Understanding the Sectors: Is it Important?

It’s application season for graduate school and exciting new developments in the SF social enterprise scene around The Hub and the Social Enterprise Alliance are keeping things interesting around here. As a result, I’m reducing my time at work to 50% this month to keep up and to also spend some time working on a paper with Ian David Moss over at createquity that we’ve been thinking about on understanding the comparative advantage of nonprofits, for-profits, and social enterprise in value creation (my undergraduate honors thesis was my first academic attempt in trying to frame the issue; recently, I wrote a more normative post that looks at the argument in favor of business approaches).

In the past several years, it seems that the lines between public and private, nonprofit and for-profit, and commerce and charity are dissolving at an accelerated pace – and increasingly, there is a growing need by social entrepreneurs, philanthropy, and policy to understand the comparative advantage of each sector. As Greg Baldwin, the CEO of VolunteerMatch, commented on Tactical Philanthropy:

I think to get underneath the questions you need a clear vision for how government and the nonprofit sector differ. What are their unique roles in society? With that you can begin a discussion of how can they work together.

So here’s a question I have for readers of this blog: Do we need a clear vision of how all the sectors should work together – dividing up who does what and when to collaborate? Is this a question that’s relevant to your work or simply an academic concern? I’d love to hear everyone’s thoughts on this – with enough interest, Ian and I want to test some new models for (philanthropy) research and liveblog the process as we dive deeper in our research and look to the community for guidance and feedback. :)

New Models for (Philanthropy) Research & Dialogue

It’s been some time since my last post, but I’ve finally been sucked back into the blogosphere – inspired after reading the Working Wikily paper and spurred on by client work and Sean’s latest column on Philanthropy’s Trifecta: Information, Wisdom, & Relationships. So let me cut to the chase: there is an incredible opportunity for better dialogue in philanthropy.

Currently, the dialogue in philanthropy is typically some variant of the following: a funder decides an issue is important, becomes an expert on a topic, and wants to share its information by publishing a report that will become a starting point for conversation, often hiring consultants to help them write the reports. But the model has its challenges. The issues that funders want to focus on are often not the issues that the field is interested in and because the process is unilateral instead of community-driven, the conversation has limited buy-in from its intended audience.

Furthermore, for the millions of $ spent on publishing foundation reports, these reports are not widely read and hide in relative obscurity. Jacob Harold, a philanthropy program officer at the Hewlett Foundation, once told me that he had a program associate look at the foundation reports he had on his bookshelf to see whether someone searching for the contents of that report would be able to find it through typical research methods. The result? Not one of the reports, despite having quality information, would have been discovered by the hypothetical researcher [disclosure: this was a few years ago and may have been indicative of the times, though I believe it still holds true today - a problem that Philanthropy Search was intended to help solve].

So here’s the trend that I’m noticing: people in the philanthropy world have a strong desire to be part of a larger conversation. In my conversations with staff members at various organizations who have asked for their web assets to be included in Philanthropy Search (including brand names like Charity Navigator, the Forum of Regional Association of Grantmakers, Alliance Magazine, and Pew Charitable Trusts), many feel that their organization’s information assets are vastly underutilized. For example, did you know that the information assets of the Pew Charitable Trusts includes the Economic Mobility project, the Cultural Data project, the Pew’s Center on the States, and at least 9 other projects? Probably not – even though the wealth of information present on these sites would really add value if part of a larger conversation. I’m also reminded of one of my favorite posts by Robert Egger where he shared his epiphany that for people under 30, “Just being asked what they think is HUGE. Never underestimate the value of turning to them and just asking… ‘Hey Man… what do you think?’ [] They are busting with new ideas – some are bold, some are fruit loops, but the need to have them truly reviewed is imperative.” [Interesting note: 21 days later, people are still having that conversation and commenting on the post].

Instead of just being pushers of content (I’ve tried following foundations on Twitter and have found them quite boring) what if foundations and their staffs became more engaged in active conversations with the community? Philanthropy has an immense opportunity staring right in front of it – new models of collaboration are just waiting to happen as social media, as Clay Shirky puts it, becomes technologically boring and socially interesting. Change can include grantees, academics, and other stakeholders of the ecosystem of change from the very beginning to build a community of involved stakeholders – with funders demonstrating leadership, community-organizing style. To frame this more concretely, here are some potential ideas:

Idea #1: Audience-Decided Content

Often times, a foundation will fund a report and try to push that report’s content to its intended audience, only to fail in reaching their intended audience because the audience doesn’t have buy-in into the process, nor has the attention span of sitting through a hundred-page report. To solve this problem, why not have the audience decide what questions it would like answered and using foundation resources to ask community questions, in the tradition of citizen-funded journalism like spot.us? Furthermore, reports as the deliverable should be carefully considered instead of selected as the default option. Perhaps it’s “deliverable isomorphism” leftover from graduate school and the institutional isomorphism of foundations, but why haven’t there been more experiments in blogging or video blogging as a way to create community dialogue? Beyond Good Intentions and Explore are great examples of video projects, though there’s room for much more innovation. Before beginning any report writing process, foundations may be better served in asking the relevant community what it is they feel would strengthen the field and using the community building process as a lever for greater involvement by all stakeholders down the road.

