Beating Innovation to Death

There is a tendency in America of late, or maybe for awhile, to over-analyze to the point of distraction. So too is the case with the Social Innovation Fund, the federal government’s $50+ million experiment in providing growth capital to nonprofits. This great experiment to see whether government can do something pretty different to address social problems is in danger of being railroaded by leaders of the social innovation community who should be the ones most supportive of a new day for government.

The Social Innovation Fund (SIF) was modeled after the idea of venture philanthropy funds who were themselves modeled on venture capital funds. The idea with the SIF is to grant $50 million to private grantors (foundations, venture philanthropy funds, etc) who match the money and then turn around and grant it to promising nonprofits to scale their proven programs. Is the idea really innovative? No. But what is innovative is that the government is  recognizing the concepts of social innovation and scale and is experimenting with becoming a builder instead of just a buyer of nonprofit services.

But this experiment is in danger of failing before it even gets out of the gate. A major controversy developed this week with the announcement of SIF grantees. The controversy centers around whether New Profit, arguably the inventor of the venture philanthropy concept, was given preferential treatment in being awarded a grant.  Paul Light, the Nonprofit Quarterly and others voiced their concerns about the granting process. You can read all the details of the saga here.

Let’s be honest, everyone knew New Profit was going to get a SIF grant. New Profit pioneered the idea of venture philanthropy. And their spin-off organization, America Forward, which works to connect the vast governmental resources to social innovation, was behind getting the Serve America Act,  containing the SIF, formulated and made into law.  Would the SIF make any sense without New Profit? They have been scaling nonprofits for years, and they have unlocked the door between government and social innovation. How could they not be at this table?

And the growing amount of documents being released by the Social Innovation Fund demonstrates the fairness and process behind the grant awards and more than makes up for any of SIF’s initial ignorance of the importance of transparency.

I understand that discussion, transparency, and refining of process are all critical elements to getting change to happen, but too much of that before the actual experiment happens can actually prevent change. Let’s not conduct business as usual by over-analyzing a new project to death. Let’s see where this experiment takes us instead of railroading it before it even begins. It’s not perfect innovation, it’s not a perfect process, but experiments never are. If we don’t give the government some space to actually innovate, they may never go down this road again. Instead of beating innovation to death, let’s get out of our own way and see where this goes.

Tags: America Forward, builder versus buyer, New Profit, Nonprofit Quarterly, Paul Light, Serve America Act, Social Innovation Fund, Venture Philanthropy

Data and the Future of Philanthropy: An Interview with Lucy Bernholz

In the August installment of our Social Velocity interview series, we are talking with Lucy Bernholz, founder and President of Blueprint Research & Design, Inc. a strategy consulting firm for philanthropic institutions and individuals. She is also the author of many seminal books (including the prescient Creating Philanthropic Capital Markets), reports (like Disrupting Philanthropy) and her famous Philanthropy 2173 blog. Lucy is considered a visionary in the philanthropic world and is doing tremendous work to move philanthropy forward.

Our interview with Lucy is below, but you can also read our past interviews with Kevin Jones, Clara Miller, and Paul Tarini.

Nell: You have become increasingly interested in data sharing and crowd-sourcing for change. What are the risks in these new forms of social problem solving?

Lucy: Data are not objective – quantitative data is subjectively collected, categorized, sourced, and analyzed and its “reputation” as neutral is unearned. Using data well requires skills that most of us don’t have – statistical analysis, methods, etc.

That said, when I talk about data I mean “anything that can be digitized.” Stories. Video. Anecdotes. Numbers.  We may not all have all the skills to make sense of every type of data, that is partly why crowds are important. For decades, only experts and the wealthy had access to data – so their subjective analyses dominated the discussion. Now, many of us – crowds – can have access, make sense of, add nuance, ask questions. That changes the “subjectivity” and changes the dynamic. Data are disruptive when access to them is broad, cheap, and easy.

We still need to be skeptical, ask questions, and think deeply about the biases behind both data collection and presentation. But, as computer programmers say, “many eyes make for shallow bugs.” Crowds and data are two sides of the same coin when it comes to disrupting the social sector.

Nell: In Disrupting Philanthropy you examine the long tails of donors (foundation and individual contributors of money for social change) and doers (nonprofits, social entrepreneurs receiving that money) and how information technology is connecting the two. But as a future teller, how and when do you see more conservative/fearful nonprofits and philanthropists embracing these new technologies?  What is the tipping point?

Lucy: There are few pressures on endowed foundations to change their behavior. It is hard to force this change from the outside.

