By Robert Egger

On September 10th, the DC Central Kitchen, which I founded 22 years ago, received a huge honor; the First Family came to work side by side with staff to help prepare 4,000 meals for our shared community.

Truth be told, it was a great day. For staff, the majority of whom are former addicts or felons, being able to work closely and speak directly with the President was an honor few could have imagined a few years back, when they were scrounging for money to get high, or just trying their best to stay alive inside prison.

For other members of our team, being able to speak to the First Lady about our school food program, which provides locally sourced, cook from scratch meals for students at DC public schools was an unbelievable opportunity to offer practical, ground-level advice about turning school cafeterias into learning labs for math, science and nutrition.

But for me, it was a bittersweet visit. Why? Because it took place just two days after the President spoke to Congress and the country about the national imperative to create jobs, and in the last 5 months, the Kitchen’s social enterprise businesses have created 50 new jobs, with great starting pay and full benefits.

This visit offered the President a historic opportunity, at this critical economic juncture, to reframe the entire discussion about job creation and introduce the notion that there is actually profit in America’s economically essential, nonprofit sector. But instead, he spoke of service. A powerful, important and deeply American concept….but what a missed opportunity!!

The Kitchen is not unique. We are but one of thousands of social enterprises that are creating wealth while also decreasing demand for traditional charity via our empowerment programs. But, like all “charities” in America, we are viewed through the limited lens of being a “.org”… a “non” profit.

Imagine a new model.

Imagine the President standing before the press and suggesting that Congress explore a return on investment formula for programs like DC Central Kitchen, so that every donor could potentially see an annual and increasing tax deduction if the organization they contributed too could verify economic growth, new jobs or the decreased need for public spending. Imagine how that might spur innovation within the sector, while also generating ways in which people could attain wealth by investing in their communities. And not just wealthy philanthropists, but everyday people who have an equal interest in paying lower taxes, having a good paying job, living in a healthier communities and supporting businesses that, by their very nature, re-invest profit back in the community.

America is no longer a manufacturing economy, with jobs for all. Nor do we produce enough “extra” money to support an unlimited number of charities. Therefore, we must begin to let go of attitudes, ideas and tax policies that rely on the incomes and opportunities of a by-gone era.

For my money, the first thing to go should be the notion that job creation is limited to .com businesses while .org charities do good deeds and provide services.

There is a brave new economy coming, where philanthropy is more about how you make or where spend your money, not the check you write at the end of the year. It will be driven in part by American consumers who will demand both transparency and social impact for the businesses they choose to support.

But it will also rely a new generation of business people who seek satisfaction not through a trip to a “soup kitchen” to serve, but by going to work every day at a business that makes the community and the planet cleaner, safer and stronger. To get there, we need leaders who aren’t confined to antiquated notions of “dots” that divide resources or limit opportunity. The future has no dots; only bold new ways of making, earning and investing dollars in ways that strengthen our country – one community at a time.

And the first candidate that offers that kind of leadership will have my vote, and every vote I can muster.

The Nonprofit Times has released their annual Power & Influence Top 50 list for the social sector. While the NPT isn’t terribly influential itself to the best of my knowledge, their annual list gets a lot of attention and I think it is generally well done.

The most interesting new member of the Top 50 is Scott Harrison, the founder of Charity: Water. Here’s a guy who seven years ago was a nightclub promoter with no connection to the social sector. Today, Charity: Water, the nonprofit he founded, raises $16 million a year, gets a ton of media attention and in my mind represents a case study in how to effectively use social media to connect with donors.

The vast majority of people on the NPT 50 have spent long careers in the social sector to build the power and influence that the paper is recognizing. Bill Gates is an exception, but it took billions of dollars for him to make list without a long history in the sector. However, Scott Harrison had quite a short social sector career before being named to the list. Whatever you think of social media, the way in which people who know how to harness it can build their own power and influence incredibly quickly is amazing (the one other person on the list with such a short social sector career is Wendy Harman, director of social media for the Red Cross).

So what is it that Scott and Charity: Water are doing with social media that has landed him on the NPT 50? Most importantly they treat social media as a tool, not a strategy itself. In other words, the core of what they are doing so well is fantastic communication with social media simply acting as an accelerator rather then thinking that social media itself is the key to success.

