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Guest blogger Josh Weissburg is the Philanthropy and Innovation Project Manager at the Aspen Institute, where he works to identify models and measures of social change. He is also a co-founder and Director of Africa Operations at Renew LLC, an investment consulting firm that connects small and medium size businesses in emerging economies to U.S.-based investors and businesses.
Last year I had a first-hand taste of how confusing it can be for a young, ambitious, idea-filled nonprofit to pursue funding these days.
My fellow board members and I were sitting in a hotel suite for the first official board meeting of a startup nonprofit that had just completed its first year of funded operations (more on that in a minute). The organization (let’s call it Start Abroad) provided a unique and powerful blend of study abroad in emerging economies and intense professional exposure and mentoring to minority high-school students in high-needs urban areas; these students would otherwise rarely travel outside the county, let alone the country.
Start Abroad was, without question, a social innovation. An innovative and holistic approach to motivating and launching students with few other avenues for personal and professional growth was deeply embedded in the culture of Start Abroad – and it was this sense of fresh thinking that led its founder to pitch the organization as a “social enterprise.”
The board, examining the organization’s balance sheet and funding prospects for the first time, understood, vaguely, that being a “social enterprise” meant that Start Abroad should examine earned income strategies that could make the organization at least partially self-sustaining over time. But Start Abroad had urgent needs to attend to first. The seed funding that enabled the organization to launch barely covered the costs of sending its first class abroad, and while the founder was able to get by on a meager fellowship stipend, she had little to no capital (or time) to grow the organization. In order to attract more funding, Start Abroad needed to demonstrate impact, and quickly.
Many potential funders had expressed excitement and interest in Start Abroad. But, as is often the case, they were mostly interested in sending needy kids abroad rather than building capacity within Start Abroad to take students’ experiences and shape them into life-changing goals and professional options. The latter (growth capital) is what Start Abroad really needed, because its value proposition lay in the idea that study abroad was just the start, the “shock to the system” that could put students on a new path; what students did with this experience – how it was processed and translated into personal and professional goals – that was the real thing.
Nonetheless, as the board examined our funding prospects, it became clear that the need to hit performance metrics – send a bigger class, find more professional internship placements, etc. – was the key to obtaining the immediate funding needed to keep Start Abroad going. So we worked to line up funding to hit these metrics with the expectation that once Start Abroad ramped up its operations, it would find itself with enough working capital (or at least a strong case for this capital) to build out the robust infrastructure it needed to deliver on its promise of holistic student development.
You’ve probably guessed where this story is going. To make a long story short: we were mistaken. Start Abroad did line up funding commitments to send a bigger class abroad during the second year. But of course commitments don’t equal cash flow. Funders’ timelines did not match those required for Start Abroad to place its class abroad, so it resorted to bridge loans to pay the bills in time to send its second class. This was the fall of 2008, and as the loans came due, many funders could not meet their commitments. Saddled with hundreds of thousands of dollars of debt and no collateral beyond funding promises, Start Abroad folded.
At first glance it may appear that Start Abroad was another sad but inevitable casualty of the financial crisis. While there’s no question that the crisis made things worse, what would have happened to Start Abroad if its funding commitments had come through? Best case: it would have paid off its loans and found itself with zero working capital, no additional staff or capacity to deliver robust mentoring to past classes, yet needing to raise a new round of funding for its next class. Not a dream scenario by any means.
This is no way for a social enterprise to grow. What’s going on here? Should Start Abroad have conceived itself as an earned income organization from the start, growing only as fast as its revenues? Would any funders have come on board if Start Abroad had tried to launch by sending only a handful of students abroad in its first several years while other study abroad programs send dozens with comparable grants?
These are the sorts of questions one confronts on the business end of social innovation. I’ll explore them in the next two posts.