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.
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.
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.)
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.