Our Poor Nonprofits, Our Rich Opportunity

GR + Esperanza070
Esperanza International, an impact organization in Discovery mode, works with women to create transformational outcomes, like traveling a path from poverty to home ownership.

 

In order for nonprofits to transform the world, nonprofits first have to transform themselves. Nonprofits today are generally in one of three business model modes: Poverty, Discovery, or Scale.

Poverty Mode

You know a nonprofit is in Poverty mode when the leader is spending the majority of time and energy raising grants and gifts for repeat operations. This mode is where most nonprofits live – including many large, successful ones.

The reason most nonprofits live here is not complicated. They utilize all their income to execute their missions and run their organizations.

Imagine a provider whose mission is to assist women to escape trafficking, prostitution, and addiction. The provider’s model involves jail outreach, court support, and a survivor support group. It raises as much money as possible through grants and donations, and that money goes to pay staff and program costs.

The model itself puts that nonprofit into a poverty process – which is ironic, because the nonprofit is supposed to help women who are stuck in the poverty process themselves.

The group can only create more impact if it raises more money, and the capability is forever gone when the money is spent. Next year, it will have to raise the same amount of money again. The CEO will worry every day about money. No amount of fundraising will ever meet the needs of the community.

Traditional philanthropy funds our Poverty-mode nonprofits in an attempt to reduce what appear to be intractable problems and suffering in our communities. Donors give as much as they are willing and able, knowing that no amount of giving will ever be enough.

No amount of philanthropic giving can solve the greatest human challenges of a city, much less of the world.

When Poverty-mode organizations talk about raising “grant capital,” they are using the term capital incorrectly. True capital will, if successfully deployed, produce permanent increases in sustainability and capability. For a nonprofit, true grant capital is utilized to move into Discovery mode, and to transform into what I have termed an impact organization.

Discovery Mode

A nonprofit, company, or social entrepreneur moves into Discovery mode when they become committed to the idea that the key human challenge they seek to solve might be addressable with a value capture model.

When our example trafficking nonprofit serves women, it of course creates value – for the women they serve, for the community, for the donors, and for the staff. But it is not capturing any of the value for the long-term sustainability of the organization.

However, if our trafficking nonprofit decides to create a training and employment program for its clients, and they produce and sell a consumer good (say, candles) in the process, and the sales revenues offset some of the costs of the program, the organization is now capturing value. It is in Discovery mode. If it remains highly committed to increasing the amount of value that it can capture, continuously innovating its model until its revenue exceeds its program costs, it will reach Scale mode.

No matter how much a Poverty-mode organization works to be efficient, and no matter how successfully it collaborates with other Poverty-mode organizations, it cannot significantly increase its impact. It can only make marginal gains. Only value capture can create scale; efficiency and collaboration alone cannot.

Discovery mode is the impact organization’s entrepreneurial process of finding and implementing a value capture model.

Many simple value capture models have been around a long time, but those simple models generally create limited scale:

  • An endowment is a value capture model – the organization motivates donors to give into a permanent capital pool and lives off the returns. Because the value capture is one-time, at the time of the original donation, the model doesn’t feed itself to grow more.
  • A thrift store is a value capture model known to everyone. It provides value to the goods donor (emotional value, a tax deduction, and the convenience of dealing with items that are no longer wanted) and then captures value when it sells them to a customer.

More powerful well-known models include:

  • Employment and training social enterprises that create goods or services via their clients
  • Antipoverty microfinance models
  • Cooperative development programs

Significant advances have been made in each of these models in the last twenty years. New domain applications, the use of technology, and collaboration among impact organizations have all driven these models to become more widespread, successful, and impactful today than ever before.

The real power in value capture models is just now arriving. Model and technology innovations in housing, the delivery of education, healthcare, and water have already blurred the line between nonprofit and for-profit impact organizations.

The most important thing a nonprofit can do in its effort to become sustainable is to stop believing that its job ends when it creates social value. It must recognize that creating social value is different from capturing value. It must look throughout its environment and constituencies to identify how it can create value for another party in a way that is translated into money, services or assets for the organization.

