A lot of the conversation in September centered around inequality, philanthropy and data. When do data and philanthropy address inequality and when do they actually reinforce it? And if you add to that discussion about whether donors really care about impact; concern about the distracting, addicting influence of social media; and a call for philanthropists to be more supportive of nonprofit organizations, September was a very interesting month in the world of social change.
- Equity has certainly become the new buzzword in philanthropy. But some are skeptical that philanthropy, as it currently operates, can actually impact it. Writing in The Guardian, Courtney Martin argues that in order to truly achieve equity, philanthropy must fundamentally change: “If we really want to reinvent philanthropy then we are going to have to look at the underlying historic and structural causes of poverty and work to dismantle them and put new systems in their place. It’s also about culture – intentionally creating boundary-bashing friendships, learning to ask better, more generous questions, taking up less space. It’s about what we are willing to acknowledge about the origins of our own wealth and privilege. It’s about reclaiming values that privilege often robs us of: first and foremost, humility. But also trust in the ingenuity and goodness of other people, particularly those without financial wealth.”
- Marjorie Kelly argues that the key to addressing wealth inequality is to return to the old model of worker ownership.
- And speaking of wealth inequality, The New York Times slices and dices U.S. income data over the last couple of decades to understand how inequality varies by state over time.
- According to Cathy O’Neil’s new book, Weapons of Math Destruction, the increased availability of data may actually be worsening wealth inequality. Journalist Aimee Rawlins reviews O’Neil’s book, which paints a very unsettling picture of how data is being used to lengthen prison sentences for people with a family history of crime, raise interest rates on a loan because of the borrower’s zip code, and otherwise reinforce our broken system. But perhaps data can also help address wealth inequality. The Salvation Army and Indiana University’s Lilly Family School of Philanthropy have released a new tool for mapping poverty in the U.S. The Human Needs Index (HNI) uses Salvation Army service data from communities across the country to track human need across seven areas. The idea is that with an improved ability to map need, philanthropy can more effectively address that need.
- One of the biggest uses of data in philanthropy is to prove the impact an intervention has, but Matthew Gerken argues that donors aren’t actually interested in impact. New research from Penelope Burk’s Cygnus Applied Research might disagree.
- Andrew Sullivan, the formerly prolific blogger, has had an epiphany about our addiction to social media and writes an amazing long-form piece about our “distraction sickness.” If you worry that our always on culture is leaving something to be desired, read this.
- Last month many were bemoaning philanthropy’s slow and weak response to the devastating summer flooding in Lousiana. Well, it looks like crowdfunding has come to the rescue.
- Long-time funder Elspeth Revere, retired from the MacArthur Foundation, writes a scathing critique of philanthropy’s unwillingness to fund nonprofits effectively and sustainably. As she puts it, “The challenges facing America and, indeed, the world require philanthropy to be as effective as possible. Nonprofit organizations are philanthropy’s partners in addressing these challenges. They have unusual flexibility to take risks and pursue solutions to our most pressing problems. As grant makers, we need to focus our attention and philanthropic resources on building strong leadership and solid, sustainable, and diverse institutions that address the problems and opportunities we care most about.” Amen!
- Jyoti Sharma, president of the Indian water and sanitation nonprofit FORCE, worries that a current focus on social entrepreneurship as the solution to world ills leaves much behind. As she argues, “Do we need to see social entrepreneurship as a “non”-nonprofit? Should we instead promote hybrid models that plan the social change effort with both charity and revenue streams? Should we encourage community entrepreneur networks where charity funds are used to support entrepreneurial efforts from within a beneficiary community that help solve their social problem? Should we advocate for governments and corporates to join hands with nonprofits in planning, delivering, and monitoring welfare services? Equally, should we set ethical and social responsibility standards for entrepreneurships and applaud them for their contribution to society?”
- And finally, the Nonprofit Tech for Good blog pulls back the curtain on social media with their “12 Not-So-Great Realities About Nonprofits and Social Media.”
