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

Constraint or Opportunity?

One of my favorite organizations and a critical player in the creation of a well-capitalized nonprofit sector, the Nonprofit Finance Fund, is seeking feedback.  NFF is a community-development fund that makes millions of dollars in loans to nonprofits and pushes for fundamental improvement in how money is given and used in the sector. Last March they published the results of a survey about how the recession is affecting the nonprofit sector.  They plan to conduct a similar survey this spring, and, in a bow to crowd-sourcing and transparency, are soliciting feedback on questions to ask in this year’s survey.  They are soliciting this feedback through comments left at the Tactical Philanthropy blog.

Last year’s survey was a good one, but a key element was missing.  The survey focused solely on the challenges that the  recession brought. Question after question had a similar pessimistic, constraint-filled theme. For example the only options available to a survey respondent in the question “To successfully weather the current economy, please check all actions below that you have taken in the last 12 months or are planning to take in the next 12 months” were negative.  The options assumed that the recession provided only challenges, not opportunities, to nonprofits. The possible responses were:

• Develop a ‘worst case scenario’ contingency budget
• Reduce staff or salaries
• Freeze all hires and current staff salaries
• Reduce staff hours (short weeks, furloughs, etc.)
• Reduce staff benefits
• Reduce or eliminate programs
• Collaborate with another organization to provide programs
• Collaborate with another organization to reduce administrative expenses
• Merge with another organization
• Reduce or refinance occupancy costs
• Sell assets such as a building or securities
• Use reserve funds
• Delay payments to vendors
• Speed up the collection of receivables
• Engage more closely with your board through more frequent reports and meetings when necessary
• Hold conversations with funders to explain your situation and projections and/or to discuss the use of currently restricted grants

19% of respondents said “none of these” or “other.”  I’m curious about those respondents.  Is anything innovative going on there?  Maybe, maybe not, but is anybody asking?

In the business world, examples abound of companies that capitalized on a recession to gain market share, snap up talented employees from their competitors, create a new product or service, and so on.  Are there really no examples of innovation in the face of adversity in the nonprofit sector?  Or are we so mired in the charity mindset to think that innovation in the nonprofit world is not possible, particularly when economic times are tough.

I understand that this survey was primarily intended to uncover the financial situation of the nonprofit sector, but was there really no room to understand any potential opportunities the recession afforded and how nonprofits might be  capitalizing on those opportunities?  I don’t mean to be a Pollyanna in the midst of a dire situation, but if we continually throw pessimism and constraint at the nonprofit sector doesn’t it make sense that they will continue to feel constrained and pessimistic?  Is there a possibility that some innovation exists out there?  Perhaps there are examples of nonprofits who bucked the trend and took the recession head on, revamping their approach to the social problem they are working on, or the funding of their operations, or the delivery of their services, or their response to competitors.

Let’s uncover the Southwest Airlines (creator of the “Grab Your Bag, It’s On” anti-recession ad campaign) of the nonprofit world who are taking the recession by the throat, making some bold moves, and innovating amid constraint.

We’ve seen it here at Social Velocity.  One of our clients, Heart House, an after-school program for at-risk children, decided last year to kick their vision for growth into gear, despite the recession.  The program, currently serving 500 kids in Austin and Dallas, knows they have a great, scalable model, so they put together a growth plan to go statewide.  Social Velocity helped them refine the plan and create an investor pitch around it, and they went out to raise $1.5 million in growth funding, recession be damned.  A few months into their campaign they’ve already raised a third of the money.  They don’t sit around talking about constraint and the horrible economy, yet they are feeling the pinch just like the rest of us.  They seized the opportunity:  when funders have nonprofit after nonprofit coming to them begging for money to get by, Heart House talks about something completely different.  They are talking about big plans, a grand vision, results and a way to scale those results, a way to solve Texas’ afterschool problem.  And funders are intrigued.

Let’s uncover those stories. Let’s hold them up as an example of how constraint can breed innovation.  That’s inspiring.  That’s encouraging.  That’s bold.

Tags: Heart House, Nonprofit Finance Fund, recession, Social Velocity, Southwest Airlines, Tactical Philanthropy

Why Do People Give?

There is a great discussion going on at the Tactical Philanthropy blog centered around the new book The Art of Giving: Where the Soul Meets a Business Plan by Charles Bronfman and Jeffrey Solomon who argue that philanthropists (big and small) should take a more strategic approach to giving.  The discussion that has followed the three posts so far gives fascinating insight into the reasons that people give.  Katya Andresen at Network for Good, nicely summarizes the two broad reasons that people give: 1) for personal return on investment (recognition, feels good, status, increase in network) and 2) social return in investment (make a difference, create impact, solve a problem, etc).

For me, there are three takeaways from this discussion.  First, anyone who raises money in the nonprofit sector should read the posts and the comments.  They provide fascinating insight into the various motivations for giving to nonprofits.  A reading of the discussion gets a nonprofit fundraiser out of the mentality of raising money around their organization’s needs and into the more lucrative mindset of what is compelling to potential donors.

Second, I think that there is an increasing focus by philanthropists on the second motivation (social ROI), as opposed to a past focus on individual ROI.   Because of the past philanthropic focus on individual gain, the resulting nonprofit fundraising activities have centered on activities that provided donors an individual ROI, for example capital campaigns that promise a new building with a donor’s name emblazoned on it, or events that provide networking and exclusive activities, or “thank you” gifts.  As social ROI becomes more of an interest to philanthropists, smart nonprofits will focus on creating their logic models and demonstrating impact.  And when they do this, I would argue that they will actually be more successful at raising money (see Kay Sprinkel Grace’s Beyond Fundraising).

