Innovation Cities in a New Economy

Innovation often comes from chaos and crisis.  In this month’s The Atlantic magazine, Richard Florida, author of The Rise of the Creative Class and director of the Martin Prosperity Institute at the University of Toronto’s Rotman School of Management, wrote an interesting prediction of how the recession will change the landscape of American cities.  He argues that the financial crisis will create “great mega-regions that already power the economy, and the smaller, talent-attracting innovation centers inside them.”  He includes Austin in the short list of mega-regions which also includes Boulder, Research Triangle and Silicon Valley.  He sees the innovation that is happening in these areas as key to the next iteration of the economy.  He argues that a reshaped America will be focused on these “mega-regions” and be “a landscape that can accommodate and accelerate invention, innovation, and creation—the activities in which the U.S. still holds a big competitive advantage.”  It seems, at least to Richard, that Austin is key to this new economy.

Along the same lines, McKinsey recently did a study of the world geography of innovation, how cities compare in terms of innovation.  The results, in a pretty interesting interactive map, place Austin in the “Silent Lake” category (in the middle between “Dynamic Oceans” and “Shrinking Pools”), which means we have “slow-growing innovation ecosystems backed by a narrow range of very large established companies that operate in a handful of sectors. These clusters are frequently the source of a steady stream of “evolutionary” innovations and step-wise improvements.”

Taken together, then, it appears that there is a bright future for Austin.  What neither the article nor the study take into consideration, though, is social innovation.  I would love to see a similar analysis of hotbeds of social innovation, areas where sectors are converging and new ideas, products, services which include a social element are emerging.  That would be fascinating and would probably mirror the mega-regions Richard describes.  Because I believe that at the end of this restructuring we are undergoing, we will have an economy where social and financial returns are fundamentally integrated. And those cities that understand and leverage this change will be far more successful.

Tags: Austin, Boulder, Economy, innovation, McKinsey, Research Triangle, Richard Florida, Silicon Valley, social innovation

Foundations’ Role in a Tough Economy

What should foundations do in an economy that has seen their assets fall by almost 30% but also has created enormous need among the nonprofits they fund and the people those nonprofits serve?  Charitable foundations are required by law to distribute (to grantees and foundation administrative expenses) at least 5% of a rolling average of their endowment each year.  They can do more, but not less.  In times like these when their return is not even close to 5%, it can be difficult to think about giving more than 5%.  Many foundations are determined to preserve the corpus of the foundation in perpetuity.  However, there is a debate raging among philanthropists, nonprofits, advisors and thought leaders about how foundations should respond in these difficult times.

First, here is how foundations are responding:

• The Foundation Center has created an interactive map detailing where and how foundations are giving in response to the economic crisis.
• Philantopic is keeping a running post of statements from foundations on how they will respond to the economic crisis.

Then, here is how people think they should be responding.  Here are just a few examples:

• Paul Brest, head of the Hewlett Foundation, wrote a blog post about the difficult position foundations are in, and he encourages them to “ensure that the best organizations — those that are delivering real outcomes — weather the storm. We’re not going to be able to salvage them from the bottom of the sea after the storm is over.”  He also warns of the importance of investing now in issues that need our immediate attention: “dollars spent today to address issues like global warming can do more good than dollars spent in ten years, when mitigating climate change will certainly be much more expensive if it is even possible.”
• Todd Cohen, editor of Philanthropy Journal, wrote a stinging post in the Stanford Social Innovation Review Opinion Blog against foundations that are prioritizing preserving their corpus above giving back to the community: “Instead of pitching fits about the plunge in value of the endowments they count on to perpetuate their power, foundations should be digging deeper and paying out more to begin to give back what they and their donors have received from taxpayers in the form of tax breaks and tax-exempt benefits.”
• Sasha Dichter, Director of Business Development for the Acumen Fund (a venture philanthropy fund working to end global poverty), wrote a piece about how the Weingert Foundation’s announcement that they were going to now support operating costs for nonprofits demonstrates how out of whack the funding apparatus for nonprofits has gotten: “The result…is that we end up with scores of nonprofits twisting themselves into knots to manage a series of too-small, too-specific “program” grants, with individual donors asked to pick up the difference between what’s funded and what’s needed to deliver on the non-profit’s mission (weren’t the foundation supposed to be the trailblazers in this equation?).”

This is a worthwhile debate and absolutely critical to the social sector going to the next level and creating solutions to the many problems that face our country and our world.  But it is not just about foundations.  They are only part (and a very small part) of the resource engine that drives the social sector.  The entire way in which the social sector is capitalized needs to change.  We need to put a financial priority on the solutions that the social sector is coming up with.  Those solutions need to be scaled and made sustainable. And adequate capital (from all sources) is the only way to do that.

