by Adam Corson-Finnerty
Copyright 2000 by Adam Corson-Finnerty
Permission is given to forward or copy this article, so long as the author's name, email address, URL, and copyright notice are included. (They are given at the end of this article.)
Doing Well, Doing Good | Business is Business | Charity is Charity
Part 1: Doing Well, Doing Good
From time to time I am contacted by "dot.com" entrepreneurs who want to market a digital service to the non-profit sector. These people have in common the notion that they will be able to do well by doing good. In fact, they hope to do *very* well.
I must confess that I am puzzled by these approaches. Many of the people who contact me know very little about the charity sector. They *do* know that billions are being spent on charity, and they know that NPOs (non-profit organizations) are not exactly in the forefront of e-management. This seems to spell o-p-p-o-r-t-u-n-i-t-y.
I don't think so. While I have seen some worthwhile and useful concepts, I have not seen a single pureplay Internet proposal that is going to make anyone rich--much less bring the level of return that venture capital firms expect from their investments.
To state a simple thesis: no one--except outright thieves--has ever gotten rich from the non-profit sector. Not new-economy rich, and not even old-economy rich.
When I say thieves, I am not being metaphorical. I mean people who have put their hands in the till to finance their gambling, or drug habits--or to keep their mistresses in style. Otherwise, I challenge anyone to give me an example of a person who has made even $10 million from a pure focus on the charity sector.
Our new economy entrepreneurs hope to make much more than $10 million. They seek investments of that size and greater from "angels" and VC firms, spinning out business plans that promise substantial returns. In the dot.com world, such early investors expect to see "multiples" of 20 or more--meaning that they want their stakes to bring back $20 for every dollar invested.
This won't happen, and unless these start-ups shift to the commercial sector, they will fail. Any charity that has devoted time, money, and information assets to the schemes of these start-ups will probably end up losing all three.
I hate to sound so negative. My development colleagues know that I have been a constant advocate for Internet-enabled fundraising, and a regular critic of go-slow NPO administrators. However, I have never been a crusader for putting charity eggs in dot.com baskets. I tend to prefer the build-your-own approach. Along with the share-what-you-learn approach.
And now I'm joining the watch-out-for-start-ups brigade.
Meltdown
We all know that the bloom is off the dot.com rose. Internet start-ups are falling by the wayside. Companies like boo.com, eve.com, productopia.com, freeinternet.com, and iBelieve.com have gone bye-bye. Even big name companies like priceline.com and amazon.com have taken a beating.
Professional investors are becoming leery of new proposals, particularly in the business to consumer sector. Furthermore, they are refusing to invest additional money in existing companies that are not showing a clear path to profitability. Profitability, in fact, is not enough. In a profile of the demise of Productopia.com, the New York Times observed that all the figures pointed to profitability and success--but the company's VC backers shut it down anyway. Why? Because it was not going to be "profitable enough" to justify further investment. So one day at 4 p.m. the employees were gathered and told to go home and stay home. ("End Is Swift and Sudden For an Internet Company," by Matt Richtel, NY Times, Nov. 6, 2000 Pg C5)
Most of us don't fret too much about the people whose fortunes are riding on the success of a start-up. The backers have probably made buckets of money elsewhere, and the employees can usually migrate to another "insanely great" firm where they may or may not strike Internet gold.
But what about the organizations that were relying on dot.com A, B, or C? "It's pretty brutal what's happening back there," a recent Silicon Valley CEO told me on a visit to the east coast. "A lot of companies have been relying on other Internet companies for services. With these failures, some companies have lost their data, their software, their memory."
For an example close to home, consider what happened to Plainfield High School in Connecticut. They responded to an offer of a free computer lab from ZapMe.com. After spending $4,000 to prepare the room for their free computers, ZapMe cancelled the offer. With its stock dropping from $13.75 per share to $2.00 per share, ZapMe is in trouble.
"ZapMe says it is refocusing on selling its technologies for high-speed Internet access and services via satellite to business." "'We're looking for people to adopt these schools,'" said a company spokesperson, but in the meantime the school has been told that it can pay a fee or return the computers. ("Offer of Free Computers for Schools is Withdrawn," by John Schwartz, NY Times, Nov. 2, 2000, pg. C1) Altogether, about 1,000 schools have been told their scheduled installations will not happen. Another 2,200 already have their computers, but don't know whether they will have to pay for them--or return them. ("No More Teachers' Dirty Looks," by Lisa Shuchman, The Industry Standard, November 27, 2000, p.96)
The lesson from all this is that NPOs should be careful about investing time and money in a partnership with a dot.com start-up. And they should be *even more careful* about entrusting any mission-critical data or functions to a dot.com. In my not-very-humble opinion, every one of the VC-backed pureplay start-ups in the charity space is going to fail, jump to commercial space, or be closed down by its backers. Their non-profit partners will be left holding the bag.