Idea #2: Crowdsourcing Wisdom

For structured content sharing, one of the coolest things I’ve seen in the philanthropy space that I just discovered is the Grant Manager’s Guide by the Grant Manager’s Network (ht @adincmiller). The business model: create an awesome wiki and have people pay to access the wiki. So instead of hiring a few experts or a consulting firm to write a report on Best Practices in Grants Management (which is what happened when the project first started by the Council on Foundations several years ago), the membership organization developed a wiki that would provide on-going, relevant content provided by the community. But crowdsourcing wisdom doesn’t always require the high setup costs of a wiki as was the case for the Grant Manager’s Network and the Packard Foundation’s Nitrogen Wiki project – asking experts from the community their opinion and engaging them in dialogue can be as easy as posting a blog and soliciting responses in the comments – something I did here for a paper some of us are working on for MacArthur. A nice side benefit: those people who were included in the dialogue are more likely to read the paper and pass it on than if they hadn’t been included in the conversation.

Idea #3: Transparent Processes & Open Participation

Foundations are notorious for acting like nebulous black boxes (anyone remember the Omidyar debacle?) – but some are the epitome of transparency and civic participation. Take for example the Peery Foundation, which has been live tweeting its strategic planning process on Twitter using the hashtag #PFwhiteboard. Not only are they displaying to the community the process in which they reach their decisions, but they are also inviting the community to be a part of that discussion via social media. While some foundations focus on gimmicks like trying to get the community to comment on a blog post or vote for their favorite projects, which becomes a war of email spam rather than true community participation, some like the Peery Foundation are really utilizing the full potential of social media to create meaningful opportunities for engagement. Imagine – what if entire programs, from the program associate to the program director, started blogging and engaging with their constituents, like Acumen Fund does, to explain their decision-making and share their wisdom and observations? What a wonderful world that would be.

—

So the big question is why aren’t ALL foundations doing these things? As someone at the Council on Foundations conference mentioned, culture eats strategy for lunch – and in this case, existing cultures at foundations may be the reason why opportunities like these aren’t recognized or implemented. But culture can change; here are three things I might consider if I were at a foundation to ensure a healthy and innovative culture:

Action Step #1: Prioritize Communication

Such an easy step – but also one that can get waylaid if processes like logic modeling and evaluation are emphasized more. Community dialogue has to be a priority if it’s to be taken seriously; a strategic planning process might be helpful here and the newly launched Socialbrite might be a good group to talk to (ht @sinatraj).

Action Step #2: Invest in Technology

Much of these practices have been facilitated by low-cost technology and social media tools. However, decreasing costs doesn’t mean free – true investments of staff time and money are required to see success. A simple first step would be to include RSS feeds for specific programs and departments so that people can stay up to date on the latest news and updates in, let’s say, Open Educational Resources (*hint hint*).

Action Step #3: Fund Flexibly

If you’re working with consultants, be open to new ideas on how best to achieve your programmatic goals. Not everything has to be a report – maybe hiring a blogger would be better, not to mention more cost effective, in engaging your constituents and really pushing forward the field than any report you could fund. But if you’re tied down to specific funding requirements, innovation may not be an option, so keep your funding options flexible when you can.

—

Ultimately, the models for research and dialogue in the philanthropic sector are awaiting a revolution – but we’re right now in a model of incremental innovation, when the arrival of a few forward-thinking leaders to the party is cause for celebration. Maybe it’s just me, but I’d like to see a philanthropic army of community organizing bloggers who share best practices and tap into the wisdom of the field where conversations about philanthropy and change are widespread, communities are engaged, and foundations are playing an active role. This is the true power of Philanthropy’s Trifecta.

Highlights from the GSVC

In response to my post on Charity vs. Business: The Business Case, I just wanted to thank everyone who commented in the blogosphere and everyone who propelled the conversation into the twittersphere (@createquity, @adnanmahmud, @lauratomasko, @nedgington, @cathyhc, @bhalchander, @ithorpe, @paconmiller, and @tactphil). It’s crystal clear to me that there is much more work to be done in articulating the difference between organizational structures (nonprofits, social enterprise, traditional for-profits) and strategies (charity vs. business, value creation vs. value capture vs. value transfer) and that as a sector, we need to present a more balanced perspective that really highlights the comparative strengths and weaknesses of each organizational form and strategy. So thanks again to everyone who contributed to the conversation – and I look forward to its continuance!

To rewind, a little over a month ago, I convinced my company (which has a new website!) to sponsor my attendance at the Global Social Venture Competition to broaden my exposure to the current issues in the social venture space. For the bargain price of $125, I was able to hear keynotes from Tracey Pettengill Turner of MicroPlace and Jonathan Greenblatt of Ethos Water and attended three panel sessions: Financing Your Social Venture, Critical Legal Issues & Strategies for Successful Social Enterprises, and International Opportunities. Here are my highlights from the panel sessions:

Financing Your Social Venture

Panelists:
Dan Crisafulli, Director, Ecosystem Investments and Partnerships, Skoll Foundation
Bill Dewes, Chief Financial Officer, D.light Design
Penelope Douglas, President and Co-Founder, Pacific Community Ventures

