socially marketing

One of the basic ideas behind socialmarkets is that there are some features of the for-profit sector that translate well to the non-profit. We’ve looked at financial markets, with an eye towards separating out those features we should flatter with imitation from those we should not.

This is sometimes easy: Do we want donors to see the potential return on their investment in any particular non-profit? Absolutely.

This is sometimes hard: Do we want a non-profit that shows poor returns on investment to be starved of resources? Hmmm… probably not, and certainly not as indifferently as financial markets do.

This is sometimes really hard: Do we want to hold non-profits and their officers to the same ethical standards as their for-profit counterparts? Um, well… let’s think about this.

There are several potential points of ethical contention within socialmarkets. The easiest starting point is at the root of all evil – money. The most concrete output of socialmarkets is the dollars flowing from donors to non-profits. The primary force behind those cash flows is information that comes from the non-profits themselves, including a range of historical and projected metrics of both budget and performance.

The better those numbers look, the more likely it is that the associated non-profit will get the funding it is looking for. The temptation to make those numbers look good is clear, and giving in to that temptation introduces an ethical slippery slope: from optimistic performance projections; to creaming only the most attractive candidates from a general pool of clients; to simply lying about how much a program costs.

Add to these temptations the lack of regulation and consequence that pervades both for-profit reporting, and non-profit reporting to other agencies (most notably the U.S. Treasury) and you see how as unpleasant a topic as it is, ethics needs be part of the socialmarkets conversation.

One key question we need to ask is: who are we trying to protect? The idea that we need to protect trusting donors from manipulative non-profits make us squirm for several reasons. For starters, it is an accidentally hilarious misrepresentation of the true balance of power between most non-profits and their sponsors. More personally, it is a misrepresentation of our general position as advocates for non-profits as well as donors, from where we argue that non-profits can generally be trusted to do the right thing.

This latter reason makes the idea of protecting non-profits from themselves equally uncomfortable: inserting safeguards to remove the means, motive or opportunity to game socialmarkets makes sound business sense objectively, but the related assumption of ethical criminals - on either the donor or non-profit side - does not sit well with us subjectively. Fortunately, I think we’ve come up with a practical ethical platform from which we can deal with the reality of socialmarket’s exposure to abuse without compromising our own integrity: we really just need to protect ourselves.

Self-preservation is the key to navigating these dangerous ethical waters. Socialmarkets will not survive if donors feel they cannot trust our participating non-profits, or if non-profits feel like we are strong-arming them into proving they are worthy of that trust. We need to have safeguards in place for everybody’s good, but most notably our own.

It only takes one bad apple to ruin the fun for everyone in the socialmarkets space, particularly when the publicity that bad apples typically attract comes into play. Just one non-profit discovered to be misusing funds and/or providing false data could be enormously damaging to us. Certainly, we can’t be responsible for the behavior of all our participating non-profits; we don’t have the resources to attempt that even if we wanted to (and we do not…) But at the very least we have to be able to show that we take reasonable precautions, so it comes down to how we interpret the term reasonable.

For now, with just a handful of non-profits who we have been working with for months and know very well, we are starting with a pretty loose interpretation. As the number of participants grow, we may have to tighten the reigns; but we will err on the side of trust (i.e. innocent till proven guilty) wherever practical, and let experience be our guide.

To see this interpretation in action, let’s go back to the money. Donations to a project listed on socialmarkets can be passed on to the relevant non-profit in one of two ways: restricted or unrestricted funds. Initially it seemed obvious that the correct manner was restricted, i.e. earmarked for the specific project the donor funded. It turns out it’s not that simple.

Non-profits are often forced into an accounting shell game because of the restricted vs. unrestricted issue. In the most extreme cases, they find themselves struggling to keep the lights on despite having tons of money on their balance sheet, because all of that money is restricted to purposes which do not include paying the utility bill. This is an enormous structural problem that the entire sector is wrestling with, and while socialmarkets can’t offer a solution, we can at least not exacerbate the problem.

We can do this by sending unrestricted funds to our participating non-profits. This means we are trusting them to manage their internal finances in such a manner that the projects they list with us get funded and the utility bills get paid. This is actually quite in keeping with the socialmarkets model, since there is clearly a positive social return associated with both raising the visibility of non-profits’ burden, and making it just a little bit lighter.

Sometimes we get so caught up in sweating the details of bringing socialmarkets to life, we forget about the bigger picture. We know our work is an important step towards advancing the social capital model, but once in a while it’s encouraging to see that socialmarkets is just one piece of the puzzle, and that we are by no means alone in this effort. Last week we had the opportunity to get a glimpse of that bigger picture, and we liked what we saw.

