Moving markets

I've been thinking about philanthropic and social capital markets for several years now. (There are dozens of posts on the evolution of these markets on this blog and this was the primary topic – and title - of my 2004 book) We are currently in one of the most dynamic periods in this area that I've seen in almost a decade. To better explain what I'm seeing, let me clarify the analog from commercial financial markets that I use to watch what is going on.

Commercial financial markets, as exemplified by a stock exchange, need three things in order to function - issuers (of the stock. In other words, companies), investors, and intermediaries.* The first two are the sellers and buyers of the stock, the intermediaries are the banks, brokers, and others who make the deals happen. You need something to sell (stock), someone to buy (investors), and someone to make the deal happen. Sometimes this is all done in private (friends and family investments, angel investing, private equity, venture capital all happen privately between the two key parties, buyers and sellers). However, if you want to bring the shares to a public market then you need an exchange. The exchange sets rules for selling (listing requirements) that ensure the whole transaction is well documented, the stock is what it claims to be, and that the deal meets certain standards of transparency and truthfulness.

Social markets already have some, but not all, of these pieces. Most of what exists in the social space is actually the equivalent of private deals. We have enterprises (e.g. organizations or companies) and investors (many of whom are funders making donations, but more and more actual investors). There is a range of activity and structure on both sides – from nonprofit organizations to social businesses on the sell side and donors to investors on the buy side. Put together the full spectrum and you get nonprofits and grants on one end and social businesses and investors at the other end. This spectrum can be laid out along an X axis that denotes the expected financial return to the resource provider – to the left, where grants are made, is a resource donation with an expected -100% financial return (no money back). In the middle might be loans or capital only investments – 100% financial return. To the far right are capital plus returns, in which the resource provider seeks return of their capital plus a few percentage points, sometimes all the way up to what would be pursued in the regular markets. These ranges are fairly easily calculated, after all their simple financial ratios.

Where it gets tricky is in the calculation of the social or environmental return. How to calculate the extent of these impacts is a thorny problem no matter where on the financial spectrum you participate. Figuring out the relationship between those returns and financial returns makes it even more complicated. Does a -100% donation (a grant) guarantee a 100% social/environmental impact? Does return of capital (a no interest loan) correspond to more or less social/environmental impact? Does pursuit of a financial return automatically reduce the possible social/environmental impact?

I don’t have an easy answer to the calculation of social/environmental return question, though I’ve been told there are at least 240 methods for measuring it.** The OECD is hosting a global project to measure social progress, they can point you to another few hundred measures. And how the social impact floats in relation to the financial impact, well, lets just leave that to another blog post.

But back to the market analog – the social markets have two of the three needed pieces of the exchange puzzle – enterprises and investors. These happen to be the two pieces that can operate in private deals. And that’s what we have now – a social market of largely private deals. Each resource allocation, each donation is handled as a 1:1 transaction. Enterprises seek money in endless series of one-off grant proposals or investment negotiations. Funders, donors and investors for the most part, do their own due diligence on the enterprise whether that be a foundation program officer review, or an investment grade analysis done by a family office staff person on behalf of a program related investment.

Now, the market is slowly building up parts of the rest of the puzzle. Sites such as GlobalGiving, Kiva, MyC4, SASIX, Give2Asia, etc. provide a portfolio of projects that donors/lenders can support - choosing within an online marketplace and relying on the sites themselves to have done some degree of due diligence on the organizations or enterprises. These markets organize different parts of the spectrum - GlobalGiving and Give2Asia offer grant opportunities, Kiva facilitates individual lending, SASIX offers social investment opportunities and Myc4 lets the individual choose their rate of return (from -100% to 100%+) and negotiate it with the enterprise.

Each of these example markets does a different kind of due diligence, they provide different degrees and types of information on the organizations, and facilitate a different type of monitoring and feedback. An investor/funder/lender cannot readily compare an offering (enterprise) on one site to that on another because the information is not standardized, the processes for the due diligence are not comparable, and the standards of reporting are not interchangeable.

This same pattern has long been the case offline as well, it just took the form of individual foundations or family offices doing their own due diligence on nonprofits. In this model every funder did his/her own due diligence, according to his/her own standards, and did not share it with others or try to use it to leverage other funders. Community foundations, which share due diligence across their unrestricted funds, their field-of-interest and donor advised funds, were probably the first to recognize they could use one set of analysis to leverage several sources of funds. There are also a few notable “syndicate deals” that have been done, such as financing for GuideStar, VolunteerMatch, Edna McConnell Clark Foundation’s work on growth capital for nonprofits, and the efforts of the Growth Philanthropy Network, to name a few. The online markets were the next stage in this changing model, as they conducted due diligence on an enterprise and then make it available to anyone who uses their platform to make a gift or a loan.