Moderator:
Kevin Jones, Principal, Good Capital

All the panelists talked about their work and the growing recognition that there are good opportunities to invest in businesses that have a social impact. However, it’s been my experience that many social ventures find it very difficult to receive critical early stage funding, especially growing from the friends and family round to the next stage of financing ($250K to $1.5M) before a traditional series A round, as this article from the SSIR and my conversations with entrepreneur Peter Frykman suggest. So I asked the panel “Where is the early stage financing? How do you get that next critical phase of funding after the angel round of funding?” Both Kevin and Penelope responded by recognizing that there is a funding gap and that there really isn’t very many good sources for that type of funding and its a conversation this sector needs to have (my follow-up conversation with both of them suggests that the gap in funding is caused by low financial returns from this segment of investing, which I would venture is caused by a market for lemons problem). Bill Dewes from D.light suggested that the solution was to participate in business plan competitions (since that’s what helped d.light get visibility in front of eventual investors like Draper Fisher Jurvetson and Grey Matters Capital), but personally I see that as a niche, bandaid solution (honestly, the funding cycle of business plan competitions is super slow and the amount of capital is trivial to what’s needed – the ROI of time is way lower than what is optimal – and Jonathan Greenblatt, during his keynote, pointed out that his company, Ethos Water, competed in the GSVC but didn’t win despite being one of the most successful companies that has emerged from the competition, suggesting that there may be considerable error in the evaluation of business proposals; Kiva.org placed 5th in the BASES Social Entrepreneurs Challenge and look at where it is now).

Critical Legal Issues & Strategies for Successful Social Enterprises

Panelists:
Lloyd W. Aubry, Of Counsel, Employment and Labor Group, Morrison and Foerster LLP
Susan H. Mac Cormac, Partner, Corporate Group, Morrison & Foerster LLP
Tessa J. Schwartz, Partner, Technology Transactions Group, Morrison and Foerster LLP
Peter J. Yim, Partner, IP/Patent Group, Morrison & Foerster LLP

Moderator:
Ken Taymor, Executive Director, Berkeley Center for Law, Business and the Economy at the University of California, Berkeley, School of Law

Being a legal nerd, I found this session from the folks at Morrison & Foerster exceptionally interesting and informative, since most of the discussion and the literature in social enterprise focuses on business strategy independent of the law. Some of the highlights include:

• 501c3 regulations are complicated, for-profit forms are straightforward
• Hybrid forms are complicated and often setup wrong
• Constituency statutes allow corporations to consider other factors besides shareholder value (for more background reading on the status of corporate constituency statutes in California, this paper presented by Jenny Kassan of Katovich Law Group at the SEA conference is a wonderful read)
• 99% of the time, you should form a corporation over a sole proprietorship or an S-corp
• Debt = promissory notes, Equity = shares in the company
• Convertible debt is a popular financial instrument (mainly used when it’s difficult to put a proper valuation on your company in the early stage)
• Don’t issue preferred stock unless you have to
• Unregistered securities require filings and exemptions
• Business judgment rule – allows corporations a lot of discretion in how they manage their business (but as the Kassan article suggests, the law is unclear what can and can’t be done under the rule)
• Form/structure follows function/strategy
• Selling/converting a nonprofit to a for-profit requires the approval of the State Attorney General’s office (The California Endowment was formed as a result of a nonprofit health provider converting to a for-profit)
• Selling a for-profit to a nonprofit is pretty straightforward; assets can be tax deductible if made as a donation
• IP ownership issues are really important – disagreement later may need to be settled by clear property rights
• Final advice: “You don’t know what you don’t know.” – It’s super important to get legal advice early on.

Social Enterprise in Emerging Markets

Panelists:
Swati Mylavarapu, Consultant, Dalberg Global Development Advisors
Mark Pretorius, Managing Partner, Premanco Ventures
Rose Shuman, Founder, Open Mind and Question Box

Moderator:
Paul Braund, Co-founder and Executive Director, RiOS Institute

Rose Shuman really drove in the point that as a social entrepreneur working in the developing world, you have to let go of your assumptions and live in the country you’re interested in starting your enterprise. Mark Pretorius talked a little bit about the need for social ventures to be exceptionally clear in their financial analysis and to not overstate returns and also argued that investments from foundations into for-profits has become increasingly easier (which I disagree with – there are many other barriers to mission investing, especially at the early stage venture capital level, that makes foundation involvement very difficult – another topic for another day). Swati Mylavarapu, who previously was at Google.org, challenged the audience to think more deeply about the design of their enterprises as “social enterprises” and pointed out that while she and the philanthropic community is excited by organizations like Ushahidi, many traditional for-profit solutions (she mentioned an Indian microfinance orgnaization that’s done extremely well to contrast) have conceivably had a much larger impact on the lives of the poor, suggesting a possible bias of philanthropy towards innovation over impact.

Some of my favorite quotes from the session (ht Amie Vaccaro for the tweets):

Swati Mylavarapu: Establishing a social value proposition is the easiest part. It’s the enterprise model that is much harder.

Rose Shuman: Most of the world does not share our culture of it’s ok to fail. There’s no safety net; you fall and you hit gravel.

The Launch of HopePhones

HopePhones.org

It’s not my style to write glowing reviews of products or charities on this blog. Though, ironically, one of my most frequently viewed posts has been my critical review of Peter Singer’s lecture on his new book The Life You Can Save. In reality, this blog is supposed to be little more than a sounding board for my brain to process information, with additional borrowed computing power provided by the blogosphere. But when Josh told me about the idea behind HopePhones last weekend while we were both at an event at the Moscone Center in San Francisco, I tried to play the role of journalist and product reviewer, asking (mainly in my head) questions like “why was a nonprofit getting involved in the traditionally commercial space of cell phone recycling?” and “would HopePhones turn out to be a brilliant, strategic move for FrontlineSMS:Medic or a failed investment in social media and social enterprise?”