For instance, in this video, Charity: Water doesn’t just pull our heartstrings, they use fantastic storytelling skills to communicate the very real statistics that underlie the problems they are trying to address.

(click here to see the video if you are viewing this in an email)

In this next video, the organization, and Scott, show the humbleness that is required of anyone who is trying to achieve results. While most nonprofit marketing paints a picture of a world where nonprofit interventions always succeed, Charity: Water shows that they understand that talking frankly about their failures is important as well.

(click here to see the video if you are viewing this in an email)

What Charity: Water and Scott’s naming to the NPT 50 demonstrate is that social media isn’t just about having a Facebook page or being on Twitter. It is simply a tool that fantastic communicators can use to greatly accelerate their power and influence. The key to success in social media has little to do with getting the technology part right and everything to do with getting the human communications part right.

“From the donors’ perspective we need something more than metrics and annual reports that cements the organization’s commitment to social good. Nonprofits have typically relied on (been given a pass by) their corporate structure and the public accountability of their boards. I’d say both of these are not strong enough. Social businesses, particularly those that meet the standards of a B Corporation, are beginning to document and commit themselves contractually to social good. This is a step toward mission insurance, but the B Corporation* standards are written mostly to protect business owners, then the investors, then the customers. We need something that will work for downstream investors or donors.

And there is nothing available to ensure customers – be they the borrowers from a microfinance organization, the teen employed by a job training company, or the working mom seeking a new credential to better her job prospects – that the services they are getting are being designed and delivered with a measurable, enforceable commitment to bettering lives and communities.”

Lucy’s proposal was made in the context of her thinking about how we might insure that social enterprises, both for-profit and nonprofit, actually achieve their social mission. But I was struck by the way that the concept illustrates so perfectly the current paradigm shift in philanthropy.

Whereas philanthropy has historically been about the gift as a moral act by the donor, today more and more people think about philanthropy in the context of the results achieved by the gift. This historical view is embedded in the legal obligations of nonprofits. Nonprofits actually have no legal requirement to achieve results. Instead they need only have a socially beneficial mission and ensure that no benefit incur to the donors that support them.

The focus on results and the emergence of for-profit social enterprises turn this understanding of philanthropy on its head. What we need now is a legal understanding of social businesses that requires them to achieve social beneficial results while recognizing that having financial benefit accrue to supporters may in fact increase and accelerate social impact.

In a comment on Lucy’s post I wrote:

“We know there are documented examples of nonprofit programs creating harm (for instance it is well documented that the DARE program to "keep kids off drugs" has no positive impact and some evidence suggests that it increases drug use).

In the world of consumers, this would be stopped. If a drug designed to decrease the drug cravings of addicts was found to have no effect and possibly to increase cravings, it would be recalled immediately.

While I think it might be hard to "insure" that a social mission is met (just like it would be hard to "insure" that a for-profit became and stayed profitable), it seems very doable to "insure" to some degree of conviction that social programs meet minimum standards. The meeting of this hurdle would then flow upstream and greatly increase the chance of mission success.”

Today, the tax protection that nonprofits enjoy is dependent only on them having a social mission and ensuring that no financial benefits flow to donors. And yet we wonder why “evidence-based” social activity, performance management and the measurement of results is so rare.

While the challenges of measuring results are real and should not be underestimated, imagine the positive transformation that would occur if tax protection was dependent on the achievement of socially positive results and whether investor/donors benefitted from the organizations activities took a backseat from a regulatory standpoint.

Which entity should receive tax benefits? A nonprofit whose programs exacerbate the problems of the people they intend to help, or an organization – either nonprofit or for-profit – that actually helps people?

Lucy’s posts were great because out of the need to communicate nonprofit due diligence best practices to a 10-year-old, Lucy manage to distill everything down to three simple questions:

1. What does the organization do?
2. How do they do it?
3. How do they know if they are making a difference?

I’ve written up my own list of five simple questions to ask, but they are a good deal more technical. Sometimes I think the “smart giving” movement gets lost in our own nuanced debates and forgets how powerful it can be to reframe our discussions so they make sense to anyone (in this case, a motivated 10-year-old ended up being the perfect foil for Lucy).