So these online markets herald an important shift – from 1:1 private deals between donor/nonprofit or investor/enterprise to public spaces, with some shared due diligence and some insight into who else might be providing resources. However, for the most part, the social capital markets still largely rely on private deals, negotiated directly between the two parties.

I think we're on the edge of the next shift in this model. REDF recently launched a key set of tools on coordinating funding at the grant end of the spectrum. The Gates Foundation routinely packages its funding with other public and private funders. The Nonprofit Finance Fund offers expertise in growth capital, and the Omidyar Network and others have played significant roles in scaling microfinance. The aforementioned Growth Philanthropy Network and Edna McConnell Clark Foundation efforts, SeaChange Capital Partners, and some of the work that NewProfit Inc and some venture philanthropy groups also fall into this category.

The next stage is building resources that can set standards for and accelerate these kinds of practices. One effort is the newly launched Global Impact Investing Reporting Standards effort, which has been re-named The Galilio Project. This work is led by my colleagues at B Corporation and builds off the incredible tools they have built (and my company has used).

This May in London New Philanthropy Capital is convening the first ever meeting of nonprofit analysts. These folks - who come from independent consulting firms, some of the online markets, pools of donor advised funds, and independent agencies such as New Philanthropy Capital, will gather to discuss the "tools of their trade." The meeting is specifically geared toward identifying common principles and definitions and building an association of nonprofit analysts. Should the group be successful, one can imagine the emergence of a set of standard criteria, methods, and reporting templates, as well as some professional definitions, guidelines, and (one hopes) ethical parameters. In other words, this association could be one step toward due diligence of nonprofit enterprises that would meet certain standards, provide an agreed upon level of information and transparency, and be conducted according to publicly available methods. These attributes would allow for comparisons of enterprises assessed under different due diligence practices. It would also allow the comparisons of those different due diligence practices. Such comparability would allow for interaction across the different listing platforms, so that a donor or investor could creditably compare an opportunity from one enterprise with that on another platform.

Then, if real comparability is achieved, we will approach the point where the due diligence providers themselves can be assessed and compared. This would accelerate the development of actual intermediaries in a capital market. They would compete – on quality of work, reputation, price, and experience – to identify, assess, package and bring together deals that serve investors and enterprises. Some might be foundation program officers, others might be independent consultants, some might work for banks, others might be investment analysts – the intermediary space in social capital markets will no doubt be as diverse as its counterpart in commercial markets.

With those three pieces – enterprises, investors, and intermediaries – as well as the rapidly expanding universe of social exchanges and online platforms – the social capital market – from grants to market rate investments, from nonprofits to social businesses – will be fully visible. It will have built a public face from its private deal history. Like I said, there are some interesting things happening in social capital markets.

The changes I’ve just described are part of the present, not the future, so I’m already peeking around the next corner to see what’s there. I’d place some bets on the growing role of visualized, integrated online data, the creation of overlapping global networks, the spread of alternative corporate structures, whole new financial product innovation, regulatory overlap, confusion, and expansion, pervasive opportunities for social action, and the deliberate cooperation, possible consolidation, in all segments of the market – issuers, investors, intermediaries, and exchanges. I’ll be sure to report back as I try to make sense of what I’m seeing.


*Thanks to Peter Clifford of WFE for this language.
** New good thinking on this is taking place under the auspices of the Global Impact Investing Network and is informed by this Monitor Institute report, which has some nice visualizations of these concepts.

The Blue Sweater - book review

I spent a good part of my recent birthday stuck on airplanes, re-routed from connecting flights, and sitting on the tarmac instead of getting home. This was my first birthday since my mom died. This was a perfect set-up for self-pity.

Luckily for me, I was traveling with a Kindle full of reading and one actual book, Jacqueline Novogratz's The Blue Sweater. The upside of my endless date with United Airlines was that I read Novogratz's book in one sitting. And self-pity quickly became pitiful.

I can sum up The Blue Sweater in three words - privilege, power and poverty. The book is a memoir that provides stories and insight into Novogratz's development as a professional and her evolution as an effective change maker. Novogratz and her organization, The Acumen Fund, are now monuments on the landscape of social enterprise, but this landscape was essentially unnamed twenty years ago when Novogratz got started. The stories Novogratz tells of making the case for bringing market rigor, feedback loops, and accountability to poverty reduction efforts are powerful in their context. They may now seem obvious and familiar to many in philanthropy (regardless of whether or not you agree with them) but they were novel and profoundly challenging to the status quo in the 80s and 90s. This seems even more so in the area of international aid in which Novogratz was refining her thinking.

