What the Changing Government Means for Social Innovation

What does the historic election of Barack Obama yesterday mean for the social sector?  It may be too early to tell, but we can get a sense from his policy platforms and interviews.  Both McCain and Obama spoke about social entrepreneurship during the campaign and supported new ideas like a social innovation fund and national service.  It was exciting to see these new ideas taking hold in mainstream politics and the mainstream media.

So, on the day after such an historic election, let’s speculate on what this changing of the guard might mean for social innovation.

First, Obama is a big proponent of national service. He wants to get every citizen involved in serving their country and has said, “As President, I will ask for the active citizenship of Americans of all ages and walks of life.”  His ideas for expanding national service, include:

• Growth of current national service programs like AmeriCorps and the Peace Corps.
• $4,000 tax credits to college students in exchange for 100 hours of community service.
• Expanded programs for engaging retirees in community service.
• 50 hours of required community service from middle and high school students each year.
• Expansion of YouthBuild, which helps at-risk kids complete high school while building affordable housing in their communities.
• Allocation of 25% of college work study funds to community service projects.

He is also interested in creating incentives for social innovation.  As he said in Time Magazine , “We need to invest in grass-roots ideas, because the ‘next great innovation’ usually doesn’t come from government.”  He wants to:

• Create a Social Investment Fund Network to use federal seed money coupled with private investor capital to spur ideas that solve social problems.
• Create a new agency within the Corporation for National and Community Service to increase the capacity and effectiveness of the nonprofit sector.

Indeed, McCain and Obama were already working on some of these ideas when they co-sponsored the Serve America Act this past September.  The bill would create more AmeriCorps-like volunteer bodies to focus on the country’s most pressing problems (education, environment, etc.).  It would also create a commission to explore how government, nonprofits and the private sector can work more closely and effectively together.  And most interesting, it would create venture capital funds for the nonprofit sector to stimulate social innovation.  The bill is in committee right now and who knows where it will go from there, but since it mirrors much of Obama’s platform on service and the social sector, when he becomes president perhaps it will have a better chance of passing.

The service aspects of his platform are interesting and exciting, to be sure.  But what really excites me is the idea of a Social Innovation Fund that couples government and private money to seed solutions in the social sector.  I don’t know that we have ever lacked ideas for solving our social problems, but the real hurdle has been capital.  The social sector is sorely undercapitalized.  There are amazing programs out there nationally and here locally in Austin and the Southwest region.  But they are only able to grow incrementally because they lack the growth capital that is available in the for-profit side.  Any entrepreneur will tell you that it takes money to make money.  The same is true in the social sector:  it takes money to create real, lasting, sustainable change.  But nonprofits cannot create that change through incremental donations.  We need social venture funds with significant capital that can be smartly invested in programs that work.  Those investments ($100K+ over 3-5 years) will allow these programs to grow to scale, have broad and deep impact and really start to solve some of the toughest problems facing our country today.

Can you imagine the impact if an Austin nonprofit that is changing outcomes could scale their program?  Take a program like College Forward.  They could apply for and receive significant growth capital from such a fund.  They could take their program, which keeps students from dropping out of high school and moves them on to college, and expand it throughout Texas, throughout the country.  Instead of providing opportunities and futures to just 900 kids, as they do now, they could reach 9,000 or 90,000 kids.  They could transform a state, a region, a country, a generation.  That’s powerful.  And growth capital is how they would do it.

It will be interesting to see what a change at the top means and whether it will trickle down to the social sector nationally and here in the Southwest.  I’ll be watching closely.

Tags: Barack Obama, College Forward, Funding, innovation, John McCain, Nonprofits, Serve America Act

A Sign of the Times

There is a fascinating discussion happening on a few social innovation blogs.  It centers around a small (less than $500,000 annual budget) nonprofit that does important work, but is struggling to the brink of closing down.  Given the current economy, this will probably be a more common occurrence in the coming months.

