Social Currency

In the 1988 presidential campaign, our soon-to-be 41^st President painted a lovely picture of a society served by a “Thousand Points of Light”: “I have spoken of a thousand points of light, of all the community organizations that are spread like stars throughout the Nation, doing good. We will work hand in hand, encouraging, sometimes leading, sometimes being led, rewarding. We will work on this in the White House, in the Cabinet agencies.”  At the time, reasonable people questioned whether that vision was superior to the light of a single government source in meeting the needs of society. The following year,world events seemed to provide answers:  A thousand points work.  One point does not.

Market Solution 1, Central Planning 0.

Events here and abroad seem to be slightly re-opening the question of how many points work best.  Regardless, America’s social fabric depends on those Thousand Points of Light hanging on the warp of government support and the weft of charity & philanthropy. 

Two decades on, how are those Thousand Points of Light holding up? I write you from a state (California) that spends more on jails than schools. Our kids are less literate than their peers from the failed Soviet experiment. Civil discourse has become increasingly vitriolic. More Americans watch “Charlie Bit My Finger – Again” on YouTube than attend all of the nations’ symphonies, operas and ballets combined. We need to check on our social fabric – and again I think part of the answer is how many points.

How do we fund our Thousand Points of Light?  An essential part of the answer is that we pay fees, make donations, and buy goods and services from them.  This revenue is all critical to support their contributions to society.  Sometimes, however, they need capital in addition to revenue.  This capital is another place where we have tried a market based solution – with limited success. 

Capital for social purpose organizations can take many forms. It can be loaned, invested, or given.  It can come with many strings attached, or few.  This notional capital market is gaining such momentum that Harvard Business Review ran a recent feature story by Robert Kaplan and Allen Grossman on it.

Of the myriad ways one can describe that capital, I find an important one is points.  How much does the money cost an enterprise? More specifically, how much less does it cost than money to open a coffee shop. Financiers describe this in basis points (1/100^ths of 1%).

Anyone can borrow capital at a risk-adjusted market rate – for Starbucks it might be 7% through corporate bonds, for Aunt Kathy when she wants to open a local coffee shop, it might be 9 ½% with a loan backed by the US Small Business Administration. The good news is that these days, nonprofits can frequently borrow commercially, too.  If you want to run a coffee shop as a workforce development program, you can borrow just like Aunt Kathy, Starbucks, or somewhere in between.

Recent innovation has helped social purpose enterprises borrow at a discount. Whether capital came from PRIs, social purpose loan funds, government programs, or any other “concessionary” source, an organization could save perhaps 200-500 basis points (2-5%) versus market rate money.  For some, these 500 basis points saved are the difference between making ends meet and not.  I’ve worked with organizations in affordable housing, public radio, and microfinance whose business models rely on such reduced rate capital.

But just as a rate reduction won’t help all mortgage holders keep their houses, a 200-500 basis point solution won’t work for all nonprofits.  A family in Fresno with one wage earner out of work can’t afford either the principle or the interest (reduced or not) on their loan.  Similarly, many charter management organizations running schools cannot remain solvent and liquid if they must repay launch capital.

How do we make sure social purpose organizations can continue to operate when the repayment of principal would break them? What do we do when there is a 10,000 basis point problem instead of a 500 basis point problem? It’s not always the last 5% - it’s often the principal—the first 100%. In my experience, there are a great number of valuable nonprofits that need capital to start or grow. Many would be crippled by returning it, but can become otherwise quite viable. There are only a few who have nonprofit businesses sufficiently strong that they can repay the capital and all but the last couple of points of interest.

Some would say not to bother – let the market provide feedback. I disagree.  For-profit companies often also require patient capital. Witness GM’s latest IPO, made possible because our government relieved the enterprise of the burden of debt service.  Had we not converted our loans into equity, the new GM would not be able to fly economically – just recently Chrysler , which benefited from no such conversion, described that it lost money, but “would have been profitable except for interest on government loans”. Similarly, many nonprofits need a window of debt relief to build otherwise viable economic models.

How do we provide a 10,000 basis point solution to organizations that cannot accept equity investments? Many are actively endeavoring to create hybrid for-profit / charitable organizations to get around the constraints. A brave few are deciding to work with the constraints by providing major capital through philanthropy – Philanthropic Equity (see our report or EMCF’s excellent GCAP report for examples). This capital does not seek a financial return, but does play the role of that 10,000 basis point solution. It is neither regular business revenue nor a loan. It is an investment in the organization, with the returns to be paid forward rather than repaid.

Others operate in between. The Ford Foundation has been an active PRI (program-related investments, see a recent column by my colleague, Kristin Giantris) maker (reduced rate loans), and has had a policy of only making PRIs to grantees.  The effect of this is to provide funds with an aggregate required repayment of less than the amount of the loans.  Essentially this offers a few thousand basis points.  For instance, instead of repaying 100% plus 7% interest, borrowers might repay 100% plus 3% interest, less a grant equal to 25% of the loan amount. Whether this policy was the result of thoughtfully finding a financial need and filling it, or as an unintended result of other intentions, I couldn’t presume to know.  Either way, I applaud it!

Nonprofit organizations need a whole range of capital solutions, ranging from market rate, to modest discounts, to partial repayment, to no need to repay at all. Some simply need commercial access. Some need 400 basis points.  Others need 10,000. Still others fit in between. A critical game for philanthropy in this era is to find solutions appropriate to the needs of the individual organizations we seek to support.  It is no longer sufficient to apply a favorite method to all.

How many points does it take?  Sometimes far more than a thousand.