To be honest, I love the simplicity of the idea – take old, unused cell phones and turn them into cell phones for the developing world. It’s TerraCycle meets BetterWorldBooks – and it seems like a service that would be competitive in the marketplace; as an individual, I would totally get more value from being a cell phone donor than a cell phone seller (in the same way that many people may get more value from donating their old car instead of selling it – an extension of the theme embedded philanthropy). Mix in the fact that this earned income stream is mission-aligned, I can’t help but think that this idea will show signs of success, especially after having just watched the Story of Stuff (funded by the Tides Foundation):

But as a researcher and as a consultant, I’m interested in not only the idea, but also how this initiative will play out so that others may be informed by HopePhones’ eventual success or failure. How much impact will social media have on their fundraising? So far, there have been 484 tweets about HopePhones as I blog this – how many donated cell phones can be traced back to Twitter? What kind of external shocks on the cell phone recycling business will affect the return on investment of the HopePhones campaign? Will increased competition among charities diminish HopePhones’ market share of the cell phone recycling fundraising industry? Similarly, will increased competition among cell phone recyclers diminish the margins per phone for HopePhones? How will cell phone recycling as a field move forward independently of the success of the HopePhones initiative? Will there be tension between the environmental goals of cell phone recycling and the health goals of FrontlineSMS:Medic? And what lessons can we learn to best encourage cell phone recycling and social change more generally?

I’m excited for FrontlineSMS:Medic and the potential direct impact their HopePhones initiative will have on the sustainability and awareness of their programs, but I’m even more excited to draw lessons from this experience so that the sector has better information in making strategic decisions. So best of luck to the FrontlineSMS:Medic team, and I look forward to observing your progress over the coming months!

Charity vs Business: The Business Case

If you had $1,000,000 to make an impact on poverty, how would you spend it? Would you give a grant to a nonprofit or would you make an investment into a for-profit? This is the challenge that some grantmakers face (for those who consider the tools of PRIs and MRIs) – but is a question that few have attempted to answer definitively.

In the past several weeks, I’ve had the privilege of attending some phenomenal events in the social enterprise space. Two weekends ago I was at the Global Social Venture Competition’s Symposium on Social Entrepreneurship and last week I was at a Northern California Grantmakers briefing titled “Stepping into New Territory: Rethinking Social Enterprise.” Both events were informative, but for different reasons. The GSVC Symposium had exceptionally informative sessions for practitioners (I attended the panels on Financing Social Ventures, Critical Legal Issues for Social Enterprises & Social Enterprises, and Social Enterprises in Emerging Markets: Trends, Challenges, and Surprising New Markets – notes to come) while the NCG event provided insight into the black box world that is philanthropy (shout out to Judi and Lucy for organizing and facilitating the event, respectively).

What these events make clear is that there is a growing realization by both philanthropic funders and practitioners that charity no longer has a monopoly in creating social impact (which was not the case a few years ago). The false dichotomy that nonprofits create only social value and for-profits only create financial value has been shattered. Each generates both social and financial return – the million dollar question is: which one generates more social impact per $.

Unfortunately, I think it’s impossible to accurately quantify and measure the social impact of any organization, whether they are nonprofit or for-profit, and skeptical whether we will be able to find useful metrics that enable us to make comparisons (I think there’s a reason why we haven’t seen any convincing analysis for one organization, let alone an entire industry – one reason I’m partially skeptical of ideas like global social investment exchanges for nonprofits). Thus, without the ability to perform sound quantitative analysis and comparisons, any attempt at comparison will likely be unsatisfying to some degree.

Nonetheless, there has been recent anecdotal evidence in mainstream publications like Time, Business Week, Forbes, and the New York Times and bloggers who cover the social enterprise space like Anne Field of Not Only For Profit, Amie Vaccaro of ecofrenzy, and Nathaniel Whittemore of socialentrepreneurship.change.org, that take a cursory look at the comparative advantage of for-profit companies compared to their nonprofit counterparts. My personal experience as a long-time observer of the social enterprise space and as a mentor to social enterprises (mainly through the BASES Social Entrepreneurs’ Challenge and my experience as a Teaching Assistant at Stanford’s Social Entrepreneurship Collaboratory) also confirms this trend of for-profits being more effective than nonprofits.

So I’m going to go out on a limb here and say that I think investments in for-profits will generally have more impact per $ than nonprofits* – and offer four key bullet points that articulate why I think this is the case:

1. Charity is (Always) Limited

Here’s a passage from Philanthrocapitalism, which describes a disagreement between Muhammad Yunus and Pierre Omidyar on a business versus aid approach to microfinance:

At issue was Omidyar’s belief that microfinance could lift millions more people out of poverty, far quicker, by running it for profit rather than as a nonprofit like the Grameen Bank founded by Yunus in Bangladesh in 1974. The two men had clashed at the home of legendary venture capitalist and philanthropist John Doerr, who was hosting the meeting as a fundraiser for microfinance. Omidyar had declined to add his own money to the $31 million that the other philanthropists had used to encourage banks in poor countries to lend more, and at lower interest rates, to local microfinance institutions. Instead, Omidyar left the meeting convinced that, if it was pursued as a for-profit business, microfinance could reach a massive scale. He calculated that meeting the needs of all the potential poor borrowers would require about $60 billion – way beyond the capacity of the traditional charitable and government donors. “There is not enough nonprofit and aid capital in the world to get microfinance to the scale it could achieve. Relying on nonprofit capital, not self-sustaining business models, is a big mistake,” he says.

Omidyar makes an important observation: there’s not enough charity and aid money in the world to meet the needs of the poor. I came to a similar realization when I was in China consulting for a social enterprise that wanted to provide P2P scholarships to students in rural regions of China; if you want to help 300 million people in Western China, charity’s not the answer. One of the key differences I use to distinguish between charity/nonprofits and business/for-profits is that charity is designed to transfer value while business is designed to create and capture value. And if we’re trying to provide value to the poor, it seems much easier to create it using the power of business then to transfer it using the power of charity.