Finally, we will never get to a place where all individual giving is social ROI focused. As the authors of the new book point out, philanthropy is very much an individual sport that is focused on the individual’s values and what they want to accomplish (whether that be personal or societal gain, or a combination of both):

When you give, you get, and we believe you need to focus on what it is that you are getting for what you give. We argue that what you get in philanthropy is nourishment for that portion of the body that is so sacred it cannot be found in any book of anatomy: the soul, where all that is best in us resides. It is simultaneously the innermost self and the one so external it seems somehow eternal—which makes it the natural connection point for our philanthropy, for we give to improve the world in a lasting way and to leave it with our stamp.

Which then begs the question, will we ever get to a place where social problems are solved through capital raised from individual philanthropists?  Charitable contributions to the nonprofit sector make up 12% of the sector’s money.  Roughly 80% of that comes from individuals. Government money has been declining and so nonprofits have increasingly focused on dollars from individuals to make up the difference.  If individual philanthropy will always have an individual return motivation, is that ultimately a problem for a sector that is trying to provide social goods?

I don’t know, but the discussion and questions that these authors have raised will no doubt help propel philanthropy forward.

Tags: Beyond Fundraising, Charles Bronfman, Jeffrey Solomon, Katya Andresen, Kay Sprinkel Grace, Network for Good, nonprofit, Philanthropy, social return on investment, Tactical Philanthropy, The Art of Giving

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 Critical Alignment Discussion

I’m back from Spring break, which came right as the flurry of discussion about my blog post The Critical Alignment of Mission, Money and Competence was winding down.  I really appreciate the great comments and discussion from Sean Stannard-Stockton (of the Tactical Philanthropy blog), Nathaniel Whittemore (of Change.org’s Social Entrepreneurship blog), Kjerstin Erickson (founder of FORGE) and Sasha Dichter (Director of Business Development for Acumen Fund), among others.

The great discussion happened and was then picked up by others (such as the Social Capital Markets blog, and the Nonprofit Assistance Fund blog) and taken further by others (Sasha kept going) because of our good friend, Twitter.   For all the jokes and rolled eyes, Twitter has a tremendous amount of value.  The discussion itself didn’t happen on Twitter, 140 characters can only do so much.  But rather, it created a space for a thoughtful discussion about a topic that seems to be of interest to many in the social innovation space, among people who otherwise would not have connected, let alone been able to have a conversation of such depth.

I’m a fairly recent convert to Twitter (aren’t we all?) and at times it can feel like an albatross (one more thing on my very long list of things to keep up with), but if you can keep up with it, even just marginally, it can hold tremendous value. (You can follow me on Twitter @nedgington).

But what came out of this great discussion?  What were the takeaways?  I’m sure the battle rages on, but for me, the key points were:

1. Although mission, money and core competencies must be in equal alignment in a nonprofit organization, funding must mold to mission, not vice versa.
2. A sustainable revenue stream is one that is sustainable not because it is based on sale of goods or services (“earned income” is often used interchangeably with “sustainable revenue stream”, which I, like Sasha, really disagree with) but because it is based on a funding mix (whatever that may be) that can be counted on for years down the road.
3. Finding a sustainable revenue engine is often about creating a context or a “market” for your work.
4. Nonprofits have to be more analytical about their funding sources and how sustainable, and aligned with their mission and core competencies, they are and will continue to be.
5. The funding community is best positioned to help with revenue misalignments.

I’m sure nothing was changed by this discussion. But the more that these kinds of discussions happen and the more that some of the assumptions of nonprofit operation and finance are challenged the more apt we are to restructure how nonprofits work so that great missions with great delivery can become sustainable.

Tags: Acumen Fund, Change.org, FORGE, mission, nonprofit, Nonprofit Assistance Fund, revenue, Social Capital Markets, Tactical Philanthropy, Twitter

Adding Equity to the Nonprofit Balance Sheet

Expanding on the argument for equity holders in the nonprofit sector, there has been a call for restructuring nonprofit accounting standards (FASB) to introduce equity capital.  The idea, proposed by Sean Stannard-Stockton, from Tactical Philanthropy, and George Overholser of the Nonprofit Finance Fund, is that we make a distinction in nonprofit accounting between revenue used to buy services (nonprofit operating revenue) and revenue used to build the nonprofit organization (philanthropic equity).  For too long nonprofits have been forced to carve out a piece of their ongoing operating revenue to build the infrastructure necessary to do their work.  That means that the infrastructure is ultimately lacking and the sector is undercapitalized.

In order for nonprofit organizations to become sustainable we must provide them the capital necessary to build their capacity and their infrastructure.  A nonprofit organization should not have to scrape together operating revenue in order to hire a Development Director, or forgo an earned income venture because they can’t find the initial investment required to make a go of the business, or not grow to scale because they don’t have the infrastructure to ensure that the program quality will survive growth.

The idea is simple, yet profound.  If we make a simple distinction on the balance sheets of our nonprofit organizations, we begin to recognize and have the ability to analyze the strength of the organization that is delivering the service.  In addition, nonprofits gain the ability to fundraise for philanthropic equity, or capacity capital (as I discussed in an earlier post), to build a stronger organization instead of apologizing for the “administrative costs” of the organization.

Once we make such a simple change we can start to understand which organizations are effective and which aren’t, which require further investment and which do not.  We start to create a structure and a system around which we move away from the increasingly dangerous position of taping together our social benefit delivery system and move to a much stronger position of well-capitalized, fully functioning, efficient organizations that are effectively delivering critical services to our society.

Tags: capacity capital, Nonprofit Finance Fund, philanthropic equity, Tactical Philanthropy