The nonprofit sector in the US is very fragmented. GuideStar estimates as of July 2015, more than 1.5 million nonprofits registered with the IRS as tax-exempt, not including 6000 nonprofits not registered with IRS but included in GuideStar database. Nevertheless, the nonprofit sector is the third largest workforce in the United States, helped by the emergence of new age philanthropy, social entrepreneurship and innovation. The US nonprofit workforce ranks third in size among the 18 major US industries, behind only retail trade and manufacturing.
An analysis by Bridgespan revealed that very few nonprofits could recuperate their profits when accounting for their direct and indirect costs.1 Many nonprofits are becoming more entrepreneurial, diversifying into alternate sources of funding. Even mainstream nonprofits have become entrepreneurial; Chronicle of Philanthropy publishes a list of top 400 nonprofits in the US ranked on the merit of fundraising. The growing importance of self-financing in the social sector shows the blurring edge between nonprofits and social enterprise.
# New Age Philanthropy. Rise of the Geeks and Technology for Giving
A resurgence in philanthropy through an altruistic thrust by young technology billionaires has made the social sector more transparent, causing a paradigm shift in the prevailing social business model. The structural shift boosted nonprofits efficiency and channeled social entrepreneurship. In recent years, new age philanthropists like Bill Gates and Melinda Gates, Paul Allen, Pierre Omidyar, Thomas Siebel, Michael and Susan Dell to name a few, brought more accountability into the nonprofit sector. The significant structural change brought by new age philanthropists resulted in an increase in capital resources, innovation, and technical know-how within the giving ecosystem. The new age of giving percolated among many billionaires and millionaires around the world, increasing the number of philanthropists. Example, Warren Buffet and Bill Gates giving pledge movement. Pic source below: givingpledge.org.
— Bill Gates (@BillGates) April 23, 2018
Focus on critical sectors, including defining a measurable mission, example, eradication of malaria by a specific date brought a renewed focus on addressing critical issues facing the society. Bountiful budget helped in designing creative solutions as well as attracting the best talent in the industry. A formative change in philanthropy started through a rigorous scientific method for identifying and evaluating critical solutions using statistics and other data-driven models. Furthermore, new age philanthropists are usually successful tech entrepreneurs, well-educated with tangible skill sets, who leverage their contacts to motivate and collaborate with other entrepreneurs, government officials for sustainable social missions.
“Warren Buffet has pledged 99% of his net worth to charity.”
The new age philanthropists provide an impetus, bringing about a mindset change around the world with the rise of for-profit social enterprises, think tanks, micro-lending organizations, and foundations to work towards measurable social change. Philanthropists today take an active participatory role, driving sustainable social change by fostering innovation and best business practices in nonprofits. Further, philanthropists enable social entrepreneurship within the business ecosystem.
# Technology, New Investment Avenues and Social Transformation
Giving has evolved into an impact-driven social transformation mushrooming into evidence based philanthropy. Further, technology plays a pivotal role in bringing awareness and collaboration for social causes complementing the rise of millenniums as a percentage of the global population. A joint effort by countries in implementing a social transformation through MDGs and SDGs boosted global philanthropy.
“The Digital Cooperation agenda backed by the United Nations envisions emerging technology as a key enabler for social transformation and inclusion.”
Microfinance, crowdsourcing, and impact investing became potent tools in helping the less privileged in the society through social innovation and entrepreneurship. Few nonprofits have built a sustainable business model using internet through crowdfunding to connect investors and small and micro social entrepreneurs. Kiva, a rare exception in the micro-funding space, effectively leverages technology for international development. Kiva’s business model keeps operational cost minimal by eliminating intermediaries and connects investors with social entrepreneurs and students on an online platform. Kiva model limits overheads, saves costs, and improves efficiency. Grameen Bank is an excellent example of a micro-finance bank providing micro capital effectively at the bottom of the pyramid for funding, sustaining, and capacity building purposes.
China has done a commendable job in leveraging technology to power inclusion using platforms like crowd sourcing, blockchain. etc. China is using blockchain technology to kick-start a philanthropy revolution within the country. Recently GCNI organised a national convention in India to facilitate nonprofits, businesses and wannabe social entrepreneurs on pioneering solutions for SDG implementation in India.
In recent years impact investing has become increasing efficient deploying capital with above average returns in social sector. McKinsey estimates impact investors making above average IRR (Internal rate of return) in India. Innovative financing using Blended Finance are backbone of Public Private Partnerships model in developing and low income countries especially in infrastructure sector. The Global Impact Investing Network (GIIN) estimates impact investing assets under management to be $502 bn with 1340 organizations managing capital. However, this is still less than 1% of global capital markets with asset managers dominating impact investing with a market share of 51% viz a viz development finance institutions (27%).
