Bill Drayton is founder and chief executive officer of Ashoka, a unique network of more than 1,800 social entrepreneurs in 60 countries. Fast Company wrote about his work in “A Lever Long Enough to Change the World.” For decades, he has preached on the coming — and necessary — convergence of the for-profit and not-for-profit sectors in addressing social change. Here, he discusses recent changes in the global capital markets that are accelerating that phenomenon.
You’ve been talking for a long time about the meeting of the for-profit and non-profit worlds. Recently, it seems like there’s been more and more evidence of that actually happening.
The basic outline of what’s happening today is absolutely what I predicted. The operating reality for organizations is moving very quickly, and financial and regulatory structures are moving to reflect that.
But there are still many things that non-profits don’t have the resources to do — and that aren’t lucrative enough for for-profits to take on. How do we bridge that divide?
Competition is a very important force. The more a citizen sector becomes competitive the better — and the existing situation, which depends mostly on funding from governments and foundations, is not going to cut it. Investing in a new opportunity generally requires being willing to lose money up front — but for a citizen group, losing money for, say, four to six months is a very big deal. They have to get bridge financing — but it would take two or three years to get that from government or foundations, and by then the opportunity would be gone. If I’m a non-profit, my for-profit competitor has this huge advantage: it’s making money, a lot of it, and providing something for customers that I can’t.
Just take the problem of irrigation. We’re putting together joint ventures between a commercial piping company in Mexico, on one hand, and citizen groups who have much lower cost structures and want to serve poor farmers. All of sudden, you can drive down by tenfold or more the size of land that can be served profitably. It’s a very good investment — but when you’re talking about a million small farmers and $5000 a hectare to irrigate, it’s still a gigantic sum of money. We’re looking at many millions of loans that will need to be made every year.
So, how do we solve that problem?
We need to reverse three centuries of walling the for-profit and non-profit sectors off from one another. When you think for-profit and non-profit, you most often think of entities with either zero social return or zero return on capital and zero social return. Clearly, there’s some opportunity in the spectrum between those extremes. What’s missing is the for-profit finance industry coming in to that area. Look at the enormous diversity of the for-profit financial industry as opposed to monolithic nature of the non-profit world; it’s quite astonishing. The transaction costs alone of getting funding from philanthropic foundations or government is 25% to 40%, compared with a few percentage points for for-profit finance. We’ve got this grass chain around people’s legs. Everyone says, you’ve got to do a foundation and legal structure to finance social change. What nonsense!
So, for-profit finance is going to solve the social sphere’s funding problems?
The finance industry is constantly developing new products and services, and it has a highly sophisticated ability to bring clients and funders together. People will be surprised by how quickly the finance industry moves to get into this market. There’s not going to be any shortage of deal flow. There’s much larger demand for a full array of social investments, where you put money in and get varying degrees of social return back.
How is Ashoka approaching that opportunity?
We want to find 40 to 60 social investment entrepreneurs a year, 160 over the next four years. One of the first is this guy in Columbia, Felipe Vergara, a Wharton grad who’s looking at the education system. The governments in many developing countries builds universities and technical schools, but there’s no pricing system, and it gives out places in those schools at way under cost. So there’s an inadequate supply being given out cheap — which leads to corruption and to poor people getting screwed.
So Vergara is putting up for-profit “human capital funds.” You invest in a pool of loans to, say, 5,000 students; you don’t know the individual outcomes, but you know the general outcome. Students repay the loans based on a percentage of their incomes after school. Felipe has a model that will increase the supply of the debt the banks can sell.
I am convinced the time is right for projects like this. We’re building an organism, and the whole is very clear once you understand the pieces. The problem is, most people don’t see the pieces, let alone the whole. It’s all part of the world becoming a radically different place.