Tags: Economy, Foundations

The Convergence of Social and Finance

If you are interested in the dramatic shifts the economy is currently undergoing and what it means for the long term, take a look at the article “Notes from the Leading Edge of Social Finance,” in the Fall issue of Green Money Journal written by Don Shaffer.  Don Shaffer is the CEO of RSF Social Finance, a 20+ year-old, leading-edge, San Francisco foundation that makes loans and grants to nonprofits. He is also the former interim head of Investors Circle, a 200+ member giving circle of venture capitalists who invest in businesses working towards a sustainable economy (social and environmental issues). Don gives a very interesting overview of where the economy is heading, and I think he is right on.

He argues that we are no longer content with an economy focused solely on individual gain, rather there is a new convergence of financial, social and environmental gain, where what is good for the investor is also good for society as a whole. Ultimately he sees the new economy “harnessing the striving energy and entrepreneurial drive of the American people to move more towards collaboration and partnership, instead of maximum individual gain, while honoring the power of free markets.” Here’s an excerpt:

International microfinance is drawing a lot of interest this year from U.S. investors. For good reason, it’s great to see direct investment going to small, growing entrepreneurial ventures in the developing world. But what about our neighbors? As the wealth divide continues to widen in this country, both in urban and rural areas, we are asking ourselves at RSF, “How can our clients best support small and medium-sized, privately held companies in the U.S. that have strong community development and ecological sustainability goals?”…We are creating a learning community that asks hard questions about money and how we use it, acknowledging that money is simply a form of energy that creates a relationship between human beings. What is true wealth…What is the right balance between investment and philanthropy…What does it look like to re-imagine money to serve our highest aspirations? What, specifically, will it take to develop a network of risk and liquidity appropriate financial vehicles that are completely different from the products of Wall Street?

These thoughts and questions are very similar to the conversations that were going on at the Social Capital Markets Conference earlier this month and that are going on around the country.  We are witnessing a pretty dramatic shift, and it is fascinating.

Tags: Economy, Green Money Journal, Investors Circle, RSF Social Finance, Social Enterprise, Social Finance, Social Investing, venture capital

A Better Way to Fundraise

A topic on many nonprofit Executive Director’s minds these days is how to find more money.  With foundation and individual donors poised to decrease their giving, governments strapped for cash, and corporate earnings, and thus their philanthropic giving programs, falling, it is difficult to figure out how to make fundraising programs already in place continue to meet their goals.

But there is a solution.  Strategic fundraising, or comprehensive revenue-generating activities that are based in strategy, can find dramatic results, even in a tough economy.

Strategic fundraising always starts with a plan.  In order to raise more money, you need a game plan to get there.  Many nonprofit organizations don’t have a comprehensive fundraising plan that details exactly what the goals are and how and when they will be met.  A fundraising plan should have 3 to 5 broad goals. For example:

1. Raise $XX from philanthropic sources
2. Raise $XX from earned-income or fee for service sources
3. Create or refine the infrastructure (technology, staffing, marketing, etc.) to meet these goals

With your goals determined you can then delineate the various deliverables, people responsible and timeline that will get you to each goal.  Such a plan drives your strategy for the entire year and tells you where to allocate resources most effectively.

Speaking of resources, strategic fundraising also necessitates that you look at each fundraising activity and determine its return on investment.  What does it cost to put on your annual fundraising gala? Not only the direct costs (food, decorations, etc.) but also the financial value of the staff time that goes into it.  When you factor all costs in, how much do you really raise?  Are there better ways to spend staff time that could raise more money?  For example, a major gifts campaign has the highest return on investment of any philanthropic fundraising activity.

You also want to look at your entire revenue picture and the sources of each piece.  If you are heavily dependent on one or two revenue sources (government funding, foundation grants) you could be hit harder when that source changes.  Diversifying your revenue strategically, for example launching an annual fund campaign to increase individual investments, looking at corporate sponsorship opportunities, getting your board of directors to invest time and money in fundraising, can strengthen your organization and cushion you from difficult periods.

And as you diversify revenue you want to look beyond typical philanthropic sources.  Earned revenue, fee-for-service, social enterprise, are all different names for the same thing:  selling a product or service to generate unrestricted income. Nonprofits have found success in generating revenue by selling something.  Museums (entrance fees) and schools (tuition) have been doing this for a long time, but other nonprofits are moving into the arena as well.  Job training nonprofits use their workforce to staff a restaurant, bakery, ice cream store.  Public broadcasting stations sell their television and radio programs on CDs and DVDs.  The list goes on.  Nonprofits have assets that they can turn into saleable products or services.  And the unrestricted revenue that successful earned income businesses generate can get them further along the path to financial sustainability.

There is an answer to a down economy.  It means thinking strategically, exploring new opportunities and being open to change.