We have a lot of discovery and learning in front of us to find and implement the right business models. While we can’t pretend it will be easy, we should be optimistic that commitment, collaboration, and innovation will uncover powerful new approaches to creating sustainable and scalable impact.

Discovery Mode Capital

Almost all impact organizations struggle to raise the capital needed for the work of Discovery mode.

For-profit companies that are addressing key challenges often find that they can make a profit, but not enough to make them attractive to angel or venture capital investors.

Nonprofits have even more difficult challenges. Discovery mode involves trying models that may not work, making talent and execution mistakes, and changing paths and plans as results come in. Traditional funders often will not fund Discovery mode:

  • They often do not want to be seen in the community as having made a mistake when innovation attempts fail.
  • They hesitate to use dollars to try experiments when that money could serve people in current need today.
  • Impact organizations that begin to earn revenue can be seen as “less needy” than those that spend all their income.
  • Discovery mode is a long process. I tell new impact funders that they should plan on a ten year process toward sustainability.

These concerns have the perverse effect of rewarding the status quo and missing the opportunity to fund those initiatives that could make much more significant progress against the problems that funders are concerned about in their communities.

Thankfully, the impact investing movement is raising awareness of the need for funders across the phases of the capital cycle of Discovery mode. (I’ll explain those phases and their associated financing instruments in an upcoming post.)

Scale Mode

If a nonprofit can develop a model that covers some of its costs, it can increase its impact and make its grant dollars go further. If its model can cover all of its costs, it reaches sustainability. If it can capture more value than its costs, it can scale.

Each of humanity’s top challenges will become dramatically diminished when large numbers of impact organizations successfully discover and implement value capture models that enable them to scale.

Google’s founding mission statement was “to organize the world’s information and make it universally accessible and useful.” What if Google had been formed as a nonprofit library and sought foundation grants each year to index all the world’s information and give access to everyone? Would we have Google today?

Google’s growth and reach was possible because it developed a financially and operationally sustainable model.

Only Impact Organizations will be able to grow to the scale needed for our greatest challenges – and if you are looking closely, you will see that the seeds of the “Googles” of water, energy, justice, poverty, education, and more are being developed today.

Total Impact (shortpost)

Here’s an interesting product invented by Kyle Lukianuk​: the Impact Card. It takes the Good Returns model to a whole new level.

How it works: you purchase a gift card from a company. You can use it or give it immediately. The company sends all the money to a sustainable impact organization as a one-year interest free loan to scale their impact. One year later the company gets paid. All the money goes to good, and you get all the money to spend.

We put Kyle’s idea into action: you can now buy an Impact Card at Soap Hope. Pick an amount. You can spend it all anytime or give it to someone as a present. Soap Hope sends all the money to Esperanza International or Milaap or PeopleFund, which lends it to women to start businesses and escape poverty. One year later Soap Hope gets the money back. We’re willing to wait a year because (1) we love our mission and (2) our customers love to give the Impact Card.

Good one, Kyle!

Stand-Up

Everyone knows the classic joke about the man who complains, “Doctor, it hurts when I do this,” and the doctor says, “Well don’t do that.”

Think about it for a second – why is that funny to us?

The doctor’s advice is actually completely practical. But we all understand the doctor is ignoring the actual problem, and that makes it funny.

So – have you heard the one about the poor villager and the cause marketing business? The villager says, “We have no opportunity.” The business says, “Here, have these shoes.”

This time, it’s not funny. Not only is the problem being ignored, the prescription is creating side effects.

The reason people are without shoes is because they are in poverty. Shoelessness is, “Doctor, it hurts when I do this.” Dumping shoes on the problem is, “Don’t do that.” A real doctor – and a real social entrepreneur – will spend time to understand the root cause, and work with the patient to cure the condition.

Social entrepreneurs have a natural impulse to help others. But when you take large-scale actions, it’s important to look at the side effects of your activity.

What are the side effects when you give away masses of shoes in a poor area?

– What happens to the people who make shoes in the region? What about the people who make the leather or fabric for them? The people who bring them to the village to sell?