This does not mean that every effort will fail. Some new companies are charitable endeavors and are not expected to return dot.com profits. Some start-ups do not have VC money, and can live on a reasonable return. And some companies are primarily earning money in the commercial realm, and don't rely on a fantasy of big returns from the charitable sector. Therefore the wise strategy is to check out the "business model" for any partner. If they brag about VC funding, be afraid.
And charity is charity. I won't say that never the twain shall meet, but when charities start thinking like businesses, or acting like businesses, or playing footsie with businesses--bad things can happen to good causes.
Yesterday, I suggested that VC-backed start-ups did not make viable partners for non-profit organizations. These enterprises only succeed when they make big money, very big money, and the charitable sector won't yield those kinds of results.
These days, every newspaper and business magazine is talking about hard times in dot.com land, especially in retail, but also in B2B. Money is hard to get, VCs are refusing to fund new concepts, and backers are closing down even profitable start-ups if they are not profitable enough. Does this mean that investors have collectively turned mean? Nope, it's just that "business is business."
As one observer put it, "The secret of being a venture capitalist is knowing when to shoot the lame ponies in your stable. You fund the dream early on, but if they stumble, you pull the plug." ("Technology: Priceline's WebHouse Club Abandoned as Investors Balk," by Saul Hansell, NY Times, October 6, 2000)
Let's imagine a mythical WeCanHelp.com, dedicated to providing services to the non-profit community, and backed by VC money. And let's imagine that one of their clients is the Thoroughbred Retirement Foundation, which puts race horses out to pasture. And then let's meditate for a moment on a horse-loving group depending upon a service backed by people who know when to shoot lame ponies…
Returning from our meditation, we may have gained the profound insight that the motivations of charity and the motivations of business may not always align. At root, businesses have to make profit their yardstick. Charities do not.
Our very successful for-profit sector depends upon players who subject themselves to the discipline of the market. If they fail to thrive, they go under. Darwinian logic prevails.
Our very successful non-profit sector is not based upon the same logic, nor the same discipline. That's not a bad thing; that's a *good* thing. Charities are formed, and obtain public and private support, in order to address issues that are not addressed by the for-profit sector--homelessness, drug addiction, historic preservation, shelters for battered women, development assistance abroad, and so on. NPOs measure their success through the performance of their mission, not in terms of ROI (return on investment).
The hallmarks of a successful charitable endeavor are service, stability, and putting-people-first. These attributes can also be found in for-profit endeavors, but they are not "the bottom line." The Bottom Line is the bottom line, and that can create a very different culture--especially in the supercharged world of VC-backed enterprise.
Ask anyone who has been in "the biz" for a while, and they'll tell you that Charles Ferguson has got it about right. Ferguson founded Vermeer Technologies, creator of Frontpage. He successfully led his startup to a successful end--an acquisition by Microsoft that made him, his key employees, and his VC backers a nice bundle of money. Sale completed, money in the bank, Ferguson wrote a tell-all book about the process called High Stakes, No Prisoners. Here is what he has to say about the competitive world of high-tech startups:
"It was like palace intrigue in fifteenth-century Florence or perhaps present-day Iraq. You just assume that anyone might try to kill you at any time, that everyone has a hidden dagger and that dagger is probably poisoned. Your food taster becomes your best friend, especially if he has a food taster too, and even more so if they have to taste your food after you've eaten it as well as before." (High Stakes, No Prisoners, by Charles H. Ferguson, Random House, 1999, page 177)
All of this is to say, in another way, that charities need to be careful about using VC-backed startups for important services. But there are other things to be said as well.
For instance, I still don't get why so many startups look to the charitable sector for success. I suppose one reason may be humanitarian impulse. Young, idealistic, entrepreneurs want to help the world and make a profit. Some entrepreneurs are not charitable at all. I gave advice for a while to one endeavor which had laudable goals, but whose founder kept talking about his "exit strategy," and the time that he would be able to spend on the beach once he got rich.
Any business plan that gets funded has to show a profit down the road. The road used to be quite long, and now is very short--but profitability is key. I have seen a number of business plans and they all seem to have one thing in common: an assumption that great gobs of money will come their way thanks to the charitable sector. Not that they will *keep* all of this money, but that they will be able to handle it, massage it; manage it, process it, take a small toll from it.