The drivers of change in this day and age include new expectations about information at a societal level, the government 2.0 movement, the skills of two to three generations of employees and managers in using online tools and finding information when they want it. These are the soft, cultural, and ultimately most meaningful drivers of change. Regulations that require more disclosure, new expectations of transparency, efforts such as The Foundation Centers Glasspockets.org, the Center for Effective Philanthropy’s assessments are other possible influencers of the timeline.

That said, don’t discount the inevitable backlash against transparency, which is coming. Recent online “revelations” that have been fueled by political agendas and resulted in “flash decision making” highlight the need for all of us to be careful about the pace of information, believing everything we read, and the need for thoughtful, investigative, well-referenced and fact checked information. As Craig Newmark says, the news business is the “immune system of democracy.” As the news business is caught in this wildly transformative moment, we must all consider where we get our information, how we use it, who provided it to us, and what its credibility is. There is no straight line to widespread adoption of new tools – it is episodic and includes strange diversions.

Nell: Where does government fit into the connection between donors and doers? What can/should government do to encourage use of data sharing, crowd-sourcing, etc.?

Lucy: The government 2.0 movement is way ahead of nonprofits and foundations in the open sharing of data. That said, most of this is a “supply side” effort at this point – cities, states, and federal agencies shoveling data over the wall into the public domain with little knowledge of what information communities want or need and even less support for communities to use the information well. Firehousing data into the public domain is one thing, but it is not enough (It can also work to distract – “You want data? Here have it all”)

As for nonprofits and foundations, the data disclosure requirements of the new 990 are small steps in the right direction. Most of what will happen as far as nonprofits and foundations sharing their data is likely to be voluntary, led by innovators, and taken up by others over time as communities and constituents learn to ask for what they want. The expanding ecosystem of nonprofit ratings/raters – from GiveWell to Greater Nonprofits to Philanthropedia to National Councils of Nonprofit Analysts, etc. will also spur this.

The proposed legislation, HR 5533, which calls for a national council on nonprofits and a central system for tracking nonprofits as funded by federal agencies is the wildcard here – if it passes, the data game on nonprofits and philanthropy will change. How so, and whether for the better, I can’t say at this time because I just don’t know enough (yet) about what is being proposed, how it is supposed to work, and how it will really work (if enacted).

Nell: As you mention in Disrupting Philanthropy, 10 years ago socially responsible investment was a small niche, but now it makes up 10% of professionally managed investment funds. How much bigger will it grow? How much can mission and money be blended in our economy?

Lucy: Socially responsible screened assets have been growing for more than a decade. This is a multi-decade trend that is growing mostly outside of the realm of the charitable and philanthropic sector and within the realm, incentives, and returns of the mutual fund business. Philanthropic efforts to connect to these assets and to promote Mission Related, Program Related spending are only now getting real traction and advocacy from within philanthropy.

Nell: Your focus is largely on philanthropy, but what do you think nonprofits should be doing to tap into these trends and take advantage of the long tails of donors and doers?

Lucy: Nonprofits are experimenting with every tool to reach the long tail that they can – from “donate now” buttons to text giving. For the most part, the process has been focused on marketing and fundraising. The exciting changes are happening where we see people developing solutions that take the digital connectivity and data as the starting point for the work they are trying to do – think about Ushahidi or CrisisCommons – their entire programs/projects/initiatives/governance models/organizations are built on deep understanding of the power of disbursed long tails. That is powerful.

Nell:  Because you are such a proponent of data and measurement, what do you make of the emotional part of giving? Do you think we can ever get to a place where it’s all about the data? And should we want to?

Lucy: I have always said that philanthropy is a business of passion – it is largely emotional. The use of data, as Hope Neighbor’s recent report shows, is a small part of the process of philanthropic decision making. And it will always happen within the personal interests of donors. And please remember, when I say data, I don’t mean just numbers.

Tags: Blueprint Research and Design, Center for Effective Philanthropy, Craig Newmark, CrisisCommons, crowdsourcing for change, data sharing, GiveWell, Glass Pockets, Greater Nonprofits, Hope Neighbor, Lucy Bernholz, PHilanthropedia, philanthropic capital markets, Philanthropy, Philanthropy 2173, Ushahidi

What I’m Reading

Someone asked me the other day how long it takes me to write a blog post. I told them the writing only takes about an hour or two. However, the reading and thinking about what’s being done, or said, or written about and what I want to add to the conversation takes many times longer. So, to that end, I thought I’d give you a list of the blog posts, articles, and books that caught my interest and really made me think in the past month…