– What happens to a child when she wears shoes for six months and then outgrows them, and there is no replacement?

– If only half the children in a village receive free shoes, what is the impact on the other half?

Real, sustainable solutions to poverty focus on empowerment – which in practice means information and access to basic resources. If a social entrepreneur wants to make a healthy impact, she focuses on sustainable ways to increase access to water, nutrition, education, healthcare, capital, employment, and legal rights – the necessary foundations for sustainable prosperity. A family with access to these foundations will buy their own shoes – the right shoes for them, at the right time for them.

It’s important to follow our impulse to help others. It’s also important to be wise about how we go about providing that help. To address the right problems. To use tools of empowerment, so that those in the grip of poverty can stand up their own lives and their own communities. No joke.

Heroes

Dr. Muhammad Yunus
Professor Muhammad Yunus

Most entrepreneurs, myself included, are independent spirits.

The “independent” part has always been a big piece of my personality. I’ve never aspired to be “like” someone, and when those stock interview questions show up I’ve always cringed at the one that asks “Who is your hero?”

That is, until 3 years ago.

Three years ago, I found myself with heroes, and someone I want to be like.

In 2010, I heard Professor Muhammad Yunus speak about humanity. He spoke extemporaneously for 45 minutes, sharing first hand stories of mothers and daughters whose lives had been transformed through education and opportunity; a vision for the end of the man-made condition of poverty; a call to action to all people to end the unacceptable suffering in our worldwide community.

It was the first time I ever had the thought, “I want to be like him.”

Yohaustria Pena, Hero
Yohaustria Pena, Hero

That same year, I went to the Dominican Republic and to Chiapas to see the work of poverty-ending microfinance institutions in the field. I saw for myself the bravery of women standing up against cultural oppression; taking steps that no woman in the history of her family had ever taken before so that her children could go to school; finding the right balance between personal initiative and working as a community; taking risks and succeeding with so little capital and time that they put entrepreneurs like me to shame. I found my heroes.

When I first started Soap Hope, my intention was to create a strong example of social entrepreneurship so that we could make a huge impact in ending poverty, both with our own company and through others adopting the model and learnings that came out of Soap Hope. And while Soap Hope did grow again for the third year in a row, and we did fund over 10,000 days of microlending for women entrepreneurs this year, most days my vision for Soap Hope still seems distant and fragile to me.

As if on cue, this week a friend sent me a video about social entrepreneurs, and when I clicked play I heard the unmistakable compassionate voice of Professor Yunus – there once again to motivate and inspire. Every time I hear his voice, I hear my calling. And when I go inside and ask what I’m to do, Soap Hope always is the answer I see.

When someone buys one bar of soap from us, it funds one day of microlending for a woman. So I say, “A bar of soap is a day of hope.” This spring, I’m starting a new initiative at Soap Hope called “One Million Days of Hope” – to fund one million days of microlending through sales and partnerships with other companies and organizations.

Everywhere Professor Yunus goes, he looks for ways to create partnerships with people, companies, and institutions small and large, to further his vision of ending poverty in our world. Yes, I want to be like him. So I will do the same.

One million days of hope would mean 100 times the impact we had last year. It would provide tools and opportunity to thousands of the women who have become my heroes. That’s not something I can do alone. You’ll surely hear me ask you for ideas and action, partnership and participation.

Watch for #onemilliondays. Think about how we can partner together. Expect a call from an independent spirit.

Stop Talking About The Poor

  • “I’m looking at the best models out there for using business to solve social problems.”
  • “This is so hard – I’ve been looking for the right organization to work with for almost a year. I don’t want to waste my time working on something that won’t really make a difference.”
  • “One day, I hope to get involved in ending poverty, so I’m studying as much as I can today.”

These are a few of the things I’ve been told by people in the last month who have e-mailed and called because they are passionate about social entrepreneurship and microfinance.

I hate to be the one to break it to them, but talking with other people about helping the poor does not help the poor. While you are talking, they are still hungry.

