Investment, Not Philanthropy: Entrepreneurship and Poverty
As the three prior posts enforce, our current investment and philanthropic paradigms offer only a rut from which a new horizon is invisible. Let’s take a look at what Jacqueline Novogratz calls a “patient capital” model, but with an emphasis on not only changing investment unquestioned assumptions and imbedded beliefs, but also philanthropic assumptions and beliefs; all for the benefit of those living in under-resourced US communities where many live in the condition of poverty.
Novogratz tends to focus on changing the paradigms of investors by offering impact investments with less-than-market returns to investors and longer investment horizons for those returns, but offering financial returns nevertheless with both quantitative and qualitative societal impacts. Her book, Manifesto for a Moral Revolution is full of stories and lived experiences that validate this potential. This is all good!
We propose a model focusing more on changing the paradigm of those with resources and philanthropy. What if philanthropists started viewing their giving as capital investment? Wait a minute! I thought we were going to talk about philanthropy, not investment? We are, but I want to propose an entirely new perspective on capital returns that are not less-than-market and these only make sense when considered from a philanthropic perspective, not an investor/capitalist perspective. I call this patient capital/impatient philanthropy. Here is a graph of the new model:
S&T stands for sustainable and transformational. This graph combines a traditional investment model with a traditional charitable donation model (see Post 3 of 4 in this series). A patient capital/impatient philanthropy paradigm starts with a normal philanthropic gift, given as an investment in a venture committed to all three ROI’s, sustainable, transformational, and social. Because of this multi-dimensional emphasis, financial returns to investors are secondary. This idea will shock those with resources bound by the ruts of the traditional investment paradigm.
Please, allow an explanation.
First of all, in an under-resourced community where those in the condition of poverty tend to live, expecting even a less-than-market return in any window of time narrows the potential for indigenous ownership of assets thereby choking the potential for real wealth-building and change to happen. It does not help indigenous entrepreneurs overcome the need for stability and security, nor mitigate the fears of entrepreneurial losses or the indignity of pandering to those with privilege who seek to help.
This patient capital/impatient philanthropy model poses an economic return vs. a financial return; returns which might only be possible years later. Economic returns must not be financial, but can be qualitative in nature. Transformational and societal returns indicate these. Impatient philanthropy or capital introduces accountability to the assumed realm of charity, but with a realistic understanding of the depth and breadth of the core problems at hand in under-resourced communities. Investing philanthropic dollars in order to fuel indigenous entrepreneurial businesses with only expectations of economic returns, with financial returns possible, but only over the long-term, is one piece of this new puzzle.
The real magic is in the return generated on philanthropic dollars, of which a traditional charitable model delivers only Social ROI, and no resolution of core problems. With an initial and reduced on-going investment, a business enterprise, owned and run by indigenous entrepreneurs can earn something. The returns will not be positive for years, but they will start to produce sustainable, transformational and social returns in ever-increasing amounts as they operate.
For years, a philanthropic or impatient capital investment will generate negative returns, but it can be expected that those negative returns diminish over time, manifesting accountability to improve the business. Note that these returns are not less-than-market returns; they’re negative. But when compared to no sustainable or transformational returns in a traditional charitable donation model, diminishing negative returns offer a far better outcome! As the business grows, creating jobs, engaging the community, fostering relationships, and growing its customer base, even if at a loss, it is improving its chance of profitability at some point in the future while helping solve core problems.
The investor/philanthropist need only decreasing levels of capital filling the gap of capital lost, not the entire initial investment or what would be the annual recurring charitable donation that solves nothing.
As one gifted with resources, won’t you consider investing in indigenous entrepreneurs in under-resourced communities where those in the condition of poverty tend to live? Would you embrace the patient capital/impatient philanthropy model committing to fill the capital gap while businesses owned by indigenous entrepreneurs work to build a business where one would not exist without both your generosity and accountability?
Within the School of Business at Benedictine College, the Byron G. Thompson Center for Integrity in Finance and Economics and the Cloud L. Cray Center for Entrepreneurial Services are committed to advancing free markets and virtue, are offering an opportunity to do just this! We are engaging with indigenous entrepreneurs living in the Ferguson, Mo., area, to help them learn entrepreneurship and listen to them as they pitch their start-up companies to investor/philanthropists at our first ever Spark Tank event.
Click for Part One in this series, “Finding a Way: Entrepreneurship and Poverty”; Part Two, “Beyond the Handout”; Part Three, “Transformational ROI — Where the Bottom Line Meets Poverty”; and Part Four, “Investment not Philanthropy.”
Image: Flickr, Vladimir Badikov