Photo Credit: Ixtlilto
I’m excited to be heading to Pennsylvania next month to speak at the 2016 Nonprofit Day Conference. My keynote address for the conference will be “The Future of the Nonprofit Sector.” I wanted to share an abbreviated version of the speech with you here via the Social Velocity Slideshare library.
In my mind, there are some fundamental shifts happening in the sector that will be important to watch. They include:
- Increasing competition in the space
- A greater demand for results and social change
- An increased use of advocacy to achieve that change
- A move to more “networked” approaches
- Less “starving” nonprofits of their operational needs
- And (of course) a move from fundraising to financing
These are interesting times, and they hold tremendous opportunity, I think, for the social change sector.
There was a bit of a dust up in the (social change) Twitterverse yesterday. Ryan Seashore from CodeNow wrote a post on TechCrunch arguing that the majority of nonprofits are “broken,” and should act more like for-profit startups in order to create impact. The post follows a similar line of other arguments over the years (most recently Carrie Rich’s argument that nonprofits should all become social enterprises) that the nonprofit form is so dysfunctional that it should be tossed out. But there is a real danger to this idea of abandoning the nonprofit sector.
Debates like these are crucial not because of the entertainment value (although I do love good drama), but because they force us to uncover and analyze our underlying assumptions. Yesterday’s debate, and others like it, which take the nonprofit sector to task for being inefficient, broken, unbusinesslike, lay bare some false and destructive assumptions about nonprofits and about social change in general.
Ryan sees nonprofits as aging dinosaurs with “too much overhead, too much bureaucracy, and a lack of focus on impact. Everything feels slow.” But for real change to happen you have to integrate the institutions that already exist with the networks, or “startups,” that want change, as I discussed in an earlier post. The two (institutions and networks) must work together. Ryan’s argument that nonprofits need to be more like startups is fundamentally flawed because if everything were a startup, change wouldn’t happen.
To quote David Brooks from a recent The New York Times piece, “Post-Internet, many people assume that big problems can be solved by swarms of small, loosely networked…social entrepreneurs. Big hierarchical organizations are dinosaurs…[but] this is misguided…Public and nonprofit management, the stuff that gets derided as ‘overhead,’ really matters. It’s as important to attract talent to health ministries as it is to spend money on specific medicines.”
To be sure, in his blog post Ryan outlines some areas where many nonprofits could improve (becoming more focused, continually innovating, diversifying revenue sources, thinking big), but these are best practices that any organization (startup or established institution, for-profit or nonprofit) should embrace. It is simplistic and misguided to think, as Ryan writes, that “the nonprofit world must embrace the nimble ways of successful startups to become more effective, and do better.” I know its not sexy, but real social change is much more complex than startup versus institution.
So let’s move on from this either/or mentality. Effective social change requires institutions AND networks, it requires Millennials AND Boomers, it requires startups AND established organizations, it requires public AND private money (and lots of it), and it requires for-profit and nonprofit solutions. We are wasting our time (and our keystrokes) by creating false dichotomies. Let’s work together toward strategic, sustainable social change.
There is an article in Forbes this month that bothered me. Carrie Rich, co-founder and CEO of The Global Good Fund, argues that more nonprofits should move from a “donor-driven organization” to a “revenue-producing social enterprise.” Instead of “relying on donor funding” more organizations should “create revenue-producing services.” In essence she is encouraging more nonprofits to figure out how to sell their services.
The problem with her argument, though, is that it encourages nonprofits to think one-dimensionally about funding sources instead of developing an overall financial strategy that may or may not include earned income.
Rich’s argument is that earned income, or what she calls “revenue-producing social enterprise” is a more sustainable and impactful way to create social change. She goes on to list all sorts of reasons (10 actually) that revenue generation (or earned income) is better than contributed income. These reasons include that revenue generation allows nonprofits to be “more responsive to change,” “attract employees who seek growth,” “accelerate growth and impact,” “become more financially sustainable and mature,” and the list goes on.
Rich is echoing a repeated dichotomy in the social change space between traditional, broken nonprofit approaches, and new, more sustainable and impactful social entrepreneurship approaches. Her line of argument stems from a distaste for fundraising done badly.
