Now the Good News...

Venture philanthropy. Patient capital. For-benefit corporations. What if you could actually make a profit while changing the world?

The problem with trying to change the world is there's no money in it. That's pat and arch, of course, but also mostly true. A for-profit technology startup wins seed capital, then venture funding and an IPO windfall, in exchange for a piece of the likely future action. Meanwhile, most social entrepreneurs attack daunting education, environmental, and health problems in hand-to-mouth mode, seeking alms and living off their wits. As an operating strategy, it works, but just barely. Though some $300 billion floods into the U.S. philanthropic world each year, it flows jerkily, with uncertain reason and, too often, unknown effect.

So what if it all worked . . . better? What if money traveled quickly and efficiently to the points of greatest need, fueled by the sort of incentives and supported by the infrastructure that make for-profit markets hum?

In fact, there has been an explosion of diverse experiments, many of them engineered by onetime Wall Street heavies, that attempt to bring new capital—and capital-market dynamics—to the realm of social good. The more modest of these efforts aim simply at cutting through a balky, foundation-clogged funding morass, steering philanthropic dollars to where they'll be most effective. A few grander schemes involve startling—and occasionally, we'd argue, impossible—leaps of imagination.

We witness this productive tumult through the prism of the FAST COMPANY/Monitor Group Social Capitalist Awards. For five years now, with our partner, the global consulting firm Monitor Group, we've identified, evaluated, and celebrated top-performing nonprofit organizations. (You can meet this year's 45 winners here.)

From the start, we have assessed such organizations' social impact—what they actually accomplish—and how they do it. Successful social entrepreneurs, like any great companies, innovate not just on the products and services they offer, but also on their business models. Sustaining themselves financially is central to their ability to deliver the good.

Increasingly, these nonprofits are tapping into funding sources that borrow the language and sensibility of for-profit markets. They can win "seed capital" from the Echoing Green Foundation, which selects about 20 fellows annually to receive grants of up to $90,000, or later-stage financing from New Profit Inc., a "venture philanthropy fund" that pools individual donations, targets a few "portfolio" investments, and offers help with strategy and management.

And now, there's "patient capital." The idea emerged from the success Teach for America had raising $20 million in 2001. TFA targeted a syndicate of wealthy individuals to provide support for long-term growth, bypassing foundations that typically fund only startups or specific projects. George M. Overholser, a cofounder of Capital One Financial, Goldman Sachs veteran Charles Harris, and others then institutionalized the idea, bringing in $15 million for College Summit and another $60 million for TFA to fuel long-term expansion. Now, Harris is raising money for a new nonprofit fund called Sea Change Capital, dedicated to this "equitylike" trench.

Such efforts, observes Katherine Fulton, president of the Monitor Institute, can fill "a tremendous need to rationalize funding for nonprofit entrepreneurs." It's not clear yet that they're attracting more dollars, but the idea behind these market-based schemes—which demand greater accountability or, with online operations like Donors Choose and Kiva, transparently connect donors and beneficiaries—has the potential to attract a new, more investor-like giver.

Of course, an investor-like donor isn't an investor, just as venture philanthropy isn't venture capital and recent attempts to create nonprofit "stock markets" aren't actually stock markets. (The brand-new Altruistiq Exchange says it will let nonprofits list virtual "shares" that donors trade based on their appraisal of the organizations' performance. Since there's no financial basis for that appraisal, nor any equity to own, the premise seems shaky.) Ultimately, these innovations still rely on tapping the philanthropic urge.

There's far greater upside in the prospect that investors could actually make money from the social sphere. Look at microfinance. A generation ago, pioneers such as ACCION International supported nonprofit financiers who, in turn, lent small amounts to seed entrepreneurs in developing nations. Now, more and more of those lenders are becoming for-profits. More telling, for-profit firms such as Developing World Markets are pooling and securitizing loans to micro-financiers. The credit crunch has decimated demand for securitization this year, but DWM is successfully marketing pooled bond and equity funds to big banks and other institutions.

This sort of deal making is accelerating, and the consequences could be profound. "We're going to be surprised by how ­quickly the finance industry moves into this market," contends Bill Drayton, founder and CEO of Ashoka, a global network of social entrepreneurs. Ashoka is trying to identify and nurture 160 people who will pioneer these financial innovations. "The finance business has a highly sophisticated ability to bring clients and funders together, and there's going to be no shortage of deal flow."