Here’s why I think Lucy’s questions are so powerful and are the core of what more complex evaluation processes are trying to get at.

What does the organizations do?

This seems to be such an obvious question that it doesn’t need to be asked. But visit the Red Cross’s website and try to explain what they do. Or check out the American Cancer Society, which many people think does cancer research, and then realize that only 17% of their program expenses go to research.

Understanding what an organizations actually does should always be the first step to building conviction in a decision to support them. A good answer to this question can’t just discuss the organization’s goals or focus area, but should describe the programs or approaches taken by the nonprofit in pursuit of those goals.

How do they do it?

The question above might be answered above for a college access nonprofit that the organization provides assistance to under-privileged high school students in the process of applying for college. But lots of nonprofits do that sort of work, so how does the nonprofit in question provide the service? How does their service differ from similar organizations? How do they fund their activities?

How do they know if they are making a difference?

Any high performing nonprofit is going to have some process in place for trying to get a handle on whether they are having success in their programs. The answer to this question doesn’t need to come in the form of a spreadsheet. It might be completely qualitative. But regardless of how it is answered, a solid nonprofit should be able to speak convincingly about their own efforts to know if they are making a difference.

In some ways, that’s about all you need. If before you make a donation you are able to fully describe what an organization does, how they do it and how they know if they’re making a difference, you are well on your way to knowing that your money is actually going to make a difference.

I’m sure some people will argue that this is too simple of a process. My own advice on this matter requires that a nonprofit base their programs on evidence about what works or, if the program is experimental, make clear that the program is a research effort. But we can go on adding qualifications and additional due diligence forever.

In a world where most people do little to no research before donating, it seems to me that a big positive shift would occur if donors began to spend 15 minutes figuring out the answers to Lucy’s questions before making a donation.

Click here to join the conversation.

Nonprofit Analysis: Beyond Metrics

One of the holy grails of nonprofit evaluation is to be able to compare nonprofits across issue areas. Concepts like “social return on investment” strive to quantify how much “good” an organization is creating, regardless of whether they are a soup kitchen or a job training program.

In recent years, the push towards using “metrics” to judge nonprofits has matured and moved beyond simplistic measures towards more holistic analysis. Groups like GiveWell,Root Cause, Philanthropedia, GreatNonprofits, and New Philanthropy Capital all strive to determine which nonprofits are best through analysis that seeks to go “beyond metrics”….

Today, we want to kick start a conversation about how nonprofit analysis can move “beyond metrics”. Here are five questions to get us started.

1. What are the most critical elements that signal that a nonprofit is deserving of a donation?
2. What is the most meaningful financial information that can help a donor determine a nonprofit’s ability to sustain their organization?
3. What is the most meaning non-financial information that can help a donor determine a nonprofit’s ability to successful implement programs that work?
4. What is the most meaningful information that can help a donor determine how much of adifference a nonprofit’s programs actual make?
5. Since much of the information of interest to nonprofit analysts is released only on a voluntary basis by nonprofits, how should they react when some charities share substantive information, revealing weaknesses and past failures, while the vast majority share no substantive information?

Rather than leave any comment on this post, please click here to join the SocialEdge conversation.

One of the reasons that the nonprofit FORGE (this Wall Street Journal articles tells the story of the FORGE/transparency drama that played out on Tactical Philanthropy and around the web. Scroll down to the third heading) was able to raise the money they needed to save themselves from closing was because they aggressively shared the mistakes that they made and therefore built a large degree of trust that their plan to fix things would work.

This sort of openness is needed for a philanthropic capital market to thrive. Lots of research shows that economies grow fastest when there is a high degree of trust among market participants. I believe the same should be true of the nonprofit economy.

One fantastic example of this dynamic played out over the last few days at the nonprofit charity:water. charity:water is a nonprofit that raises money to drill wells in areas of the world where people do not have access to clean water. Led by charismatic photographer Scott Harrison, charity:water has been very successful at drawing attention to themselves via social media and the use of ultra high quality photos and video (see this compelling video they made with Hollywood star Jennifer Connelly).

As a donor to charity:water, you would want to know that the money you gave was used to build a well. Pretty simple. Except of course things don’t always go right.