Believe me, I get it. Fundraising is broken. But just because traditional fundraising is flawed doesn’t mean we should eschew all contributed income.Yes there is deep dysfunction within the nonprofit sector – I talk about it all the time. But the answer is not to simply dismiss the sector and all of its trappings (and revenue sources).
Let’s remember that a nonprofit organization is often created to provide a public good that is not offered by the market. In other words, nonprofits are selling what someone is unable to purchase.
Thus, nonprofits typically have two customers:
- Those who benefit from the services (“Clients”), and
- Those who buy the services (“Donors”)
When social change organizations are able to conflate the two – when the client becomes the buyer – a social enterprise is born. And while that is great, it is rarely the case. Therefore, market-based solutions will never provide all the social change we need.
Every social change organization must analyze their overall strategy and develop a financial model that best delivers on that strategy. That financial model may have earned income elements, contributed income (individual, corporate and foundation grants) elements, government funding or, most likely, some combination of all of these. And every nonprofit should at least analyze whether earned income is right for their financial model. But social enterprise will never be right for all nonprofits, or even a majority of them.
Instead of completely throwing out “traditional charity models,” let’s make them better. Rich argues that one of the many reasons earned income is better is that it allows organizations to “afford the best technologies to help them succeed.” If social change organizations need more capital investments for technology (which they definitely do) then let’s make capacity capital ubiquitous in the sector. But let’s not erroneously assume that more earned income equates to more capital investment.
Let’s move past these social enterprise vs. charity debates and instead focus on helping social change organizations develop smart, sustainable financial engines that include the right revenue (and capital) mix.
Photo Credit: Yoel Ben-Avraham
Bradach asked leaders and thinkers in the scale movement – like Risa Lavizzo-Mourey from the Robert Wood Johnson Foundation, Billy Shore from Share Our Strength, Wendy Kopp from Teach for All, and Nancy Lublin from Do Something – to contribute their insights to the series. Bradach is doing this because he believes we have not yet figured out how to grow solutions to a point at which they are actually solving problems. As he wrote in his kick-off post to the series:
Over the past couple of decades, leaders have developed a growing catalog of programs and practices that have real evidence of effectiveness. And they’ve demonstrated the ability to successfully replicate these to multiple cities, states, even nations in some cases, reaching thousands or even millions of those in need. Despite all this progress, today even the most impressive programs and field-based practices rarely reach more than a tiny fraction of the population in need. So we find ourselves at a crossroads. We have seen a burst of program innovation over the past two decades; we now need an equivalent burst of innovation in strategies for scaling.
One of the places where scale has been an on-going topic of conversation is the annual Social Impact Exchange’s Conference on Scaling Impact. Now in its fifth year, this conference next month in New York City brings together “funders, advisors and leaders to share knowledge, learn about co-funding opportunities and develop a community to help scale top initiatives and build the field.” The conference is organized, in part, by the Growth Philanthropy Network, which “is creating a philanthropic capital marketplace that provides funding and management assistance to help exceptional nonprofits scale-up regionally and nationally.”
I’m excited to be attending this year’s conference and participating in a panel called “Business Models for Sustainability at Scale.” From my perspective, one of the biggest hurdles to scale is a financial one. Very few nonprofits have yet figured out how to create a sustainable financial model, let alone how to create one at scale. And this hurdle exists for many reasons, including: lack of sufficient capital in the sector, lack of sufficient management and financial acumen among nonprofit leaders, an unwillingness among funders to recognize the full costs of operation. So I’m excited to be part of this important conversation about how we can actually create financially sustainable scale.
It will be interesting to see how the conversations at the Scaling Impact conference – led by rockstars in the field like Antony Bugg-Levine from the Nonprofit Finance Fund; Tonya Allen from the Skillman Foundation; Heather McLeod Grant, author of Forces for Good; Paul Carttar from The Bridgespan Group; and Amy Celep from Community Wealth Partners – will relate to the perspectives of those writing in the “Transformative Scale” blog series. I wonder where there will be overlap and where there will be disagreement or even controversy. Scale is an incredibly difficult nut to crack. And as Bradach rightly states, no one has figured it out yet.
