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“Scaling” for Social Impact

December 15, 2012

Kevin Starr, executive director at the Mulago Foundation, has sparked a fascinating conversation on the debate of for-profit versus nonprofit social enterprise. Here’s the crux of Starr’s position,

If you have a potentially high-impact new idea, you start out as a subsidized nonprofit that is focused on developing a scalable business model worthy of real capital. If you manage to get there, the organization flips into a for-profit and raises money from investors. The emerging business must be structured to ensure that it stays on mission, but that can be managed. We haven’t worked out all the kinks yet, but it’s cleaner than the alternative and more likely to produce a business that really can scale via the market. All we need to make it work are philanthropists and investors who know their jobs and are willing to try something (kind of) new.

And if your impact is profound but your breakeven point stays over the horizon, you can simply remain a nonprofit. You can’t sell equity, but you can get grants and cheap loans. Grants are free money, and zero-interest loans to nonprofits are not unheard of. Better a struggling nonprofit than a dead for-profit, and given the overall performance of social enterprise equity investments so far, would-be impact investors might want to save themselves a headache and just give you the money instead. They probably weren’t going to see it again anyway.

The Mulago Foundation is focused on “lasting change that goes to scale.” This is incredibly instructive. Starr is a funder who only cares about achieving large-scale social impact–imagine that!–and is willing to experiment and innovate; in short, he’s a philanthropist who knows his job. Starr is agnostic to whether a nonprofit or for-profit achieves big social impact and he also recognizes that the market can (potentially) support what philanthropy cannot–significant growth.

That said, creating a viable business model capable of scaling and producing significant social impact is extremely difficult. So here’s the question: If you’re motivated to see big, widespread social impact, are you willing to subsidize it to make it viable for the market? For Starr, it’s a resolute “yes.”

It reminds me of the wonderful observations made by Reach Incorporated founder and executive director Mark Hecker on sustainability versus growth in the nonprofit sector: the nonprofit structure “impacts speed of growth far more than it impacts the likelihood of long-term existence” and “market-based solutions offer the promise of fast growth in a way that nonprofit models do not.”

So, again, the question is: If you’re willing to fund a program that positively impacts 1,000 youth, might you be willing to subsidize development of a market-based solution that might positively impact 1,000,000?

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