Novogratz's book is powerful in its human-ness. Her efforts to understand her colleagues who found themselves on both sides of the Rwanda genocide are compellingly unresolved, powerful elements of understanding her and her work, and poignant inquiries into why people do what they do. Her honest telling of the mistakes she made in learning about other cultures and holding poor African women to standards of work she honed at Chase Bank all add to her credibility as a change maker, both for the reader and in the work itself. The very timeline of the book is useful to today's social entrepreneurs and philanthropists. Novogratz is no overnight sensation - she tried things and failed, moved from job to job, weighed salary and meaning decisions, and created TPW, Next Generation Leadership, and other programs before launching Acumen. Most refreshing is her absolute awareness of the privileges and advantages she has in doing what she's trying to do. My favorite stories on this point are those she shares not of travels and work in Africa, India or Pakistan but in the Mississippi Delta with a gay, black, female colleague. Novogratz faces, and faces down, sexism, racism, nationalism, and privilege throughout her work, and weaves what she learns into what she is trying to build and the story she is trying to tell. She's not above or separate from these "isms" - rather her life and work are shaped by them and her struggle with them. Much of what we now discuss - return on investment, feedback loops, social networks, market return, sustainability, empowering the poor - came to the forefront of contemporary social change dialogue through the time period and work that The Blue Sweater describes. The story grounds these developments in real people, organizations, and dilemmas.

There are two parts of the book that fell short of my expectations. The first is interwoven with the larger strategic narrative of Novogratz's life - the pursuit of "humane business" successes that could fundamentally ease poverty. Ironically, her discussion of the founding of Acumen, a nonprofit venture fund, leaves out any meaningful parsing of why the fund is organized as a nonprofit. Part of this quibble on my behalf may be anachronistic - the very existence of an Acumen and the work Novogratz has done has helped build social enterprise and new capital structures and financing mechanisms for social change. They didn't exist when she was creating Acumen, she helped build them. So I don't wish to hold her at fault for not choosing an option that did not yet exist. The book, however, would be that much stronger if she - as someone who grappled with the dualism of nonprofit/philanthropic and profit-driven/sustainable - would look at the new middle ground that is growing so rapidly and reflect more deeply on the potential and limitations of that new space.

The second shortcoming is not about the strategies or hypotheses that motivated Novogratz, nor about the results of her work. Rather it has to do with her key lesson from the book - that of learning to listen. She is elegant in her memories of the late John Gardner on the importance of listening. Her personal stories are full of her failures and improvements as a listener, whether it involved new colleagues in India, her parents, Kenyan bureaucrats, or Stanford classmates. She is a compelling advocate on behalf of markets as listening tools and the ups and downs of her many enterprises offer plentiful examples of that. So it is somewhat ironic that the book is sadly missing the voices of those whose lives have been improved by these market interventions. We meet Novogratz, her mentors, her colleagues, and the social entrepreneurs she learns so much from and to whom she brings so much. But other than the little boy in the titular sweater and a sunflower farmer in Pakistan we rarely meet the people whose lives are improved by new irrigation tools, business ownership, or telecom access. We meet the people who use market forces to bring these tools far and wide, but we don't meet (many) of the people whose lives are changed by them. Maybe in her next book.

Random notes on philanthropy

I'm on the road again. What follows are several areas of thought, not necessarily related or coherent:

Volunteers and nonprofits
In a discussion group yesterday with about 30 foundation executives two threads kept passing one another. The first - will this economic moment be one in which the age-old trope about "too many nonprofits" passes on, as more and more npos merge or go under?* The second - commentary on the recent news coverage of waves of volunteers . How did these threads cross? One line of discussion was how to help nonprofits use volunteers well and effectively, when this particular flood of them may very well be highly transient. Another had to do with helping the volunteers stay engaged, without encouraging them to start new nonprofits. And finally, some blue sky talk about perhaps the two phenomena shouldn't just cross - new volunteers and old organizations - perhaps they were the first signs on the horizon of a new ecosystem. No one really knew what that meant, but it sounded good and was fun to think about.

Minimum viable product
Venture capitalists are talking about products that get to market with only the most basic features. These products/services - think iPhone, twitter, Flip video camera - go out to customers in a near raw state and then the developers behind them watch what happens. How do customers use them? What features do they want most, ask for most persistently? This process does several things - it allows for real-time feedback from users to be useful in product development, it lowers the cost to getting a product out there, it (theoretically) brings in revenue faster (assuming first product is not free), and it builds a customer base early on. It relies on being able to "release early and often" (in other words, to iterate fast) It also limits the "oval office" syndrome of only talking to those in your inner circle and then pretending to know what the outside world wants.