# Venture Philanthropy, and Social Entrepreneurs
Ease of capital for social entrepreneurs pioneering solutions at the bottom of the pyramid became enablers of social change. Companies like Ashoka, Rockefeller Foundation, Avishkaar, Acumen, and Bridgespan help facilitate seed capital and expertise to help develop and scale up the business model. Scalability of businesses is a significant hindrance for social enterprises, especially for those operating in the niche segment.
The role of venture philanthropy in encouraging social entrepreneurship cannot be understated, especially during the 90s and early part of this century. Venture funds gave preference to the social return of capital, provided seed capital and mentored wannabe social entrepreneurs to set up successful businesses.
# Social Entrepreneurs and Social Impact
“A social enterprise is defined as a business venture created for a social purpose-mitigating to reduce a social problem or a market failure and to generate social value while operating with financial discipline, innovation, and determination of a private sector business.”2
Social Enterprises are self-sustaining businesses making a social impact at the bottom of the pyramid. The social enterprise works through various business models; one example is of an integrated social enterprise, wherein they share costs and assets through shared business activities.
Scojo Foundation in India, a healthcare social enterprise, specializes in providing eye-care to less privileged people in the society. To fund its initiative in providing free ready-made reading glasses to rural people in India, the foundation launched its for profit operation in urban areas. Leveraging shared resources, Scojo subsidized free reading glasses for poor people from the profits generated by the urban eye-care section. It started as a nonprofit and realized it could not be able to sustain its business over a longer time. The concentric diversification model into an urban segment helps it to self-finance its mission in providing healthcare to people suffering from presbyopia- blurry close vision. Arvind Eyecare in India is another excellent example. Project Shakti, a HUL initiative, empowers rural women in India providing a sustainable livelihood. The project has over 1,00,000 rural women entrepreneurs across 18 states.
“Michael and Susan Dell Foundation has deployed 60–70 percent of their funds in India as impact investors in three years.” McKinsey
# Social Entrepreneurs Complement Nonprofits, Businesses, and Government
Philanthropy aids nonprofits and social entrepreneurship, to become more efficient and impactful. In many cases, social entrepreneurship form alliances with other nonprofits bringing in better management and innovation, working as partners in eradicating the same social problem. Nonprofits have their own space in addressing social issues, especially in poverty eradication programs, where it’s challenging to build a sustainable business model for low income and less privileged people open to price sensitivity. Social Entrepreneurs, in turn, complement nonprofits in their goal to serve less privileged people effectively. Take the case of Minneapolis where philanthropy gave rise to community service, which in turn helped nonprofits.
Social enterprises are unique in partnering with corporates for a symbiotic good. Share Our Strength leveraged its mission of eradicating hunger through a partnership with American Express. Percentage of proceeds of purchase through American Credit cards go towards a fund providing food for the less privileged people. The campaign raised money and consciousness for hunger relief and Share Our Strength.
The new wave of giving has a trickle down effect on a majority of companies operating within the society’s ecosystem. Even large multinationals are involved in bringing a sustained social change. through best social responsibility practices. Pampers, has partnered with UNICEF in its worldwide initiative to eliminate maternal and neonatal tetanus (MNT) in developing nations thorough its flagship one pack = one vaccine campaign. Launched in 2006 in UK, the campaign has been highly effective in alleviating MNT in developing countries.
# The Pitfalls Ahead
Nonprofits and social enterprises risk losing their focus on mission while generating income to self-finance their business. It’s essential to have a very diverse and autonomous board of directors including philanthropists to keep an active vigil on purpose of incorporation and correct any deviations from the vision and mission.
The proliferation of social enterprises effectively addresses market failures in the social sector, supplements nonprofits in niche segments, drives social innovation percolating down to nonprofits through collaboration. The symbiotic relationship improves efficiency through best business shared practices. Social Innovation leads to better accountability, social impact, and productivity making social sector pie to grow through charitable grants, philanthropy, venture & impact investment, and government funding. In recent years, innovative forms of finance are being used to drive sustainable social entrepreneurs including blended finance previously used in the private sector. Blended Capital aims to address the $2.5 trillion gap in capital funding towards the successful implementation of Sustainable Development Goals (SDGs) by 2030.
1. Should nonprofits seek profits?
2. Social Enterprise Topology: Kim Alter