Sector Blur Expands Opportunities for Impact

This is the first of a planned series of posts inspired by “Doing Good in the 21st Century”, a joint project with Emerging Practitioners in Philanthropy to explore what the sector will need to succeed in the new reality. 

This post is co-authored by Rosalyn Allison-Jacobs and Bob Harrington.

In 2009, La Piana Consulting began exploring transformational forces in the social sector from multiple perspectives.  With support from the James Irvine Foundation, we first conducted research and interviewed thought leaders to identify five emerging trends, the ways that they will reshape the social sector, and the core competencies of social sector organizations that will thrive in the convergence of those trends. Earlier this year, as an extension of that exploration we partnered with Emerging Practitioners in Philanthropy (EPIP) to capture in Doing Good in the 21^st Century the perspectives of young leaders in philanthropy on what social sector organizations will need to succeed in the 21^st Century. Not surprisingly, we found echoes of some of the same themes continuing to reverberate five years after our first study — one of these is sector blur.

Blurred Boundaries

The gradual but accelerating crossover of investment, innovation, roles, and execution among government, the private sector, and the nonprofit sector — is particularly intriguing for the creative and non-territorial partnerships that it inspires and requires. We believe that it holds great promise for incorporating the best attributes of competitive market and investment forces, while preserving a focused commitment on solving intransigent social problems.

Sector blur is being fueled by several factors.  First, deepening financial crises at all levels of government have resulted in public sector divestment in solving society’s big problems. At the federal level, the Social Innovation Fund and the Investing in Innovation Fund were created specifically to leverage private sector dollars in a way that would engage the best thinkers from the business world, and encourage cross-sector partnerships on behalf of social programs.

Second, the nonprofit sector has had to become more innovative in its partnerships to survive, thrive, and raise capital to invest in sometimes untested and, therefore, higher-risk strategies. Fortunately, the sector has found willing investors in social innovation from organizations like Social Venture Partners and LGT Venture Philanthropy.  In particular, educational reform has attracted massive philanthropic investments in experimental strategies like small high schools, community schools, and pre-K – 8 grade clustering from philanthropic powerhouses like Gates, Broad, and Buffett.

Third, and perhaps most importantly, there has been a generationally-driven shift in philosophy among entrepreneurs and corporate and individual philanthropic leaders who see an obligatory partnership role for the private sector in solving social problems.  This has inspired and influenced the creation of investment instruments that link the social sector to capital markets, tax incentives, and social impact bonds.

Business Model Innovations

A related trend is the surge in nonprofit organizations seeking earned income as one means to sustainably diversify revenue streams.  According to Naomi Takeuchi, President and Founder of 1000 Cranes consulting, social entrepreneurship training and consulting are in high demand.  Takeuchi rightly asserts that nonprofits must become more financially independent and entrepreneurial to survive as all funding sources, including foundation grants, are becoming more restricted (and restrictive).  However, she cautions that nonprofits must have enough of a financial cushion to undertake a revenue-generating spinoff.  As with for-profit startups, nonprofits must be prepared for entrepreneurial ventures to operate at a deficit for three years or more, and social sector angel investors must exhibit the same patience as with private sector startups.  Nonprofits must also ensure clear alignment between their missions and the social enterprise, or risk incurring tax liability and loss of opportunity to engage their primary clients in the business.

Takeuchi cites, as evidence of advancing sector blur, three very different but equally successful examples of the semi-fusion that is underway between two, and sometimes three, sectors.

1. Blue Ridge Community Action and Western Carolina Community Action found a way to underwrite the cost of their evidence-based, best practice, early childhood programs for low-income children by creating parallel for-profit entities.  In providing early childhood education programs for self-pay populations, they employ all of the best practices of Head Start while generating revenue to support their mission-focused work.
2. Community Wealth Ventures, Inc. has documented its Social Franchise Ventures Initiative in its white paper, Streams of Hope.  Citing the critical need for new funding streams, the report shares the stories of seven nonprofit organizations and their forays into social franchising, and the for-profit businesses that recognized a golden opportunity to expand their presence into new markets while incorporating a social good focus into their business models.
3. Finally, Takeuchi recognizes the Triangle Residential Organization for Substance Abuse (TROSA) in Durham, NC as one of the greatest success stories in sector blur.  The program that began as a rehab facility with a financial investment from local government has grown by developing three business lines that generate almost 100% of the revenue required to run its treatment programs while simultaneously providing job training and employment for its clients.  The program also receives federal funding to provide housing for veterans who are struggling with substance abuse and unemployment.

Role Revolution

Lest we neglect the role of foundations in the sector-blur mix, opportunities abound for them to advance this systemic strategy for achieving social good in sustainable ways.  Specifically, Program-Related Investments (PRIs), as described by the Foundation Center, are “investments made by foundations to support charitable activities that involve the potential return of capital within an established time frame.” PRIs resemble financing offered by banks in that they include financing methods that can yield returns to the corpus of the foundation from equity investments in charitable organizations or in commercial ventures for charitable purposes. Takeuchi notes that PRIs are currently being granted by only a few hundred foundations, so the conversation about investing — rather than grantmaking — in sector-blurring ventures has only just begun.

The cross-sector engagement of thought partners, investors, and partners in service delivery is heartening and inspiring at a time when our nation’s growing divides in income, wealth, educational achievement, and health outcomes threaten our collective future. Nothing short of this revolution in partnership roles will be required for the social sector to be nimble and adaptive enough in its approaches to solve our most complex social challenges.