October 13, 2010

Nonprofits Can't Always Borrow From Business

The seemingly sudden decision of Unitus to exit the microfinance field has raised many interesting questions about the rise of social entrepreneurship.

Unitus—a Seattle organization founded by venture capitalists and tech entrepreneurs to use innovative, private-sector strategies to fight global poverty—this summer dismissed its entire staff and saw three board members resign as it declared victory and exited microfinance.

Donors, meanwhile, were left wondering what the heck had just happened.

The ability to quickly change, to abandon a strategy that no longer holds true, and to turn and head off in some radical new direction are seen by entrepreneurs as normal and a regular part of a successful business. But in the nonprofit world, Unitus's decision was greeted with confusion and consternation. To understand why, we must understand how the nonprofit world perceives the concept of risk.

When a for-profit business goes bankrupt, it is the investors and equity shareholders who bear the brunt of the loss. Employees suffer from lost jobs and wages but are ultimately able to seek employment elsewhere. Customers, while inconvenienced, are not penalized—if Starbucks goes out of business, customers can just go down the street to any of a myriad other coffee shops to get their latte fix.

But in the world of nonprofit groups and foundations, the consequences of failure (or, in the case of Unitus, declared victory) are not borne by the donors or even by the organization itself.  When a nonprofit closes its doors, the donors and grant makers who supported it, while possibly inconvenienced, continue onward.  Employees, like those of the for-profit business, lose their jobs but, again, can seek employment elsewhere.  But the customers—in this case, the nonprofit's clients—bear the consequences.

In many parts of the United States, especially in rural areas, there is often only a single provider for a number of critical safety-net services.  So when a nonprofit shuts its doors, children go hungry, victims of domestic violence have no place to go, and the sick are denied access to medical services.

That is not to say that groups like Unitus can never change. But there needs to be a deep appreciation for and commitment to making sure that crucial services are still being provided.

The danger in rushing to adapt private-sector and entrepreneurial strategies to address social concerns is that we fail to understand that the consequences of failure are much different than they are in the business world. We are not simply dealing with the loss of an investment but possibly the loss of lives.

Nonprofit and foundation leaders must bear a special responsibility that goes beyond simply being business-minded, because it is the people who are most vulnerable who suffer the consequences of bad decisions and sudden changes of direction.

As Geoff “Chester” Woolley, a former Unitus board member, explained, “Unitus wanted to demonstrate that microfinance was scalable and could be commercialized.”

“Over the last two years or more, it started to become evident to the board that Unitus’s original goals were being achieved,” he said.

Whether or not Unitus was actually responsible for the rapid growth of microfinance was not addressed, but the implication was that Unitus is taking credit for it, declaring victory and moving on. This highlights another critical distinction between for-profit enterprise and the social sector.  Often, for issues like global poverty, there is no exit strategy.

Mr. Woolley's idea that investors can “catalyze and … then get out of the way” is simply not a reality unless we make some fundamental changes to how nonprofits are capitalized and how capital flows in the social sector.