The false dichotomy between for-profits and nonprofits hurts our ability to solve global problems.
I was at a lunch with impact investors, and my optimism about getting seed funding for the social venture I had recently cofounded was fading. The lunch featured a roundtable where social entrepreneurs quickly pitched their businesses and received early signs if there was a glimmer of interest. The company I was pitching, NeedsList, is a resolutely mission-driven business; we’re developing a marketplace for humanitarian aid that makes it easy for donors to buy supplies or volunteer for small organizations doing relief work in natural disaster zones and refugee camps. The market is massive — in 2016, private spending on humanitarian aid was $6 billion, and with the number of people displaced by war and climate change expected to quadruple from its current high of 60 million by 2050, that spending will continue to grow. The scale of the displacement and the need for innovation in a sector that has not changed in nearly 70 years persuaded us to incorporate as Public Benefit Corporation. This way, we reasoned, we could save lives, increase efficiency in the sector, and grow into a sustainable, profit-generating business that would reinvest profits back into existing nonprofits or new startups.
But in the 90 seconds it took for me to pitch the company, I saw the looks on these investors’ faces morph from interest to skepticism to bemusement.
“So,” one asked, “Why aren’t you a nonprofit?”
It’s a question we confront often. Investors question our ability to be profitable or insinuate that the challenges we face are for nonprofits to solve. Most foundations can’t give us grants because we don’t have nonprofit tax status. And even some nonprofits have questioned our ethics or declined to work with us, citing our desire to be profitable as an anathema to their values. Many days, it feels as if the entire world is calling our right to exist into question. Each rejection reveals the real challenges social ventures like ours face as they navigate between the nonprofit sector, which uses frugality as a primary barometer of success, and the traditional investment sector, which expects rapid scale and profit over everything else. It’s nearly as impossible to maneuver as the fabled waters between the monster Scylla and the whirlpool Charybdis. But we have to chart a new path.
Donor focus on frugality in the nonprofit sector is the wrong barometer of impact.
Prior to co-founding NeedsList, I was either an employee or consultant for nonprofits for over 15 years. I spent some of those early years convinced nonprofits were the only entities moral and ethical enough to solve the world’s problems, divorced as they were from the imperative to generate profits. But I quickly found the culture of many nonprofits — especially grassroots ones — to be unsustainable. Grant and donor funding that came in tended to be earmarked for project-specific, rather than general, funding. Employees were expected to work incredibly long hours for low wages, and to feel grateful for the opportunity to do so. After all, we were solving the world’s problems — that was payment enough. It’s a badge that some wear with pride and others — especially those without other sources of income or whose lives change as they become parents or take on mortgages — are forced to trade in for higher paying jobs, often in the for-profit or government sectors. Entrenched attitudes around salaries extends to donors, too, who value “low overhead” above everything else. As Dan Pallotta said in his TED talk about our relationship to charities:
“We have a visceral reaction to the idea that anyone would make very much money helping other people. Interestingly, we don’t have a visceral reaction to the notion that people would make a lot of money not helping other people. You know, you want to make 50 million dollars selling violent video games to kids, go for it. We’ll put you on the cover of Wired magazine. But you want to make half a million dollars trying to cure kids of malaria, and you’re considered a parasite yourself.”
But what if all of us, as donors, thought more like investors? We’d ask different kinds of questions, like: What kind of impact do you want to have in the world and how are you going to get there? What resources do you need to make that happen more quickly? What partnerships can help you scale? Is the current funding that you have in place enough to achieve your goals? We would give money to wherever it was needed most, because we would trust the organization to make the proper determination as to how it should be spent. In short, donors would start from a place of assuming that organizations with ambitious goals — ending poverty, climate change, or domestic violence — would need enough resources to make that happen. And they would provide the unrestricted funds to make that happen.
Meanwhile, nonprofits, liberated from expectations about keeping their spending low, would be allowed to think big — really big — about their goals and what it would take in terms of resources and funding to achieve them. They could use the money anyway they pleased, including to provide better salaries to retain talent, and to market and fundraise for what they plan to achieve in the future.
A “purpose only” mentality stifles the ability of NGOs to scale their impact.
The attitude towards compensation in the nonprofit sector also trickles down to partnerships. Because, the logic goes, how could we possibly partner with companies that are seeking to solve this problem in a way that generates profits? This is a reaction we’ve confronted at NeedsList from some nonprofits as we’ve sought to increase our ability to meet the needs of displaced people. The rejection of partnerships with for-profit companies, even social enterprises seeking to create more just and human marketplaces, is curious, misguided, and counterproductive. Curious, because one must always rely on for-profit companies, especially in the provision of humanitarian aid — there are shoes, food, and diapers to be purchased. Misguided, because it assumes that there is only one way to solve social problems, and those must come from the nonprofit sector exclusively. Counterproductive, because it denies collaborations which could serve more people and save more lives.
The false dichotomy keeps too many nonprofits mired in a culture of siloed thinking, scarcity and competition. It hampers their ability to solve big problems, and keeps them attached to ideals of purity in their partnerships, when what they need is integrity.
And it keeps them — and donors — focused on the question: “How much did you spend?” Instead of “What was accomplished”?
The focus on profits for social startups sacrifices long-term achievement at the altar of quick gains.
