Small Groups Need Sustained Funding to Develop Breakthrough Ideas

When is explosive growth, not?

The past 15 years have seen an eruption of new nonprofit organizations and businesses to promote social change. With more than 1 million charities and over 1,000 B corporations—companies whose goal is to benefit society as well as shareholders—more people and groups than ever are focused on new ways to do good.

While this is an exciting development, most of these new enterprises are small, often micro-size. As an ecosystem, they make up a vast and varied landscape of social entrepreneurs striving to change the world. Individually, few ever get big enough to solve their own organizational issues, never mind make headway on large-scale problems or achieve any major influence.

But innovation tends to spring from these hungry start-ups, which then find it difficult to grow.

Unfortunately, too many in philanthropy and impact investing exacerbate the problem by providing seed money to promising enterprises but not doing what it takes to expand the best approaches broadly. Also causing more harm than good are the various business competitions, “innovation awards,” and other means by which new projects get attention but meager funding.

The current approach is doing little but producing a growing network of small-scale groups that duplicate efforts and compete for limited resources.

Take a look at international development and relief groups. GuideStar lists more than 12,500 such organizations, and lots more probably operate below the radar.

Nearly nine in 10 listed in GuideStar have annual budgets under $1-million. Less than 2 percent have annual revenues greater than $10-million, the minimum a group needs to take risks and build a strong staff and management.

Scrolling through the list of the biggest international development organizations, it is striking just how many have been around for decades or have a strong religious affiliation.

Few, if any, are the innovative breakthrough organizations created by the new generation of donors who dream of making a difference on a big scale.

Only 10 percent of the big nonprofits focused on international development were founded after 2000, and fewer than two dozen of those groups have grown to $10-million or more in revenue. This means that most of the hundreds of millions of dollars invested in expanding innovative solutions to society’s most intractable problems is going to a very small group of large organizations on the one hand and a vast ecosystem of tiny groups on the other.

A review of the Form 990 informational tax returns filed by a randomly selected group of 60 international development organizations funded before 2007 by the Mulago, Skoll, and Lemelson foundations and the venture-capital firm Draper Richards shows that most have remained quite small, even after five to seven years of support to spread their work.

A few, like Water for People and KickStart, have gotten past the $10-million mark and continue to grow. Among the Draper Richards grantees, for example, we find Kiva, Room to Read, and the One Acre Fund—all breakthrough organizations that have taken innovative new ideas and expanded them. But these are the exceptions.

Much more common are organizations with budgets of $800,000 to $4-million. What is striking about these groups is not only how numerous they are but how smart, sophisticated, and impressive they are in terms of their ideas for how to change the world. They have created tremendous organizational capital in the form of relationships, leadership, knowledge, and skills.

Individually, however, they lack financial capital and suffer from the usual ailments of small organizations.

They are stuck in the nonprofit tar pit of tight annual budgets and limited growth prospects. Their balance sheets show very little liquidity. They don’t have the flexibility to invest in marketing or building their organizational capacity and financial base. They cannot take advantage of opportunities. They have extremely low tolerance for risk because a single bad decision can spell fiscal doom. They often dread the departure of a leader who has been a magnet for funding, even if that leader is ill-prepared to lead a large enterprise beyond the start-up phase.

In effect, these enterprises are marooned—islands of stranded social capital. They may have a game-changing idea, but they are stalled by an inability to spread it broadly.

So what is the way forward to help this network of organizations with significant social capital but too little financial capital?

To be sure, not all good ideas can expand to a bigger stage. But organizations that do have a promising approach can learn what it takes to grow rapidly.

They can learn from other breakthrough organizations what steps to take and develop a strategy.

And they can test their potential to achieve real social change through analytics, evaluation, and disciplined scenario planning.

Just as important, nonprofits and social enterprises can learn from growth-oriented small businesses and look for an “exit.”

An exit in the business world is a sacred event, the moment when the success (real or hoped for) of an enterprise gets the attention of the capital markets or a much larger business. The exit occurs when the company either goes public or is sold to another company, often with a major payday for the acquired company’s founders.

In the nonprofit world, the exit is often a merger or acquisition. Nobody walks away with a golden parachute, but the benefits to society are what matter: the accumulated social capital that provides the seeds for building long-term social impact.

Unfortunately, the nonprofit world doesn’t have well-developed systems that make mergers and acquisitions as plentiful as they should be. Too many nonprofit leaders fear that a merger is an admission of failure. They don’t really know what it is or how to do it. As Bridgespan’s recent research on mergers has shown, while in many places the number of new organizations is exploding, merger activity is still limited and following well-worn paths. This is a shame—but also an opportunity.

Grant makers can make a big difference in providing the support that will lead to the growth of the strongest organizations and the building of new alliances that are big enough to take risks and spread great ideas.

We should review the work of our grantees and assess their vision, business model, and leadership to see which ones are most likely to expand. Then we should provide those groups with continuous and comprehensive support to bolster their operations, helping then with basic management, organizational development, measurement systems, and investments in talented professionals.

Early in this process, we should start talking about merger options and remove the stigma that such unions are a sign of weakness. As grant makers, we should build partnerships to aggregate capital and consider alternatives to building stand-alone organizations.

We all know social impact can grow exponentially when we share knowledge—and great ideas—through networks and coalitions. Why not take a new approach in these times when truly a thousand flowers have bloomed? We could see better results without the fragmentation and duplication of the last 15 years.

It’s time to figure out how to take today’s stranded social capital and liberate it to make a real difference.