‘Not for profit’ not so different from ‘for profit’: How investing in non-profits has taken on a familiar face25th Nov 2018
One of the offshoots of the financial crisis of 2007 was that it forced a collision of two very different worlds. According to classic economic theory, wealth and innovation in a society are generated by for-profit businesses, while social change is brought about by not-for-profit, mission-driven organisations.
Not any more.
As public confidence and perceptions of the for-profit world plummeted, businesses were forced to accept that society expected them to be more than just vehicles, merely generating profit. They were now expected to act as good corporate citizens.
Their reaction was to beef up their corporate social responsibility departments, improve their social-impact reporting, and in some cases partner with non-profit bodies to help them design better products, or set new industry standards. Beverage companies started reporting about their water consumption, consumer goods companies started setting goals to lower the amount of packaging, and airlines began disclosing (and helping passengers offset) their carbon footprint.
The changes were also felt in the non-profit sector. As overall economic output dropped following the crisis, non-profit organisations started seeing a reduction in revenues. Grants from governments came under heavy pressure, while the value of endowments invested in the market tanked. Non-profits were forced to adopt the same sort of efficiency measures common in the for-profit world. Instead of having resources tied to outputs, like how many people went through job training, resources started being tied to outcomes, like how many people found employment as a result of the training.
The outcomes-based approach of linking performance to resources has made it easier for investors to evaluate which non-profits they would like to make investments in. Improvements in performance measurement and increasingly rigorous evaluation and reporting have in turn created better feedback for investors, similar to the feedback loops they see in analyst reports and the stock market.
The move towards the for-profit world doesn’t stop there though. The rapidly growing movement of social venture philanthropy has seen foundations use venture capital techniques and assessment tools to help them choose which non-profits to invest in. Like venture capitalists, venture philanthropists are characterised by taking a much more active role in the management of the non-profits they invest in. Other similarities include giving multi-year support, having innovative financing models, and deploying significant non-financial resources to improve capacity building. Venture philanthropy has even resulted in more traditional foundations changing the way they evaluate the non-profits they are partnered with.
Even the difference between starting a non-profit and starting a for-profit organisation is now beginning to disappear. Y Combinator, the California-based accelerator program that has helped launch successful startups like Reddit, Airbnb and Dropbox, accepted a non-profit organisation into its programme: a San Francisco-based organisation called Watsi that uses the internet to connect donors to medical patients who need to have procedures they can’t afford.
Guidestar is a service used to evaluate and compare nonprofits in the USA. At a glance, their advice on what questions you should ask before you invest in a non-profit seems very similar to the advice you’d get from your financial advisor before investing in a company on the stock market. They suggest you ask questions about annual goals and measurement of results, the different ways that revenue is generated, the level of efficiency in the organisation, who their main competitors are, and how they deal with them.
Given this similarity between how to assess potential investments in non-profits and listed companies, it is perhaps not surprising that some non-profits have even launched their own initial public offering (IPO). Homeward Bound, a non-profit organisation in Marin County that works with the homeless, famously launched its own version of an IPO, and had billionaire Warren Buffet buy its first share (they called it an immediate public offering to distinguish it from the better-known initial public offering companies use to list on stock exchanges).
While some may label this type of creative fundraising a gimmick, some non-profits have embraced aspects of selling shares from the for-profit world, including having quarterly shareholder meetings and granting voting rights to shareholders when choosing board members. Non-profits are also exploring issuing bonds, which the government will repay if a desired set of outcomes is reached.
Yet despite the tremendous progress made by non-profits to mirror their cousins in the for-profit world, significant challenges remain. Dan Pallotta’s incredible TED talk titled ‘How we think about non-profits is dead wrong’ highlights how non-profits face enormous barriers in order to succeed, which for-profit organisations don’t have. Proof of this can be seen in that since 1970 more than 46 000 for-profit organisations have grown to have revenue above $ 50 million. The number of non-profits that have hit that mark? A paltry 144.
Two of the reasons Pallotta suggests relate to our discomfort around areas like compensation and advertising. We simply aren’t comfortable with non-profit executives having similar compensation to that of for-profit execs. Nor are we okay with non-profits spending our donations on advertising. We have this discomfort even though it is commonly accepted that compensation for executives and investments in advertising are critical in order to succeed.
Non-profit organisations play a vital role in bringing social benefits to vulnerable groups. In South Africa there are about 90 000 registered non-profits, with a combined revenue of over R 5.5 billion. This appears to be an impressive scale until you consider the social and environmental problems these organisations are trying to address. To succeed, it’s clear that they will require significant investment in the years to come.
With this pressing need in mind, it’s no surprise that nonprofits have moved to provide us with investment choices that mirror those we are so familiar with in the for-profit world. They have made these innovations to raise the much-needed capital to further their social impact. Given the similarities in the investment options we now face, it is finally easy for us to heed their call.