Funeral for a Friend?

The current political and social climate has called the world of investing into serious question, with issues from moral to economic to pragmatic being actively examined and debated. One of the main dialogues centers around an examination of the creative destruction that occurs when firms merge or are acquired. While generally viewed as a good thing from a business perspective, the current social debate is asking if the jobs lost and lives disrupted may be too high a cost to pay for the increased efficiency that mergers and acquisitions typically create. But hidden in this issue is another key distinction that social entrepreneurs can leverage to bring about the change they seek.


The reasons that business merge are really pretty simple, and the benefits are quite clear. Two organizations can operate more efficiently if they can share the back office costs that are an essential part of any venture. The aggregated talents of the two leadership teams can bring even more expertise to the markets the firm serves, allowing for increased value to be delivered to the customer. Often, the two firms serve complimentary markets or products that can be combined to make a broader or deeper offering, which then attracts a wider range of customers. It can also be a great way for an owner who has put his or life into the business to get the cash they need to retire comfortably. From just about every business angle, it’s a good thing. So good, in fact, that it often is the cause for significant celebration. And some of the folks involved in the transaction make a pretty good paycheck advising in these matters (In fact, one of my best friends, and one of the most honorable people I know, is an attorney working in this space – so I know first-hand that not everyone in M&A is abhorrent). In a commercial context, mergers and acquisitions are a good thing.

As I made the transition from commercial to social entrepreneurship, I was amazed to find that in the social benefit space, the exact opposite is true. Most of the time, when two nonprofits merge, or one is acquired by another, we don’t hold a party – we hold a funeral. There a lot of anxiety and wringing of hands and the general sense is that “we’ve lost another great program”. The same facts that are almost reflexive in business – greater efficiency, broader service base, deeper reach – are rarely mentioned or even though of. And yet, isn’t that exactly what we want for all these mission based ventures that we love so much? How many fundraisers, charity balls, silent auctions or phone –a-thons have you been involved in where the goal of the funding is to enhance the mission’s ability to serve by buying equipment that will make is more efficient? Why are we not considering the possibility that this very same equipment might already be owned and sitting underused in a brother or sister organization with a similar mission? And that this same organization might be struggling to meet budget in part because they’re struggling to pay off the blankety-blank equipment?

So here’s the part that is really frustrating. When a commercial M&A transaction is completed, the economic benefit goes to a few - mostly the owners and investors in the entities involved (which is why folks like the occupiers are so stirred up). When a similar transaction occurs in a social benefit context, the value can be plowed back into the mission – effectively doubling or tripling the increase created by improved operations.

Maybe instead of blaming the tools, we should start to talk about the motives of the carpenters. Just like a hammer can be used to build a house or break a kneecap, the tools and techniques that are common in commercial enterprise can be used to even greater good in a social benefit context. By combining forces, leveraging key resources, forming joint ventures, building strategic alliances and yes – even merging and acquiring synergistic firms, we can redeem the process and restore capitalism to its original honest intent. Who knows, we might even convert some of the great minds working in the commercial sector to our cause. At the very least, we’ll have a much stronger social sector, more celebrations - and a lot less funerals.

Let the angels be angels

"The fault, dear Brutus, is not in our stars, but in ourselves"

Whenever the holidays roll around, I always have to pull out the VHS player and pop in my ancient copy of "It's a Wonderful Life" (I've seen it so many times now, I cry at the opening credits). No matter how cold and cynical you are, you gotta love the end, when little Zuzu tells her father that "teacher says every time a bell rings, an angel gets its wings".  Now, in venture capital, the term "angel investor" refers to those early stage folks who see passion and vision and are willing to put money into an unproven idea to see if the wild eyed dreamer can pull the idea together (And this kind of angel doesn't get wings, he gives them). It's a key role at a critical time in the growth of a new venture.

So what has all this got to do with social benefit organizations? Well, quite simply, there is a hole in the funding cycle for social innovation, and we need to let the angels be angels. Allow me to explain.

Most old school non-profits are primarily funded by grants. And they depend on that critical relationship with a local foundation to feed them, year after year. But then one year, the foundation comes to them and starts to talk about sustainability - which the nonprofit correctly interprets as a signal that the gravy train is about to come to a halt. So there is much wringing of hands, and pleading, and maybe the grant is cut but they get another year - mostly because they are good and decent folks who hate like h**l to kick a good program to the curb. But nobody's really happy, because we're not letting the angels be angels.

What foundations really want is to spark new ideas, help build new models and drive change. It's also something they're very good at. But the need to fund the ongoing operations of projects they already support becomes a significant limitation, hampering their ability to seed new projects - and (sorry but it's true) it’s the nonprofits that are to blame for this.

When a social benefit organization clings to old funding models instead of embracing new ways of capturing value created by awesome programs, they tie the hands of the very folks who could help set them free. And the answer is right in front of us.

"I freed a thousand slaves - I could have freed a thousand more if only they knew they were slaves"

Any commercial entrepreneur can tell you what each stage of funding is for, what it can do and how it works. A vision that needs to be fleshed out? That's either bootstrapping (you use your own money) or the three Fs (friends, family and fools). Once the idea has some solid thinking behind it, then it's time for proof of concept (can we make this thing work?), and  that's when you need an angel.   Once the concept it proven, then more sophisticated investors will be involved - debt instruments to fund acquisition of capital for assets, for example (and by the way - if you consider yourself a social entrepreneur and you're not hip to what's happening in impact investing, you're just not hip).

In the social benefit space, that same continuum doesn't yet exist. It takes a much more sophisticated and determined effort to piece such a process together - it's still a ladder with several rungs missing. But despite the protestations of our peers and colleagues, it's not the philanthropic community that's holding us back. Even though this is entrepreneurial finance 101, the vast majority of socials entrepreneurs (doing an amazing job of driving social innovation btw) still think of foundations as the best source for ongoing operating income. And as long as we keep behaving this way, we'll keep having the results. On the other hand, if a few brave folks break free, it makes it much easier for others to follow suit.  Program related investments, social impact bonds, pay for performance are all efforts that are moving us in the right direction. But we need more - much more.

Casuis was right - it is a problem of our own making. The good news is that means it is also a problem that we have the power to solve. We just need the courage.

"But I could show my prowess, be a lion not a mou-ess; if I only had the nerve"