• Punching at Your Own Weight in Social Media
• Philanthropy’s Next Decade
• Leadership to the Rescue
• The Social Innovation Fund One Year Later
• The Giving Pledge and the Opportunity of a Generation
• U.S. Lagging, Not Leading, Social Entrepreneurship
• Warren Buffett’s Philanthropic Pledge
• How Can Nonprofits Plan for Growth and Impact?
• The Networked Nonprofit
• Social Media Listening: You Don’t Have To Be Joey Chestnut on the 4th of July!
• Wall Street Saves the World!
• Getting Results: Outputs, Outcomes & Impact
• The Slacktivist Debate Continues
• Is All Entrepreneurship Social?
• Are You Crazy Enough to Change the World?

What caught your interest this month?  Add to the list in the comments.

Photo Credit: pixel0908

Tags: nonprofit growth, nonprofit leadership, nonprofit outcomes, Philanthropy, Social Innovation Fund, social media, The Networked Nonprofit, Warren Buffett

Funding Social Innovation: An Interview with Paul Tarini

In the July installment of the Social Velocity interview series we are talking with Paul Tarini of the Robert Wood Johnson Foundation. You can read our previous Social Velocity blog interviews with Clara Miller and Kevin Jones.

Paul Tarini is the head of the Foundation’s Pioneer Portfolio, which actively seeks innovative projects that can lead to fundamental breakthroughs in health and health care.  Because the Pioneer team is dedicated to thinking and talking about new ideas and groundbreaking approaches, including those from nontraditional sources and fields, Pioneer enables the Foundation to make conceptual leaps and take risks in grantmaking that would otherwise not be possible. Since funding is so critical to making social innovation a reality, we thought Paul would have a unique perspective on what funders can do to incentivize social innovation.

Nell: The Pioneer portfolio strikes me as a more risk-tolerant approach to giving than typical foundations are used to. Why is RWJF more comfortable with the risks inherent in this kind of portfolio of projects?

Paul: RWJF is comfortable with the higher risk, unconventional, future-facing ideas Pioneer supports because it first identified a specific niche that needed to be filled within the institutional ecology.  We call that ecology our Impact Framework.  It was conceived of at a time when RWJF was thinking hard about how we organized our work.  The Impact Framework helps us understand our grantmaking as a whole, so, not just what do the grants in a particular area add up to, but what does the whole enterprise add up to.  As we were thinking about the impact we wanted to have, we knew we needed to work in fewer, more focused teams that were/are accountable for specific outcomes.

But we realized that while focus brings power and discipline, it also can be limiting.  We wanted a way to look out beyond the work of these targeted teams.  We were thinking about how to stay relevant for the long run as a philanthropy that operates on a national scale.  We felt that in addition to the targeted work being done, we needed a place devoted to the exploration of new ideas, where we could bring in new concepts, work with different people, and support more unconventional and future-facing ideas.  Such work could help RWJF stay fresh, bring in new ideas and new grantees, continue to grow, stay ahead of the curve.  And, if we found some real winners, health and health care would benefit from the outcomes of those projects.

Out of this came Pioneer.  Here are some examples of the work we’ve supported…We funded a natural resources economist to work on the problem of antibiotic resistance (Don’t approach it as an infectious diseases problem; think about our stock of antibiotics as a natural resource that needs to be managed and develop new policy from that perspective; we’ve been funding research into whether and how digital games can be effective therapeutic interventions (Can a game that uses a breathing tube as the controller that moves characters around the screen help kids with cystic fibrosis improve their breathing therapy?); we’ve funded early work exploring whether there are specific health strengths which, if strengthened more, could serve to forestall disease and mitigate effects once disease strikes.  We’re also supporting work that builds platforms that could produce lots of new knowledge and improve care, including Kaiser Permanente’s Research Program on Genes, the Environment and Health; and, efforts to link electronic health records databases with millions of patient records in order to learn much faster about what works for patients (Rapid Learning).

Nell: I understand that the Pioneer program has a rolling unsolicited application process, but I imagine you probably need to do a good bit of on-the-ground scoping and cultivation of ideas in order to get the most promising projects into the portfolio. How do you create a deal flow for innovative projects?

