Written by Robert S. Kaplan and Allen S. Grossman
Published:
http://hbr.org/2010/10/the-emerging-capital-market-for-nonprofits/ar/1
Editor's Note: It's hard to imagine but over $300 billion in donations now goes to non-profits in the USA - representing over 2% of our gross domestic product. So it's no surprise that such innovation now surrounds this "burgeoning industry." Harvard Business Review checks emerging innovations in the capital market side of this equation. [more]
The Emerging Capital Market for Nonprofits
Written by Robert S. Kaplan and Allen S. Grossman
Fifty years ago, Microsoft, Wal-Mart, Intel, Apple, Cisco, Oracle, and Google didn’t even exist. Today each one has a market value exceeding $100 billion. Meanwhile, many companies that were business giants in 1960—including Bethlehem Steel, U.S. Steel, CBS, RCA, GTE, ITT, and LTV—have disappeared, shrunk, or merged into other companies. These dramatic shifts in fortune are vivid examples of the cycle of creative destruction famously described by the economist Joseph Schumpeter.
Few new nonprofit ventures, in contrast, ever reach national scale (Habitat for Humanity and Teach for America are among the exceptions), and the largest nonprofits rarely fall out of the top rankings or disappear. Apparently, Schumpeter’s cycle doesn’t operate in the social sector.
That few innovative nonprofits grow to a significant size is, at first, surprising, since each year people make massive new investments in this sector. In both 2007 and 2008, donations to nonprofits in the United States exceeded $300 billion—more than 2% of GDP. But small local organizations dominate the sector. More than 700,000 nonprofits operated in the United States in 2009. Ninety percent of them had annual budgets of less than $500,000, and 99% spent less than $10 million on their constituents. The average grant size for large foundations was only $50,000.
While small may be beautiful, size matters when it comes to having a substantive impact on society’s pervasive and complex problems. By leveraging economies of scale and management talent, large nonprofits can deliver improved services at lower cost. They can offer their staff better compensation and career opportunities. They have greater capacity to conduct experiments, assess innovations, and share best practices across multiple locations. In an effective system, innovative nonprofits with the best management and social change agendas would grow in scale and scope while less effective and efficient ones would diminish and eventually disappear.
Why, then, do the dynamics in the for-profit and nonprofit sectors differ? Why do effective business start-ups grow into large, successful corporations while their nonprofit counterparts struggle to achieve national scale? We believe that a lack of development in the mechanisms and institutions that channel information and money between donors and nonprofits is to blame.
The good news, though, is that a new generation of charitable foundations and intermediaries is changing the game by measuring the social impact of donations and offering ways to funnel dollars to the most-effective nonprofits. In the following pages, we sketch out how the nascent capital marketplace for nonprofits is developing. To set the context, let’s look first at the current deficits in the sector’s infrastructure.
A Tale of Two Markets
In the private sector, capital markets connect investors who have money with entrepreneurs who have ideas but little money. The flow of funds is rarely direct, however. A set of institutions has evolved over hundreds of years to facilitate the exchange of information and capital between investors and businesses.
Consider the role of financial reports. Companies use these statements, which are independently audited by accounting firms, to communicate their performance to current and potential investors. Information intermediaries, such as financial analysts and business publications, then help investors interpret the reports.
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http://hbr.org/2010/10/the-emerging-capital-market-for-nonprofits/ar/1