The Efficient Market Still Eludes the Sector (Part 2)

In "Now the Good News"; Fast Company captures the current thinking and practice in the nonprofit sector on applying for profit investment concepts - returns, patient capital, social investment funds, portfolio management, seed money, late stage venture capital - to the business of giving.

This is catchy stuff, but not the breakthrough innovation that many would like to hope. It is simply product packaging - one more of the requirements of a future “efficient market” in the social capital marketplace, where capital sources (donors) are connected efficiently with high performing capital uses (nonprofits).

Not withstanding the fancy language, “patient capital” is a donation that represents more money than the nonprofit needs to keep the doors open in a given year. Its use represents better marketing and packaging of a giving opportunity that was already available to any donor.

Better packaging of giving opportunities sells. We’ve argued before that universities and churches capture the lion’s share of individual giving because they are better at packaging (and making the ask).

But better packaging alone will not unlock the flow of donor capital to high performing nonprofits. Patient capital allows the organization to grow, but, in the case of great nonprofits such as Teach for America and College Summit that are highlighted in the article, does little to improve their fundamental drivers of capital sustainability. It is not investment capital, it does not provide a return and it does not increase the ability of the organization providing direct service to people in need to sustain itself.

The rigidity of this country’s legal structures -- either you are a nonprofit or a for profit - reduces our sector to tactics like better product packaging to grow, instead of getting to the heart of what will unlock capital flows from donors.

Fast Company highlights several for profit companies that work within this rigidity to provide social goods. Tellingly, a different article in the same issue highlights the measures many of these companies will take to ensure that their mission is not sullied by future for profit ownership pressures. [Note: Kudos again go to Fast Company for keeping these issues front and center.]

Many of the best in our sector, including several of the 2008 Social Capitalist Award winners, will tell you over cocktails that they would trade a lot to be able to eschew donations for a more sustainable capital source. It is time for our sector to come up with better ways.

More tomorrow on the latest on what the fourth sector network is trying to do about the problem.

Carla E. Dearing