If you want to discover the best model for combining business and social problems, the very first thing you should do is start a business to solve social problems, or go work for one – right now. Then you will learn what is really involved in a social enterprise. I can tell you from experience, you will be throwing out almost all the ideas and opinions you have about the matter until you do it yourself.

If you want to find the best organization to work with, go work for any organization that is focused on changing any life besides your own – right now. During the year you have been carefully avoiding wasting your time, you have wasted a year.

If you are studying as much as you can today, you have forgotten that while you are studying the problem, a child has missed her opportunity to go to school, so the cycle of poverty is being extended an entire generation in her family. Why are you studying to work on the problem later? The problem is now – work on it right now, and you will learn more than any book could ever teach you.

I’m not saying we shouldn’t talk, reflect, or study. But I have noticed there are too many people who are mostly talking, reflecting and studying. Ask yourself now, am I spending more time talking about changing the world than I am actually working on it? If so, I suggest correcting that imbalance – now.

Stop looking for the perfect way to participate. Go do anything for those in extreme poverty, anywhere – not for you, for them. Not a conference – first provide a meal. Not a study – first send money for medicine. Not a meeting – first fund a water well.

Raise money for Grameen Foundation. Volunteer with Women For Women. Buy a scarf from WORN. Fund a Bank of Hope at Esperanza International. Donate services to CitySquare. Start a weekend business that funds microloans.

Stop talking about it, and do it.

It’s not enough to teach a man to fish (or, Poverty is a Process)

Almost everyone knowns the proverb: “Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.”

But what good is teaching a woman to fish if she cannot afford a fishing pole? If her children are sick and she cannot leave them? If a middleman buys her fish for a pittance and keeps all the profit, because she cannot determine the market price?

Most people view poverty as a problem, as a situation. But poverty is actually a process. The many intertwined aspects of the poverty process are self-reinforcing. In order to end the process, many simultaneous individual problems need to be addressed at the same time.

Think about a 28-year-old woman in Africa who is currently trapped in the process of poverty:

Unlike us, she was not taught to read. Did you ever learn anything from a book? Do you remember every recipe you will ever make? Do you ever use a list to remember what to do? Have you ever read how to repair something, or how to use a medicine?

Our friend cannot learn anything except what she experiences directly in person. She must remember everything important in her head. There is no to-do list, no planning. No recipes. No new food preservation technique unless she can remember exactly how to do it when shown. She certainly cannot make any written agreement with a buyer of goods. If her children need three medicines, she will need to remember the dosage and timing of each one by the color and shape of the pill. Can you do all this?

Unlike us, she was not taught how to do basic math. “How much feed can I afford to buy to raise my livestock, given the amount of time it takes to mature them and the price at the market?” “Given the cost of this thread and dye, how much do I have to be able to sell these shawls for to make it profitable?” It is almost impossible to operate the simplest trade without some basic math skills.

Unlike us, she does not have water nearby. Have you ever been thirsty for a few hours? Do you remember how slow you become, how tired it makes you , how it becomes difficult to think and the mood it puts you in?

Our friend cannot fetch water because it is 2 hours away, and she must be with her baby, prepare food and tend to her family’s other needs. So her two oldest sons, perhaps 8 and 10, walk with containers to fetch water for the family. It takes 2 hours to get there, and it takes 3 hours to get back. Have you ever carried water? It is heavy. The boys make this trip 3 times weekly. This trip is one of the main reasons they are not in school. They, like their mother, will not learn to read and write, perpetuating the poverty process.

There are many other dimensions to the poverty process. Chronic illness, climate change, political unrest and many other forces can create instability that makes it difficult to thrive.

Because there are so many interacting factors that work to keep people in poverty, many attempts to address poverty fail. If there are five or six intertwined problems and a program only addresses one or two, the program won’t work.

One of the most powerful tools for addressing all the elements of poverty comes in the form of nonprofit microfinance institutions. In the absence of an industry term, in my group we call it “Microfinance Plus.” Microfinance Plus institutions deploy programs that enable the local population to address all their poverty drivers. They provide small loans to women who use the capital to fund a personal business, like making something to sell at market, opening a kiosk, raising livestock, and yes even fishing. But these loans are also tied to antipoverty programs like literacy training, math skills, healthcare education, schools, and highly local needs like how to preserve an abundant local food or how to avoid a particular local pathogen.

