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.

Either Or, Dallas

“How can you be focused on global poverty when Dallas has its own poverty problem?” You can replace poverty with education, justice, food security, or slavery – I hear this concern from institutions working on Dallas’ serious social problems.

Many of my mentors and heroes – and sheroes, thanks Catherine Cuellar! – are people in Dallas who have dedicated their lives to solving our own poverty, education and justice challenges. I don’t want anyone to think that I’m diminishing the scale of the problems we face in Dallas at all, or to minimize the work that many passionate people are doing in Dallas.

I don’t believe in the either/or of working on global scale problems or local problems. In fact, I believe in a different either/or: either focus on the best, biggest, scalable solutions for all humanity, or miss out on tens of thousands of people whose minds, talent and resources can pitch in to solve our city’s toughest problems.

I’m asking us to consider a different strategy for our city – both for its problems, and for its potential.

My vision for Dallas is to become the Impact City – the center of the world for solving humanity’s greatest challenges. That center is going to emerge somewhere. If you work on our local social problems, I propose that you should actively support the emergence of Dallas as the Impact City:

  • Would it be better for our city if the greatest minds working on scalable poverty solutions live in Seattle, or in Dallas?
  • Do we want the top innovators from around the world working on improving educational outcomes for poor children to be concentrated in New York, or in Dallas?
  • Do we want the top global-scale foundations investing in food desert solutions to be located in Chicago, or in Dallas?
  • Which gives us a better chance of solving our local homelessness problem: if thousands of social entrepreneurs working on improving the lives of billions of people around the world are concentrated in London, or in Dallas?
  • What will happen to the city that invites tens of thousands of global-scale thinkers, social innovators, compassionate and passionate and committed people who dedicate their lives to solving deeply challenging human issues – do we want them to volunteer for nonprofits in Dallas, to be on the boards of the foundations in Dallas, to mentor the millennials of Dallas, to engage the corporations in Dallas, to teach at Dallas universities, to invest in Dallas social impact funds? Or is it better if they live in Cincinnati or Detroit?

How do we bring this energy to the city? By creating irresistible programs in Dallas that bring together the greatest minds and resources for global-scale impact. Once they are here, those minds will apply their passion and talent to the city’s challenges as well.

By bringing energetic innovators and a resource-rich ecosystem to our city, a whole new dynamic for solving Dallas’ local problems will emerge. Impact City isn’t just for the world, it’s for Dallas too.

We’ve already defined several powerful programs to launch the Impact City initiative, to become that magnet for impact organizations to come to the city. I’ll share them in upcoming posts – stay tuned.

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!

The Social Entrepreneur’s Scaling Dilemma (and One Solution)

It’s rare for a social entrepreneur to get through the gauntlet of hurdles to reach that amazing milestone she strives for: a functioning, growing, sustainable business that is solving a core problem of humanity.

But even once she gets there, she faces a decision that can be excruciating: I call it the social entrepreneur’s Scaling Dilemma. Scaling strategy is yet another area where impact organizations face an either/or decision that profit-only businesses don’t have to make.

A traditional business has only one thing to maximize: profits. Well-run businesses optimize their prices based on what will produce the greatest profit, not what will produce the greatest number of customers. If a company believes that raising prices will increase profits after taking into account lost customers, then that’s what it will do.

But for a social entrepreneur, raising prices can be heartbreaking when the customer is disadvantaged. Not only are fewer clients served by the mission; those that are no longer able to afford the service will be the most disadvantaged in the pool.

A clean water service that charges just enough to break even will serve the largest possible pool of people that it can reach. It also leaves the most money in those people’s hands as possible. If the facility increases its prices, it will be more profitable – but less people will be served, those that are served will have less money for other survival needs, and those that can’t afford the water at all anymore will be the poorest of the population.

A water business run as a for-profit company with ROI as its primary objective will find the perfect price to maximize its profits, with no care at all to these social negatives. But for an impact organization, the loss of impact is a terrible side effect of increasing profits.