Paul: This is a constant challenge for us.  We do have an open door, and we do accept unsolicited proposals at any time. But most of the proposals that come in through this door are not good fits for Pioneer. We were set up to explore unconventional and untested approaches to problems, to bring in ideas from other disciplines, to look to the future.  We were not set up to support projects that promise incremental improvements, however important those improvements may be.  We look for projects with the potential for transformative change, the kind of change that can reach beyond a single discipline or group.  Most of what comes in unsolicited doesn’t meet that standard.  Finding ideas takes work.  And because we look for ideas across the breadth of health and health care, we can’t focus on just one haystack to look for needles.  We network.  We connect with interesting people at conferences, we go to events, we take meetings and phone calls, we visit people.  We are experimenting with other ways to source ideas.  We’ve had some success with open-source competitions, though the back end, taking a winning idea and creating a fundable project, takes time.  We are putting a lot of time and energy into social media right now as another way to build networks and find ideas.  Half of me wishes there was an easier way to find ideas, but I suspect that easier would also mean more passive on our part and passive is really boring.

Nell: You currently only invest in nonprofit projects, correct? Do you see the potential for investing in for-profit or hybrid organizations, through mission-related investing, down the road, particularly as social entrepreneurship grows and for-profit solutions to healthcare issues become more prevalent?

Paul: While the majority of our investments, our funding, are in the form of grants to nonprofit organizations, there is nothing that precludes us from supporting for-profit entities.  The largest award to come out of Pioneer to date—$15.6 million—went to a for-profit, Archimedes, Inc. However, before we can make an award to a for-profit, we need to clearly establish that RWJF’s dollars are going to fund an activity with a clear charitable purpose that relates to our mission.   This is just an additional test we need to meet.  The challenge we face on Pioneer is less about whether an entity is a nonprofit, a hybrid, or a for-profit.  Our challenge is whether that entity is doing work that isn’t merely an improvement, but is doing something unconventional, disruptive and future-facing and could produce breakthroughs in health and health care.  If we’re convinced the work meets that standard, we can usually figure out how to fund it.

Nell: What is holding philanthropy back from becoming more innovative and/or risk tolerant?

Paul: People who spend more time observing philanthropies are better suited to answer this question than I am.  That said, I think it’s hard to ask this question about philanthropy as a sector.  Philanthropies have a lot of latitude; you can’t assume they are fairly similar and that we can generalize our way to an answer.  In the same way there are differences between a business that employs 200 people and one with 20,000, there are big differences between a multi-billion-dollar philanthropy and a small community foundation.  Political contexts differ, staff sophistication differs (bigger isn’t always more sophisticated), boards and donors have varying levels of influence, so I think there’s a range of reasons — philanthropy by philanthropy — for being less risk-tolerant.

If I had to pick one reason, it would be that there’s no inherent reason for a philanthropy to be innovative and highly risk-tolerant.  A lot of good can come—and has come—from philanthropies that are cautious.  As I noted above, the decision at RWJF to have a portfolio that takes on more risk came from an institutional recognition of the long-term value to us—and to the field—of such investments.  So the niche-in-the-institutional-ecology point is important here. Also, frankly, our ecology is much larger than most, and so it can be more diverse.  Other philanthropies would need to work though their own reasons to embrace more risk-taking.

Nell: The nonprofit capital market overall is fairly immature compared to the capital market of the for-profit world. Do you see other foundations creating new giving programs or financial vehicles to expand the types of capital available to nonprofits?

Paul: There is a great discussion and a lot of effort being devoted to maturing the nonprofit capital market.  More money, philanthropic and otherwise, is examining and entering this space; and, more nonprofits are thinking about what they need to do to operate in this space.  It’s very exciting and I definitely think we’ll see more of that over time.  But I also think it will be years before we see a robust capital market for nonprofits.  As much interest as there is in moving into this space, the amount of money there and the portion of nonprofits positioned to take advantage of such a capital market is still relatively small compared with traditional ways of financing and operating.

Also, I think it will take a while to understand when it makes sense for nonprofits to access capital markets and when more traditional sources of philanthropic funding are more appropriate.  Philanthropies need to understand better—given what they’re trying to achieve—when a traditional grant makes the most sense and when some other financial vehicle does.

Nell: What do you think is the potential for greater partnerships between foundations and individual investors to bring more capital to social entrepreneurs, particularly in the healthcare sector?

Paul: Good question.  For large foundations such as RWJF, I think we need to consider carefully when looking at when individual investors as funding partners makes sense.  The projects we fund, by their nature, tend to be large.  The effort involved in soliciting individual investors might not be worth the result unless we are looking at folks who have considerable wealth at their disposal.  It’s a lift when you’re trying to aggregate a bunch of $100,000 contributions to reach $5 million; fundraising is not a core competency of ours.  I do think, though, that efforts such as the Social Impact Exchange, where individual dollars would flow directly to the organizations that need them, make a lot of sense.  So I think the opportunities for individual investors to participate as true funding partners on projects with RWJF are probably limited, though we are open to them if they make sense.  But there are definitely opportunities for foundations such as RWJF to help individual investors find groups that are worthy recipients.

