(Social) startups feel the pinch or philanthropy to the rescue?

Published October 20, 2008 @ 07:12AM PT

An important conversation at SoCap08 was whether those of us interested in this emerging space between business and nonprofits should consider traditional, grant-based, no-return philanthropy as a part of the investment spectrum.

I think one of the most compelling reasons to include philanthropic giving in the social enterprise and entrepreneurship discussion is the fact that it doesn't have to deal with "risk" the same way a traditional investor (or even a new social investor) does. Foundations (and for that matter, communities of individuals) can invest in new ideas with unproven business models. And while a lot of little experiments with organizations that may not be able to sustain themselves in the long run might be messy and might not satisfy needs for scale, in some ways creating a new marketplace is about throwing a lot of new ideas at the wall and seeing what sticks. Philanthropic organizations are often in a better position to do that than investors who need a return (even if that return is over a longer period of time and at a lower rate than the market might normally demand). It might not be a surprise, then, that the first big wave of funding for social entrepreneurship has come from foundations like Skoll and Echoing Green.

One of the things this blog will be keeping its eyes on is how the economic downturn is impacting funding for social startups and entrepreneurial nonprofits in general. Some smart things to consider include: Lucy Bernholz's feeling that philanthropy is headed for a bit of a downturn, with possible impacts for social entrepreneurs, the GiveWell blog's discussion about whether individuals donate based on their brains or their guts and whether that's changing (important because presumably, if people were just giving "smart", high impact social startups might have a funding advantage).

What do you think, is the economic downturn going to impact funding for social entrepreneurship startups? Why or why not? (Ben, Danny, and the other Change.org leaders who are responsible for passing out the dough, what do you think?)

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Comments (5)

constraining the problem to just one sort of mission focused capital (philanthropic) seems like a limiting way to view the problem. I think what we are learning is that all these asset classes, from giving, to debt, to public sector money, to private equity need to be brought in as needed.

Posted by Kevin Jones on 10/20/2008 @ 04:08PM PT
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that is to say, dealing with the question in isolation is only dealing with part of the question. sometimes you need to just look at a particular silo, but capital is more valuable when you mix the right things together to make things flow with less friction.

when you are storing grain that you don't want adulterated, as one particular example. but most grain is made into something through process manufacturing; crushed, transformed, mixed with eggs, milk, and whatever else, to be turned into something more valuable than the thing stored in the silo.

Posted by Kevin Jones on 10/20/2008 @ 04:13PM PT
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Maybe, and the point is well taken, but I guess the question that I'm exploring here is whether the difference in the risk equation of philanthropic dollars has bigger impact during economic hard times. Ceterus Paribus with regard to project quality, will it be easier for social startups to get foundation dollars now? I'm not sure that's the case, but its an interesting case study in how the larger economic environment can impact which asset classes are brought in when (to paraphrase your point).

Posted by Nathaniel Whittemore on 10/20/2008 @ 04:15PM PT
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but doesn't the admixture of asset classes change the risk equation, since the right resources will be applied to the right project? yes, i agree there could be potentially fewer philanthropic dollars. but maybe there will be more dollars for mission as cash flees the old capital market into a market that includes impact as part of the risk return equation. philanthropic dollars to your first point, do no exist in a vacuum; they are part of the excess people feel safe in giving on the personal level, or the five percent traditional foundations give, at opposite ends of the equation.

even if the philanthropic dollars were to either1. remain constant despite other economic concerns (unlikely) or 2. even grow relative to the total number of dollars in circulation/in savings/in the market they would not be enough to accomplish what the world needs at this point.

so why just focus on one aspect of the resources that can be applied to the problems we face? we need all the tools in the tool belt deployed right now.

and finally, i guess i don't understand the risk equation of philanthropic dollars. is it donation dollar to impact, or leverage for donation dollars toward total mission goal?

Posted by Kevin Jones on 10/20/2008 @ 07:12PM PT
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philanthropic dollars without leverage of investment dollars are less valuable; they don't go as far.

Posted by Kevin Jones on 10/20/2008 @ 07:12PM PT
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Nathaniel is the founding Director of the Center for Global Engagement at Northwestern University, which works annually with hundreds of students in dozens of countries around the world through curricular programs and student project incubation.