Now here is the dilemma: those profits that the social entrepreneur is foregoing to serve today’s poor are the same profits that would enable the business to scale. Without profits, there is no self-funding capital to build the next water treatment plant. Without returns, there is nothing to entice investment capital either. So the impact organization, by maximizing today’s impact, has limited tomorrow’s impact.

What should the CEO of the impact organization do? Should she maximize profits today, grow through reinvestment, and then accept lower profits later to increase scale? When should that happen? What if she knows that some people will die in the meantime? Should she pass up investors today, because she knows she won’t be able to downshift later to increase reach by lowering prices? This is a difficult moral place to be for the social entrepreneur.

That’s why social enterprises need a model like Good Returns. It solves the Social Entrepreneur’s Scaling Dilemma. Good Returns effectively says, “CEO, offer your services at the lower possible price while maintaining sustainability. Maximize today’s reach. We will provide the scale capital you need so you can maximize tomorrow’s reach, too.”

Good Returns works because it creates new value by providing businesses and their investors with a reason to invest capital into impact organizations. This capital provides a missing piece that solves the Scaling Dilemma.

Profits are the end for traditional business. For impact organizations, profits are not the end – the mission is. But profits are a critical tool that provides the sustainability and scale that the impact organization needs to achieve its mission. This need to focus on both mission and profits creates a multitude of challenges for social entrepreneurs. We need to be working together to find structures and devices that transcend these dilemmas.

If you have struggled with the Scaling Dilemma, please share your thinking process and the decisions you have made. If you have found other solutions to the problem, please share your approach so other social entrepreneurs can learn. Comments are open below.

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.

The Easy Way

I once told my friend Lucy something I secretly had been thinking about for a while.

I told her I wanted to get rid of the few things I keep around in life, and move to the Dominican Republic to work for Esperanza International – an anti-poverty institution that I love and admire.

I’d spend half my time at headquarters, helping to improve operations and fundraising. And I’d spend half my time in the field, working directly with the women who are empowered by Esperanza.

It’s so compelling to me. For the rest of my life I would know that I had helped, hands-on, some of the most vulnerable people in my human family. I would forever have those memories, being shoulder to shoulder with the women and the field workers, changing lives. I would have the incomparable experience of helping to build a first class poverty fighting institution.

Lucy is one of the most practical people I know, so I thought she was going to tell me that wouldn’t be very wise for my career or retirement plans. But that’s not what she said at all. Her eyes flashed, and she spoke sharply, so I would remember it.

“Salah! You’re being selfish!”

It wasn’t the reaction I expected after just explaining that I wanted to get rid of all my worldly possessions and move to another land to help impoverished women.

Lucy said, “You’re mixing up feeling good about what you do with actual impact. There are many people who can go help the women of Esperanza. There are less that can help improve the operations of Esperanza, but there are still a lot. But you told me that you are working on a business model that could enable thousands of entrepreneurs to impact the lives of millions of people around the globe.”

“Your problem,” she said, “is that you are scared that you might fail. If you strive for something really big and really difficult, the likelihood of failure is high. You might waste precious years in your effort to create a platform to empower millions of lives. You might be left with nothing to show for your work. But if you don’t make the attempt, you will certainly not achieve your potential.”

“If you go to the island, the likelihood that you will help a few people is very high. It will certainly make you feel good. But you will be squandering any chance you have at making a big, worldwide impact. There’s nothing wrong with that – but see it with clear eyes. It’s selfish.”

If you are a social entrepreneur, I hope you have a Lucy in your life. Whenever I have a difficult decision to make, I remember what she showed me that evening. It helps give me the courage to go all-in. It keeps me from accidentally taking the easy way.

Thanks Lucy!

I’d like to hear your stories about risk taking and impact. Comments are open, or e-mail me at salah@soaphope.com, or connect with me on Facebook.

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.