NEWSBYNELL EDGINGTON

There is a concept that good entrepreneurs know only too well, but nonprofits could stand to explore. A "value proposition" is the unique value a product or service provides a consumer. Without a value proposition a business has no place in the market. For a nonprofit, a social value proposition is just as critical to success, but often ignored. In an increasingly competitive marketplace, due in part to the growth of for-profit social entrepreneurs, nonprofits must analyze, articulate, and deliver on a social value proposition.

In the past, nonprofits could exist without a value proposition. Donors wouldn't argue that a library, homeless shelter, food pantry or school provided a necessary service. But as we move further down the road of social innovation, the assumption that money will automatically follow good works is no longer valid.

The issue is complicated by the fact that nonprofits have two sets of consumers: those who benefit from the product or service (clients) and those who buy the service (funders, investors, philanthropists). There is increasing competition for both sets of consumers.

In order to attract the consumers who buy services (and who, by the way, increasingly want a social return on their purchase) nonprofits must articulate the value that the consumer (donor, investor, philanthropist, sponsor, whatever you want to call them) receives by writing a check.

In the nonprofit sector the closest thing to a value proposition has been a case for support. But when this is created (which isn't often) it tends to focus on the organization and its needs rather than on the potential social return on investment for the funder. A good value proposition articulates how an organization is uniquely positioned to create significant social impact that is much greater than the costs associated. It involves an organization analyzing, understanding and delivering on three very important things:

1. Capability: What is the organization uniquely positioned to provide to the community (the marketplace). Why is this organization better positioned than other organizations (nonprofits, for-profits, government) to deliver it?
2. Social Impact: What change is the organization creating in the community, region, world? Why is this significant? Why should/will consumers (funders) care?
3. Cost: How do the costs of the service being delivered compare to that social impact? Is there a social profit being achieved, i.e. are the costs involved in delivering the service significantly less than the benefits? Will a funder (who is paying these costs) receive a significant social return on their investment in the organization?

A value proposition is less about a well-articulated statement and more about an organization's ability to think through these questions and really understand the marketplace in which they operate. More and more the nonprofit that can effectively execute on a social value proposition will find the financial stability that ultimately leads them to create lasting social change.

Photo Credit: Tim Snell

For the nonprofit sector to truly climb aboard the social innovation train, as opposed to being abandoned by it, nonprofit leaders need to move past the reactive toward the strategic.

But is that possible? Have nonprofits been stuck in a resource-constrained, charity mindset for too long to be made strategic, bold, big thinkers? It's been a vicious cycle. Nonprofits lack adequate resources so they become very protective of what they have and wary of any actions which might threaten those resources. Therefore they become exceedingly risk averse and fearful of innovation. They focus more often than not on keeping the doors open as opposed to investing time, energy and resources in long-term strategy.

But that' s just not going to cut it anymore. These times demand a radically different mindset and approach. The nonprofit sector must move from the reactive to the strategic. So how does a reactive approach differ from a strategic one? It looks like this:

When a financial crisis hits the organization, the reactive approach is to focus on keeping the doors open and staying afloat. But a strategic approach focuses on what caused the crisis and how to fix the underlying problem, model or system so that they never return there again.

When a funder wants to award a significant sum to an organization for new programs that detract from, rather than bolster, the organization's theory of change, a reactive approach focuses on the increase in revenue, but a strategic approach recognizes the misalignment and turns the money down.

There is something pretty amazing going on in Denver, and it might just change the world. B-cycle, a nonprofit that provides rental bikes around the city, has found a cheap, fun way to make Denver a cleaner city and its inhabitants and visitors healthier.  I spent last weekend playing tourist in Denver and the experience was made so much better, and cleaner, because of the rows of red B-cycle rental bikes around the city. Denver is demonstrating that change really is possible, especially when it's easy and fun.

Denver is the first U.S. city to do what European, Canadian, Chinese and Mexican cities have already done--share bikes. Here's how it works. You buy a short or long-term "membership" via credit card online starting at $5. Then grab one of the 500 bikes waiting for you at the 50 kiosks around the city (found through a pretty cool iPhone app) and ride. When you're done, return it to any of the kiosks, and your card will be charged for the amount of time you rode. The first 30 minutes are free, and it goes up in increments of around $1-2 for each 30 minutes after that.

As tourists, my husband and I found enormous value in B-cycle. Because of the availability of the shared bikes, we decided not to rent a car. By the end of 3 days we had (according to the computers embedded in our bikes) ridden 49 miles, burned 1,944 calories, created a carbon offset of 46 pounds and saved $25.76 in gas money. In addition, we saved about $150 in rental car costs and parking.   Our total bike rental fees was only $26. So we saved about $150 in costs, got some fabulous exercise, did not pollute the city, and actually got a much more intimate view of the city than we would ever have by car. Not bad for a holiday weekend.

But it's not just for tourists, by far. The idea is that Denver residents can climb on a bike "for trips that are too far to walk but too short to drive." With a shared bike you can run an errand, get out for a bit at lunch, travel from the bus stop to your office, and much more.

