Will Nonprofits Still Have a Place in the Wake of the Social Enterprise Revolution?
The answer is likely yes, however defining that place needs some careful consideration.
Nonprofits have long been the heart and the means of grassroots change in our post-industrial society. The model attracts the most risky capital there is — philanthropic giving. Furthermore, many find supporting nonprofits to be a better alternative than granting more powers to what they see as an ever-centralizing government. The psychology here is fascinating: people feel as though the government is robbing them when they are taxed to achieve a social end, however they feel esteemed when they decide to donate to an organization that achieves the same end. And though class struggle is finally becoming more evident in American politics, the very nature of magnanimity will keep a large percentage of wealth in the control of a few to dole out as pleases their egos. So yes, philanthropy will still be around in one form or another.
One goal of the social enterprise movement should be to transfer the same aura of magnanimity onto impact investors that has worked so well for nonprofits. Then, perhaps, risk capital for social ventures will increase in substantial proportion.
To properly understand the place of nonprofits in the future of our economy, we have to look at the value chain of innovation.
Historically, technological innovation has advanced during times of need/crisis when only the government had the ability to front capital for extensive research and development. When the payouts from this long-term investing proved to be quite substantial, large corporations started investing more heavily in R&D. And as innovation accelerated, a new type of risk capital was born: venture capital.
Yet now we are seeing fear in the investment community. Venture Capitalists are not taking the same risks they once did, and return horizons are shrinking. Venture has become safer capital. The risky investments with the highest payouts are always the ones that solve substantial problems, which is why many feel that impact investing is the new venture capital.
While the capital markets’ evolution to tackle the most pressing issues of our age is nothing short of fascinating, the execution is still lacking. Why? Perhaps the single, largest reason is lack of social enterprises that really are better alternatives. Why are they lacking? Mostly because the risk is so large that sources of capital for developing new business systems that provide social good are coming mainly from the government and (you guessed it) nonprofits.
True, nonprofits often have real issues with efficient use of resources and scale to say nothing of fundraising. Yet private foundations are largely funding nonprofits that provide the necessary ecosystem for social good business models to thrive. Investors, by and large, do not want to take the risk on a concept that appears to be largely unproven. So nonprofits not only have a place, but they are integral to the evolution of our economy.
Yes, the old nonprofit model will still be around to tackle obscure or fringe causes or rare diseases where the markets are small and the R&D need is large. However, the best part about the nonprofit model is that it makes a perfect foundation for developing the methodology and leaders to make social entrepreneurship possible. It is the first link in the social enterprise ecosystem.
At the root we have social entrepreneurs (activists, professionals, students, and others who are committed to next “truly best” thing), then nonprofits that are incubating change and sharing resources, then seed investors and accelerators. Once that pipeline is full and has real momentum, there are major players from the largest financial institutions in the world who are eager to invest in quality deals that serve social and environmental good.
The only tasks left to us are to have a unified understanding of where different players fit in the larger value chain and help the base of the pyramid pull through truly innovative companies. We cannot get distracted by nonprofit and for-profit any longer. We need to recognize that public and philanthropic dollars can absorb a greater amount of risk than most investors in the capital markets are willing to. However, once the fledgling ideas are closer to viability, risk capital can enter the picture, bringing large resources as well as knowledge of efficiency and scale. Investors do have a profit motive, but, controlling for externalities, they can contribute to the magnitude of impact in ways nonprofits struggle with because of the unity of social and profit motivations.
What this means is that we need to direct our philanthropic dollars to the beginning of the value chain in hopes that in a few years we can reinvest in higher impact, higher return businesses. It means that investors need to stop looking at risk solely based on horizon and start realizing that a longer approach done right can upend entire markets.
I truly believe this is our future because extremism cannot combat the very real challenges we face without costly sacrifices to our freedom. Now that the movement has structure and speaks the language of economic sense, I encourage each of you to reach out to those you know and have a conversation. Talk about this emerging value chain and what it can do for our future and our economy. Support a budding social entrepreneur. Encourage philanthropy into this pipeline and advise investment further downstream. Do not feed extremist or fear-based excuses. Life is about incremental change and managing that change with as few casualties as possible. If we are proactive now, we can avoid many hard choices ahead.
So next time you want to give to a nonprofit, I encourage you to think of those dollars as an investment — one that you can double down on if you’re smart. Donate to a social enterprise ecosystem today so you can invest in the outcomes tomorrow.
