Brazil needs more social investors

To say that nonprofits are not sustainable for being dependent on donations is like saying that companies are not sustainable for being dependent on sales

by Leonardo Letelier and Beatriz Cardoso

Original printed in O Globo, 14 March 2015 http://glo.bo/1RALhGr

In Brazil 24% of companies close after two years of operations (according to Sebrae’s 2013 census of entrepreneurship) and in the US, half do not last more than four years (based on the average of a number of studies). So why then do we insist on saying that nonprofits are not sustainable, despite the fact that some are more than a century old?

The definition of financial sustainability is not all that complicated: a company, a social organization or even the government is sustainable provided it earns more than it spends. When that does not happen, the consequences are clear: companies go bust and social organizations close.

Nonprofits receive funds by means of donations; for a company, by selling a product or service. Both are “valid” forms of revenue—the only difference is that fact that donations are made to benefit third parties and sales benefit the customer herself. To say that nonprofits are not sustainable for being dependent on donations is like saying that companies are not sustainable for being dependent on sales.

The challenge of sustainability is not down to the choice of the nonprofit model. The majority of them are or should be sustainable, given that a donation is a “legitimate” source of income. Rather than insisting on the logic of earned income and proposing solutions that are inappropriate for the challenges of the third sector, we should invest in building a culture of philanthropy and donations. Each one of us could get involved by setting aside a small portion of our salaries or assets towards solving social issues.
It is important to highlight that this is not to say that all social organizations are financially sustainable—not all companies are either. Rather it is to contest the premise that nonprofits must be sustained only by earned income.

The true challenge for any organization is to find a source of income that is predictable, diversified and in excess of its costs. For a nonprofit, having one donor is as bad as a company having one customer. Following this logic, having a base of small to large donors, both individuals and companies based in Brazil and abroad, is as good as a company having a diversified base of customers.
Two other factors mean that comparisons such as this are not adequate.

The first is that there is much more money to invest in the “commercial” world than in the “social” world. The difference in the order of magnitude is self-evident when one compares the value of the stock and credit markets (trillions of reals) and any estimate of social sector donations (in SITAWI we use an estimate of R$30 billion).

The second, and the one we have control over, is that the society—that is, both you and us—is willing to more than “cost” for a can of carbonated water with sugar and carcinogens, or for any other product. This difference between price and cost means that companies are able to attract top professionals with top salaries, to invest in marketing and innovation and to attend more customers. This also means more funds to keep the show on the road, as well as creating conditions for the innovation and knowledge that are necessary for the growth of any sector.

In general, when we fund a social intervention, however, we do not accept paying more than direct costs, the soup or a coat for a homeless person. The obvious consequence is that social organizations have professionals with lower qualifications than is ideal, invest little, find it difficult to innovate and do not reach scale.

If we believe that neither the market nor the government are able to solve all these problems, we need an engaged civil society with strong organizations and creative solutions.

If you want to help build a more solid donation culture and make social transformation possible, do your part. When you give your son or daughter their allowance, divide it into three envelopes: one to save, one to spend and one to donate. If you want to do something yourself, give, give more and give better. We really hope you do both.

Leonardo Letelier is the executive director of SITAWI Finance for Good (a social finance institution) and Beatriz Cardoso is the executive director of the Education Laboratory (Laboratório de Educação).