One of the biggest difficulties around the philanthrocapitalism debate is what the word even means. There is a branch of philanthrocapitalists who believe that for-profit business models can cure all the world’s ills. That every social problems has a profitable solution.
I think those people are deeply wrong.
There’s another branch of philanthrocapitalists who believe that philanthropy and the nonprofit sector can benefit greatly by using a financial markets approach to understanding nonprofits and to funding their operations.
This is the camp I fall in.
There is a set of simple equations that are important to understanding the difference between for-profits and nonprofits.
For-profits take labor and capital as inputs into an organization and produce financial profits as an output.
Nonprofits take labor and capital as inputs into an organization and produce social impact as an output.
To me, this implies that there is a good deal of overlap between understanding how nonprofits and for-profits utilize inputs. But there is relatively little overlap in understanding their outputs. This is why there is so much theoretically debate around measuring impact. There’s no good reference point in the for-profit world. Nonprofits exist for a fundamentally different purpose than for-profits. When philanthrocapitalist types demand that nonprofits become financial sustainable, I think they’re missing the point. The real point is to achieve impact. Achieving financial sustainability is just a fancy way of saying that nonprofits need to find a systematic way to secure the inputs they need to operate. But first nonprofits need to determine if they have a system in place to efficiently turn inputs into outputs (impact). If they do (and I believe many do not), then securing sustainability is key.
But sometimes nonprofits will find ways to become sustainable in a way that impairs their ability to achieve impact. Maybe a nonprofit that provides housing for low income families realizes that they could increase rents and become financially sustainable. But in all likelihood, doing so would reduce impact. It would reduce the degree to which the nonprofit was helping the cause of providing housing to low income families.
The interesting thing is that for-profits actually face the same problem. Let’s say a for-profit isn’t taking in enough revenue to pay their bills. They need more revenue so they slash the price of their product by 50%. This may very well have the impact of increasing demand so much that they sell tons more product and revenue goes up. Except profits go down. The for-profit is losing money on every sale and while they’ve increased the “inputs” available to the firm, they’ve reduced their “output” (plenty of for-profit firms have made this mistake, seeking to maximize revenue instead of maximizing profits).
Nonprofits are firms that transform capital and labor into social impact. While there are interesting opportunities for for-profits to create social impact as well as profits, the majority of issues that nonprofits seek to work on will not provide profit opportunities to the firms that are maximizing social impact. There may be ways that a firm can produce both a profit and social impact, but in most cases the firm will realize that by foregoing profits they can increase social impact.
What I think is most critical is that we begin to understand that the work of producing social impact is just as worthy as the work of producing profit.