (at least here in Canada, where charities must disburse 80% of the receipted income in a given year). It is difficult to be a leader when your pockets are empty, you can’t attract investments, and you are obligated to spend everything (and not a penny more) each fiscal year.

Nonetheless, I work at the nexus of non-profit caring, compassion and vision and the veritable “business” benefits of measurable marketing and service delivery. Like you, I see that the decades of expertise in the non-profit sector is beginning to be combined with a business acumen; this new realm is a haven for those who wish to invest in meaningful, considered, and measured social change.

Jonathan Wade, President
Social Delta

Nell Edgington
September 9, 2009

Thanks Jonathan. I completely agree that it is difficult to be a leader when your pockets are empty. And that is exactly why the social capital market needs to include the capital needs of the nonprofit sector. If we can channel more resources into the sector, while we diminish some of the structures that impede their progress and their ability to take risks and innovate, then the sector can become more productive at creating social change. But they can’t do it alone, which is why we need all of those working towards a social capital market to understand the nonprofit plight and the benefits to be had if they are included in these efforts.

[...] This post was mentioned on Twitter by Nell Edgington and Karim Harji. Nell Edgington said: One thing missing at last week's #SoCap conference was a broader discussion of how #nonprofits fit in: http://bit.ly/AcQOS [...]

ben metz
September 10, 2009

The quote of socap09 for me was an amazing indian social entrepreneur, annapurna (I forget her last name) running a cloth weaving social enterprise and moving it to scale. When asked “how do you value your company” she simply replied “I value my company”. I’ll flesh out her full answer a little more… she said:

“I value my company,

The people who i work with value my company, their children and families value my company.

For me value is an emotional word, not a financial one

For me equity is about equality.

I value my company.”

In my opinion Annapurna captured what was missing from SoCap and what the social capital markets should be really about – the redefining and recapturing of terms such as value, that have been perverted by commence and finance, and their re-anchoring into real meaning….

Good blog post Nell, thanks, but my feeling is we should be demanding a lot more from SoCap10….. you game???

Nell Edgington
September 10, 2009

I completely agree, Ben. SoCap10 must more fully integrate nonprofits into the conversation and philanthropic capital must be viewed as just as critical an element to the social capital markets as is social investment capital. I’m right there with you.

Greg Berry
September 10, 2009

Nell,

Thanks for the thoughtful post.

I agree with your spectrum analysis, and think the most interesting work is being done at or near the non-profit / for-profit line. I also think that this distinction does not serve us well — mission driven enterprises are what matter to us all.

Though sympathetic with your perspective (I am firmly in the for-benefit business camp regarding my own activities, and I have done a lot of NP work in my life), this post does not reflect the perspective of financial capital.

The challenge for keepers of financial capital — progressive and socially minded capital, as well as traditional — is that of risk and return.

The benefit of a for-profit structure is that it has at least the promise of capital return, if not growth. This is still the foremost issue in the minds of the minders of the capital, and is their legal responsibility.

Traditional non-profit / charity work has historically done a poor job of earning income, and equally poor job of measuring impact. This reality means that non-profits only have access to the philanthropic piece of any given portfolio.

Since the risk of failure is the same (if not higher) at a non-profit, but the reward is lower, it’s hard to see how any investor is going to be as excited to invest in a NP enterprise — all other things being equal — than in a for-profit enterprise with the same mission.

And that, as I understand it, is the purpose of the SoCap conference.

Personally, I want to see non-profits thriving, largely because they have a sustainable financial position and are making impact. As earned-income non-profits proliferate and thrive, they will gain access to new types of capital. But until non-profits address the risk / reward question head-on, for-profit / for-benefit entities will have access to more and different types of capital.

Nell Edgington
September 10, 2009

Greg, thanks so much for your comments. I am really glad you wrote because I think you articulate very clearly some of the underlying assumptions which were prevalent at SoCap and which my post tried to address head on.

As I understand it, the SoCap conference, and ultimately the emerging social capital marketplace, is where money and meaning intersect. If that is the case, then nonprofits are very much part of the conversation.

