 Economics:
The Mother of Innovation
By Bill
Shore
Founder and CEO, Share Our Strength
If necessity
is the mother of invention, as Plato first said, then economics is the
mother of innovation. The economics of taking good ideas to scale is
leading nonprofits to innovate as never before. Much of this innovation
centers on building bridges to connect social needs with capital
markets.
In a commencement address at Harvard in June, Bill Gates called for “a
more creative capitalism” and proposed that we “stretch the reach of
market forces so that more people can make a profit, or at least make a
living, serving people who are suffering from the worst inequities.”
One example is the Gates Foundation's investment in GAVI (formerly known
as the Global Alliance for Vaccines and Immunization), which develops
vaccines for HIV, malaria, and tuberculosis. By creating a new financing
mechanism called an advance market commitment—a promise by foundations
and industrialized nations to subsidize the future purchase (up to a
predetermined price) of a vaccine not yet available—GAVI guarantees
potential drug companies of a viable market if they develop new
vaccines.
Most nonprofits were established in response to a market failure; to
fill gaps left by either the marketplace or the government due to the
lack of economic or political incentive. So the challenge is whether
nonprofits can use philanthropy to develop a needed product or service,
but then attract market forces to sustain it and reach all of those in
need.
This requires
something different from entrepreneurship—including social
entrepreneurship—and distinct from the passion, innovation, and
risk-taking that entrepreneurship implies. Rather, it requires a
nongovernmental organization, or NGO, to innovate to become a
market-directed organization, or MDO.
An MDO takes steps that make it more attractive to market forces, such
as developing metrics for a return on investment and instill
accountability, financing strategies that include use of debt and
equity, and earned income activities to generate diversified revenues.
A variety of such strategies has already emerged from innovative
organizations:
-
Fee-for-service: College Summit, which is located in
Washington, DC and helps talented low-income students navigate the
college access process, has created a model in which philanthropy
covers the overhead for the national headquarters but
fee-for-service paid by schools covers local variable costs. This
enables College Summit to grow without depending solely on
charitable gifts.
-
Creating community wealth: The Caroline Center in
Baltimore provides job training for women and runs a
furniture reupholstering business. Jewish Social Services Agency in
Rockville, MD, runs a private duty, home health care service. Both of
these business ventures generate a profit.
-
Tapping
secondary markets: Sanaria, a biotech company in
Rockville, MD, is developing a vaccine to prevent malaria. But the
upfront investment required for clinical trials and regulatory
approval dwarfs any philanthropic investment. Sanaria estimates the
vaccine market for tourists traveling overseas, the military,
business people, and government officials could total 100 million
people and help subsidize vaccine distribution in developing
countries.
-
Investing in entrepreneurs: The Acumen Fund invests
philanthropic dollars in business enterprises that deliver
affordable and critical goods and services in poor countries.
Investments include Kashf, a commercially-viable financial services
company in Pakistan that makes small loans to women in Pakistan.
Peter Drucker
defined innovation as change that creates a new dimension of
performance. Aligning with market forces designed to attract more
capital is just such an innovation.
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