Social Capital Marketplace Requirements (Part 3)
While the analogy between the development of private capital markets supporting investment in the private market sector and the development of ‘social capital’ markets that could support investment in the public, voluntary sector seems robust, it remains to be seen whether there exists an incentive structure that would drive the creation of the market mechanism for that market. Jed Emerson notes that there are several barriers to creating such a mechanism in the nonprofit sector:
* The risks that the ‘investor’ takes are “out of line with the possible return you are offering”
* There is a fundamental lack of “deal standardization”
* The funders are oriented toward “giving to charity” as opposed to “investing in value”
* There is a “fundamental financial illiteracy on the part of many of those involved”
* There are “people who understand the traditional charitable approach” and those “who understand the mainstream market approach So you have two sets of people trying to solve a common problem who are using different language.”
* There is a mismatch between the sources and uses of capital - a need for opportunities to structure grants in new ways
* There is a need for shared information about structures that work.
I would argue that there is a need to deal substantively with the facts when trying to draw an analogy between the for-profit and non-profit capital markets. The answer is not as simple as plugging in the right components here and there. Indeed, two fundamental problems exist that may prohibit the creation of a nonprofit capital market structure: first, there is no ‘return’ or repayment source for philanthropic investments; and second, there is no incentive for funders to create this marketplace.
I do believe, however, that there is a future value proposition for philanthropy. That is, there is an opportunity to deliver philanthropic opportunities so strategically placed, so compellingly articulated, so personally relevant and so refreshingly accountable that they will significantly increase the scale and impact of philanthropy, thereby seeding and transforming the social capital marketplace.