Allan and I were invited to a discussion group on The Social Capital Marketplace (SCM) here in NYC. It was a small gathering - just a dozen or so people hosted by GivingNet, powerful proponents of SCM (as well as our fiscal sponsors.) While the group was small, it included a good cross-section of the market, from the supply side (e.g. donor advisors) to the demand side (e.g. nonprofit advocates) and the spaces between them (e.g. socialmarkets.) Everyone brought something special to the table, and the discussions which took place around it were animated, unscripted and best of all, highly educational. I may go into details in a later post, but for now I’ll focus on just one general idea: how social capital markets are gearing up for growth right now.

There are more wealthy people than ever pouring more money than ever into the nonprofit sector. This statistic is a mixed bag, since this new wealth is hardly democratic. As the rich are getting richer, the wealth divide is getting larger. However, as the invisible hand of the capital market moves us further into economic inequality, the social capital market offers a counter-balance. The inclination of the wealthy to “give back”, and in particular the “giving while living” trend offers new inputs to SCM. Gates and Buffett are setting good examples, but they’re really just the tip of the iceberg. Also, it’s not just the quantity of new philanthropists, it’s the quality: many if not most of them come from the quant-based worlds of finance and technology, so are receptive to the market approach of SCM. Here are a few of the creative ways that receptivity is being exercised:

• Knowledge is power

Several efforts (including ours) attempt to bring transparency and accountability to the market by doing more due diligence on nonprofits. There is very little information available for most nonprofits beyond IRS Form 990, which offers no insight on function and impact. Ultimately these efforts can produce complete ratings and analysis functions, offering potential social capital investors the chance to make more informed decisions. The functionality is like Moody’s, but the Web 2.0 model makes it more like a cross between Kiva and TripAdvisor.

• Behind the buzzwords

Terms like Social Entrepreneurship and Venture Philanthropy are so over-used that we forget the powerful ideas behind them. There are many current projects which recognize that social vs. economic capital is not a black and white issue. Inside the gray area between, there is plenty of room for deriving economic profits from social services. A little flexibility on the size and time frames for those profits can go a long way towards directing real money into social markets.

• Bottomless bottom lines

Once you broaden your definition of ‘profit’ to include non-economic criteria, the sky’s the limit. Double bottom line accounting, which adds social returns into the equation, allows for a more complete picture of what defines a successful business. This is where other often abused buzzwords like Socially Responsible Investing and Corporate Social Responsibility show their true power. When your only bottom line is economic, you’re shut out of several alternative (and arguably larger) economies, including the human, social, environmental and spiritual. At some point we should probably stop counting (triple and quadruple bottom lines are common, and I even found a quintuplet here) but the bottom line is that there is more than just one bottom line.

This is just a taste of what is happening in the SCM space, and it was all the more tasty because we got to meet the people behind the projects. We try to keep up with the literature, but you can get so much more out of face-to-face interactions with the people who share your goals- especially if those people are smart, committed and open to sharing. I think we all left that conference room a little wiser, and a little more energized. Socialmarkets is a web-based operation, so we spend a lot of our time in virtual spaces. Once in a while it’s awfully nice to check in with the real world.

One of our resolutions for the new year is to post more frequently to this blog, so we’re kicking off 2008 by taking a look at what we learned in 2007 - socialmarkets’s first year.

Bringing this project to life has been challenging on many fronts, and in the interest of transparency we should talk about all of them. I’ll start with one of the most fundamental: the social benefits of charitable efforts is the basis of our work, and calculating it is really, really hard.

The volume of existing research into SROI (Social Return On Investment) varies greatly within the nonprofit sector. For example, there’s good quality and quantity of data for homelessness intervention, and far less of either for advocacy projects. Most of the sector falls somewhere in between.

We’ve been incredibly lucky to have many of the best minds in the SROI field helping us map out the current landscape, usually with nothing more than our gratitude as payment. Their input was instrumental in our decision to hold off on our initial alpha (i.e. proof of concept) release until we added one additional feature to help fill in some of the SROI holes: crowdsourcing. You may already be familiar with that term, or it’s cousin “The Widsom of Crowds“.

In the socialmarkets context, there are two essential ideas that pointed us in the crowdsourcing direction:

• All markets (stocks, real estate, ebay…) self-define the value of its offerings, through the collective interactions of the people who participate in it

• Participants in the social sector have opinions on the relative importance of nonprofit projects and their outcomes, and capturing these priorities can help define the value of the related social returns

The new alpha is just about ready for prime time, so please stay tuned. We want to be models of our favourite buzzwords like transparency and accountability, so we want your honest feedback - for our own education, and to share with the larger community. This is, after all, a grand experiment in social science, and we’re excited to be a part of it.

Here’s to a great 2008!