Tags: Archimedes Inc, community foundation, grantmaking, Kaiser Permanente, nonprofit capital market, Paul Tarini, Philanthropy, Pioneer Portfolio, Robert Wood Johnson Foundation, Social Entrepreneurship, social impact exchange

A Revolution in Nonprofit Finance: An Interview with Clara Miller

Last month we kicked off a new, monthly Social Velocity blog interview series where I interview leading thinkers and doers in the social innovation space. Our inaugural interview was with Kevin Jones co-founder of both Good Capital, one of the first venture capital funds that invests in social enterprises, and the Social Capital Markets Conference (SoCap) which marks its third year with the upcoming October event.

This month’s Social Velocity interview is with Clara Miller, President, CEO and founder of the Nonprofit Finance Fund, a national leader in nonprofit, philanthropic and social enterprise finance. Directly and with others, NFF has leveraged $1 billion of capital investment into nonprofits, and  provided over $200 million in direct loans. Clara Miller was named among The NonProfit Times “Power and Influence Top 50″ four years in a row and is a board member of GuideStar and Grantmakers for Effective Organizations.

Nell: You and the Nonprofit Finance Fund have initiated this idea of equity capital for nonprofits, or money to “build” organizations rather than the tradition funding to “buy” services. Do you think the idea of equity capital for nonprofits is catching on?

Clara: First of all, I should say that many people have contributed to the idea of a nonprofit version of equity over the years.  My NFF colleague George Overholser has been a field leader.  He focuses almost exclusively on the version we call “growth” capital, which is used to rapidly build organizations, changing what they do through major investment undertaken around a single set of metrics, business plan, and ideally, with all funders acting in concert.

And yes, I do think the broader notion of “equity”—and for that matter, the importance of the balance sheet in its entirety—is catching on, especially among major foundations, capital campaign veterans and those familiar with these concepts in the for-profit world.  The broader concepts of “building” organizations and “buying” services, and how financial roles differ, are resonating strongly with both organizations and funders.  We have a foundation partner that has simply put the question, “is this a “buy” grant or a “build” grant?” on the program officers’ intake checklist.

Nell: How do traditional nonprofit capital campaigns, which are predominantly focused on raising money for new buildings, fit into all of this?

Clara: We think these “growth capital” and “equity” principles comprise an ideal way to think about (and operate) a successful capital campaign.  Our early work in the 1980s (when we were Nonprofit Facilities Fund, and exclusively financed  “community facilities” with loans) revealed that a rash of problems would almost invariably follow capital campaigns for facilities: cash crises, burnout, funder fatigue, “night of the living dead” program operations, the need to lease excess space at below-cost rent…you get the idea.  It was a real eye opener. We learned a lot about the need for truly unrestricted “growth capital,” in addition to funds focused (and often restricted) to build and fit out the facility.  Among the NFF-documented  lessons: that facilities projects typically need 3 to 4 times the bricks and mortar cost for working capital to cover program and administrative growth needs; that the building frequently changed the business model radically, but planning never covered the whole enterprise; and that putting large amounts of cash into an illiquid asset while expanding operations was problematic on a number of levels.  Also, many of these building projects came with opportunity costs: organizations weren’t investing in new technology, upgrading skill sets, or replenishing cash reserves.

Beyond facilities projects, capital campaigns frequently focus on other (typically illiquid) parts of the balance sheet: building an endowment, or on the acquisition of, for example, a program asset (such as a painting or piece of medical equipment). Thinking holistically about improving or acquiring illiquid assets, via a campaign for growth capital, can better the situation.

Nell: The for-profit sector currently enjoys a broader and deeper array of financial vehicles than does the nonprofit sector (seed funding, angel investors, growth capital, stacked deals, etc.) do you anticipate that the capital market for nonprofit organizations will become more robust and what will it take for that to happen?

Clara: I’ll push back a little and say that the vast majority of both nonprofits and for-profits (that are small, with less than $200K in revenue) have approximately the same level of access to similar financing vehicles: sweat equity, seed/angel funders/investors (friends and family, the first foundation grants, etc.), credit card debt, bank loans, retained earnings, etc.   Then there is “growth capital” or “capital grants,” which a very small proportion can access in either sector.  And while large for-profits are much, much larger than large nonprofits, large nonprofits have reliable access to some highly sophisticated funding and financing vehicles that for-profits don’t (and vice versa).  Some very large nonprofits have access to for-profit subsidiary ventures and investments—and some are highly sophisticated (universities investing in development of intellectual property and associated products, CDFIs with venture funds, public media with development and sales of program assets, and others).  And on the debt side, much of nonprofits’ “capital market” is for-profit-run (bank debt, investments, tax-exempt bonds, etc.)