I think you are over-simplifying what the social capital market is all about. It is not just about risk/reward. It is about adequately resourcing solutions to social problems. That can sometimes work with a for profit model, and it can sometimes work with a nonprofit model. But either model needs adequate capital to seed and scale that solution. A strong social capital market will provide this capital to the solution (again, whether it is nonprofit, for profit or something in between).

I completely disagree with your comment: “Since the risk of failure is the same (if not higher) at a non-profit, but the reward is lower, it’s hard to see how any investor is going to be as excited to invest in a NP enterprise — all other things being equal — than in a for-profit enterprise with the same mission.”

First of all, define investor. In the social capital market as I see it, there are all kinds of investors: foundations who can invest in nonprofits or social businesses (depending on whether it is a grant, loan or mission-related investment), wealthy individuals who can make a market rate return investment, a trade-off investment that includes a mix of social and financial return, or a philanthropic investment that provides them a social return and a tax write off (which is also a financial return), and so on. My point is that we no longer have a binary system where on one side investors get a financial return and on the other they get a social return. The social capital markets are about all of the different ways you can blend capital to achieve some sort of social good. Sometimes that might mean that that social good comes with a market rate financial return, sometimes that financial return is less than market rate.

Secondly, the “reward” that you define is incorrect. Reward is no longer just narrowly defined as financial reward. Reward, in this new market, is a blended financial and social impact reward. That being the case, we need to understand how to measure that reward and how different business models (nonprofit, for profit, hybrid) can deliver different blendings of rewards. And why do you automatically assume that the “reward” in a nonprofit setting is lower than the “reward” in a social business setting. Again, this goes to your assumption that financial return is the ultimate reward. As metrics for social impact become more prevalent and accepted, I think social return will become just as important, if not more important, to investors.

The social capital marketplace that I envision and that I’m articulating is radically different from the traditional binary for-profit/nonprofit segregation of the past, and it is also very different from the permutation of that binary system that you articulate.

Martin Montero
September 10, 2009

OK so I have mixed feelings here. I will admit that I am burnt out on non profits having volunteered,worked for,help create more than my fair share and even served on the board of a couple. I got really tired of scarcity mentalities, the mandatory vows of poverty to work for them (and the marketing to make vows of poverty seems cool) the really bizarre dynamics of the helper/helpee, funder.fundee relationships, territorial battles, disconnected boards…

In the for profit world dysfunction only goes on so long and then the venture collapses often with no one to rescue it or if they do it’s at the cost of assuming control and cleaning house. The problem with the non profit sector is there is always another sap willing to listen to a sob story and fund it regardless of the mission track record.

Take Frontsteps our local homeless shelter and giant tax payer money black hole. After 3 years of volunteer work and 2 years of full time employment there how this place is run and treat the homeless in Austin is a total afront to every principle of social justice and human dignity.

On the mandatory vows of poverty any serious believer in social justice will not support organizations or groups or people(s) that pay it’s people crap, work them like slaves and care more about dogma,policies,grants,catering to funders,politics and appearances than the people who tirelessly work for it and the people they serve.

Having grown up and spent my entire professional life with one foot in the non profit sector and one foot in the for profit I saw how transformative a capitalistic shift could be in the lives of the poor.

You are right social entrepreneurship is a very ancient practice dating back a few millennia and no one here is a pioneer. This is just now being recognized for what it is.

So if inviting our cousins means they truly want to learn to work together not just buddy up to money or bring with them the host of problems I mentioned above then fine I welcome that.

I would argue that a bad non profit does the same or worse social damage that a bad corporation does.

A new way has to emerge. Neither Business nor charity as usual are sustainable, good or truly effective.

Nell Edgington
September 11, 2009

Martin, I agree with your assertion that a new way has to emerge. This new way, as I said in my post “is to completely reconfigure, and create a productive convergence among, the three sectors.” I agree with you that the nonprofit sector has a lot of dysfunction, but so does the private sector, and so does the government sector. But if we discount, or dismiss, one or two of those sectors because of that dysfunction, instead of working to fix the dysfunction, we are getting ourselves nowhere. Each of the three sectors has tremendous assets to bring to the mounting problems we face. To me, the only way forward is to combine forces, learn from what works, get rid of what doesn’t, and rethink and rework how we can work together to solve problems.

Greg Berry
September 11, 2009

Nell,

Thoughtful and well-articulated points.

