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

A False Dichotomy: Non-profit vs. For-profit Solutions

In a recent blog post, Tony Wang, a brilliant researcher at Lucy Bernholz’s  Blueprint Research & Design, a strategy consulting firm for philanthropy in the Bay Area, makes a thought-provoking, yet ultimately flawed argument about the social impact of nonprofits (which he calls charities) versus social businesses. Tony and I have sparred before on PRIs and mission-related investing, and I had to take up the cause again with his argument that poses a false dichotomy.

Tony’s underlying argument is that a for-profit business model is better able to deliver social impact per dollar than a nonprofit one.  He gives many reasons for this:

1. Dollars for charity are limited. True the nonprofit sector is undercapitalized, but that is changing, and will continue to change as the public, private and nonprofit sectors continue to converge and the social capital market, for both for-profit and nonprofit social impact organizations, grows.  The mere fact that nonprofits are undercapitalized is not a reason to dismiss nonprofit solutions out of hand.
2. Charity is often inefficient “ because of its lack of accountability to the people who are the primary beneficiaries of aid.”  This has been true in the past, but I think it is changing.  An increasing focus on metrics, brought on by the venture philanthropy movement and others, has encouraged nonprofits to track and demonstrate outcomes.  These aren’t perfect by any means and there is much work still to be done, but why not work to encourage better accountability rather than simply say nonprofits are inefficient?
3. Charity is often harmful and insulting to its recipients.  I agree that Western solutions to third world problems can sometimes be full of hubris, but this is no less true in social businesses than it is in nonprofits.  Read my post on the “missionary” nature of some social business solutions.
4. Business has a much easier time scaling: “it will be difficult for domestic nonprofits to scale when the federal government is the only viable answer and that international nonprofits will still struggle mightily with the issue.”  Government isn’t the only viable answer.  Some great organizations have been able to scale without government assistance (Teach for America, KIPP, Citizen Schools). And the beauty of nonprofit organizations is that scale doesn’t have to mean just the expansion of a single organization.  Rather, scale can mean the dissemination of a solution that works.  Because nonprofits worry less about competition, they are more likely to want to share best practices, models that work, and allow local adaptations of a solution from another area.

Because of all of this, Tony believes that “a lot of young social entrepreneurs…are starting to realize that business solutions and not charity solutions can be more ideal when it comes to maximizing impact (and philanthropy’s impact would be multiplied if it leveraged its capital to fund social impact businesses with true potential).”

I’m sorry, Tony, but I really disagree with this.  Why does it have to be either, or?  Why is one model inherently better able to create value than another? Rather, I would say that it depends on the problem and what the best solution is.  Yes, there are problems and inefficiencies within the nonprofit sector, but there are also some pretty major problems, and inefficiencies in the for-profit sector (dot-com bust, financial crisis, anyone?).

Rather, we need to take a holistic approach to social impact.  There need to be multiple tools available to social entrepreneurs, whether they be for-profit or nonprofit  (different business models, various financing, etc).  And let’s remember that there are some inherent problems with for-profit social impact models as well.  When a solution requires the appearance of impartiality, a nonprofit model might be more effective.

I think the whole point of the convergence and “resetting,” to quote Lucy Bernholz, that is going on is that the old dichotomies and definitions don’t work anymore.  We have to break out of the notion that the way we used to categorize things doesn’t apply anymore.  Structures are changing, new models are emerging.  We need to be flexible and analyze the best solution to each problem that faces us.  “One or the other” thinking just won’t cut it anymore.

Tags: Blueprint Research and Design, charity, Citizen Schools, KIPP, Lucy Bernholz, nonprofit, social business, Teach for America, Venture Philanthropy

Understanding Social Innovation

If you are interested in learning more about the social innovation movement and will be in Austin on May 14th, join me for a seminar, “New Models: Social Innovation.” This 90-minute session will discuss what social innovation is, what the terms social entrepreneurship, growth capital, venture philanthropy, mission-related investing, and social enterprise mean, and what some really innovative organizations are doing in this space.  If you run a nonprofit, serve on a board, run a social business or are thinking of launching one, donate to social impact organizations, or are interested in solutions to social problems, there is great significance for you in the social innovation movement. And because Austin  has a lead role to play in the movement, I’ll examine how Austin compares to the rest of the country.  You can read some of my past posts on Austin’s social innovation ecosystem, where Austin is going and what it needs to be a leader in this space here, here and here.

If you’ve been intrigued by social innovation and want to learn more, join us:

Lunch and Learn: New Models  – The Social Innovation Movement

May 14, 2009
11:30am-1:00pm
At Greenlights

Click Here to Register

Tags: Austin, nonprofit, social business, Social Enterprise, Social Entrepreneurship, social innovation, Venture Philanthropy

Austin the Social Startup Capital of the World?

One of the things I talk and write about (possibly ad nauseam) is how well positioned Austin is to lead in the social innovation movement.  Our rank as the 3rd largest venture capital city in the country, our entrepreneurial spirit, our tech focus, our passion for green living and our tremendous wealth all make us uniquely positioned to capitalize (both financially and socially) on the growing movement for innovation and enterprise around social impact.

I’ve written here and here about what elements of a city’s infrastructure are necessary to catalyze social innovation.  And I was particularly excited when Nathaniel Whittemore, Director of the Center for Global Engagement at Northwestern University, described in a recent blog an ideal environment to stimulate successful social enterprise:

So here is what I’d like to see. Someone combines The Hub model of collaborative working space for social entrepreneurs with the Y-Combinator model of funding low-cost tech startups [provide promising startups small amounts of seed capital and intense mentorship and networking in anticipation of further investment ]. In this model, which is geared toward social enterprise, the Y-Combinator style investment would be focused on tech startups that are building services useful for other businesses and social startups (things like Yammer, which is great for keeping a team of volunteers or employees connected to one another). In addition to the cash investment, the tech startups get to work (and maybe even live?) in the Hub space. In return, they give up equity – but also a small chunk of their developer time (25%? 10 hpw?) to pro-bono or reduced cost projects for the nonprofit social entrepreneurs who are part of the same Hub community. This combines the density, talent and energy of the tech startup world with the mission focus of the social enterprise world. All it would take are the right partners. Sounds like a pretty good combination to me…

This sounds just like Austin.  And, in fact, we have these kind of incubators on the pure business side.  For example, Capital Factory is an Austin-based seed stage mentoring program for startups that provides a small amount of seed capital and weekly mentoring sessions by entrepreneurs who have founded successful companies.  What if there were a Capital Factory for social enterprises and social businesses?  I’m not aware of anything like that anywhere else in the country.  Couldn’t Austin pave the way in social enterprise by taking something we already do very well (venture capital, angel investing, start up incubators, entrepreneurial mentoring, etc.) and put a social spin on it? That would be truly innovative and get us out ahead of the curve of what is shaping up to be a huge movement.  And there is financial and social profit to be made.  Don’t we want a piece of that?  It seems such a natural thing to me.  What is stopping it?  And how do we overcome those roadblocks?

If you’re interested in exploring this topic more, join me and Jessica Shortall for our RISE session on March 3rd:  Start Ups with Social Impact where we’ll talk with Austin-based social enterprises and discuss what is required to make Austin a leader in this space.

Tags: Austin, Capital Factory, Center for Global Engagement, incubator, social business, Social Enterprise, social innovation, The Hub, venture capital, Y-Combinator