Convergence Can’t Be Denied

There is a fascinating debate going on in the blogsphere touched off by Michael Edwards, author of  Small Change: Why Business Won’t Save the World and former director of the Ford Foundation’s Governance and Civil Society program.

In essence, the debate is about whether the convergence of the private (business) and the nonprofit sectors is a good or bad thing, whether market forces help or hurt social change efforts.  Michael kicked off the debate on Monday with the first in a week-long series of posts called “Should Civil Society Be Reduced to a Subset of the Market?” In subsequent posts he went on to attack the emerging social capital market among other things.  You can read the whole series here.

Sean Stannard-Stockton, of the Tactical Philanthropy blog, took up the charge and debated many of his points.  Then the two have gone back and forth over the issues. And the debate expanded on the New Philanthropy Capital blog where Tris Lumley wrote that Michael’s argument “boils down to social capital markets vs civil society – impact measurement vs social justice, data vs values, competition vs solidarity. And in this binary view of the world, he threatens to undermine the very real progress that’s being made towards a much more balanced and realistic perspective.”  Michael responds and so does Tris.

It seems to me that fundamental to Michael’s argument is his fear about the growing convergence between the nonprofit, private and government sectors.  That somehow the “market” will sully social change efforts.  Michael argues that civil society and the market are separate entities: “Civil society operates on solidarity and commitment—the willingness to hang in there for the long haul even if results don’t go your way. Markets work on the opposite principle, “exit”: consumers are free to move from one supplier to another whenever and wherever they like. Otherwise the efficiency of resource allocation would suffer.”

But the fact is that social change efforts and the nonprofits leading them have always existed within a market economy. Resource allocation to nonprofits is very much based on a market. If nonprofits can’t convince donors or governments that their work is important or has meaning, they won’t receive resources.  Nonprofit funders are consumers who are “free to move from one supplier to another whenever and wherever they like.”  It would be great if social change efforts could exist in some sort of vacuum where their good work automatically finds resources, but the world doesn’t work like that.  And as resources for social change efforts become increasingly competitive, nonprofits, and for profits working towards social change, have to become smarter about responding to the marketplace. And as the marketplace demands more social change efforts, which is increasingly the case, more resources will be brought to bear on those social change efforts, thus the creation of the social capital market.

The growing convergence among the public, private and nonprofit sectors is a reality we can’t avoid.  Nonprofits have to respond more effectively to market forces, governments have to be more efficient in their allocation and use of resources, and businesses, in order to survive in a marketplace that increasingly values social good, have to understand and respond to the effects their products and services and business model have on the broader society.

Binary systems and separated sectors just don’t exist anymore.  The lines are blurring.  The market is part of the reality of social change efforts.  To deny that is silly.

Tags: Ford Foundation, Michael Edwards, New Philanthropy Capital, Sean Stannard-Stockton, Small Change, Tactical Philanthropy, Tris Lumley

The Beginning of a Movement

You really get the sense here at the edge of the San Francisco Bay at Fort Mason Center that you are at the beginning of something amazing.  There are 1,000 of us here at the second annual Social Capital Markets Conference (SoCap), and there are some amazing people, many of whom have been toiling away for the last decade or so trying to convince investors, funders, donors, organizations, governments that there is no longer a binary system of philanthropic money and investment money.  There is a third way where money can have a social and a financial return, and there are countless ways to do that.

Day One was amazing.  The opening plenary had Sonal Shah, the new head of the White House Office of Social Innovation speaking and then joining a panel of experts on government’s role in the emerging social capital markets.  Much of the discussion centered around the $50 million Social Innovation Fund recently approved by Congress, but really that’s such a small part of the potential for collaboration with government in this new movement.  The takeaway from the session for me was that because this is such a new movement, no one has a playbook, and it is really up to us, all of us, to chart this new territory and define and describe how we want government to be involved.  And government really must be involved because they have tremendous resources and the problems we are all attempting to solve cannot be solved without that 800-pound gorilla.  Exactly what the right role for government in all of this is, is still very much to be determined.  But I’m hopeful that we may have some clearer answers on that when SoCap10 roles around.