A little while ago, charity:water sent me an email asking me to donate in support of drilling a well and telling the story of how fantastic they are at the work they do. Then yesterday I got the following email:

Dear friends,

I want to sincerely thank all of you that donated $35 (and sometimes more!) for my 35th birthday.

We tried to drill a well live yesterday in a village called Moale, deep in the heart of the Central African Republic. Sadly, we came up short. Both holes collapsed, and the people of Moale who have waited 16 years for water, will have to wait a little longer. It was a pretty rough birthday, seeing the hopes of Moale crushed like that.

If you’d like to see what a failed attempt looks like and the challenges we sometimes face in the field, I posted this short video yesterday:

If you are reading this in an email, click here to view the video.

Note what happens when you watch that video. Your trust in charity:water goes up. As a donor, you become more certain that charity:water is a good steward of your money and making a donation to them feels like it is a better investment.

charity:water has produced uplifting videos of tons of successful well drills. But it is this video showing them failing that makes the most compelling case that they are good at what they do.

For example Forbes columnist John Tamny writes:

“But while it’s exciting to contemplate the giving nature of Gates and Buffett, if their true desire is to help their fellow man, they should hoard every penny of their significant wealth…

Some will no doubt benefit in the near term, but the removal of limited capital from the productive parts of the economy will ultimately reduce our standard of living, drive up unemployment and make individuals more–as opposed to less–needful of charity.

Conversely, money saved and invested constitutes capital offered to today’s and tomorrow’s businesses. When individuals save, they’re by definition providing capital to entrepreneurs, and the capital formation that results from saving naturally stimulates job creation. Considered in this light, savers and investors are conferring the ultimate benefit on others by virtue of their financial means supporting individuals eager to work.”

Tamny’s underlying assumption is that nonprofits are not productive, that they don’t stimulate job creation and do not enhance the standard of living.

Tamny’s understanding of the nonprofit sector is so misinformed that it is difficult to understand how Forbes editors published his column. It isn’t that Tamny’s opinion isn’t valid, certainly there could be an argument that for-profits produce more value than nonprofits, it is that Tamny seems unaware of the fact that nonprofits are businesses.

Nonprofits employ people, nonprofits buy goods and services from for-profits, nonprofits are an important economic engine of the US economy. In fact, nonprofits are a bigger portion of the economy than many other industries.

Today, I’m happy to share an outstanding video that highlights just how significant the nonprofit economy is. Not many sectors of the economy book over a trillion dollars in revenue and employ 10% of all US workers!

Click here to see the video if you are viewing this post within an email. The video was produced by Philanthropy Reports

But a few nonprofits have been playing with new formats for annual reports that help donors better understand their organization. The key to an annual report being useful and compelling for a donor is that the report 1) be engaging, 2) tell the story of the organization and 3) explain the organization’s results and goals within the context of the organization’s story.

While a simple paper report can do all of the above, new technologies are helping some nonprofits up the engagement factor of their reports. One great example is the new annual report from VolunteerMatch.

[If the text is hard to read in the report or you are reading this in an email, click here to view a larger version]

The report is presented using the new, innovative presentation software called Prezi. In my public speaking, I’ve started using Prezi exclusively. One of the interesting elements about communication, is that how you present information is often as or more important that what you say. While this can of course be used to “spin” information, it can also be used to present information in ways that help the listener better understand what you are trying to say.

VolunteerMatch has a history of strong, donor centric communication. It isn’t enough for the social sector to move to a world where results are the focus. Results need to be given the same level of communication attention that fundraising is given.

Replication vs. Diffusion: Does scaling social impact require scaling organizations?
A successful for-profit organization must maintain ownership of its concept while it scales in order to capture profit. But social impact accrues to the public, not the firm that owns the process that generates the impact. How should social enterprises weigh the tradeoffs between scaling their organization or scaling impact through sharing their process with others? Learn about two organizations that have successfully scaled using entirely different approaches (this session is still subject to change).

Today, I saw an interesting example of a "diffusion” strategy of scaling impact. New Philanthropy Capital, a nonprofit analysis firm in the UK which is itself a nonprofit, announced the launch of PHINEO, a new nonprofit analysis firm in Germany.

