Blurring the Lines Between For-Profit and Nonprofit

Posted by Michael Hickey on July 30, 2012

In my last blog post I spent a good chunk of time talking about the trend toward "complexification" in the nonprofit sector. There are plenty of small, scrappy, neighborhood based nonprofits around (as a matter of fact, that number continues to grow), but we've also seen the emergence of nonprofits with $100 million plus in annual revenues, hundreds of staff, sophisticated operational structures, and highly complex financial instruments built to conduct their business. 

I argued that we're past due in borrowing some tools from our for-profit colleagues, including stronger staff development and retention regimens, the ability to access substantial capital for opportunistic growth, shaping board relationships that focus on organizational development and not just fiduciary oversight, and developing a nonprofit sector trade association to lobby on the collective needs and issues of our sector. 

We're clearly entering a new era that will continue to blur the lines between for-profit and nonprofit.  And let's be honest: it's a little scary. Why? Because we're all very worried that we might somehow become like, you know, them. 

Well, how did I get here?

I think this whole thing really got started when Muhammad Yunus became a lender to the poor way back in 1976. Yunus' revolutionary realization was that very poor people needed more than handouts - they needed access to borrowed capital at affordable rates to support home enterprises such as baking bread, weaving baskets, raising livestock and making bricks.  When their debt got affordable, these small enterprises actually generated modest returns - enough to help them grow their small businesses, sustain their families, send their kids to school, and so forth.  In short, they could become the developing world's version of upwardly mobile.  And the best part was, Yunus was harnessing the power of the market and loaned capital to do it - it wasn't all just grants and public dollars. 

"Microfinance" bloomed.  Or rather, boomed. 

It is now, almost 40 years later, what you might call a mature market.  This $70 billion industry serves tens of millions of borrowers, provides numerous other financial products including savings accounts and insurance, and in some cases is every bit as sophisticated, and prone to corruption and greed, as any rapidly growing financial services market could hope for. 

But all this is somewhat beside the point. What I'm really trying to say is that microfinance is sexy. Or at least it was. And by "sexy" I mean that every business school in the country started studying it, and creating courses in "double bottom line" strategies that provided an economic return and made you feel good about doing your job because you were helping society.  And as microfinance has matured and gotten, well, a bit pear-shaped, all those intellectually rigorous professors and bright young minds started looking for other opportunities to give birth to double bottom line businesses in everything from solar power, to coffee cooperatives, to clean water delivery, to rural cellular access. 

Let's not forget that all this has been going on right alongside the creation and growth of the CDC movement over the past 40 years, as grassroots efforts to save blighted neighborhoods and restore vacant buildings have evolved into scaled urban reinvention machines with their own complex markets, multiple financial products, and plenty of corruption and greed of its own.  Plenty of good has been done in both microfinance and neighborhood stabilization—way more good than harm—but greater resources attract greater risks of shenanigans.

I think what we're experiencing is a kind of convergence.  All those B-school types have been pushing traditional financial strategies and tools down into mission-related territory—and meanwhile all of us hippy types have been learning to talk about spreads and ROI.  Add 2008's lovely financial sector meltdown to the mix and you've got the momentum of that disillusionment driving even more financial sector refugees into mission-related activity: small business loan funds, affordable housing finance, energy conservation. 

It's enough to make you want to say: your chocolate is in my peanut butter.

The recent six-part blog series in the Center for Effective Philanthropy by Phil Buchanan arguing against our "Starry Eyed Idealization of the Markets" does just that.  Buchanan delivers an eloquent apologia that basically says nonprofits have nothing to be ashamed of, and for-profits don't have all the answers. 

That's all well and good, but I think the real issue here is that complex nonprofits and mission-related for-profits are going to look more and more alike. As a matter of fact, I think we’re seeing the emergence of a new kind of organization.

There will always be local and grassroots nonprofits (and thank the heavens for that), and there will be more for-profit entities that find a way to make a living in the mission-related sector.

But what’s most interesting to me is that we will also see a growing cadre of “supra-profits” that bring together elements of both, combining philanthropic support, mission-related investing, commercial capital, contracts and earned revenues to extend their scale and impact.

I think this convergence is natural.  It's time to name it and claim it.  We have seen the enemy and they is us.  And maybe that’s not so scary after all.

About the author more »

Michael Hickey currently serves as Vice President of Development for the Fund for Public Schools. He writes the Man-About-Town blog, http://man-about-town.org.

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