2. Charity is (Often) Inefficient

However, philanthropy’s problem isn’t limited to its size, but also its marginal efficacy; philanthropy is inefficient per $ spent because of bureaucratic and allocative inefficiency. One of the reasons there’s all this talk about global social investment exchanges and markets for philanthropy is this failure of philanthropy to allocate its resources efficiently. As William Easterley writes in The White Man’s Burden:

A price that clears the market is like a heating thermostat. When the house gets too cold, the thermostat automatically turns on the heat. If the house gets too warm, the thermostat turns off the heat… The market works in the same way-if there is excess demand, the price goes up; if there is excess supply, the price goes down…

The difficulty of foreign aid agencies is that a bureaucrat is controlling the thermostat to the distant blanket of some poor person, who has little ability to communicate whether she is too hot or too cold. The bureaucratic Planners get little or no feedback from the poor. So the poor foreign aid recipients get some things they never wanted, and don’t get things they urgently need. (168-169)

Like Easterly, I strongly believe that aid is by design an inherently inefficient way of helping the poor because of its lack of accountability to the people who are the primary beneficiaries of aid (what I like to call the Nonprofit Efficiency Impossibility Theorem). Paul Polak, in his excellent book Out of Poverty: What Works When Traditional Approaches Fail, shares the same criticism and argues in favor of market-based solutions to poverty:

In the first twenty years of my work with IDE, development leaders were outraged by my notion that you can and should sell things to poor people at a fair market price instead of giving things to them for nothing. “Business” was a dirty word to development organizations.

“It’s exactly the multinational corporations that use the business approach you advocate who have caused the problem of poverty in the first place,” they would say. “Poor people simply can’t afford to buy the things they need, and they need these things very badly. The only way to make a real difference is to donate these things to them.”

And the development organizations continued to donate mountains of food, free village hand pumps that broke down within a year and were never fixed, and thousands of free tractors that continue to rust under the African sun.

While I see the merits of aid organizations like FORGE (which provides “aid” to refugees in Africa) and Room to Read (which provides educational resources to children in developing countries), where cost recovery really isn’t possible, I’m wary of aid as THE PRIMARY solution to global poverty because of aid’s general lack of accountability.

3. Charity (and Aid) is Often Insulting and Harmful

Andrew Mwenda’s TED talk on how the media should really stop portraying Africa as a continent of hopelessness that needs foreign aid. Enough said. (If you haven’t watched this talk, you really really should).

4. Business (if Successful) Scales

Although I disagree with Yunus’ call for subsidized capital from social investors, a question I’ll explore in much more detail in a later post, I agree with a lot of what Yunus says in his new book Creating a World Without Poverty: Social Business and the Future of Capitalism. In particular, Yunus points out the difference in ability between a business and nonprofit in achieving scale (in fact, one of the first articles on the social entrepreneurship movement back in 2003 by a reporter from ABC News highlights the issue of scale as being ‘the sticking point’ facing the sector). Here’s what Yunus has to say about (social) business, being able to scale more effectively:

Charity too has a significant built-in weakness: It relies on a steady stream of donations by generous individuals, organizations, or government agencies. When these funds fall short, the good works stop. And as almost any director of a nonprofit organization will tell you, there is never enough money to take care of all the needs. Even when the economy is strong and people have full purses, there is a limit to the portion of their income they will donate to charity. And in hard times, when the needs of the unfortunate are greatest, giving slows down. Charity is a form of trickle-down economics; if the trickle stops, so does help for the needy.

A social business is different. Operated in accordance with management principles just like a traditional PMB, a social business aims for full cost recovery, or more, even as it concentrates of creating products or services that provide a social benefit. It pursues this goal by charging a price or fee for the products or services it creates…

The achievement of full cost recovery is a moment worth celebrating. Once a social-objective-driven project overcomes the gravitational force of financial dependence, it is ready for space flight. Such a project is self-sustaining and enjoys the potential for almost unlimited growth and expansion. And as the social business grows, so do the benefits it provides to society.

While the White House’s new Social Innovation Fund might address some of the inequities facing nonprofits in achieving scale, I still think 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. Social businesses on the other hand can sidestep the need for charitable funding entirely.

Conclusion

I believe businesses are generally more efficient than nonprofits, especially when it comes to creating wealth for low-income communities, and that impact investing will be the new giving – mission investing circles anyone? – if philanthropy stops letting function follow form (see Lucy’s excellent post on institutional isomorphism). That’s why I believe a lot of young social entrepreneurs, like Sam Goldman and Peter Frykman, 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).

QED.

*While I frame the question of for-profits versus nonprofits by equating nonprofits with charity, I understand that not all nonprofits are engaged in charitable activities; some are engaged in earned income activities as well, making them more similar to the for-profits under question. In a future post, I will expand on my earlier post Reexamining the Case for Social Enterprise, and explain why I and many people I have talked to (especially those in philanthropy and law), are skeptical of not-very-profitable social enterprises and the new L3c form.

The Business Model of Change is Important!

When I was a kid, I always wondered whether two people in the world were ever thinking about the same thing at the same exact moment in time. As I’ve gotten older and realized the almost mathematical certainty of such an occurrence (since there are 6.77 billion people in the world – you could also look at Twitter), I’m still struck by its reality when I observe the similarities in timing and thinking of thought leaders in the social sector (which I imagined would be more improbable).