For the only Session block of the day I chose Sean Stannard-Stockton’s Donor Advised Funds session.  This was an eye-opener for me in terms of the power and opportunity that donor advised funds hold, on several fronts.  First, the minimum investment requirements to start a donor advised fund is declining.  You used to require $250K to start one, now minimums are as low as $25k, which means that these tools are now open to young, emerging philanthropists, which is very exciting since they might be the ones who are more willing to take some risks and innovate with their money.  Secondly, because the tax event happens when the initial donation into the fund is made, donor advised funds can act like a “third pocket” separate from the straight philanthropic pocket of money and the financial returns only pocket of money.  Kim Wright-Violich from Schwab Charitable described all sorts of exciting things that they are able to do with the aggregated sum of their donor advised funds.  They can guarantee microfinance institutions, be the guarantor on a loan that a nonprofit organization would otherwise not qualify for, make investments in social businesses, and so on.  Schwab and the other funds represented at the session are obviously on the cutting-edge of the use of donor advised funds. But imagine the impact if the donor advised funds at the community foundations that exist in most parts of this country took even a little bit of their money and started using it to make social or mission-related investments, make loans to nonprofits, experiment with microfinance, and on and on.  How much capital would that free up in new ways for the social capital markets?  It really boggles the mind and is an incredibly exciting opportunity.

Finally, the highlight of my day was the Plenary Session moderated by Matthew Bishop from the Economist and author of PhilanthroCaptialism, which gave an overview of the spectrum of the social capital market today.  And that spectrum ran from nonprofit venture philanthropy funds like Kim Smith from New Schools Venture Funds to Root Capital, a nonprofit social investment fund that provides capital to small farmers in developing countries, to a social venture fund, to a social investment fund that provides market rate return along with its social impact, finally to Jed Emerson of Uhuru, a hedge fund that donates part of its profit.  It was fascinating to hear about the various types of social capital that is occurring out there and where these pioneers see the hurdles and the trends.  Some top level comments from panelists that really made me think:

• We are performing 2 tasks simultaneously: using old financial tools in new ways, while creating new tools. We need to do more of the latter.
• We have worked to solve the governance issues on the for-profit side, but we have also known that governance was a huge problem in the nonprofit side for a long time, but have yet to do anything to change it.
• The social capital market is a big tent, we need to stop taking nonprofit/for profit sides and arguging about which ways is right and start sharing deals and complementing each others skills/expertise.
• We need to organize the space that is emerging between the previously binary markets (philanthropic and financial) that have evolved fairly efficiently, but separately.
• In the financial collapse, social investments far outperformed traditional investments, yet the majority of people went right back to the old binary system. We are all responsible for demonstrating that social investment is a better way and getting others on board.

The bottomline for me after this first day of listening to these intelligent, brave, entrepreneurial leaders in this emerging market is that although the field has grown in a year (for example last year SoCap had 600 attendees, this year it has 1,000) people who understand and work to enlarge the social capital market space are few and far between.  We are on the edge of a massive change to our financial markets and how we understood, and separated, our money.  But change takes time and it takes work to convince those who are comfortable with the old way of doing things, as Machiavelli wrote:

There is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things.  For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order.

Change means risk, and people, for the most part, are risk averse. So let’s not get caught up in the excitement and the hype and think that the social capital market is massive.  There is still much work to do, but there always is at beginnings.

Tags: New Schools Venture Fund, Root Capital, Schwab Charitable, Sean Stannard-Stockton, SoCap, Social Capital Markets conference, Sonal Shah, Uhuru

Making Change the New Norm

It occurred to me in two conversations I had this morning that small change can create large change, but how exactly does that happen?

My first conversation was a phone call with George Overholser, from the Nonprofit Finance Fund and a leading thinker around new kinds of capital for nonprofit organizations.  I was getting some background from him on the whole movement to make growth capital (money necessary to build organizations rather than simply buy services) a reality for nonprofit organizations in preparation for my session later this week at the Social Capital Markets conference.

At the Nonprofit Finance Fund they have launched several exciting programs to help nonprofits secure the money necessary to scale great programs, such as the SEGUE program that takes the traditional nonprofit capital campaign approach and turns it on its head raising money not for a building, but rather for the patient capital required to pay the bills while a nonprofit figures out how to grow and make sustainable their business model.