Drayton's notion is that most of those deals will yield market returns. (One model is the "human capital contract" that Felipe Vergara, a Wharton-educated Colombian, is piloting in his home country and in Chile. His idea: Students borrow for college, then pay a fixed percentage of their income for a fixed period after graduation. Investors buy shares in a fund that pools thousands of loans, so their return reflects the combined success of graduates across professions and income levels.)

But there's mounting evidence that for-profit investments don't necessarily have to generate full market returns. Calvert Investment Foundation, another Social Capitalist Award winner, has seen steady growth in holdings of its Community Investment Notes (from $91 million at the end of 2005 to $118 million as of July 31, 2007). Investors choose their return, up to 3%; if they're happy with 1%, and some are, that's what they get. The capital goes to microfinance, small-business development, housing, and so on—again, at investors' discretion.

The critical assumption behind Calvert's notes—that there are investors who will be content with a below-market financial profit if it's accompanied by demonstrable social return—would have been a nonstarter a generation ago. The increasing acceptability of that trade-off is driving the creation of a new sort of enterprise that integrates financial returns with social good. Sometimes called "for benefit" companies, these hybrids have access to capital markets, but they're explicit that profit isn't the top priority, or at least not at the expense of the workers, the environment, or the community. New Leaf Paper, for example, has created a foundation aimed at decreasing demand for its products, and Equal Exchange has encouraged competition in its fair-trade food space, reasoning that new entrants will enlarge the market and better serve low-income farmers.

Such enterprises and the investors who love them are ­clearly still the exception. "I think we're 40 or 50 years into a process that will take 70 years to happen," says John Elkington, founder and chief entrepreneur of SustainAbility, a consulting firm that specializes in social-responsibility issues.

But a market infrastructure is emerging to support these companies. In July, an outfit called B-Lab, founded by three college buddies who had enjoyed some success in private enterprise, unveiled its roster of 21 charter "B corporations." (That's B, as in "benefit.") To qualify, companies have to demonstrate transparent, comprehensive reporting on social and environmental performance; restate their articles of incorporation to reflect nonfinancial stakeholders' interests; and pay up to 0.1% of revenue to license B-Lab's branding and technical support.

"Traditional capital markets have a massive amount of infrastructure built up over the years," says Andrew Kassoy, a former hedge-fund guy who's one of B-Lab's founders. "Capital, laws, tax codes, research, ratings. This sector needs that sort of infrastructure." B-Lab says it's talking with potential partners about creating a dedicated stock exchange for B companies; it's also lobbying for changes in state laws that would make it easier for hybrid for-profits to incorporate.

As for the remaining infrastructure—well, that's happening too. Research firms such as KLD have sprung up to quantify companies' social and environmental performance; these outfits are the would-be Moody's and S&Ps of the for-benefit sector. (We like to think that the Social Capitalist Awards serve a similar standard-setting role; this year, in fact, we launched an experiment to recognize for-profit companies. The winners are listed below.) The Global Reporting Initiative, created by SoCap winner Ceres, recently asked its online readers to participate in an effort to score corporate sustainability reports; the wisdom of crowds, it appears, might cut through all that turgid prose.

No one expects this phenomenon to transform global capital markets overnight. But it forces us to confront an intriguing question: Do we really believe that short-term financial performance should determine access to capital? There's a connection, over the long term, between social good and corporate success. A paper company can't survive if all the world's forests are chainsawed away. Coffee shops do better if bean growers make enough to live on. "Some in the investing public have begun to see sustainability as contributing to the valuation of the enterprise," says Brian Walker, CEO of office furniture maker Herman Miller, one of our for-profit winners. "There is actually the opportunity for value creation in being socially responsible."

Change the world. Make some money. Raise more money, and make more change. It's an appealing prospect. Nonprofits were born because for-profits weren't addressing some market failures—pollution, poverty, illiteracy. Profit won't cure those ills, but it's becoming a bigger part of more solutions. Perhaps it's dawning on us that the cost of capital for changing the world should be lower. Perhaps the capital markets will cut the world a break.

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  • Shel Horowitz

    Fascinating. Of course, for decades there have been many, many entrepreneurs working well within the rubric of existing capitalism to generate money to improve the world, e.g., Ben & Jerry's, The Body Shop--but it's nice to see a growing together of alternative funding mechanisms within the nonprofit community directly.

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