For example, Nathaniel Whittemore posted his thoughts on what he considers the distinction betwen “Scale” and “Diffusion”, recounting a conversation that happened at the recent Global Engagement Summit. In the context of his discussion with Josh Nesbit, one of the GES delegates and co-founder of FrontlineSMS:Medic, Nathaniel writes:

What he’s really looking for is not a “scale” that provides new benefits for ownership because of reduced costs, but the diffusion of a tool and an approach to supporting rural health care. I wonder how many innovations in the social sector are under-leveraged or face too-limited distribution because our conception of scale is rooted in a private sector ownership conception of scale?

Sean Stannard-Stockton, who was working simultaneously on a similar blog post, writes about a group called Homeboy Industries who resists calls to scale. He recounts his recent experience at the Center for Effective Philanthropy conference:

During the session, founder and executive director Father Greg Boyle explained that they have intentionally resisted the many offers to replicate their program in other cities. However they do act as a model for other programs and help other programs get started. Since “scale” is the constant buzzword of social entrepreneurship in particular and philanthropy in general, it is interesting to hear the counter argument.

…

So does scale make sense?

In many cases I think it does. But given the assumption that many people make that scale is the obvious goal, I think it is important that we examine when going to scale makes sense and when helping other people steal your ideas is a better strategy.

Both Sean and Nathaniel recognize that the diffusion of the innovation can be more important than scaling the organization – we don’t need more people to try and build empires at the expense of social impact, as others also point out. However, I think it’s critically important for social entrepreneurs and innovators to understand that both scale and diffusion are an inherent and not inconsequential challenge part of social innovation (and that the ability of an organization to scale is often correlated with the ability of an idea to diffuse). Great ideas that improve the state of the world are a dime a dozen and inherent in the challenge of creating sustainable, scalable impact is figuring out how to sustain that change. If you’re a nonprofit like FORGE or FrontlineSMS:Medic, the question of where you are going to find the funding to help scale your operations is as relevant if not more so than how to develop the innovation itself.

Designing the right business model that can scale to best support the diffusion of your innovation can be the key difference between success and failure (at least that’s what I learned from my own failure – and it’s the driving reason why I’ve been studying the business models of change for so long).

p.s. Stay tuned for my upcoming post (Business vs Charity: The Business Case) which argues why business is often the right choice for scaling.

Design Principles of Philanthropy Search

Giving is not an exact science, it is an art. (From LB's office door)

Sometimes innovation is more an art than a science, as this Gizmodo post wonderfully illustrates in what they consider a contrast between Google’s emphasis on evidence and Apple’s emphasis on design (h/t to my college buddy D. Chi.).

On that note, I’ve been wondering aloud about design principles recently (as a result of this paper that we’ve been thinking about) and what a design principle truly represents. Unlike evidence-based strategies, design principles are often rooted in intuition. A good photographer might consider the “rule of thirds” to guide his decision of how to frame a shot. But, the rule wasn’t derived from lots of scientific testing, but rather an intuition of what makes a good photograph, the accumulated wisdom of an entire field boiled down to an easily remembered word or phrase.

When I first started working on Philanthropy Search, it was a tool to solve a very specific need – I needed to find reports from the philanthropy universe on field-building for a particular paper that I really couldn’t find with any existing tool. Though I had thought about the implications and benefits of a search engine for philanthropy before I had first started designing the tool (I remember asking around the office how people searched for information in this sector), I never needed to articulate the design principles of the search engine. But now, while some are voicing their concern of what might become and others are beginning to use and adopt the tool, I find it increasingly important to articulate both the objectives and design principles of the search engine. Here are my initial thoughts:

Objectives

1. To organize philanthropy’s information and make it universally accessible and useful (modified from Google’s own mission statement).
2. To encourage philanthropy to share higher quality and more relevant information.

Design Principles

1. Transparency – As Peter Deitz illustrates with his comment on The Googlification of Philanthropy, transparency may be especially important in encouraging adoption and innovation. I agree – which is why I have always published the list of sites indexed by the search engine in a Google Doc.
2. Standards – Philanthropy Search isn’t meant to index the entire Internet. Rather, it is meant to index the subset of the Internet relevant to the philanthropy universe. But what should be considered as part of the philanthropic universe and what should not? Should nonprofit websites be included? Should any blogger who identifies as being part of philanthropy be listed? Though the answers may not be straightforward, widely accepted standards for what should and should not be included will be important in moving forward.
3. Sustainability - As much as I love blogging and helping out the sector, most of the development of the tool from here on out is on my own time. It’s not entirely fair for my firm to be the one to have to pay for development costs by letting me work on the tool in lieu of client work (it’s already unfair that we compete as a for-profit against nonprofit firms that receive tax and software subsidies). While I’m willing to volunteer to keep the project going (in the same way that I’m willing to work for less in the nonprofit sector), it would be nice if someone out there in the philanthropy universe would make a long-term commitment to develop, refine, and maintain this tool (honestly, it sounds like a perfect project or grantmaking opportunity for Google.org).