First, some personal clarification. I agree entirely with your perspective, which I’ll call the basic blended value position. I also subscribe more-or-less completely to the spectrum view, both on the enterprise side, and on the money side. I share your values (I think), and see a pretty significant gap between these values and how investments are generally handled.

By way of ensuring quality discourse, kindly don’t put words in my mouth, nor mis-characterize my intent. I’m by no means the mercenary capitalist you imply, and it seems to me that you have a bit of an issue with the cold, hard facts of the capital markets, which I have neither created nor defend. Nonetheless, they exist. I am reporting on the perspective on the progressive (read: SRI, sustainable, 3BL) wealth managers I know, as well as the HNWs in my network, and not my own view. Ignore this reality at your own peril (you’d hardly be the first non-profit exec with that worldview).

When you ask me to “define investor,” I mean someone with money, who is trying to decide how to deploy it. I know that no matter how these decisions get made, there are financial, social and environmental impacts that go along with it, just as there are with almost any decision about deploying any type of capital (including social capital, human capital, intellectual capital and so on).

Unfortunately (and I honestly wish it were different), philanthropy is a tiny fraction of all the money that people deploy. I don’t know the number, but suspect it’s less than 5%, probably much less.

So that leaves us with the bulk of the investment money in the world getting deployed in such a way as to at least ensure the value of the money is maintained, and, generally speaking, that there is some kind of growth.

You inaccurately characterize my description of reward as being “narrowly financial.” What I am saying is that without financial reward — which non-profits typically do not create for an investor — a lot of the potential money comes off the table. I think the discussion about how financial reward should be balanced with social and environmental benefits is one of the most important discussions of our day.

I would love to learn about non-profits that return financial capital to a philanthropist. I know there are debt funds (where money given to a non-profit is a loan, and not a grant) out there, but perceive they are in the minority (please correct me if I’m wrong here). Generally, though, non-profits spend grants directly on programs, getting a 1x multiplier effect. However, if the same amount of capital can get an enterprise up and running that has the ability to generate its own cash flow, then there can be a 2x, 5x or 10x multiplier effect on the same initial investment.

Furthermore, financial sustainability is the core of any enterprise (for-profit or non-profit), and the lack of it means that zero social or environmental impact gets generated. The lack of fiscal innovation and discipline in non-profits as a whole (there are wonderful and inspiring exceptions) is probably the single biggest problem in philanthropy today, in my humble opinion.

If non-profits don’t take into account the importance of respecting and maintaining the value of financial capital — as for-benefit and 3BL for-profits do — then they won’t have the same opportunity to make the impact on social or environmental issues.

In closing, I absolutely do not subscribe the binary model you suggest. I think a blended value investing model is the best path out of the mess we are in. But until non-profits take more care of the financial capital they receive, the SoCap discussion, and the professional capital mangers therein, is going to focus more of its energy and interest on the for benefit / for profit enterprises.

Nell Edgington
September 11, 2009

Greg,

First, let me say, that I have no intention of putting words in your mouth, nor did I mean to imply that you are a mercenary capitalist. I hope you will agree that open, honest debate like ours is the only way to move the markets forward and to encourage innovation.

I will also point out that I don’t have a problem with the “cold hard facts of the capital markets,” rather I, like a lot of people in the last year, have seen that the capital markets, as they’ve been envisioned and operated in the past, do not work. Therefore those “cold hard facts” are being re-envisioned, restructured and re-thought. Which is where the social capital market movement comes into play.

In my post and the follow up discussion that has ensued (which, again, I really appreciate, enjoy and think is very beneficial) I am merely making the point that we cannot dismiss nonprofits from the movement or the restructuring that will need to happen as meaning and money converge.

I know you balk at my characterization that you are still subscribing to some kind of binary thinking, and I honestly mean no offense, but I do think your thinking is still gravitating toward a dichotomy between financial investment and philanthropic donation. Rather, the two are converging.

Nonprofits can and do return capital (PRIs, loans, etc). But they also (if done right) return social impact. And “someone with money, who is trying to decide how to deploy it” is beginning to consider both in the equation about where to place their money. A nonprofit that is high performing and generates impressive social return can be an attractive alternative to a traditional or social business that may provide more financial return but less social impact. The calculation becomes more complicated, less either, or.