I will be posting to the blog during the conference about what I’m hearing and where there are common threads or separate camps.
I hope to see you there!
Image Credit: Social Impact Exchange
Today is Halloween, which, in my world, means that beyond candy, and trick or treating, and pumpkins it’s time for my annual “Monster List of Resources.” A few years ago I started the tradition of offering a list of resources for nonprofit leaders on Halloween (you can see past lists here and here). Each list is culled from the much larger, constantly evolving list of conferences, organizations, articles, books, blogs, and reports on the Social Velocity Resources Page.
This year I want to focus on the ever-growing number of conferences in the social innovation space. I’m really excited by how many really interesting gatherings are occurring.
But what did I miss? Please add to the list in the comments below. And don’t forget to check out (and add to) the much larger list of resources here.
Social Innovation Conferences
- After the Leap
- Center for Effective Philanthropy Conference
- CityWorks (X)po
- Clinton Global Initiative
- Global Social Venture Competition
- Grantmakers for Effective Organizations Conference
- Harvard Social Enterprise Conference
- Impact Conference
- Investors’ Circle
- Millennial Impact Conference
- National Innovation Summit for Arts and Culture
- Net Impact Conference
- NextGen: Charity
- The Nonprofit Management Institute
- Nonprofit Technology Conference
- NYU Social Innovation Symposium
- Opportunity Collaboration
- Skoll World Forum on Social Entrepreneurship
- Slow Money
- Social Capital Markets Conference
- Social Enterprise Summit
- Social Good Summit
- Social Impact Exchange
- Social Innovation Summit
- Social Venture Partners
- The Feast
- Yale Philanthropy Conference
Photo Credit: Wikipedia
I’m out of the office this week, so in my place I am offering you two interviews this month. Tuesday was my video interview with Hope Neighbor.
And today I’m talking with Geeta Goel, Director of Mission Investing at Michael & Susan Dell Foundation. In addition to traditional philanthropy, Michael & Susan Dell Foundation makes program-related investments across its India-based microfinance, health and education initiatives, and its US-based education initiatives. Prior to the Michael & Susan Dell Foundation, Geeta spent more than 12 years with the Corporate Finance Group of PricewaterhouseCoopers in India, advising large Indian and multinational clients on joint ventures, mergers and acquisitions, business plans, and valuations.
Nell: Why has Michael & Susan Dell Foundation decided to put an emphasis on program-related investments (PRIs)? How exactly does that particular financial vehicle further your mission?
Geeta: Our mission is to transform the lives of children living in urban poverty through better health and education. There are 2.4 billion people living below the World Bank’s poverty line of $2 a day, and more than 160 million children are suffering from malnutrition. To tackle those numbers and address deep-rooted complex problems, we need solutions that are both scalable and sustainable. And for that we need to tap into different and larger sources of funds – government and private. Program Related Investments (PRIs) are just one of several financial tools we use to further our mission.
The foundation has always sought to concentrate its limited philanthropic dollars to achieve direct, measurable, replicable and lasting systemic change. Early on we realized the power of markets as one lever for creating a more inclusive society. Free markets definitely increase access where it’s most needed. They can also help raise the bar for quality in terms of what customers expect and what they will pay for.
A great example is the microfinance sector in India. Today there are more than 30 million microfinance clients in India. These clients are accessing some $4 billion in credit to invest in income-generating assets such as trading businesses, tea/food stalls and livestock. We played a catalytic role in the Indian microfinance sector by influencing a market shift from rural to urban environments. Beginning in 2006 and continuing through 2009, we provided seed funding to some eight urban-focused MFIs. The success of these institutions helped prove that microfinance is a sustainable, scalable and investible asset class. There are now more than 25 MFIs active in urban India.
This scale has been achieved only because microfinance offers a market-based, sustainable solution that attracted private capital.
Nell: What methods do you use to find projects that make sense for a PRI, rather than a traditional philanthropic, investment?