Immediate Needs

1. Supply Chain Management - What I really mean by SCM is a good source for finding lists of websites that I can rely on from year to year. The Foundation Center is a great resource for Top 100 lists of foundations (I’m hoping I can get a full list of foundations and websites from them) and the Council on Foundations has some lists of affinity groups, regional associations, and academic centers (though the lists appear to be outdated), but I can’t find a Technorati 100 for Top 100 Blogs in Philanthropy (nonprofit.alltop.com isn’t that great of a substitute) – and I have no idea where to find exhaustive lists of publications and consulting firms. Thoughts?
2. Marketing Strategy – If this tool can be useful to program officers and other professionals in philanthropy, I would like them to know about this tool to aid them in their research. One of my former professors just asked me for information about L3Cs and the search engine was critical in identifying relevant news and reports – if I wasn’t one of his former students, he probably wouldn’t have known about the tool and I think lots of people like my professor can benefit from the tool.  But I’d like to market this tool in a professional manner without sounding like a subprime mortgage lender.
3. Software Engineering – My skills are limited when it comes to coding (after all, my full-time job is research and analysis) so the search tool right now will pretty much look the same without some additional help. Ideally, the tool could become more of a portal with other interesting tidbits on the homepage, like they do over on BlawgSearch at Justia – or maybe it’s better as the simple Google search engine it is. Regardless, it would be nice if someone with some coding skills took a look at the site and offered some suggestions on how to improve the user experience.

These are just some of the thoughts I’ve had as I’ve been developing Philanthropy Search. What do others think could be improved about the tool? Are there other design principles or objectives that are important but have been omitted? Any useful feedback and comments would be great!

Philanthropy Search Engine

PhilanthropySearch.org

As a researcher in this field, I’ve primarily used Google to conduct my research. Now that I work at a consulting firm, I have a few more tools available, like subscriptions to Foundation Center, Guidestar, and the Chronicle of Philanthropy. But to be honest, I rarely use the Chronicle of Philanthropy as a research tool and use Guidestar and Foundation Center only when I’m looking for very specific information.

I know there is a better way to do research – a way that makes the reports foundations publish more relevant to those working in similar fields, instead of sitting idly in the ether somewhere. But information sharing just doesn’t happen, as many people have pointed out. Organizations like Issue Lab and others have tried to address the issue of collaboration in their own clunky way (from a workflow and UI perspective, the tool isn’t that good). While I was researching the topic of philanthropy and field-building, I tried using a normal Google query of ["field-building" "field building" philanthropy] but only found Lucy’s and Sean’s posts on the topic and a few semi-relevant reports from The Foundation Center and the Robert Wood Johnson Foundation.

I think there’s a better way. And I think the answer is search.

Google revolutionized how we find and access information – but that’s only half the story. Google also revolutionized how we create and share information. As the dominance of Google increased, so did the number of people who tailored their search results for Google’s search engine (what industry people call “search engine optimization”). Google didn’t think, “Let’s try and contact everyone to give us their documents and we’ll reorganize the information” but instead thought of a way to provide a tool that takes unorganized data and makes it more relevant to the person looking for information – with the consequence of people making their information more organized and relevant.

But the most interesting effect of Google and its relation to philanthropy is its effect on the evolution of conversation. For the most part, people read blogs only if they’re relevant and blogs only become relevant if they produce highly useful information. Thus, blogs like Tactical Philanthropy and Philanthropy 2173 have come to dominate the philanthropy blogosphere arguably because of their relevance – but more importantly, they illustrate how people now have an incentive to produce highly useful information as competition for attention increases. The more useful the information you produce, the more likely people are to listen to you – and in theory, the greater your impact.

I’m hoping that philanthropy recognizes the importance of its knowledge assets in addition to its other assets as an institution and as a grantmaker. And I think one way foundations can use their knowledge assets better is by creating a more efficient marketplace of information that provides the right incentives for people to provide highly useful information. And I think that search can be part of the answer. Through an improved search tool customized for philanthropy, I was able to find many more resources on field-building than I previously was able to (including a key report by the Kellogg Foundation on its field-building initiative in service-learning, and other reports by the Wallace and Ford foundations), which in theory enabled us to write a better paper (forthcoming) and will enable foundations to have greater impact.

So if you’re in the field of philanthropy and think this might be a useful tool, I would love to hear your feedback on how you like the tool and what suggestions you might have to make the tool better. Right now it has a couple of blogs, consulting firms, academic centers, and the top 100 foundations by asset size as part of its index (Google spreadsheet available) and I would be interested to know what other sites you think should be included in the index and other features the tool should have.

Update #1: If you’re interested in searching for reports using the tool, try typing in filetype:pdf as part of your search query.

Update #2: I made a few stylistic changes to this post and added some sites to the index (it now indexes 193 sites, with a reports filter that will search only pdf files). The search engine can now also be accessed via PhilanthropySearch.org.

Youth Venture Responds!

Youth Venture Responds!

Blogging five years ago and blogging now has dramatically changed. Before, I would never have expected people outside of my close circle of friends to stumble upon my blog and leave comments. Now, after writing a post that mentions Youth Venture, I have someone from the Mumbai office and someone from the US office both contact me! The world has changed – and it is flat.

What astonishes me the most though is the way organizations are now using the web to gain global, real-time feedback. “Crowdsourcing” as some might call it – the web has now given organizations unprecedented access to what their customers and stakeholders are honestly thinking. There have been reports of corporations using Twitter for real-time feedback and I’m pretty sure authors are now tracking the blogosphere for any mention of their book as a way to encourage further discussion (it happened to my girlfriend and it happened to me). Nonetheless, it came as a big surprise that organizations like Ashoka (who runs the Youth Venture program) are reaching out via the blogosphere. Here’s an email I got from Kate Myers, who’s with the Youth Venture team (the email has been edited for the purposes of this blog):

Hey Tony,

I recently saw the posting on your blog Philosopher 2.0 about Youth Venture and the ways that it engages youth. I was wondering if we could set up a time to discuss your thoughts on expanding strategic thinking in youth organizations.  It would also be great to hear about your experience with Youth Venture and Solutions Magazine and any suggestions you may have.

