The World Economic Forum at Davos is a lens for us to see what really improves the lives of billions across the planet. One topic is economic growth and social inclusion, and there’s little doubt that the one-percenters attending have the capacity to achieve both. Yet even these sessions seem more focused on profit than social impact—and a broken nonprofit model.
Maybe that’s because our progress is hampered by traditional notions of philanthropy, social inclusion and impact.
It used to be that, if we wanted to help those less fortunate, we followed the 19th century example of the Carnegies and Rockefellers and gave to charity. Quite a bit has changed in the past 200 years and it begs the question: Does this model still work?
Industrial philanthropists helped found libraries, universities and social service institutions. That handful of nonprofit organizations has grown to 1,484,229 nonprofits (including 100,000 private foundations). All have good intentions, but what is the impact of each one? And how can a donor possibly choose well with so many options to research?
A recent study of nonprofits in the county where I live (Marin, Calfornia) showed that 45% of U.S. Nonprofits have budgets of less than $100,000—in Marin, nearly 2 out of every 3 nonprofits exist at a subsistence level. Which leaves me wondering …
How is it possible to pay a capable staff person and deliver program results for less than $100,000 a year?
The structure of a nonprofit deprives it of the most critical piece of knowledge needed to make a significant impact: a market mechanism. The beneficiaries of nonprofit services are, by definition, not the ones paying for those services. As long as a nonprofit can find donors to fund programs, it can continue doing what it does—without any consistent feedback loop linking program quality, impact and cost.
Profit incentive is not necessarily a bad thing.
The evolving social impact sector offers the best of pure philanthropy and pure capitalism. New hybrids allow social impact and financial validation. Impact investing is no longer the realm of the super wealthy. (And if you’re not hearing about it from your financial advisor, switch advisors.)
Impact investments, B-corps, gender lens companies, and social enterprises are exciting developments that were not available to the “robber baron” businessman of the 1800s. LInking the creation of social change and capital means provides the missing link of market validation: social change that works will also make money. Even when subsidized, social enterprises offer real-time data on solutions that create meaningful impact. Better yet if they’re scalable business models that, once proven, can expand to reach even more of those in need.
By this measure, success will drive more funding to the model from socially-minded investors. It will also allow 501(c)3 boards to govern more effectively: they will have a business model that works (or doesn’t) rather than having to rely on the executive director’s word that the program works. And it’s a rare nonprofit, indeed, that has truly sustainable funding, rather than living payroll to payroll.
Shifting investments towards ROI + social impact could fundamentally change the way global capital flows to solutions for our most intractable social problems.
Now if only that were the conversation this week at Davos.