This past weekend I went to the Renegade Craft Fair, the first time the traveling "edgy craft fair" has made it to Austin. As I passed booth after booth of creative, cool, handmade posters, paper, clothing, bags and other items, I was struck by how this craft fair is a fascinating microcosm of the convergence of three trends that are moving social entrepreneurship toward a tipping point.

The Renegade Craft Fair was started in 2003 in Chicago by Kathleen Habbley and Sue Blatt, two "crafters" who wanted a venue to sell their funky, homemade wares. In the past 7 years the fair has seen great success and expanded to four other cities, including this year's foray into Texas.

Renegade is one of many examples of a handmade, or "do it yourself," revolution that is sweeping the country. But I think that this revolution isn't just about the homemade, it's also about social entrepreneurship and the converging trends that are (we hope) taking it mainstream:

1. Entrepreneurship is Increasingly Social
The artisans in the booths at Renegade would probably not consider themselves social entrepreneurs, they might not even consider themselves entrepreneurs.  They have simply found a way to make money doing what they love. But in the process they have founded ethical, environmentally sound, social businesses. They use recycled materials, enjoy a small carbon footprint, and make only as many items as they can sell, cutting down on the waste of the mass produced processes prevalent in regular retail.

2. Technology Makes Social Entrepreneurship Viable
Five or ten years ago these entrepreneurs could not have made a living at what they do. Although fairs like Renegade are great publicity for these artisans, they make their real money at places like Etsy, an online marketplace for handmade items. Etsy has created a channel for creative people to sell enough of their crafts, with very low fixed costs, to make a living. Instead of having to find a large scale buyer or set up a bricks and mortar shop, these artisans can simple create their items, put them up on Etsy and find a market.

3. Market Demand is Moving to the Social
The Renegade Craft Fair has a large following and continues to add new cities. And similar fairs and events for artists abound. Etsy's sales continue to sky rocket, with a 103% increase in sales to $21.9 million in November 2009 compared to November 2008, and an 82% increase in new members year-over-year. There is obviously a huge demand for a return to handmade, unique products and a move away from the mass produced. These artists have found beauty and use, and ultimately a market, for items that would otherwise wind up in landfills. Like the man who takes old books, adds blank pages, rebinds them and calls it a "journal."  I bought two. Or the woman who took apart old junk jewelery and refashioned it into stunning necklaces, buttons, barrettes, and pins. The market is increasingly rewarding the individual entrepreneur who is using environmentally sound, ethical practices in producing the products we buy.

It all works together so effortlessly. Talented artists create beautiful, useful everyday items from recycled materials in low-waste processes. These items are sold one-by-one through low-cost online stores that remove the wastes of excess inventory and bricks and mortar storefronts. The artists are able to sell enough to make a living wage doing what they love. And the public benefits by getting unique, handmade items that support individual entrepreneurs and the larger world. Social entrepreneurship, even when we don't label it as such, can be so effective in its simplicity.

Photo Credit: Renegade Craft Fair

There is an economic concept that is beautifully profound in its simplicity, but often overlooked in the nonprofit sector. Opportunity costs are the cost (financial, time, resource, other) of what you have given up in making a choice between two or more options. Understanding the opportunity costs of decisions is particularly important when resources are scarce, as is the case in the nonprofit sector.

Key to the concept of opportunity costs is that you are consciously analyzing two or more options and what you must give up in choosing one over the others.  So, for example, a child who has to decide if they want a candy bar or an ice cream cone recognizes that in choosing the candy bar they are giving up the enjoyment of the ice cream cone. It seems so simple, yet in the nonprofit world it becomes much more complex.

Because the nonprofit sector is undercapitalized, money is king. A driving motivation in many nonprofit organizations is to preserve money, or go after money, at all costs.  So the idea of opportunity costs is often thrown out the window.

Say, for example, that a nonprofit leader is deciding whether to spend $45,000 to hire a grant writer or $75,000 to hire a Development Director.  The tendency would be to hire the grantwriter because they are cheaper, because in the world of nonprofits, cheaper is always better.

But let's look at the opportunity costs.  In hiring a grantwriter, the nonprofit would save $30,000, but lose many times that amount in opportunity costs. If they had hired a skilled Development Director with experience raising money from sources beyond foundations (individuals, corporations, earned income), the difference in revenue brought in under the grantwriter versus under the Development Director could be in the hundreds of thousands.  In choosing the "cheaper" grantwriter, the nonprofit is actually costing the organization a huge amount--the opportunity cost.

On Wednesday, the Corporation for National and Community Service announced the new head of the federal Social Innovation Fund would be Paul Carttar. Although Carttar's appointment warrants much excitement, his stated goal to develop the nonprofit capital marketplace may be undermined by the constraints of the Social Innovation Fund as it is currently imagined.

Carttar is a smart pick for this position. He's got great experience in scaling nonprofits from his work at New Profit, the first venture philanthropy fund, and at Bridgespan and Monitor groups, the biggest and most sophisticated consulting firms for large nonprofits. He has the potential to really take the Social Innovation Fund and run with it and I'm excited to see what he does. But at the same time, we need to be cautious about our expectations for what this fund will do.