My big question to George, however, was: How do we get these great new ideas, like patient capital (which is normal and accepted in the for profit world) prevalent and accepted in the nonprofit and philanthropic worlds?  The number of nonprofits and donors currently participating in growth capital deals is very small.

George’s response was that these new ideas don’t have to be widely accepted or embraced.  The end game is not to get all of the “mom and pop” nonprofits and donors to embrace these concepts.  Rather, he looks forward to the day when there are ten $20 million growth capital deals out in the marketplace, that that alone will create tremendous change.  He gave the example of Teach for America.  If they can grow their successful program throughout the country, there would be tremendous change in the education landscape as a result .  The end goal is to secure capital for a select few nonprofits that are uniquely poised to grow. He compared it to Apple, which is a company that makes billions of dollars, but has grown to that stage with only a few tens of millions, say $50 million, in growth capital. And Apple has transformed not only its industry, but really, how we all communicate, interact with data and live. That’s a pretty impressive impact for a $50 million investment in growth capital.  He argues that the same is possible in the nonprofit world.  We could have a handful of nonprofit growth capital deals and transform not only the nonprofit sector, but some enormous social problems.

An interesting hypothesis, but I don’t know if I buy it.  Which brings me to my second conversation of the morning, with Sean Stannard-Stockton of the Tactical Philanthropy blog.  Sean has been known for the past three years as a leading-edge thinker about how to make philanthropy more effective at delivering social impact.  He announced this morning that he is launching a new philanthropic advisory fund called Tactical Philanthropy Advisors.  The firm will advise high-net worth philanthropists (accounts of $1 million or more) on “the social impact of their financial investments, and work with their investment advisors to align their financial portfolios with their philanthropic goals.”

They are seeking to elevate philanthropic advising to the respect, time and resources that overall financial advising has enjoyed.  In this new firm, philanthropic advising is no longer an add-on service that a wealth management company offers its clients.  And their fee structure has them paid by a percentage of the overall portfolio an investor holds with them.  So, in essence, they are paid as a traditional financial advisor is paid, based on the performance of the overall portfolio, but in this case the portfolio return is a social, not a financial one.  They are also interesting because they are a for-profit company, with a social purpose and are applying to become a B Corp.  So the firm is and of itself a social business; they are social entrepreneurs charting this new landscape along with the rest of us.

You only need to read a few entries in Sean’s 3-year old Tactical Philanthropy blog to understand how this new firm could revolutionize how the philanthropic sector, and thus the nonprofit sector, operates.  Sean understands and believes in philanthropic equity, mission-related investing, scaling nonprofits, organization-building, and so on.  He understands these new ideas that George and others promote and could be a critical partner in helping philanthropists understand how to use their money more effectively to drive change in a sector that is undercapitalized and dysfunctional.

However, Sean and his firm will probably only work with a small group of the countless philanthropists out there, so again, what change does this signify?  And how do we bring along other philanthropists who cannot or will not be touched by Tactical Philanthropy Advisors?

It all comes down to the single question: How does change happen?

I would argue that it is not enough to have single examples in the largest nonprofits or among the largest philanthropists.  The Nonprofit Finance Fund, Teach for America, Sea Change Capital, Tactical Philanthropy Advisors and all the other cutting-edge thinkers and examples of how we can do things better are great and absolutely necessary.  Without innovation we have nothing.

But let’s not forget stage two, whenever it may come, that involves making these great examples the norm.  The day when all, or most, nonprofits understand and have access to the power of patient capital and capacity capital, when all or most philanthropists understand the power of investments rather than gifts and how to truly support social change. Ten deals are great, but they are just a start.  True change must be systemic, must be ingrained, must become the norm.  It can’t exist just on the East and West coasts.  It can’t just be in the understanding and practice of the largest, most resourced organizations. That’s why I started Social Velocity; I wanted to bring these cutting-edge ideas and practices to places, organizations and philanthropists that weren’t in the top 10, but were still instrumental to creating social change.  To really be transformative, these new ideas have to become common practice. As David Bornstein has put it:

An important social change frequently begins with a single entrepreneurial author: one obsessive individual who sees a problem and envisions a new solution, who takes the initiative to act on that vision, who gathers resources and builds organizations to protect and market that vision, who provides the energy and sustained focus to overcome the inevitable resistance, and who- decade after decade- keeps improving, strengthening, and broadening that vision until what was once a marginal idea has become a new norm.