What would this look like in philanthropy? Perhaps foundations might engage nonprofits and activists sooner in designing programs and strategies? Perhaps nonprofits might listen to their constituents earlier about what they need, even trying to act as "thru-ways" for that information to get to funders? Is it too risky to do this (life-saving services are not video cameras, after all)? Where does your organization fit on a spectrum from "minimum viable product" to "analyzed ad infinitum and thus perfect in every sense except it lacks any reality testing"?

Bonus bailout conversion foundations
Several rounds of ideas, discussion and tongue-in-cheek posturing about Congress taking back the AIG bonuses and using the money to fund community investment funds, loan pools, job training programs, etc. At least one person proposed taking the $165 million and putting it in the Starr Foundation, created by the founder of AIG. Others (read the comments on the post) thought not. One person noted that taking back these bonuses and a small part of the rest of the bailout funds would allow for a per capita distribution of $1 m per American. If nothing else comes from our current moment, I find it all deeply useful and provocative for getting people to join me in my favorite topic of discussion - how does philanthropy relate to the commercial and public sectors, how is that changing, and what would better look like.



*Somewhere on twitter in the last week I saw a stat of about 52,000 +/- 501 c 3 registered by IRS in 2007 - of course, being on twitter, there was no context for that number. I don't know if its high, low or normal.

Atlas Corp Fellowships - Apply Now

The following is a free public service announcement....

Atlas Service Corps seeks nonprofit leaders from around the world to apply for their 2009-2010 fellowship positions in Washington, DC and Bogota, Colombia.

All expenses are paid -- including a living stipend, health insurance, visa, travel, training, and a $2,500 end of service award. Applicants must have 3 or more years of experience in the nonprofit sector, a college degree, fluency in English (and Spanish if applying to volunteer in Colombia), and a commitment to returning to their home country after one year. Candidates from outside the U.S. are placed at outstanding host organizations in Washington, DC including Ashoka, Asian American LEAD, CentroNĂ­a, Grameen Foundation, TechnoServe, GlobalGiving, and Population Action International. Candidates from the U.S. are placed at organizations in Bogota like Give to Colombia and Oxfam GB. In addition to volunteering full time at their host organizations, Fellows are enrolled in a management development training program and join a growing network of nonprofit leaders from around the world. For more details about eligibility requirements and the application process, please visit: http://www.atlascorps.org/apply.html and watch a short video about the application process here.

Questions? please email apply@atlascorps.org.

The deadline to apply is April 1, 2009.

Foundations - set your content free!

I am working on a book on information, knowledge and philanthropy. This is not news - I've been "working" on this since my last book in 2004. This is the year, I can feel it (Hey, if I can get to "inbox 0" I can write another book! Perhaps what I need is an underwriter or two...anyone interested please give a call. I'd be happy to offer up a logo-emblazoned coffee cup or tote bag.)

Anyway - this is a MUST READ post on sharing information with creative commons licensing from nonprofit change guru Beth Kanter. Here are a few teasers from Beth:

"I believe in setting my content free. It provides a huge return on investment. Here's why:

  • A way to crowd source ideas. People can add and embellish your content and if you have access to the remix, it can give you new ideas
  • It creates a gift economy and that help you build your network
  • It gets your work out there. My photos and blog posts have traveled around the world!"


That said, the more I dig into the role of information in different economic situations the more complicated I understand this to be. I'm reading two very different books that are provoking a lot of thought on this. One, recommended by @jranck (A go-to source on knowledge, health, development, technology, innovation and philanthropy) is "When Nature Goes Public" by Cori Hayden, an anthropology professor at UC Berkeley. This is a deep look at "bioprospecting" - in which drugs are developed from medicinal plants and traditional knowledge. The challenge - how are the monetary rewards from these drugs distributed between the corporations that develop the drugs and the indigenous populations that provide the knowledge? As Hayden describes it, in recent years, due to the efforts of indigenous rights movements and shifts in academic practice the drug companies had a "fragile obligation" to generate some form of "equitable returns" to the communities that provided them the plants and information about how to use them.

Such a commitment - returning the financial value of information/knowledge to marginalized populations - is a worthy goal that benefits efforts at both economic development, human rights, and community health. However, free sharing of information - also a worthy goal per Beth's post - won't advance these kinds of efforts. So different protocols are needed in different settings.