Youth Venture has grown a lot in recent years and has expanded many of its programs to better address this issue of strategic thinking. For example, we now have a workshop series called the Dream It Do It Challenge (more information attached) that engages youth in a 12 session program with a weekend retreat that focuses on the strategies that will help them to effectively build and sustain their Venture. There are some other ways we are trying to expand youth critical thinking skills, which I would be more than happy to share with you if you are interested.

As a YVer yourself, it would be great to have you become more involved in the Youth Venture community. There are a variety of ways including: serving on selection panels for new Youth Venture teams, helping us establish more of a presence in social media by contributing or linking to some of our blogs, or possibly attend and present a workshop at the YV Summit in Boston on June 26-29.  Being a former Venturer yourself, you are an important resource to current Venturers and are able to provide them with guidance and suggestions.

Could we set up a time to talk over the phone in the coming days? Your input and suggestions are very important as we strive to provide the best possible programs for youth development. Let me know what works for you.

If you would like to learn more about the programs and opportunities at Youth Venture, please visit our website www.genv.net

I look forward to hearing from you. Thanks,
Kate

There are a couple of things I like about this email. First, instead of going on the defensive, Youth Venture saw my criticism as an opportunity to learn and improve, which I think is one of the most admirable qualities in individuals and organizations (I can’t think of many more important ones – can you?). Second, Youth Venture used this opportunity to reach out and get me involved. While mass marketing emails and brochures usually focus on the company’s or organization’s desire to get out their message, by personalizing this email and making it relevant to something I’m doing (in this case what I’m writing and blogging about), I feel much more connected to what they are trying to do and Youth Venture is 10x more likely to get me involved.

That said, I’m not sure how I can really help – I’d love to spend more time developing curriculum and thinking about ways of helping the Youth Venture community, but I’m stretched thin as it is. I can give them a 30 minute conversation (which I did today), an hour or two of my brain time, and maybe participate in some kind of event for a weekend – but coming up with real recommendations on strategy, curriculum changes, and other ways they could improve is serious work.

Here’s where you come in: Let’s see how many suggestions we can give Youth Venture on how they could improve their program. If you were the team leader of the Youth Venture program, what changes would you like to see in the program and what would you do about it? If you were a young social entrepreneur, what would you most want to learn? What resources would you most like to have access to? What would you do to improve the impact of young people interested in social change? And what questions would you be asking to help improve the program?

The Need for Strategic Thinking in (Youth) Social Entrepreneurship

What Would You Do?

Yesterday, I was at the dosomething.org conference in the Golden Gate Club of San Francisco attending workshops on how to start a nonprofit if you’re a young person (which they define as being under 25). There were a couple of recent grads like me who work in the nonprofit consulting world, but the vast majority of people at the conference were high school and college students looking to start or build their nonprofit organization. (Quick shout out to @Kjer, who led a great session on international projects – if you’re starting an international project, make sure you think carefully about 1. logistics, 2. culture, and 3. sustainability).

However, to my surprise, I felt completely out of place and extremely worried while I was at the conference. What worries me is how we’re teaching the future generations to change the world.

I was a Youth Venture kid back in the day. I applied for and received a $1000 grant to start my “social enterprise” to try and change the world. While I’m not going to go into every detail of why the nonprofit sector, particularly youth programs like Youth Venture frustrate me, I do want to focus on one particularly alarming problem: the lack of emphasis on strategic thinking in many nonprofit bootcamps.

At the dosomething.org conference, the day starts out with a quick introduction to the day’s events and it immediately has participants jump into sessions like “Branding and Marketing,” “Political Activism and Community Organizing,” and “Corporate Sponsors.” But what’s missing is a more robust discussion on how to approach problem solving in the social sector (or what some call social innovation). If you want to see organic food in your school’s cafeteria, does seeking corporate sponsorship or thinking about branding and marketing really make sense? Or if you want to address the issue of homelessness, why does creating a nonprofit that raises awareness of the issue among students the best solution?

The design of programs like Youth Venture and dosomething (and even classes on social entrepreneurship at Stanford) share something in common: they begin with the implicit assumption that the way to change the world is by creating an organization. There’s no discussion of working closely with an existing nonprofit, no discussion of what research they should be doing about the problem, or what solutions already exist out there or why past solutions have failed. These are critical thinking skills that are direly needed in this sector but omitted in these contexts. By focusing too much on youth empowerment and not necessarily on youth impact, I’m worried that these kinds of programs might be setting students up for failure, or even worse, a false notion of success that is already too common in the nonprofit sector.

Don’t get me wrong – I’m all for youth entrepreneurship and social entrepreneurship – and I think the dosomething staff are an extremely enthusiastic and talented bunch – but I also want to make sure we provide today’s youth the necessary critical thinking skills that can help them understand how to be strategic in their social entrepreneurship and innovation. Maybe sessions on 1) how to recruit a board, 2) how to research problems, and 3) how to design effective solutions would help.

—

On a side note, I really enjoyed the speed pitching session at the end of the conference and got great feedback from the people I pitched my idea to. A program director at a local foundation is helping me to identify sources of program related investment (PRI) while two VC professionals, including one from DFJ, both think the idea has a lot of merit and worth pursuing. I’m planning on making a video common-craft style – so stay tuned!