The Social Sector Needs More Unicorns
The tech and entrepreneurship media have been filled with stories of so-called unicorns, startup companies that are valued at $1 billion or more by investors. The current herd has grown to more than 100 companies, many of which are household names: Uber, Airbnb, Dropbox, Pinterest, to name a few.
Venture capitalists and other investors — call them unicorn hunters — actively look for unicorns. They want their investments to generate the greatest possible returns. Tech entrepreneurs actively try to create ventures so significant that they’ll garner big investments and generate even bigger returns for the founders and investors when there is an exit.
These are companies that are disrupting established markets. They are scaling quickly. They’re raising significant money to support their growth. They’re taking risks. They sometimes fail. They learn and iterate and ultimately succeed. They’re rewarded for their risk taking. They’re touching millions of people per day.
These unicorns are all for-profit entities. We need not-for-profit unicorns.
So where are the unicorns of the social sector? Isn’t the social change space where millions of lives need to be touched every day? Where disruptive changes can have life-altering effects? Where the greatest possible returns are most needed?
This isn’t a question of size; there are many billion dollar not-for-profits. But the social change space is not oriented to reward disruptive, significantly scalable solutions.
And to effect real change where there is such great need, it should be.
A bit of background. Social change — from trying to end homelessness to saving the environment — has long been the purview of not-for-profit organizations. There is a still-relatively-nascent for-profit social-good movement, represented by B Corporations and others, that is combining the profit motive that has been the domain of the for-profit world with the social change motive that has been the domain of the not-for-profit world. But for the most part, organizations fighting hunger, trying to cure diseases, providing affordable places to live, supporting veterans, and almost any other cause you can name are not-for-profit organizations.
The risk-averse traditional funding models in the not-for-profit space do not encourage and reward the type of risk-taking that breeds innovation or the types of big bets that lead to big returns. In fact, they discourage risk-taking and inhibit the type of growth and scale that would create the most change where it is most needed.
Instead, here’s what happens in most cases: an organization is created by incredibly well-meaning people who want to have a significant impact on an issue about which they care deeply. They reach out to their networks and raise enough money from individuals to get off the ground.
So far, that pretty much sounds like the start of a unicorn. For-profit entrepreneurs also typically start their ventures by raising a round of friends and family financing.
As the not-for-profit grows, its capital needs change. Unless it has access to a handful of high net worth donors who are willing to donate large sums of money (or unless it’s generating significant fee for service revenue), it needs to turn to institutional funding to get to its next stage of growth.
That’s also similar to the early stages of a unicorn. But that’s where the similarities end. A unicorn raises a first round of institutional funding from one or more investors who take an equity stake and then have a vested interest in the success of the company. The money raised is typically enough to staff up, scale up, and grow to the next stage, at which point an additional round of funding is frequently sought. That cycle can continue until there is an exit — either a sale to another company or group of investors, or a public offering.
A not-for-profit pursues its first round of institutional funding. It’s frequently unable to raise real money because it doesn’t have a significant enough track record. If it’s able to successfully secure funds, it’s frequently from several different institutions with different priorities and expectations that are willing to invest a limited amount of money at different times rather than in a funding round. The use of those funds is frequently restricted. The funds generally need to be expended within a year or returned to the funder. That cycle repeats annually and fails to reward innovation or risk taking. It does not breed unicorns.
Don’t get me wrong. Unicorns are incredibly rare link and not every organization can — or should try to — be a unicorn. And there are lots of issues with the unicorns that exist in the for-profit space. But the potential they create and the possibility of creating or investing in one creates a strong enough incentive for potentially disruptive ideas to swing for the fences. Many, probably most, unicorn wanna-be companies fail. And most unicorn hunders lose their money. But the ones that succeed change their markets. And that potential creates funding ecosystems: entrepreneurs with big ideas and investors with big checkbooks.
I’m not saying that venture capital has figured this all out and that not-for-profits should be more like for-profits (though I’ll make elements of that case in a future post). I’m not saying that the tech unicorn valuations make any sense, or that the growth for growth’s sake that they breed is sustainable or necessarily a good practice. I’m also not saying that not-for-profit entrepreneurs think small. What I am saying is that the success of a few companies has bred hunger to create more success. It has rewarded big ideas that might fail spectacularly — and cost quite a bit of money in the process — but might create positive disruptive change if they succeed. And it has buoyed investors who are willing to put significant capital at risk because of the potential for significant change.
In the social change space, the realities of access to capital and the relative absence of rewards for disruptive ideas limit growth and potential — precisely where the need for unlimited growth and potential is greatest
The social change sector needs more unicorns. And more unicorn hunters. Large-scale, systemic, innovative social change, supported by funding structures that encourage and reward disruption and scale, should not be a mythical creature.