Tags: Economy, Foundations, Fundraising, Nonprofits, Social Enterprise

Discussing the Downturn

My last few posts have focused on the downturn in the economy and how it already is, or soon might, affect the social sector.  It seems to be a topic on everyone’s mind.

I wrote an article that was just published today in Texas Nonprofits online magazine, entitled, “Social Innovation Provides Hope in the Uncertainty,” that explores how new models like social entrepreneurship, social enterprise and strategic fundraising could actually be very helpful, especially in times like these.

Also, Greenlights for Nonprofit Success, Austin’s nonprofit management center, is hosting a panel and discussion on October 30th to talk about how the economy may affect the sector and what can be done.  It should be very interesting; I plan to attend.

Tags: Economy, Fundraising, Nonprofits, Social Enterprise, Social Entrepreneurship

Maybe Things Won’t Be So Bad After All

The Foundation Center just released a pretty encouraging report analyzing the trends in foundation giving during economic downturns.

The data (since they started tracking it in 1975) shows that in past recessions, foundation giving was only marginally affected, if at all.  Because foundations tend to determine their payout amounts based on a 2-5 year rolling average, the effects of one or two bad years are lessened.  Also, in past recessions some foundations went into their corpus to make good on pledges made before the downturn hit.  That’s not to say that if we go into a deeper economic downturn that things won’t be different, but it is encouraging to see that history (at least brief history) tells us that things aren’t as bad as they seem.

This also parallels nicely with the Council on Foundations open letter to their membership, earlier this week, urging them to step up to the plate during this economic crisis and not hide behind lower earnings.  Indeed, going into the corpus to support programs, or even, as some innovative foundations are starting to do,  to fund for-profit/social mission businesses (social enterprises), are some of the creative ways that foundations could continue to support the social sector during these difficult times.

Thanks to Sean Stannard-Stockton’s Tactical Philanthropy blog for pointing out the report.

Tags: Economy, Foundations, Philanthropy, Social Enterprise

Evidence of a Shift

The economic uncertainty is starting to hit the nonprofit sector. Some foundations are already talking about how, given the devaluation of financial assets, grants will be smaller in number and size in the coming year.  And wealthy individuals, suffering similar financial hits, will likely restrict their giving.  At the same time, the need for the services many nonprofits, particularly social service agencies, provide is increasing.  But the costs to provide those services are also growing (gas, food, etc.). Add to that the impact of the credit crisis on nonprofits ability to expand, or just continue, their services, and the picture is pretty bleak.

However, in the midst of all of this there are some very encouraging signs of increased interest in the social sector and philanthropy. Over the past 40 years philanthropic giving has increased almost 3 fold.  The number of national conferences, meetings and gatherings around philanthropy, social innovation, social enterprise, and social entrepreneurship throughout the country has grown significantly in the last several years.  As has the number of investor or giving circles (groups of people who pool their money to make large investments in nonprofits). And discussions about national service, greater philanthropy, more volunteerism have become regular features in political campaigns and the mainstream media.

Despite the fact that the nonprofit sector is really struggling and will continue to do so for awhile, a real shift is taking place.  More people are recognizing that the nonprofit sector cannot just limp by.  We need to find a better way to solve the many problems facing our country.  We need to invest more money in the sector, we need to devote more time to it, we need to find more solutions, we need to pool our efforts and our thinking to come up with new strategies.  It is an exciting, if unsettling, time.

Tags: Economy, Foundations, nonprofit, Philanthropy, volunteerism

The Opportunity in the Chaos

These past months have been frightening, with new banks crumbling every week and the government weighing the merits of a $700 billion bailout.  The economy is reeling with tremendous uncertainty.  I can see the nonprofit sector, which is often hit hardest and longest by any economic downturn, holding its collective breath, unsure what all of this will mean to the critical services they provide.  And, if the government does end up providing a tremendous influx of cash to the overall economy, it must mean that less will be left over for nonprofit programs.

All of this seems incredibly bleak.  Indeed, the times we live in are rather bleak.  But they are also incredibly historic.  And what if, instead of battening down the hatches, we viewed these times as an opportunity? Perhaps times like these are exactly when system-changing ideas can take hold.  Take New Orleans for instance.  Despite the incredible destruction of Katrina which threatened to wipe that city off the map, New Orleans is starting to come back.  And social entrepreneurship is driving that come back.  New Orleans’ school system was in disarray before Katrina.  It was one of the worst in the country.  However, Katrina has given them a clean slate.  And social entrepreneurs, with great new ideas for education, have taken the city by storm, using it as a test case for some pretty exciting and powerful models for changing the end game:  improving future outcomes for at-risk kids.  It’s a pretty inspirational story.

So, maybe, amid all of the bleak news of recent days there is a ray of hope.  When nothing is sure, anything is possible.

Tags: Economy, government, New Orleans, nonprofit, Social Entrepreneurship