The most important barrier to enterprise scale (for either sector) is not so much lack of access to capital as it is a scalable, focused business model with reliable net revenue.  Once you have those—or evidence that they are possible—capital will flow.

But that said, we’re talking about a couple of “market wide” dysfunctions.  The first is that despite highly resourceful managers, sophisticated board members and billions of dollars of revenue and capital funds, there is no tradition of “enterprise finance” in the sector.  “Pretty bad ‘best practices’” designed to make nonprofits more efficient and fiscally prudent cost the sector dearly.  Confusion about the direct funding of programs (it’s not possible, most of the time you need to fund an enterprise to deliver programs) means capital is mixed up with revenue, growth with regular operations, and “build” grants with “buy” grants (and a variety of hybrids!).  This wreaks financial havoc in growing organizations. Missions—along with the public—suffer.

The second problem is that there’s no really reliable signaling mechanism for organizations to fold their tents, pass their programs to another organization, and go out of business.  In the for-profit world, that would be financial failure; in our world, that’s not so straightforward: so we hang in there, meaning resources that might go to a stronger program remain tied up.  It also means that the biggest and richest players have (and, largely, keep) the vast lion’s share of resources (even more pronounced than in the for-profit world).

Finally, there is a problem with access to charitable revenue.  Promising, mid-sized organizations—especially those serving low-income people (and therefore lacking access to the traditional source of capital in the sector, individual donors) have a difficult time building the operation they need to grow.  Foundations are the logical path here, and having foundations embrace “enterprise friendly” practices—including growth capital and build-buy understanding—can go a long way toward changing that dynamic.  Establishing a field-wide understanding of basic enterprise finance principles will help insure that growth capital campaigns become true innovation with long-term staying power, rather than a short-term novelty.

Nell: Growth capital for nonprofits is mostly only available to larger nonprofits that have the capacity to prove the results of their model. Do you think growth capital will increasingly become available to the bottom 80% of nonprofits (those with a budget less than $1 million), and how and when do you see that happening?

Clara: Our goal is not that all organizations of every size and business model have access to growth capital and pursue aggressive growth goals ASAP.  That’s neither possible nor desirable in either the for-profit or the nonprofit worlds.   In both sectors, some business models may not be scalable, and that’s ok—in fact, it’s good.  Nobody wants their favorite neighborhood clam shack or Italian restaurant to go public or become a Pizza Hut.  Diversity is good; and most people like things about both large and small enterprises. This is true in any sector, where economies of scale and preservation of quality are frequently subject to the laws of diminishing returns.  Growth capital is not for everyone, and it is only one tool in the enterprise tool box.

The more important revolution is to make broadly accessible the tools and principles of enterprise finance—with a clear understanding of the realities of the commercial proposition of the sector (i.e., there’s a reason we have a nonprofit sector). There are well-managed and poorly managed (and capitalized) enterprises of all sizes and tax statuses, and there are scalable and non-scalable ones as well.  Most critical on the scaling front is that our sector embraces and deploys the broad set of principles that make enterprises of any size or shape effective in reliably achieving great results.  Trouble arises when a specific social benefit or innovation is so compelling that we all want the maximum number of people to benefit from it: Our failure to use the principles of growth capital and proper scaling techniques to assure results while growth proceeds is (and has been) tragic for the social sector, and a change in practice can help.

Nell: How do you think the Social Innovation Fund will change the capital landscape for nonprofits?

Clara: I think the SIF already has raised the profile of the ideas around growth capital and scaling discussed here.  And it certainly has the attention of a group of large foundations, a significant number of whom are applying as intermediaries.  I think it took courage for them to apply, and courage for the SIF to get developed. At the beginning there will be some fits and starts, and government procurement can be dicey (especially when it’s trying to be capital rather than revenue), and foundations are trying to make it work in this way for the first time.  That said, it’s very exciting for us to see “growth capital,” which is the core concept, being given a whirl by both the White House and the Foundation world.

Nell: Venture philanthropy funds (that provide growth capital to nonprofits) and social venture capital funds (that provide capital to double bottom-line businesses) currently don’t interact very much in the marketplace. Do you see an opportunity for greater integration of nonprofit and for profit social investing? And if so, what will it take to get there?