From the post:

“NPC is excited about the arrival of PHINEO, and also a little proud. As of Monday, Phineo’s team of 17 will research social problems in Germany as well as analysing charities trying to tackle them, to find those that have a large impact on the lives of beneficiaries. For this work, PHINEO has carefully adapted NPC’s charity analysis methodology for the German market, and has developed a three-staged charity analysis process…

NPC and PHINEO share a commitment to effectiveness, impact-driven funding, and the creation of public knowledge. We also believe that collaboration is essential to build the case for effectiveness and hope more and more similar organisations will spring up around the globe so we can learn from each other. We’re looking forward to following PHINEO’s progress—watch this space for regular updates.”

So NPC has essentially worked to create their own competition. This is not a one-off event. From my discussions with NPC, sharing their methodology with startups is a systematic part of their process.

This strategy would be insane for a for-profit company. As we note in the description of our SoCap panel, “a successful for-profit organization must maintain ownership of its concept while it scales in order to capture profit. But social impact accrues to the public, not the firm that owns the process that generates the impact.” This means that NPC can legitimately “claim” the impact generated by groups like PHINEO who they help get started. By sharing their knowledge, they are scaling their impact.

This approach is quite different from the more traditional approach to scaling, which generally refers to growing an organization so that it serves more people. The fact that social impact accrues to the public while profit only accrues to a single organization creates a striking difference between effective social sector strategies and for-profit strategies.

Bravo to New Philanthropy Capital for getting that their success should be measured by the degree to which they help drive “effectiveness, impact-driven funding, and the creation of public knowledge” instead of by the growth of their own organization.

The Institutional Imperative leads to companies making acquisitions of other companies which increase the size of the institution, but do not increase shareholder value. It leads to companies following what other companies are doing so that they do not risk looking bad instead of charting the course that would best lead to enhanced shareholder profits.

In short, the Institutional Imperative describes how many management teams manage their organization for the sake of the organization instead of recognizing that they should be managing their organization for the sake of shareholders.

I believe that many nonprofit organizations are in the grips of a variant of the Institutional Imperative.

The for-profit Institutional Imperative is driven by greed (management teams that want to run bigger organizations) and a desire to not look bad (management teams that follow the herd, even during periods of irrationality such as the dot-com boom and the period leading up to the financial crisis). The nonprofit Institutional Imperative is driven by fear, the fear created by running an organization which is constantly fighting for survival.

Nonprofits, even large ones, rarely have enough money. Even when their revenue is high, they frequently do not have the philanthropic equity on their balance sheet that would give them the ability to invest in the future. When an organization, or an organism, is in survival mode, it must shut down nonessential functions. It must operate so as to preserve itself. In the case of a nonprofit, this means focusing on fundraising and executing existing programs.

The nonprofit Institutional Imperative is responsible for the fact that so few nonprofit measure their performance, track the outcomes of their work or make the resources available to share information about what works (and what does not) with the field.

The nonprofit Institutional Imperative leads nonprofit management teams to run their organization for the sake of the organization rather than for the sake of stakeholders.

Warren Buffett believes that simple human nature is responsible for the Institutional Imperative. Observing that many for-profit and nonprofit organizations fall prey to the Institutional Imperative is not a criticism so much as a recognition that the normal human emotions of greed and fear lead management teams of both for-profits and nonprofits to run their organizations in ways that do not maximize benefits to shareholders and stakeholders.

But great organizations are led by teams who refuse to succumb to the Institutional Imperative. They recognize that the organization they lead is not itself an entity to preserve so much as a vehicle for delivering value to shareholders and stakeholders. The gifted executive is one who realizes that they have been entrusted with stewarding this value creating vehicle. They have been given the responsibility of maximizing the value that their organization creates, not simply tending to the care and feeding of the organization.

Before making every decision an executive team should be able to answer “Yes” to the question, “Does this action enhance value to our shareholders or stakeholders?” NOT “Does this action benefit our organization?”

By throwing off the shackles of the Institutional Imperative, you can align all of your resources towards your true goal. You can do more with less because you are putting every ounce of effort into creating value.

You can truly make a difference.