They also provide the intangible but critical ingredient of human support – also known as “hope.” In many areas, poverty has been present for so long and is so profound that the people need to hear about the possibility for a different and better future for themselves and their children, in order to kick-start the process of working toward that future in a new way.

Now we can see that our old proverb doesn’t give us the outcome we want: the end of the process of poverty. “Teach a woman to read and to do basic math; provide her with affordable sources of clean drinking water, basic healthcare, and business training; give her human support and respect; and enable her children to go to school.” Then you don’t need to feed her for a lifetime. She can do that for herself and her family, just as we do.

The Moneylender in Microlender’s Clothing

When Dr. Muhammad Yunus first went into the villages of Bangladesh to study the causes of poverty up close, he found the people oppressed by loan sharks or as he calls them “moneylenders.”

Dr. Yunus’ model involved lending small sums of money to women in self-motivating, self-regulating groups of women for the purpose of creating sustainable income. His approach has improved the lives of millions of people around the world. The model became known as “microfinance.” One key success factor in his model is that the lender’s primary goal is not to earn a profit; instead the first goal is to lift women from poverty.

Dr. Yunus’ approach became so large and successful that it attracted the attention of corporate, banking and political interests around the world – most of which do not have the cause of ending poverty as their priority, but rather see profit potential in lending to the world’s poorest. These interests now dominate the microlending landscape. They have usurped the term “microfinance.” The most egregious of them are big, sophisticated, well-financed and powerfully marketed versions of the moneylenders that Dr. Yunus fought so hard against.

I have called on Grameen Foundation and other anti-poverty leaders to create a new, legally protected term for the kind of microfinance that is designed to end poverty, and to develop an international certifying body that will let philanthropists, foundations and social entrepreneurs have a clear picture of what groups are practicing anti-poverty driven microfinance. Minimum standards and practices would be developed by this international body and would evolve as our knowledge, tools and methods evolve.

In the absence of a branded term, those in my circle who work in anti-poverty driven microfinance have begun to call it “Microfinance Plus.” Microfinance Plus implies the following to us:

– The lender is either not for profit, of if it is a for profit institution (which is required by law to engage in lending in some countries) then the lender is owned almost exclusively either by a not-for-profit or by the clients of the lender themselves. Another way to think about it: the lender’s profits are not for the enrichment of anyone except the poor.

– Although failure to pay loans may impact a borrower’s ability to borrow again, the lender never punishes a borrower for failure to pay. Another way to think about this: a borrower’s financial situation is not to be made worse by having taken a loan, whether repaid or not.

– Money is only loaned for purposes of investment (for example business, education, home, and so on) and the borrower must demonstrate a plan for repayment. Loans are never given for paying back other debt or for purposes that do not increase the borrower’s ability to improve her financial situation.

– The lender, whether itself or through partners, actively works with its clients to eliminate the drivers of poverty in borrowers’ lives. These drivers are different in various parts of the world, so each lender creates its own approach. Some common drivers of poverty that are currently addressed by Microfinance Plus institutions are: lack of affordable clean water, lack of basic health education, malnutrition, illiteracy, chronic illness, lack of affordable childcare, and cultural or political oppression. There are many more. Each organization addresses its local needs.

It is imperative that the anti-poverty driven microfinance industry move quickly to create a protected term and a certification process, because without it we cannot drive large capital flows into Microfinance Plus institutions. Companies like my business Soap Hope (which invests all its profits into Microfinance Plus institutions) and philanthropic donors and investors need a simple and reliable way to identify these groups and to hold them accountable. By making the investment to define and certify what qualifies as anti-poverty microfinance, our industry will be able to grow the number of people served under Dr. Yunus’ original intent.

– Salah Boukadoum

Stay in touch with me:
salah@soaphope.com
@soaphope
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