Geeta: I love your question. It places things in perspective and in the correct sequence.
Our approach has been to first identify projects that can help achieve our desired mission (fighting urban poverty in order to improve children’s lifetime outcomes), and then decide an appropriate funding structure. This is in contrast to other organizations that have de-linked grants and investments; their grant strategy is distinct from their PRI strategy.
We view grants and investments, including PRIs, as part of the same toolset. When we are selecting any projects to fund, the main criteria are the level of their social impact, scale and sustainability. On sustainability, we ask a variety of questions pertaining to the project. Is there a strong business model, and has the product/service been tested? Can it generate revenue and remain true to the original intent? Will other funders—government, investors, and grant-makers, step in to help establish sustainability and scale? Are there adequate quality safeguards or do they need to be created?
The structure of our support is a complex decision emerging from these deliberations. The funding structure can be in the form of a grant, loan, equity or a combination. For instance we made an equity investment in Janalakshmi Financial Services when it was a start-up microfinance institution. We also offered grant support to their non-profit arm Jana Urban Foundation to conduct a detailed analysis of their client base. This helped Janalakshmi Financial Services to better understand the financial needs of their customers and offer additional products tailored to those needs, thus strengthening the company.
An example of a straight PRI is our support for Waterlife, a for profit company offering clean drinking water to low income customers in rural areas, to test the market in urban areas through a concessional investment structure. The goal of the project was to help Waterlife develop and scale an urban business model that would replicate its rural success, given the different challenges within an urban setting.
Nell: Only 1% of U.S. foundations make PRIs. What do you think holds other foundations back from experimenting with mission-related investing?
Geeta: You’re right. Our legal counsel often find themselves in an odd spot at foundation conferences, as we are in a minority group that does PRIs, and an even smaller minority that does direct PRI equity investments internationally. I can’t speak on behalf of other foundations, but based on my discussions over the last few years, I’ve witnessed that investing in market-based solutions is unfamiliar territory for most foundations. They are pushed outside their comfort zone.
Moreover, PRIs are more complex to design and structure than grants. We’re really looking at a culture shift in terms of staffing. PRIs require financial and investment skills that traditional grant teams might not necessarily possess.
Another possible reason is that for many philanthropists making a profit is viewed negatively. Anything that is grant based or in the non-profit space is seen as delivering a positive impact. Anything that is in the market-space is viewed as uncontrollable and exploitative. Lastly, I think it’s the risk of failure that holds back many foundations. Not only are PRIs more risky, their success or failure is transparent and easy to measure in more objective terms. At the foundation, we have seen the ways that PRIs and markets can support social progress. By setting up guardrails and standards, we have managed to contain the inherent risks of PRIs.
Nell: It seems like there is an enormous opportunity to connect impact investors and philanthropists, but that really hasn’t happened yet. How do we better pool philanthropic and impact investment capital for more social change?
Geeta: Traditionally, development efforts and markets have been viewed as two parallel tracks that are unlikely to converge. This has resulted in limited interaction between philanthropists (focusing on non-profits) and impact investors (focusing on for profits).
However, as we move towards recognizing that markets can bridge some of the existing inequalities in access and outreach, there is a definite need for increased connections between philanthropists and impact investors. A few organizations are now consciously working towards this end, especially the ones that are championing a sector based approach to creating and catalyzing markets, like FSG, Monitor Inclusive Markets, and Mission Investors Exchange.
And with impact investments set to reach between $400 billion to $1 trillion over the next decade (JP Morgan Global Research) there should definitely be greater collaboration between the two worlds. This needs to begin with defining “common ground” amongst the two stakeholders.
Today, we do not have an agreed definition of impact and how to measure it. This is a good starting point. Once we have this common terminology and performance assessment framework, appropriate forums and a structured approach to sector level change will go a long way in increased collaboration amongst donors and impact investors.
Nell: Michael & Susan Dell Foundation is obviously at the forefront of program-related investing, but what about other innovative financial vehicles? What is the foundation’s view on philanthropic equity investments (investing in growing or strengthening nonprofit solutions)? Is there promise in those kinds of investments?