The work of Lightyears IP shows another way that protocols fit into these puzzles. Lightyears IP has helped coffee, cocoa and vanilla farmers in various African countries earn a more fair share of the value of their products. It did this by renegotiating the "value of a brand" - returning 00s of millions of dollars to Ethiopian coffee farmers, for example, "simply" by helping them regain control over their luxury brand rather than remaining at the mercy of commodity markets. I think this work is truly transformative - more on it can be found here. An award winning movie "Black Gold" documents this work.

As an historian, I am trying to understand some of the roots of these various practices of information development and sharing so that I can think about where we might try to head in the future. I finished Steven Johnson's "The Invention of Air" in one sitting - gleefully inhaling this well-told story of Joseph Priestly, 18th century scientist and theologian. Among other insights, Johnson shares Priestly's prescient approach to open sharing of scientific discoveries, hails the cafe society which made it possible, and notes that Priestly offered an alternative to corporate and academic bureaucracies as funders of innovation. (pp 143-146) While transatlantic letter carriers and amateur societies such as The Lunar Society (whose members were the original lunaticks (sp)) were the email and online networks of Priestly's day it was the iterative, open sharing of ideas, and reliance on diverse networks of thinkers from many disciplines that bear the most resemblance to the issues of innovation in the 21st century.

My second current night time reading is "The Science of Leonardo" by Fritjof Capra. I can't help but contrast Johnson's portrait of Priestly with this view of the Renaissance genius Leonardo Da Vinci. Leonardo certainly has Priestly trumped in terms of 21st century name recognition. But Capra makes a key point - Leonardo was known during his lifetime and ever since largely as an artist, not as a scientist. It wasn't until 200 years after Da Vinci's death in 1519 that his scientific notebooks were discovered and the real polyglot genius began to be known. According to Capra, this was no accident. It stems directly Da Vinci propensity to widely share his thinking and writing about art during his lifetime (in addition to painting on every major church in Italy), while keeping his scientific process and inquiries largely too himself. He went so far as to keep his scientific workshop on cables, so that he could lower it through the floor into a hidden room below when he wasn't working. Why? No one knows, but Capra speculates that Leonardo "regarded it as his intellectual capital" and primary source of income. (p 27) Capra's thesis is that Leonardo's talents in art and science were inextricably linked and deserve recognition as a root source of systems thinking, ecological analysis, and even the Gaia Theory. However, since he shared his "art" in ways that he did not share his "science," the true complexity of what Leonardo was up to during his life has only come to light over hundreds of years later.

Thus, Leonardo Da Vinci - whose name is synonymous with genies - wrote of the deep interplay between art, science and imagination yet treated these "disciplines" very differently in terms of sharing information and capitalizing on them monetarily. Priestly demonstrates "old" practices gaining new attention as our tools for sharing grow faster and more global. And Hayden and Lightyears IP demonstrate that the balance of power in a global economy does not default to the benefit of the poor, and our emerging knowledge economy will be no more of an automatically equitable free market than was its industrial or agricultural predecessors.

The more I read the more complex it gets. The process of writing the book will (I hope) force me to navigate a clear line of argument through all of this. I'd also love to build a cohort of similarly interested thinkers to help clear that path. Surely, with blogs, twitter, wikis, and cafes we can "be like Priestly" and the lunaticks, share our ideas like Beth, and collectively advance our thinking on information, knowledge, sharing, economies, globalization, and philanthropy. Please let me know if you are interested, how you'd like to participate, and any tools, resources or networks you are already using or plugged into. And, if you'd like to underwrite the book or the conversation, I'd love to hear from you too. One thing Priestly and Da Vinci had in common - underwriters.


*For a totally different level of book recommendations let me point those with kids (or not) to the new series The 39 Clues. My 8 yr old and I inhaled the first 3 of these over the weekend - traveling through an imagined world of Mozart, Ben Franklin and countless other "big thinkers." The series shows the power of networks extends to young readers' entertainment. This being 2009, it is, of course, more than just a book series, it is also a game and a web site.

What the public sector might learn from philanthropy

This short piece from NPR interviews several foundation executives on the challenges of spending the dollars in the federal stimulus bill well.

http://www.npr.org/templates/story/story.php?storyId=101234127
"The art of doling out stimulus dollars"

I was struck by the juxtaposition of the above story - which relies on the expertise of professionals in setting goals and monitoring them - with the approach of ShovelWatch - a crowdsourced effort to watch those same dollars.

ShovelWatch is a joint effort of PRI's The TakeAway, WNYC, and ProPublica. This effort intrigues me not only as a means of monitoring major spending and policy implementation, but for what it might mean in the raging, lived debates over the future of journalism and news.