I hate to be a party-pooper, but great sums of money are not sloshing around in the charitable sector. Yes, there are billions involved, but almost every penny is pre-committed or needed in six places. Charities are notoriously tight-fisted, and loath to spend money on goods and services. If anything, charities are overly slow to adopt new technologies and new techniques. They shun risk, and fear being accused of "wasting" money. In our culture, non-profits are not supposed to spend lavishly, nor are they supposed to give handsome rewards to their staff, nor are they to build luxurious home offices, or offer "perks" to their executives.
When we are at our most exacting, we expect charities to examine every penny, and we want to be shown that every penny is being spent to fulfill their mission. If it isn't, we damn well want to know why. This is particularly true of every penny spent on fundraising. Thus fundraising units tend to be particularly careful about taking risks.
So. Along comes WeCanHelp.com. Its principals are sure that they have a fabulous service for charities, and that once they roll it out, charities will flock to their virtual doorstep, money in hand. NPO executives are wooed with promises of new efficiencies, new resources, new donors, and even with freebies (like computer labs). Some sign on, but not in the massive numbers needed to meet the goals of the business plan. WeCanHelp.com becomes WeCanBail.com
I work as the development officer for a university library system. Recently I made a presentation to a group of business-oriented supporters. I showed them an experimental "information portal" that we have developed for use by our alumni. They obviously liked it, because their first questions had to do with how we could package it and sell it to other universities. I replied with a smile that we were planning on openly sharing the methods we used to create the site so that others could take advantage of what we had accomplished. They thought I was joking.
But I wasn't. The library world is based upon sharing. Its logic is not business logic. Every innovation is considered a contribution to the profession, and ultimately to the public. We measure our success through statistics on usage and customer-satisfaction surveys, not through net profits.
The academic world is also based upon sharing, particularly in the research arena, where results are openly published for others to test and build open. University researchers traditionally have measured their success through promotion, awards, and the esteem of their colleagues.
This cooperative and collegial spirit permeates the non-profit world, even in fields where some degree of competition is inevitable. As an example, take International Relief and Development work. Yes, World Vision competes with CARE for charitable dollars, and yes "development" agencies have critical things to say in private about pure "relief" agencies. But I have worked in this field, and I can tell you that resource-sharing and field-level cooperation are hallmarks of every effort. Visit a country in crisis and you will see staff from every agency working fluidly together to serve people in need.
Which is exactly as it ought to be. And ditto for local, state, and federal government. Has municipality "A" come up with a better way to treat sewage? Then it has a civic responsibility to share its findings with other municipalities.
"More Like Business"
In recent years, charities have been taken to task for not being "more like businesses." Critics argue that charities should be more efficient (like business), more effective (like business), and more attuned to income-producing activities (like business).
These critics are contrasting business at its best with charity at its worst, a common debate technique. But I am surprised that people can make such claims with a straight face. Anyone who has studied business can find endless examples of staggering waste, gross inefficiency, and sheer stupidity. Not to mention the tendency of business to externalize the cost of environmental degradation, push worthless products on a gullible public, and sell dangerous products so long as no one (who can afford a lawyer) complains.
I am not anti-business. With the fall of the Berlin Wall, modern history rendered its judgment: Socialism lost, Capitalism won. Not unbridled capitalism, of course, but bridled capitalism. Mixed capitalism. The Galbraithean capitalism of countervailing powers.
The non-profit sector is a key element in this mixed economy, as is the government sector. Each has its duties, each its logic, each its role in making the whole—if not perfect—then at least better than the competition.
I believe our society functions best when charity acts like charity. As I said in Part 2, when charities start thinking like businesses, or acting like businesses, or playing footsie with businesses--bad things can happen to good causes.
Thus I have never been comfortable with charities selling diapers and perfume on their websites. Your website is your identity. Why muddy your identity by having commercials or commercial links on your homepage?
I am hesitant when non-profits decide that they want to launch a business, or push their income-producing activities. And I am very uncomfortable with the notion that every time a non-profit has a good idea, it should try to bottle it and sell it to other non-profits and to the world.
Selling versus Sharing
In the Internet Age, big money is being made through patenting new ideas and techniques. For universities—always on the lookout for more money—it is very tempting to join the party and grab a share of the loot. Has a researcher developed a promising bit of software, a new diagnostic technique, a great wrinkle cream? Has a faculty team come up with interesting new techniques for teaching online? Why not copyright the design, and patent the methods? Does a company want to form a partnership to develop "courseware"? Well, how about a little equity as part of the deal?
Money, money, money. How much money? Well, how about $73 million for the University of California System, or $62 million for Columbia, or a modest $9 million for Harvard? These are income figures for licenses granted to commercial enterprises in 1998, as cited by the Association of University Technology Managers in the Chronicle of Higher Education (December 10, 1999). Columbia’s $62 million—predicted to grow to $98 million in 1999—is a nice piece of change. Therefore, when Columbia’s Business School Dean made an exclusive online instruction deal with UNext for $20 million and a share of equity, he was just marching with the band.
