What if there were an efficient mechanism for distributing capital in the nonprofit sector?
Exploring the requirements of the social capital marketplace
(This article is the first section of a full research update on GivingNet's social capital marketplace research. You may download the full .pdf report, right.)
 The problem
The for-profit world has NASDAQ, the New York, American, London and Tokyo Stock Exchanges (among many others around the globe) to raise capital, mobilize savings for investment, facilitate company growth, redistribute wealth, provide for corporate governance, create investment opportunities, and to serve as an overall barometer of the economy.
Unfortunately, no such efficient mechanism exists in the nonprofit world.
In a nutshell, the problem in the nonprofit marketplace is two-fold: 1) It is difficult at best to get capital to high-performing social entrepreneurial organizations; and 2) The social processes used to mobilize charitable giving are inefficient and ineffective. As Mario Marino and Bill Shore state,
"…the lack of sufficient funding—growth capital—to build strong and healthy organizations is what keeps the sector from leveraging its assets and knowledge to improve, grow, and scale its most successful and effective organizations.
High-engagement philanthropy stresses [greater effectiveness]—building stronger management teams and boards, investing in outcome assessment, improving product and service quality and delivery, and other strategic ways to improve effectiveness and increase scale."
Greater effectiveness and access to capital are inextricably linked and the challenge facing funders and nonprofits alike is a lack of access to capital—money to fund and grow nonprofits—and the means to distribute it effectively." 1
According to Jed Emerson, Senior Fellow, Generation Foundation, Generation Investment Management, "We need new ways of capitalizing social enterprise because individual enterprises are not getting the right kind of capital at the right time, principally because of the outmoded nature of the non-profit capital market."2
At the same time, there is a body of research that indicates that there is potential to tap wealth management market dynamics for the philanthropic market. For the super wealthy, deciding about charitable donations takes on much more importance than for other individuals. In fact, we know that today’s donors want3:
- to be engaged in their giving
- to give their money away while they are living
- to engage their children in their philanthropic efforts
- low-cost, easy, flexible giving options, and
- "psychic reward"
So just what are the requirements of a social capital market that would start to efficiently bring together both the sources (donors, foundations, government, etc.) and uses (nonprofits, social entrepreneurs, higher education institutions, etc.) of nonprofit capital?
The Nature of the Social Capital Marketplace
According to a key feature in The Economist that highlighted this issue almost three years ago, three things are needed for a philanthropic marketplace to work:
"First, there must be something for philanthropists to ‘invest’ in—something that, ideally, will be created by ‘social entrepreneurs’, just as in the for-profit world entrepreneurs create companies that end up traded on the stockmarket.
Second, the market requires an infrastructure, the philanthropic equivalent of stockmarkets, investment banks, research houses, management consultants and so on….
Third, philanthropists themselves need to behave more like investors. That means allocating their money to make the greatest possible difference to society's problems: in other words, to maximise their ‘social return’."4
So, effectively, the structure of the social capital market has six main components:
- Sources of capital
- Uses of capital
- A market mechanism
- Marketplace infrastructure
- Intermediaries and other distributors
- Products to packing giving opportunities into interesting or relevant bundles
[1] Mario Marino and Bill Shore, “High Engagement Philanthropy: A Bridge to a More Effective Social Sector,” Venture Philanthropy Partners and Community Wealth Ventures, June 2004.
[2] Ibid.
[3] “Wealth and Values Survey 2005,” HNW, Inc.
[4] “The birth of philanthrocapitalism,” The Economist, February 23, 2006
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