Clara: I think there is increasingly frequent interaction between for-profit and non-profit business models (and entrepreneurs) on the conceptual level, and that’s being translated into some compelling platform-agnostic enterprise structures to accomplish social ends in many sectors—health care, research, arts and culture, media, housing—are all examples.  And interactions may not be best between two enterprises that are both at the “venture” or “start up” stage.  A start-up nonprofit may want to partner with a fully-scaled for-profits (and this is common), while a fully-scaled nonprofit may want to create (or house) a venture for-profit to help reach certain social goals.

On the “deal” level, I think there’s a reason to maintain a bright line between the nonprofit and for-profit tax status.  I favor crisply defined hybrids (of which there are a variety) over mushiness (we’re a for-profit but we are good people doing socially beneficial work) because they are more likely to stand the test of time and skepticism, and since ownership and tax structures have bright-line legal and moral duties attached to them.

Tags: CDFIs, Clara Miller, equity capital for nonprofits, George Overholser, Good Capital, Grantmakers for Effective Organizations, growth capital, GuideStar, Kevin Jones, nonprofit capital campaign, Nonprofit Finance Fund, NonProfit Times, Social Capital Markets conference, Social Innovation Fund, White House

The Social Capital Markets Conference 3.0

I just registered for this year’s Social Capital Markets Conference held in San Francisco in October. It is my favorite conference in the social innovation space for a number of reasons, and I think this year’s conference (the third) may just be even better.

The Social Capital Markets Conference brings together social entrepreneurs (both for-profit and nonprofit, although the latter have gotten less airtime in past years) and those who invest, or would like to, in them.  Last year it really felt as if the conference and the incredibly talented and visionary people attending it were at the beginning of something pretty amazing, new ways of providing sufficient capital to social solutions.

This year promises to go much broader and deeper exploring the financial tools and vehicles that social entrepreneurs need and how we create them. For starters, Sean Stannard-Stockton of Tactical Philanthropy is addressing the conference’s tendency in past years to downplay nonprofits and philanthropy at the conference by leading a new “Tactical Philanthropy Track” that will, as Sean has said:

Bring more donors and nonprofits to the “social capital markets table.” To that end, we’re building a series of panel sessions that examine the way in which philanthropy is an integrated part of the social capital markets, not a separate activity. Our sessions will give donors, nonprofits, investors and for-profits the opportunity to examine together the role that philanthropy plays in social capital markets.

Secondly, representatives from the Bill and Melinda Gates Foundation will be at the conference to discuss their decision to put $400 million behind their new Program Related Investments program, which I’ve discussed before as a watershed for the social capital market. The SoCap conference website explains what the Gates session will do:

Gates foundation will discuss the foundation’s PRI initiative including the rationale for charitable investment, the value of investment partners to leverage expertise and capital, and the foundation’s hopes for philanthropy in the social capital market. Remarks will be followed by a deep dive into their experience putting this PRI approach to work with Root Capital.

The Gates Foundation decision to put 1% of their capital into a fund to provide risk capital to social entrepreneurs has the potential to encourage other foundations to similarly experiment with new tools for investing in social entrepreneurs, which ultimately means more dollars in the social capital market.

It’s exciting to see what started three years ago as a small conference of less than 600 (a number achieved only at the last minute by a deluge of laid off investment bankers from the financial collapse) becoming arguably the most important conference in the social innovation space. I hope to see you there!

Tags: nonprofit, Philanthropy, Social Capital Markets conference, social entrepreneur, Social Investing, Tactical Philanthropy

We Need an Ecosystem for The Bottom 80%

In response to my post last week on the Change.org blog about the Social Innovation Fund, Sean Stannard-Stockton, of the Tactical Philanthropy blog, wrote a comment that really got me thinking.

My post argued that the $50 million federal Social Innovation Fund is only one small piece of the capital the nonprofit sector needs. The fund will help the top nonprofit organizations, but will not remedy the lack of capital available to the smaller, less sophisticated nonprofits that make up the majority (80%) of the sector. Sean rightly pointed out that like the business sector, the vast majority of nonprofits are small, and as we have done with businesses, we need to create different expectations for different kinds of nonprofits.  I would take Sean’s comments even further and argue that we actually need to create a similar ecosystem of funding and expertise for the nonprofit sector, as we have done for businesses.

Sean writes:

One thing I think that people need to keep in mind when they point to how many nonprofits are small is that the same is true in business. While good revenue numbers are hard to find, did you know that 73% of for-profits have less than 10 employees and 54% have less than 4 employees? It seems to me that as a field we need to do a better job of segmenting the nonprofit market and having very different expectations for nonprofits which are “small businesses” vs those that are “public companies.”