This year, NFF will conduct a similar survey. In the interest of providing the most valuable information possible to the sector, NFF wants to ask people what information would be useful to them and has selected the Tactical Philanthropy Community as the venue through which they’d like to gather input.

You can find information about last year’s survey here, summary results here and the full survey here. NFF would like the Tactical Philanthropy Community to make suggestions as to what additional questions should be asked in this year’s survey and plans to add a couple of questions based on this input.

To add your thoughts on what you’d like them to ask, leave a comment on this post.

But to many people active in online social action communities, these events had deeper meaning. This is a guest post from Amy Sample Ward, NetSquared’s Global Community Development Manager

So let’s run with this idea for a minute. There are 24 Social Venture Partners chapters and over 2,000 members. With this fund, the Rhode Island chapter is effectively unleashing their knowledge, making it available to the public and offering to steward any gifts made by the public since they are already providing services beyond the grant to the nonprofits they support.

In effect, this sets SVPRI on a path that potentially competes with community foundations. They are offering geographic specific advice on outstanding nonprofits without requiring that donors place the money with them (such as in a donor advised fund) and they are doing it for free. Why for free? Because information about social impact becomes more valuable as it spreads since the “owner” of the knowledge generates social value when other investors use their knowledge.

Of course, SVPRI’s fund will not offer personalized one-on-one consulting. They are not getting into the relationship management game. But they are “unbundling” information about which nonprofits are doing a good job from the administration and relationship management services that have traditionally been bundled within community foundations.

One of the underlying premises of Tactical Philanthropy Advisors is that high end advisors to major donors no longer need to have a geographic focus because geographic focus is only relevant in regards to grantee information and today we’re witnessing a massive trend towards sharing knowledge about grantees.

On Friday, I’ll be at the Social Venture Partners conference in Dallas. One of the session I’m leading will be on SVP’s potential role in sector-wide initiatives. I think the new fund being launched by the Rhode Island chapter is a fascinating example of how SVP (and other smart grantmakers) can leverage their knowledge and engage with the sector as a whole.

In the article, David (a consultant to grantmakers and nonprofit agencies and the former Director of Evaluation and Knowledge Development at the Edna McConnell Clark Foundation, a key practitioner of social investing) puts forth an excellent argument for what social investing is and what the implications of the approach are for the social sector. I encourage you to read the full article.

David starts with three “Unpleasant Truths”:

Unpleasant truth number 1: While nonprofits work incredibly hard, with passion and dedication, and often in incredibly difficult circumstances to solve society’s most intractable problems, there is virtually no credible evidence that most nonprofit organizations actually produce any social value.

Unpleasant truth number 2: Because so few nonprofits are willing to face this fact and ask themselves whether they are doing any good at all, or even as much good as they may be doing harm, we cannot rely on direct service nonprofits to fix themselves without a serious push.

Unpleasant truth number 3: In general, nonprofits do what their funders tell them to do. When funders make demands, more often than not the vision, mission, goals and objectives of nonprofit organizations give way. As the saying goes, We are what we eat. . . . and most nonprofits are what their funders make them.

He then goes on to give examples of a number of organizations who he says are actually destroying social value (either by spending money that results in no positive change or actually encourages the opposite of the intended outcomes – such as a violence prevention program that has been show to actually increase violent behavior).

David believes (as I do) that a social investing approach can greatly increase the social value production of the nonprofit sector and he lays out an inclusive definition of social investing:

• the use of rigorous selection criteria to choose nonprofit organizations to support,
• structuring investments to strengthen organizations in which investments are made in order to enhance their ability to provide effective services reliably and sustainably at high levels of quality,
• tracking performance and providing non-financial supports as indicated, thus helping these agencies become more effective and efficient in helping the people they serve to measurably improve their lives and life prospects,
• diminishing transaction costs to help these organizations stay focused on achieving their respective missions, and
• helping nonprofits to build reliable revenue streams that will support them sustainably at the appropriate level of scale — before terminating the investment.