I applaud people like Sean and George and the countless others who are working to change mindsets, organizations, systems and structures.  Let’s build on the innovation they have started and make those powerful ideas and examples the new norm.

Tags: B Corp, David Bornstein, George Overholser, growth capital, nonprofit, Nonprofit Finance Fund, Philanthropy, Sean Stannard-Stockton, SEGUE program, Social Capital Markets conference, Tactical Philanthropy, Teach for America

The Significance of the Social Innovation Fund

While many were starting their 4th of July vacations last week (me included) President Obama had a remarkable event at the White House.  He invited a very impressive list of nonprofit leaders, philanthropists, social entrepreneurs, and thought leaders to launch his “Community Solutions Agenda.”  Key to this agenda are the White House Office of Social Innovation and the Social Innovation Fund.

Sean Stannard-Stockton of the Tactical Philanthropy blog gives an excellent description of exactly what the Social Innovation Fund will do.  Essentially the Social Innovation Fund is a $50 million federal government fund (assuming Congress actually appropriates the money) that will be granted, via the Corporation for National Service, to “grantmaking institutions” to then regrant (and match the regrant 1 to 1) to nonprofit organizations.

The nonprofits that receive the regranted funds are required to:

• Match the grants 1 to 1  through state, local, or private sources (thus resulting in an overall 2 to 1 match of federal dollars)
• Grow proven programs, or support new programs, in low-income communities
• Demonstrate that they can sustain the program at the end of the grant period
• Use performance metrics to evaluate and improve the program
• Contribute the resulting knowledge to their field

In addition, the grantmakers that receive the Social Innovation funds must provide technical assistance to their grantees.  And the Corporation will 1)provide technical assistance to both the grantmakers and the nonprofits receiving the regranted funds and 2) create a clearinghouse for best practices from the funded projects.

There has been much debate (here and  here for a start) about whether the Social Innovation Fund will have a positive, negative, or any effect on the nonprofit sector and its ability to find and grow solutions.  The most pessimistic of these is Jeff Trexler, professor of Social Entrepreneurship at Pace University, who writes:

At its core, the [Social Innovation Fund] follows a model that’s all too familiar from comparative administrative law–a government program that gives money to subgrantees who in turn give money to other subgrantees, managed through the relentless documentation of how stated program goals were met.  For example, Russia moved to precisely this model recently, channeling social funds through grantmaking intermediaries, and USAID has been doing it for years.

True, the mechanisms of the Fund are probably not that innovative.  And the relatively small size of it ($50 million compared to the hundreds of billions of dollars of federal funding that annually goes into the nonprofit sector) is not very impressive.  But what is interesting and exciting is that the largest nonprofit funder (the federal government) is turning a page.

As Bob Ottenhoff points out on the Guidestar blog, the federal government is by far the largest funder to the nonprofit sector, providing over 29% of its funding, compared to the 12% that comes from charitable giving, which we spend most of our time talking about.  If the federal government could take an interest in innovation in the nonprofit sector (when was the last time that that many nonprofits and philanthropists were assembled together at the White House?), try and succeed at some new funding vehicles, take a lead role (or, really, any role) in the creation of a social capital market to seed and scale social innovation, THAT would be tremendous.

The Social Innovation Fund, in and of itself, is maybe not that impressive. But what is impressive is that the federal government has recognized social innovation as a force for change, is willing to take a risk (albeit small) in this new realm and may be willing to use this test case as R&D for a future, much larger, more innovative stab at getting itself pointing in a new, more helpful direction.  If we are truly going to scale social solutions then the largest funder of those solutions has to be on board. So let’s see what happens when the federal government dips its toe into the waters of social innovation.

Tags: Corporation for National Service, federal government, Jeff Trexler, nonprofit, President Obama, Sean Stannard-Stockton, social entrepreneurs, Social Innovation Fund, White House Office of Social Innovation