Geeta: As I said earlier, we are very focused on our mission and the guiding principles of impact, scale and sustainability. We are open to adopting different tools and approaches that help advance the mission. Right now we are focusing our energies on traditional grants and PRIs.
Philanthropic equity investment is a fairly new concept that definitely holds promise. They are a one-time grant to nonprofits that help strengthen the capacity of the organizations and make them more sustainable. We do not rule out such investments. For the foundation, the key factors to evaluate the option of philanthropic equity are measurable and comparable outcomes and in-built mechanisms for quality and cost efficiencies. In non-profits, these are difficult metrics to achieve, but not impossible, especially as the development world ups the ante on measurement, transparency, and pay for success. We believe that strong governance, transparent reporting and incentives for achieving greater impact at lower costs will go a long way in building the field for philanthropic equity investments.
In today’s Social Velocity interview, I’m talking with Ted Levinson. Ted is the Director of Lending at RSF Social Finance, a San Francisco-based financial services non-profit dedicated to transforming the way the world works with money. Levinson manages RSF’s flagship $75 million Social Investment Fund which provides debt capital to US and Canadian social enterprises.
You can read past interviews in the Social Innovation Interview Series here.
Nell: RSF Social Finance is really the leader in the social finance market, you’ve been doing this long before anyone started talking about a “social capital marketplace.” Given that long history, how do you view the current state of the social capital market? Are we where we need to be to funnel enough and the right kinds of capital to social change efforts? And if not, how do we get there?
Ted: RSF has a twenty-nine year operating history, but it’s still early days for the field of social finance. The industry is at the same stage of development as natural food stores were thirty years ago – we’re established, we’re growing, we’re doing good work, and yet we’re still considered a fringe movement. I believe we are on the cusp of mainstream acceptance which will mean a much broader audience of impact investors (especially young people and unaccredited investors) and far greater demand for social capital from the growing number of social enterprises that are just now becoming investment-ready.
There’s been a shift in society’s view of natural food stores – we’ve overcome our fear of the bulk bins and now all grocery stores look more like natural food stores. I expect the same thing to happen with our conventional financial institutions which are just now beginning to pay attention to social finance.
What the field really needs is to expand the financial products available to social enterprises and address some of the existing gaps. Frustrated social entrepreneurs may disagree, but I think the angel capital and large-scale venture capital spaces are meeting the needs of for-profits. Incubators, business plan competitions and seed funds are providing modest amounts of funding to emerging non-profits and for-profits. RSF and some of our friends including Nonprofit Finance Fund, Calvert and New Resource Bank are addressing the middle market market.
The big voids in social finance include:
- True “risk capital” for non-profit social enterprises. We need more foundations willing to place bets on high-potential organizations.
- Bigger finance players or (better yet) a more robust consortium of social finance organizations that can band together to meet the $5 million + needs of high growth social enterprises such as Evergreen Lodge, Playworks and other organizations that are reaching scale.
I believe the field will get there but we’re playing “catch-up” now and social entrepreneurs are an impatient bunch.
Nell: RSF does something pretty revolutionary in that you combine philanthropic giving with impact investing, whereas these two sides of the social capital marketplace have not yet really found a way to work together in any large scale or significant way. Why do you think that is? And what needs to change in order to encourage foundations and impact investors to work more closely together?
Ted: We call our approach of combining debt and philanthropic dollars “integrated capital,” and we think it’s going to have a profound effect on impact investors, philanthropists and the social enterprises it serves.
Most non-profit social enterprises rely on a combination of earned revenue and gift money. There’s no reason why a single transaction can’t bridge these two forms of capital. With integrated capital we can leverage philanthropic grants or loan guarantees to push high-impact loan prospects from the “just barely declined” category into the “approved” category. In fact, even some for-profit social enterprises are eligible for this. Our loan to EcoScraps – a fast-growing, national, composting business was made possible by a foundation that shared in some of RSF’s risk.