These days, you’d think it would be easy to raise investment as a social entrepreneur. Impact investing is on the rise. So is the number of mission-driven startups and businesses seeking to integrate impact into their business models — a trend driven largely by consumer and employee preferences. Social entrepreneurs are being lauded across every industry for their approach to solving some of the world’s biggest problems. Forbes has an annual list of 30 Under 30 Social Entrepreneurs. The city where I live, Philadelphia, just launched a $15 million impact fund aimed at catalyzing new impact-focused businesses and supporting existing ones.
But the reality is that mission-driven businesses still break investors’ brains. Many simply will not entertain the idea of investing in a socially-driven venture if it’s not philanthropic.
Meanwhile, impact investing is still an emergent approach to investing that favors established companies, which means that early-stage companies struggle to raise capital to prove their concepts. And if these companies are run by women and/or people of color — the very entrepreneurs whose vision would be most truly “disruptive” of the entrenched white male status quo — the odds are far worse, with less than 5% of funding going to female founders, and less than 1% to founders of color.
This lack of seed funding often pushes social entrepreneurs to pivot before they’ve had to chance to fully test their business models. Many mission-driven tech startups,especially out-of-the-box ones like NeedsList, wander in a sparsely inhabited funding landscape, only to end up becoming nonprofits, or using their technology to become more conventional, purely profit-focused startups.
Back in 2013, a group of impact investors coined the term “the Pioneer Gap” to describe the difficulty social entrepreneurs face in raising capital for their social ventures at early stages. These businesses, created by highly ambitious social entrepreneurs to attack some of the world’s biggest challenges, struggle to raise money from either the philanthropic sector (because they are not nonprofits); nor can they get enough support from the impact investing sector, which is still fairly conservative and at its core somewhat skeptical of the idea that mission-driven businesses can generate a substantial financial return on investment.
As a result, companies that seek to create profitable, double- or triple-bottom line businesses have nowhere to turn.
Compounding the problem is the fact that impact investing is still struggling to define that central differentiator — impact. I once sat next to someone who pitched their business — human-grade dogfood, delivered straight to your door — to a group of impact investors. And I’ve now participated in two impact accelerators which didn’t ask companies to define or measure their impact, focusing instead on profitability. And for all of my experience pitching to investors, not a single one has ever asked me to define how we measure impact, which to me suggests a sector that is still immature in its definition of impact, or even what it is asking entrepreneurs to consider.
In this sense, impact investing sector suffers from the same problem as the nonprofit sector, by asking the wrong questions from entrepreneurs. These questions should not only be “What’s your path to profitability?” or “What’s the likelihood that this company will generate a high return on investment?” A focus on “impact,” if the word is going to be something other than a synonym for profit, should mean asking, “What real problem are you trying to solve in the world?” and “How will your company or product make the world (or your sector) quantifiably better than existing solutions?”
What if we flipped the script and made our interactions with nonprofits and businesses about the pathway to solving problems, rather than about the pathway to frugality or profits?
I am sector agnostic: I believe that great ideas can come from anywhere. I’ve seen innovation come out of government, nonprofit, philanthropy, big corporations, and startups. But I’ve also seen nonprofits limit their potential — and their impact — because of their ideological purity and the disincentives to spend money on their visions.
Likewise, I’ve seen far too many potentially world-changing ideas never realized because there were no investors from any sector willing to take the risk to fund them. Ross Baird, the founder of Village Capital, just wrote “The Innovation Blind Spot” about this problem (and how to solve it), and I’d encourage everyone to read it.
So let’s talk means and ends, and how they get confused in these two sectors. In my work, I see these twin poles — frugality and profits — as means to an end, which is solving social problems. I will readily admit that sometimes it makes sense to emphasize frugality, like when we try to find local suppliers for shoes so that nonprofits and donors aren’t paying for shipping containers filled with used goods that will be tossed out. Sometimes, we must also emphasize profits, so that we can continue to grow our business, attract the best talent, and pay them wages that are competitive with industry standards. But the mistake each sector, nonprofit and impact investing, makes is that each one of them sets up one of these as an end in itself, and loses sight of the real end: changing the world.
In the past year of being the cofounder of NeedsList, two primary things have become clear to me. First, the orchards of impact investment have yet to yield fruits for social entrepreneurs, who need more patient capital, and more risk capital, at earlier stages.
And second, despite the real growth in numbers of social entrepreneurs and socially driven businesses, the for-profit/nonprofit binary is still a powerful mindset for both nonprofits and investors alike. It doesn’t serve us anymore. Let’s lead with the problems that need to be solved, and then decide the best structure to solve them with. To that end, I am thrilled that the Zebra movement, led by Jennifer Brandel, Mara Zepeda, Astrid Scholz & Aniyia Williams, is gaining steam, because it is the place where companies like NeedsList can explore and define alternative models of funding and operating that will allow us to to not only to be profitable, but also explore how to repair humanitarian aid for the 21st century.
Money is not the enemy. But our ideas about money, whether the Scylla who equates frugality with virtue or the Charybdis who thinks the best measure of all work is profit, certainly are.
Are you an NGO battling donor expectations around money, or a Zebra company trying to raise money? Share your stories!
(Thanks to my dear friend Madeline Miller, whose book Circe provided me with the evocative retelling of of Scylla and Charybdis that inspired this piece. Miller’s Circe is a badass recentering of the witch who is usually just a detour in the Greek myths. It’s out in April 2018 but available for pre-order now!)