A Discussion Between Paul Shoemaker and Mario Morino... During our recent Venture Philanthropy Partners (VPP) board meeting, marking the end of our first seven years and beginning our next stage and second fund, we started a discussion of lessons learned. I'd like to share a few of the points as they have particular relevance to the issues of scaling and funding in the nonprofit sector and to the points raised by Paul Shoemaker's post.

It is important to caveat my comments because we are "place-based" in our work and, therefore, naturally constrained in the size of our "investment opportunity universe." By "place-based," I mean we invest within a geographical region, in our case the National Capital Region of the District of Columbia, the adjacent Maryland suburbs, and Northern Virginia. Additionally, our scope is further delimited by our focus on the core needs of education, learning, and healthy development for children and youth of low-income families - a target population that receives one of the lowest percentages of overall philanthropic giving and is remarkably weak in the public policy arena because it has no political influence and advocacy power. After all, kids don't vote.

Here, in essence, are a few of the points we discussed.

A Misguided Focus on Scaling?
First, the overall emphasis on scaling nonprofits may be one of the worst disservices many of us have perpetrated over the past 10 years. This is not to say scaling isn't of value; it is indeed of great relevance and value to a number of organizations. But, as a group, we never did a good job of segmenting the nonprofit world functionally and structurally to understand where scaling is most applicable, needed, and effective—and where it isn't. From our experience, many of the organizations seeking to scale, in terms of expansion, should instead focus on making what they do more effective. Some of this phenomenon comes from the donors themselves who in their business lives have watched scaling take place on much larger levels and in relatively short periods of time. The irony, however, in our work, is that by reversing this focus on scaling, we might:
1) encourage improved quality of service and better recognition;
2) better support the community-building role of nonprofits (the John Gardner school of thinking that we are coming to appreciate more and more); and
3) reduce some of the competition for philanthropic and public funding.

I think much of the work being done to better define impact and scaling will prove of great value. In my view, however, most of this research has neglected to look at impact and scaling by the various segments within the social sector, which are as different and diverse as we can possibly imagine.

A Social Capital Market and Nonprofit Funding
The risk that newer philanthropic investment approaches will scale organizations and, in so doing, create a larger funding crisis is very real. There is simply not enough focus on building revenue ahead of, or at least aligned to, expense growth, and while I believe that efforts like Chuck Harris' SeaChange can succeed, I do not see the ready emergence of a "social capital market" as many proclaim. I say this because we are talking about, at best, markets of hundreds of millions (less than the corpus of many foundations today), and the need is way up into the billions.

Our preliminary conclusion on scaling is that we need to invest in segments within the sector where there is available capital or the basis for financial sustainability. This, in turn, means that there are clear and obviously available public funding sources of considerable magnitude, e.g., K-12 education, healthcare, and the like. Or, it requires that there is a fee-based economic model that can drive the organization's financing. Only in the rarest of cases will an organization be able to scale up via a major donor development capacity (as Harlem Children's Zone has done) as the focus, mechanics, and skill sets available all work against doing this in any kind of scale - at least for the focus we've defined.

Talent Shortage
There is an acute shortage of executive talent, i.e., CxO roles, in all sectors, and even more so in the social sector. Further, the general lack of supporting infrastructure to build strong enterprises is weak overall. Ironically, and often not spoken about, is the enigma that the emergence of Bridgespan, the McKinsey Non-profit Practice, and a handful of other select providers has created. Their presence and relative effectiveness have shown how weak the field of "technical assistance" available to aspiring nonprofit executives really is. Certainly, access to capital is a constraining factor, but what concerns me even more is the overall acute shortage of talent. The inflow of talent from college campuses in the form of public-policy or civic-oriented youth or individuals from the business world wanting to "give something back" is not an immediate or clear solution. All too often, these folks need greater understanding of the social issues, dynamics, complexities, and cultures that are generally the difference between organizations that will make a real, lasting difference and those that will not. This talent shortage may well prove to be the biggest impediment to overcome.

Absence of Market Pressures and the Social Entrepreneur Movement
I am highly supportive of the social entrepreneur movement burgeoning in the United States, but I am equally as strident about the need for some adjustment so the potential it can generate can be achieved. The absence of market pressures may prove to be one of the biggest limitations to the movement. There are critically few natural mechanisms to help these leaders either develop as highly effective executives or exit - voluntarily or not - when the organization has outgrown their capacities.

I see some areas that the field needs to better understand and deal with for the years ahead. For example, what is the effective lifespan of a young social entrepreneur in the sector? They are unlike community activists who have often taken on their roles out of sheer necessity and grown to stay with their organizations for decades. This may not be the norm for social entrepreneurs, and we have witnessed some early indications first-hand. In the private sector, save for the few "bubble" years, the entrepreneur or leader typically has a long career, with those 35 to 45 years of age hitting their prime. With social innovators who often create programs in their late 20s or early 30s, we have to worry whether we are developing the executive core for the sector or if this is really a stepping stone to a different career. Marriage, children, age, and pressures of the work can all converge, making things like salary and stability more important. But, even more so, as the organizations they created grow and scale, they have to be managers - and management is really hard! These leaders often find themselves worrying more about administration and the sustainability of their organization than the moral or social issue they seek to advance. Given time, it's not as rewarding as it once was, and public policy, corporate positions, consulting gigs and the like may look a lot more attractive.

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Note: the preceding was drawn from a private exchange between Paul Shoemaker and Mario Morino. Although not originally intended for a public audience, the idea of posting this exchange was suggested by an interested party who was "listening in."