While having a $50 million public/private partnership of new money to scale innovative nonprofits is a great addition to a very limited nonprofit capital market, I'm not sure that it can actually, as Carttar said yesterday, "Develop the capital market around funding results as opposed to funding stories, funding founders, [funding] connections, funding a CEO's ability to weave a yarn."

It seems that the underlying assumptions of the Fund are that a) results, if they are there, are easily gathered and b) mezzanine funding is the most important capital lacking in the nonprofit sector. I would say, however, that capacity funding is the bigger, and more pressing, hole in the nonprofit capital market.

The fact of the matter is, the vast majority of nonprofit organizations in this country (more than 80%) have budgets under $1 million. That means that they often lack basic infrastructure and capacity for large scale growth, and by that I mean they don't have the "evidence," or research, to prove that their solution is really working, let alone basic funding to drive operations, create a strategy for growth, etc. Indeed, most nonprofits don't even have an articulated theory of change, which would be the beginning step in driving research to find those "results" the Social Innovation Fund wants to grow.

I am a huge supporter of organizations like New Profit, Bridgespan and Monitor.  I think they have done incredible work to make the top echelon of the nonprofit community more focused on scale. They have really raised the bar. They count Teach for America, Citizen Schools, Build and others among the nonprofits that they have grown towards systemic change. But those nonprofits are the exception, rather than the rule in the sector. I'm concerned that a focus on a model like theirs of selecting and growing nonprofits that already have systems, capacity, infrastructure, proven results in place, is simply guilding the lily, rather than truly transforming the marketplace.

That's not to say that mezzanine funding is not needed. But it's not enough. We need to see more public/private funding partnerships around capacity investments for innovative nonprofits, like funding the articulation of a theory of change, or a strategy for growth, or program evaluation so that nonprofits have results to point to in the first place.

The Social Innovation Fund is a much needed entrant into a very immature nonprofit capital market. But let's not forget that a truly robust capital market provides funding for innovative ideas and organizations at every stage of the game.  We're not there yet.

Photo Credit: pfala

The nonprofit sector often suffers from a propensity toward niceness. Indeed, according to a recent study by researchers at Stanford and two other business schools, nonprofits are perceived as "warm, generous and caring organizations, but lacking the competence to produce high-quality goods or services and run financially sound businesses."

In other words, we think they are nice -- but not competent.

But this perception stems from a reality that is often imposed on the sector. Nonprofits are encouraged to collaborate instead of compete, hold onto under-performing staff, accept martyr-like salaries, smile and nod when funders push them in tangential directions and keep quiet when government programs want the same services at a lower price.

This demand that the sector play "nice" is the result of (at least) two things. One is its focus on the social. The sector exists to address and (hopefully) solve social problems. Thus, by definition, it's socially oriented and has a tendency toward an inclusive, consensus-based approach to doing business. Secondly, the sector is structured so that a nonprofit has many more constituents to answer to than its for-profit counterparts do.

These include, for example, customers such as: 1). those that benefit from the services they provide (the clients) and 2). those who pay for those services (funders). And nonprofits are led by volunteer committees (board of directors) that need to be corralled. The end results is that funders, volunteers, board members, staff and clients must somehow be brought together and moved toward a common direction.

This demand to collaborate, build consensus -- and play nice -- probably helps explain the label of inefficiency that often gets attached to the sector.

But in order to innovate and work toward real solutions, in order to get out from under consensus-based mediocrity, nonprofits need to break free from the niceness trap. They need to get meaner, uglier, messier.

With all the excitement and energy around social entrepreneurship, there's a tendency to dismiss the sector that was working on social impact long before it was cool: the nonprofit world.

These days, nonprofits get far less airtime in the social innovation movement than their for-profit, social entrepreneur counterparts. Perhaps that's because the for-profit form of social change is new, so it seems more interesting, sexier -- more apt to create change. And, of course, the idea that business can be reworked to address public goods is incredibly compelling.

But often the older nonprofit sector is left behind, partly because the sector tends to be risk- and change-averse. Again and again, Ive heard again that innovation will never become part of the nonprofit system -- that nonprofits are too set in their ways. Or that the sector is too broken to emerge anew.

That attitude, though, is unacceptable. There's great danger in dismissing the sector. Sure, it's inefficient, dysfunctional and broken. Yet it has tremendous potential for innovation. Indeed, without innovation in the nonprofit sector, the broader movement to solve social problems is doomed.

The current hype around for-profit social entrepreneurship sometimes reminds me of the dot.com bubble, or even the more recent unbounded speculation in the financial markets. We have to be careful of the hubris that accompanies new trends. The nonprofit sector is an enormous part of our economy and has a long history of working towards social change. If we were to cast it aside completely, we'd lose the tremendous resources (money, people, mind-share) that are being invested in that sector every day. Without its oldest component, the social innovation movement is weakened.

So instead of tossing it aside, let's remake it, re-envision, restructure and reinvent it.