I find the trend to "think commercially" quite alarming. Offices of "technology transfer" are being formed; incubators are carved out of nearby office buildings; policies for handling IP (intellectual property) are being promulgated and argued about. Partnerships with distance education dot.coms are touted, future faculty "courseware-stars" are being cultivated.
Taken individually, any given project may seem to present no harm to the academic enterprise. Taken collectively—that is, if every university tries to make a buck from its ideas—does this not detract from the greater good?
Consider the World Wide Web as an example. Tim Berners-Lee, credited as the "father" of the Web, is often asked whether he regrets building it as an open and freely-shared set of programs and protocols—instead of trying keep control of it and make himself a billionaire. This makes him angry.
****What is maddening is the terrible notion that a person’s value depends on how important and financially successful they are, and that is measured in terms of money. That suggests disrespect for the researchers across the globe developing ideas for the next leaps in science and technology. …To use net worth as a criterion by which to judge people is to set our children’s sights on cash rather than on things that will actually make them happy.**** (Source: Weaving the Web, by Tim Berners-Lee, HarperSanFrancisco, 1999, pages 84, 107-8)
Staying True
I would like to pass along a mantra. It was passed to me by Michael Jensen, Director of Publishing Technologies at the National Academy Press. In an article in the October 29, 1999 Chronicle of Higher Education, Jensen quotes the President of the University of Arizona, Peter W. Likins: "A for-profit's mission is to create as much value for its stockholders as possible, within the constraints of society. The non-profits' mission is to create as much value for society as possible, within the constraints of its money."
Jensen writes about the value of "open source" software, of which html, and xml are good examples. He argues that universities should commit themselves to backing open-source software, because to do so "fits philosophically with the fundamentals of scholarship."
"…If the goal of most of our ".org" and ".edu" organizations in academe and academic publishing is to create value for society, then, as members of the educational enterprise, we must take full advantage of our strengths: our commitment to shared knowledge, our mission to facilitate understanding, and our insistence on the correct (rather than the most popular or prettiest) solution." ("Information Technology at a Crossroads: Open-Source Computer Programming," by Michael Jensen, in the Chronicle of Higher Education, October 29, 1999.)
At the opening of the twenty-first century the Internet and its offspring, the Web, have made staggering changes in the way people work, play, shop, think, and dream. It is worth keeping in mind that both the Internet and the Web are based upon open-source software, and therefore the collaboration of thousands of great (or at least clever) minds. This fabulous resource was created not by the commercial sector, but through publicly-funded research (DARPA, CERN, NSF, etc), and constructed by academic and government researchers. Through openness, collaboration, and a concept of the "public good," something quite valuable has been launched.
In the past five years, the commercial sector has latched onto the Internet and has put its development into hyperdrive. New companies are being founded, new services are being provided, great fortunes are being made. It is ironic that some of the very people whose fortunes have been made on the back of a public good (the Internet) are the most vociferous about the overriding value of unbridled capitalism. Looking around them, they see a landscape painted by Ayn Rand: rampant selfishness leading to a bigger, better, stronger Economy. When they are asked to consider the needs of the non-profit sector, they are astonished to see how dowdy and dumpy it is compared to the go-go environment of Silicon Valley. "Get with it," they urge us. "Figure out what you have to sell."
Perhaps it is fortunate that the Internet balloon has sprung a leak. Perhaps it is a good thing that VC money is tighter, back-of-the-napkin fantasies are not getting funded, and "insanely great" dot.coms are going bankrupt. Perhaps business hubris will become less blinding, and we can look together at the role that a healthy non-profit sector plays in creating value for society.
The message of this article, however, is not aimed at the business community. Rather, it is directed to my colleagues in the non-profit community. Let Charity.notcom be our watchword. We are *not* commercial enterprises, and we should not be embarrassed about that. The non-profit sector is absolutely crucial to the development of a better society. We have every reason to turn to individuals, families, corporations and foundations that have gotten wealthy from the "com" side of our economy and ask them to invest in our organization or cause.
We must show that we are good stewards of financial resources, but we do not have to be defensive if we do not "make money." Of course we don't make money. We accept money and use it for the public good.
Copyright
2000 by Adam Corson-Finnerty
Development Officer, Author
and Very Occasional Consultant
http://www.fund-online.com
Contact and feedback: corsonf@fund-online.com
For more on online fundraising, see
"Cybergifts,"
a multi-part series, at: http://www.fund-online.com/musings/index.html
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