Integrated capital is possible because RSF works with individuals and foundations that have overcome the prevailing view that how you invest your money and how you give are distinct activities. We’re also fortunate to work with an enlightened bunch of people who recognize that philanthropic support for social enterprises isn’t a crutch or a sign of a failed enterprise.
Our work at RSF is driven by a belief that money ought to serve the highest intentions of the human spirit. Conscientiously investing money, giving money and spending money can all further this goal.
Nell: What do you make of the emerging social impact bond movement? Is this a social finance vehicle that you think will work?
Ted: I’m deeply hopeful and deeply skeptical of the future of social impact bonds. I’m hopeful because our government is notoriously risk-adverse and slow to adopt new ways of improving education, reducing recidivism, or curbing our runaway health care costs. I think spending money on early interventions could go a long ways towards improving these fields societal challenges, but paying now to save in the future is at loggerheads with the short-term view which prevails in politics. Social impact bonds are a clever way to push the risk on to investors who are willing to take a longer view for the potential of a big upside.
I’m also a fan because social impact bonds are an alternative to the financial engineering which brought us collateralized debt obligations. They demonstrate that Wall Street doesn’t have a monopoly on financial innovation.
That being said, I’m skeptical that this market can ever reach a stage where transactions costs can drop enough to make it economically viable. Bringing together the multiple parties that are required for such a transaction (the government, the investor, the non-profit, a monitoring entity, a social finance organization, an attorney and possibly a foundation) just seems unaffordable to me.
Nell: What sets the nonprofits and social enterprises you invest in apart? What characteristics do you look for in the investments you make?
Ted: All of our borrowers fall into one or more of three focus areas – sustainable food systems, the environment and education & the arts. These borrowers all have capable, committed management who recognize that financial sustainability is a prerequisite for lasting change. Our best borrowers have strong communities supporting them whether it is donors, customers or suppliers.
Evaluating these stakeholders is a key component of our underwriting process at RSF.
Our experience demonstrates that performance improves when social enterprises engage all of their stakeholders. RSF’s long-standing support of fair trade is an example of this commitment. We also regularly expect borrowers to solicit their community members to join RSF’s investor community as a precondition to approval. We take community seriously at RSF!
Our borrowers are all addressing major social or environmental problems such as a lack of adequate housing for developmentally disabled adults (Foundation for the Challenged), inefficiencies in the wind industry (FrontierPro) and poverty and environmental degradation from rice farming (Lotus Foods.) As social enterprises, they’re primary activities are DIRECTLY making the world a better place. We believe our borrowers have the potential to scale their organizations and make a real dent in these problems, or become a model for others to do the same.
For example, we were one of the first lenders to Revolution Foods when they were operating out of a defunct fast food restaurant in Alameda, CA. Today they deliver over 200,000 healthy meals a day to public school children.
Similarly, we think DC Central Kitchen’s model of combining culinary training for adults with barriers to employment with a robust meals business (they deliver 5,000 meals a day to schools and homeless shelters) is a winning approach that can be replicated throughout the country.
Nell: Some have argued that nonprofit leaders lack a level of sophistication when it comes to financial strategy and use of financial tools. Obviously you find nonprofits and social enterprises that are able to effectively employ sophisticated financial vehicles, so how do you respond to that argument?
Ted: Rather than argue I prefer to let the results of our borrowers speak for themselves. DePaul Industries, for example, is a $30 million non-profit that employs over a thousand disabled Oregonians. The Portland Business Journal ranked them one of the most admired companies in the state and they did this all with 98% earned revenue. Network for Good processes over $150 million of online donations every year while Digital Divide Data has a decade of year over year revenue growth in the field of impact outsourcing.
I see no lack of financial sophistication in the non-profit sector. I do, however, see a lack of risk-taking, which can sometimes be misinterpreted as unsophistication when compared with the for-profit world. It’s a shame this mentality is so pervasive because of the importance and urgency of the work that so many non-profits do. Many icons of industry have biographies filled with risky expansion, leverage, false starts and failures. We need to de-stigmatize failure in the non-profit sector and adopt that same boldness which has led to so many of the biggest successes in the commercial world.