Nonprofits and the Emerging Social Capital Market

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

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

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

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

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

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

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

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

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

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

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

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

Tags: capacity capital, government, growth capital, investors, nonprofit, Philanthropy, SoCap, social business, Social Capital Markets conference, social entrepreneur, social return

The Coming Fourth Sector

In the last couple of years there have been discussions about the convergence of the public, private and nonprofit sectors, some call this The Fourth Sector.  Up until now, there have been, for the most part, 3 separate sectors.  The government sector was separate and distinct from the private (or for-profit) sector which was separate and distinct from the nonprofit sector.  That’s not to say that there weren’t crossovers and partnerships and joint ventures.  There absolutely were.  Government has always been a huge funder of the nonprofit sector.  The business sector has always helped fund and lead (via board seats, etc.) the nonprofit sector.  The government provided incentives to the growth and development of the business sector, and so.

But the concept of the Fourth Sector is that the three sectors can no longer be separate entities.  In the Fourth Sector you have concepts like social capital markets where the nonprofit and for-profit sectors find and channel their capital in almost the same way.  Just as we invest in and grow successful businesses to scale, we will invest in and grow successful nonprofits to scale, often with the same sources of capital.  Good Capital and Investors Circle are just a couple of examples of this.  Also in the Fourth Sector, government becomes a venture capital fund for social innovation.  Government, along with business partners, provides growth capital to nonprofit organizations just as a for-profit venture capital fund would provide growth capital to a business.  I discussed Obama’s platform on a Social Innovation Fund like this in an earlier post.

In the Fourth Sector, the old rules don’t apply.  Government can act like a venture capitalist.  Nonprofits can scale their solutions like an entrepreneur scales her business.  Wealthy individuals can invest for financial return or social return or both.  Nonprofit fundraisers are no longer looking purely at philanthropic revenue; they are also exploring business revenue, investment revenue, growth capital, and other vehicles that in the past were only available to their for-profit counterparts.  The lines are blurred.  The idea is that each of the three sectors can build on the assets of the other two.  Businesses can and should start taking the social and community effects of their business into consideration as they grow.  Nonprofits should start thinking about exponential, not just incremental, growth and strategy, as successful businesses do.  Government should use their tremendous resources in more effective and efficient ways to achieve greater impact.-

The idea behind the Fourth Sector is a simple, yet profound, one.  By merging the three sectors we can, perhaps, have the best of three worlds.  At the very least, we can learn a lot from each other and move solutions to the many problems that plague us forward.

Tags: for-profit, Fourth Sector, government, nonprofit

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