And there are more financial models emerging for investment in the nonprofit sector. Your comments make me wonder if you are aware of the venture philanthropy movement. You might want to check out New Profit (www.newprofit.org) a venture philanthropy fund that has been around for 10+ years. They have provided growth capital to nonprofits such as Teach for America, Citizen Schools and others. The growth capital investments New Profit has made helped to generate 5X+ growth in the social impact created by their portfolio companies while elevating the revenue-generating functions of those organization so that they could maintain that level of social impact once New Profit exited. True, New Profit does not see a return of their capital, but their investments have allowed their portfolio organizations to create exponential growth in social impact.

Some investors are interested in maximizing social impact in exchange for diminished financial return, and some aren’t. But why not expand the financial tools and vehicles available to nonprofit organizations while we are expanding the tools and vehicles available to social businesses so that we can increase social impact no matter what the business model?

Finally, let me address your last comment: “But until non-profits take more care of the financial capital they receive, the SoCap discussion, and the professional capital mangers therein, is going to focus more of its energy and interest on the for benefit / for profit enterprises.” I would not argue with you that nonprofit organizations are dysfunctional and at times broken. There has been tremendous mismanagement of funds, inefficiencies and value lost. But, I’m sorry, have I not just described the for-profit sector as well?

Again, my point is, each of the three sectors (nonprofit, private, public) has its share of inefficiencies, poor financial management, misaligned incentives, bad metrics, and so on. No one has figured it out. Why would we dismiss one sector (or two, as those who are equally frustrated with the government sector might want to do? Aren’t we better off by figuring out how to restructure, rethink and re-purpose all activity that is occurring in the social impact space so that all of it (for profit or nonprofit) is more efficient, is adequately capitalized, turns no investor away and ultimately, succeeds in creating solutions?

Greg Berry
September 11, 2009

Nell,

At the macro level, I think we are in radical agreement. : )

My only point is that the keeper of capital have not come around to your worldview in a major way yet. I think groups like New Profit are incredible, but they are still in the radical minority. Frankly, these are the models that give me hope.

The reason I’m even in this (specific, as well as general) discussion in the first place is to contribute to changing that mindset, which is more or less what I spend every day doing.

Look forward to the next rich discussion.

Nell Edgington
September 11, 2009

Greg,
I completely agree that the keepers of capital have not yet come around to my worldview in a major way. And you are absolutely right that New Profit and others like them are in the radical minority. Which is exactly why we need to work to create more entities and financial tools and vehicles, such as venture philanthropy, that provide nonprofits that are achieving social impact with access to capital of all sorts. If we can get the social capital markets to include that worldview, then I am happy.

Thanks for taking the time to debate this. I really appreciate your thoughtful arguments and interest in the topic.

Deedle Dee
September 14, 2009

I just wanna say, that the non-profit sector are not “cousins”. They are the mother. Business is the Father, and Democratic Gov’t the fertile soil. Don’t forget your roots people. Also, remember that to the Greeks, the only sin was Hubris…

Christine Egger
September 15, 2009

Quick appreciation for the post and discussion in the thread here. Gives me hope that events like SoCap really are inspiring thoughtful and productive dialogue –

Nell Edgington
September 15, 2009

Thanks Christine. I think events like SoCap are inspiring productive dialogue, and I hope that that dialogue helps shape a more effective and broader social capital market.

Melinda Lewis
September 17, 2009

I got so much out of the post and the discussions in the comments; I’m still learning about this whole concept of social investment, but I think that your point about not pushing nonprofits to the side in pursuit of flashier, trendier models is important (especially because there are some things worth doing in our society that may not generate financial returns (at least in the short term) and because nonprofits can learn a lot (in ways that would address, perhaps, some of the critiques reflected in the comments) from closer proximity to social business innovations, even if not all NPOs are candidates for social investment at this time. Anyway, thank you!

Nell Edgington
September 21, 2009

Thanks Melinda. I’m glad the post and discussion were informative. I completely agree with you. Thanks for joining the discussion!

[...] that provide both a social and financial return. Philanthropy and nonprofit organizations have been somewhat left behind. But this will change with a growing recognition of the benefits of broadening the definition of [...]

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