Sean makes a critical point. The vast nonprofit sector is often lumped together as one. When in reality, the sector is incredibly diverse. And although over the past 10 years there have been some innovative strides made in providing capital, expertise, and other resources to the top 20% of the nonprofit sector (such as venture philanthropy funds like New Profit and Venture Philanthropy Partners and management expertise from consulting companies like Monitor and Bridgespan) the fact remains that the “bottom” 80% of the nonprofit sector is still very much alone.

This is one of the reasons I started Social Velocity. I saw a real hole in the marketplace in terms of capital and management expertise to the bottom 80% of the nonprofit market. A $500,000 nonprofit organization can’t engage a Monitor or Bridgespan group, and a venture philanthropy fund wouldn’t be interested in scaling them since no one will fund evaluation to prove their results.  These organizations are stuck within the vicious starvation cycle and cannot get out.

We need to do a better job, as Sean says, of segmenting the nonprofit sector and creating appropriate expectations for those different segments, but we need to go much further. We have to create an ecosystem of expertise and funding for the smaller, less sophisticated segments of the sector, which includes:

• Educating smaller, less sophisticated philanthropists that creating solutions requires funding for less sexy things like capacity, organization building, evaluation
• Providing significant capacity capital to build out revenue functions, attract and retain top talent, articulate a value add, message effectively
• Supplying growth capital to nonprofits who have a great solution and the desire to scale
• Creating realistic and cost-effective evaluation tools so that smaller organizations can prove their impact along with the big guys
• Securing management expertise to help smaller nonprofits create strategic and growth plans, articulate their impact and value add to potential investors, develop comprehensive financial strategies, etc.

I think it’s fabulous that there is a growing understanding that nonprofits can’t do it alone anymore. And I’m so pleased to see new funding vehicles like the Social Innovation Fund that are helping to take social innovation to the next level. But let’s not forget that there are many other innovative nonprofit organizations that will never catch the eye of the Social Innovation Fund, or their funding and consulting counterparts.

Over the past 200+ years America has established a fairly advanced ecosystem that supports (albeit not perfectly) the growth and success of entrepreneurs at every stage of the game.  We are starting to recognize the need for a similar ecosystem in the nonprofit sector.  But there is still much work to be done. Let’s not forget the smaller, less sophisticated nonprofits that may have tremendous solutions to contribute, but who just can’t get past the many hurdles in their way.

Tags: Bridgespan, growth capital, Monitor, New Profit, nonprofit, nonprofit starvation cycle, philanthropists, Sean Stannard-Stockton, Social Innovation Fund, Social Velocity, Tactical Philanthropy, Venture Philanthropy Partners

Will the Social Innovation Fund Really Change the Nonprofit Market?

Last week a new head of the federal Social Innovation Fund, the $50 million public/private fund to scale innovative nonprofits that came out of the Serve America Act, was named. Paul Carttar brings a wealth of experience and knowledge having worked at New Profit, the first venture philanthropy fund, and Bridgespan and Monitor consulting groups, the largest and most sophisticated consulting firms to large nonprofits. He knows how to scale proven nonprofit models.

But we need to be cautious about how much the Social Innovation Fund can do to transform the nonprofit capital market. While it will provide mezzanine funding to the best nonprofits, there are still some glaring holes in the capital available to the rest of the nonprofit sector. You can read my post “Will the Social Innovation Fund Really Change the Nonprofit Market?” at the Change.org blog.

Tags: Bridgespan, Monitor, New Profit, Paul Carttar, Serve America Act, Social Innovation Fund

The Perils of Nice

I have a new post up on the Change.org Social Entrepreneurship blog called “The Perils of Nice.” Here is an excerpt:

The nonprofit sector often suffers from a propensity toward niceness. Indeed, according to a recent study by researchers at Stanford and two other business schools, nonprofits are perceived as “warm, generous and caring organizations, but lacking the competence to produce high-quality goods or services and run financially sound businesses.” In other words, we think they are nice — but not competent. But this perception stems from a reality that is often imposed on the sector. Nonprofits are encouraged to collaborate instead of compete, hold onto under-performing staff, accept martyr-like salaries, smile and nod when funders push them in tangential directions and keep quiet when government programs want the same services at a lower price…But in order to innovate and work toward real solutions, in order to get out from under consensus-based mediocrity, nonprofits need to break free from the niceness trap. They need to get meaner, uglier, messier…

Tags: Change.org Social Entrepreneurship blog, Stanford