FORGE harnesses the power of refugees in African camps in order to promote peace-building and social stabilization. Founder & Executive Director Kjerstin Erickson has been blogging about the immediate financial crisis FORGE is facing-a $100K budget shortfall for this year (25% of their annual budget).  They recently changed their business model where refugees now create the programs instead of having American student volunteers, who had also been required to raise money, create the programs. At the same time a donor mailing that usually contributes a good bit of money was sent at the height of the recent financial crisis.  Their new revenue model is based on the idea that people would visit their website and create a Kiva-like scenario, where donors find programs that appeal to them and contribute accordingly, but it hasn’t panned out yet.

Other bloggers have taken notice and asked what can be done to help this innovative nonprofit survive.  Sean Stannard-Stockton’s Tactical Philanthropy blog, called Kjerstin’s The Most Important Nonprofit Blog, because “it is a fascinating real world drama of a social media savvy, impact focused nonprofit trying to deal with the financial crisis.”

The resulting discussion here and here has been really interesting.  I was even compelled to join in.  It seems to me that FORGE is a perfect case study, or microcosm, of some of the trends occurring in the social sector.  FORGE is a great example of a social entrepreneur taking a new view of a problem and coming up with an innovative solution that is scalable.  However, that innovation must be paired with strategy, a solid business plan and a sustainable revenue model.  It is interesting to me that in her response to some of the blog comments, Kjerstin says that their strategy is sound, but their fundraising and marketing skills may be lacking:

We (I take most of the responsibility) made some pretty naive/inaccurate assumptions about the way funding would work under our new model, and that says something about FORGE and my judgment. What I am hoping is that those that are out there listening are able to decouple strength in marketing and fundraising with strength in strategy, programming, and impact management.

I would argue that strength in strategy, programming and impact management INCLUDES strength in marketing and fundraising.  You can’t have a strong, strategic, sustainable program that creates real change without having a revenue model behind it.  A great idea is a start, but unless you can combine that with a business model that works and is sustainable it remains just an idea.

FORGE is definitely on to something, and I admire Kjerstin’s tenacity and courage, especially her ability to document FORGE’s weaknesses and to ask for help.  However, the whole thing reminds me a little bit of the dot com era.  During the boom, the assumption was that there was an “old” way of doing business and determining value and a “new” way that was less interested in profitability, etc.  There are a lot of exciting things going on in the social space and some really great ideas and new ways of looking at things.  But the fundamentals of the space are still the same.  Social mission organizations still exist within a market economy, therefore in order to survive they must find consumers who will pay for the services they provide, i.e. donors.  When FORGE gave up their model of volunteer program directors helping to fundraise for the programs they run, they gave up the revenue piece and there wasn’t much left in its place.  They had hoped that their website would generate donors, but that takes time to build.  They needed, and still do, to build a base of donors who would support them through other means.  Foundations, wealthy individuals, etc.  The “old” line of funds available to nonprofit organizations.

If they were to ask for my advice to get out of this situation I would recommend the following:

1. Start with your board and major donors (if they have any).  Who on that list could make a large donation ($10-25K) or could open the door to such a donation? This would help them cover the shortfall and keep them in business.
2. Put together a new business plan that creates a sustainable, scalable revenue model to replaces the one they lost.  Is there a creative way to generate revenue (earned or philanthropic) that could be on-going?
3. As part of this plan, determine what infrastructure (staffing, technology, etc.) will be required to fully realize this new plan.  I would recommend a Development Director or Business Development Director, or other revenue-generating position be added to the team.  Then put a price tag on that plan and start shopping it around to your board, wealthy donors, foundations, etc.  Determine what the ROI of such an investment would be.  If you could fully implement your new plan and make FORGE scalable and sustainable, how many lives will you change, what is the long-term impact?  Compare that to the investment being made and you start to have a compelling argument for some pretty serious growth capital.
4. Once you have the shortfall money in house and the growth capital in place then put your plan in motion and be ever-cognizant of the connection between strategy, program scale and revenue.  In order not to end up here again, you have to be clear that your business model and any changes to it have to include revenue implications.