As part of the selection criteria for investing in a nonprofit, David believes that social investors must ask the following questions:

• Who, exactly, is the organization serving and what are their needs?
• How many and what percentage of the people they serve finish the programs or receive a large enough and long enough exposure to services so that they can benefit?
• What empirical basis is there for believing that an organization’s program(s) and service(s) are effective — that is, producing outcomes for the people they serve?
• What are those outcomes, what are the indicators used to assess them, and what is the rate of success for program participants in reaching them?

This is where the rubber hits the road. According to David:

“In my experience, the majority of nonprofits cannot answer these questions… in this new age of accountability, nonprofits that cannot answer these questions will find it harder and harder to attract funding from social investors. And social investors will increasingly represent the larger sources of revenues flowing into the nonprofit sector… Social investing, if widely adopted, will help channel funding streams that are directed by measurable performance rather than feel-good stories, habits of giving and rank sentimentality. And social investing has the potential (yet to be realized) to advance a selection process that either forces poor performers to evolve and improve, or weeds them out.”

I agree with David on the way he has described social investing and the implications of it being widely adopted as an alternative to traditional charitable giving. I greatly applaud the clarity with which he describes the process. However, I must also reject the nihilistic claim that most nonprofits and the social sector as a whole is not currently producing social value.

To put this claim in context, realize that 8% of US workers are employed by nonprofits and the sector receives and spends roughly $1.5 trillion in revenue each year. Now I believe that the amount of social value creation in the nonprofit sector can be significantly increased. I believe that currently, as a country we are getting far less social value per dollar spent than we would if social investing became a dominate approach in philanthropy. But just because we have limited evidence of impact does not mean that the sector is not producing positive social value.

I point out this disagreement because I think that David’s starting point is shared by many analytical thinkers who hope to create a more robust social capital market. But I believe that painting this picture of the current social sector actual impedes the development of social investing because it 1) Flies in the face of the experience that most donors and nonprofit employees have and allows them to then dismiss the need for social investing and 2) It greatly lowers the bar to lay claim to being a successful social investor. If in fact the social sector is currently creating no social value, then any investment that creates social value, even a minimal amount, could be seen as having been successful.

David is a super smart guy. He’s also not afraid to say what’s on his mind, such as when he suggested earlier this year that I did not have a “smidgeon of knowledge” about evaluation and that I needed to get a “solid grounding” in social investing issues before I wrote any more about it(!). He’s also a member with me of the Alliance for Effective Social Investing.

What do you think? Is social investing needed? Will it lead to a more effective nonprofit sector? If you work for a nonprofit, are David’s criteria for social investments questions that you feel are relevant and important items for you to be able to answer (I certainly do)? If you are a funder, would you describe yourself as practicing social investing? If not, why have you chosen to use another approach and what flaws are their with the social investing approach?

If this outlook it correct, it is critical that nonprofits recognize this moment as one of great opportunity.

Cutting back is tough to do. Income is relative, so while getting a raise from $50,000 a year to $75,000 a year makes people feel flush, getting your pay cut from $100,000 to $75,000 requires painful cutbacks in your lifestyle.

The good news is that if the recession is ending, we have all completed most of the cutbacks we needed to achieve. Today, we stand within organizations that were able to handle the downturn and are now operating on budgets set well below where they were a few years ago. We’ve completed the tough layoffs, we’ve cut back on wasteful spending, we’ve reset our expectations.

If you are operating a nonprofit you have a huge opportunity to reset the future path of your organization’s financial health. At any given time, it is hard to take resources that are needed to tackle today’s problems and invest them in the future. But because income is relative, as the economy improves and additional resources become available, you will face the easiest possible time to earmark those resources for investment in your future.

• Develop the next generation of your most effective program.
• Put in place an outcome measurement system.
• Build a reserve fund.
• Upgrade your technology infrastructure.
• Hire a top notch fundraiser.

You’ve already done the hard work of cutting back. Don’t let this opportunity go to waste by simply letting your budgets slow creep back up to where they were before the crisis. If before the crisis you had told people you wanted to enact layoffs, cut back on travel and eliminate your weakest program in order to invest in one of the items above, you would have faced a revolt. But today you’ve already done the cutbacks. It is up to you what new path you chart as the economy recovers.

This recession was the worst since the Great Depression. So if economist are right and the recession is ending, the next few years offer the easiest possible time to invest in your future.

If not now, when?