The new ideas happening in the social space are exciting, but we have to understand them and implement them within the knowledge we have gained from philanthropy and the social sector over time.  A great idea isn’t enough, you need a solid business model behind it.

Tags: Funding, nonprofit, Social Entrepreneurship

A Crazy Idea?

While everyone is thinking and worrying about the economic crisis and the potential detrimental effects on the nonprofit sector, an idea occurs to me.  With the continuing volatility in the stock market and a dark economic forecast at least for the next few months, perhaps the next year, foundations and individuals won’t make money on their investments in the market.  What if a foundation took say $100,000 from their corpus and made a program-related investment (PRI) in a nonprofit hoping to build their capacity to raise unrestricted dollars.  A PRI is basically a loan to a nonprofit at low interest rates.

What if a foundation, or a wealthy individual, loaned a nonprofit $100K+ for a 2-3 year term.  Then, the nonprofit could use that capital to invest in their fundraising infrastructure in order to diversify and be more strategic in raising unrestricted dollars.  They could hire a seasoned Development Director, purchase a new donor database, upgrade their website and email marketing efforts, launch a major gifts campaign, train their board, and so on.  The idea is that all of these investments would pay for themselves in 2 or 3 years, at which time the nonprofit could pay back the individual or the foundation.

We did something like this at KLRU, however it wasn’t with PRIs, but with donor investments, which in a market like this might be harder to come by.  With investments from a handful of donors totaling $350K we completely revamped our fundraising function and increased annual revenue by $1.6 million, a 40% increase.  That’s a pretty amazing ROI.  And donors loved it.

If you applied this idea to PRIs, donors could help nonprofits increase their capacity and sustainability, while the donor protects his corpus in a down market.

Just a thought.

Tags: Foundations, Funding, PRIs

Clinton Global Initiative Coming to Austin

In the midst of an historic week focused on the bailout of the American economy, the Clinton Global Initiative’s annual meeting was going on in New York City last week.  Former President, Bill Clinton, launched the Clinton Global Initiative in 2005 in order to bring world leaders together to take innovative action to solve some of the world’s most pressing problems.  At the meeting last week, Clinton announced plans for the coming year that will invest $8 billion globally and impact 158 million lives.  Some of the new programs include: school feeding programs, access to healthcare, new vaccines, distribution of safe drinking water, microcredit programs, etc.  The details on the new initiatives are here.  But the really exciting thing is that the University of Texas at Austin will be host to the second meeting of CGI University, an initiative that brings students, faculty and staff from universities across the country and the world together to come up with plans to tackle global issues.  The first CGI U was held in New Orleans in March 2008.  Attendees agree to commitments to change the world.  So far, commitments from the New Orleans innaugural meeting have totaled over 1,000.  The Austin CGI U will be held this coming February.

Tags: Clinton Global Initiative, Funding, innovation, social innovation

A Call for Growth Capital

In recent months there has been an increasing call among writers and thinkers in the social sector for growth capital in the nonprofit sector.  In the for-profit sector, successful businesses reach a point at which they need significant investment capital (separate from operating revenue) to grow their business to the next level.  Successful nonprofits have similar needs.  However, foundations and individuals, for the most part, are hesitant to fund something other than program or general operating expenses.  A handful of foundations, though, are starting to realize that making a significant ($1 million+) one-time investment in a nonprofit that has proven success and needs capital to scale their program makes a lot of sense.  In the most recent issue of the Standford Social Innovation Review, you can read more about Money to Grow On. Their online articles are for subscribers only, so if you aren’t already, you should consider becoming one.  Money very well spent.

Tags: capital, Funding, growth, investment, nonprofit