Would You Buy A Share In Capital Good Fund?

Here are are the lessons I've learned after 5 years of running a non-profit, illustrated in a simple formula:

 X(scale + innovation + implementation + luck) = social change, where X = money

Here are those lessons put another way: the math of social change should be algebraic but rather resembles a calculus problem

Why So Hard?

Let's consider the non-profit paradigm.  Non-profit begs for money from individuals, foundations, corporations and government.  Money dribbles in.  Money is predominantly spent on programs, because funders don't like their donations to go toward "overhead" (read that: infrastructure, personnel, marketing, etc.).  Programs result in some good stories that touch the hearstrings of funders.  Money dribbles in again.  Rinse and repeat.

Notice that scale and social impact were left out of that equation.  Now consider the for-profit paradigm. For-profit pitches the investment opportunity to investors.  For-profit knows how much it need to become profitable.  Investors evaluate for-profit for profit potential.  For-profit makes necessary investments: it probably loses money for several years as it builds up back-end systems, refines the business model, markets its products and services and grows its market share.  For-profit seeks new investment as needed.  Some for-profits return profit to investors; others go under.  Those that are profitable continue to grow and either go public or are purchased by a larger company.  

Notice that social impact is left out of the equation.

The Wrong Kind Of Budget?

What if one of our most fundamental assumptions--that the first step to financial stability is the creation of a personal budget--misses the point?  A recent article in FastCompany, 'Poverty Drains Mental Energy,' seems to imply just that.  Let's put it bluntly: being poor is exhausting and stressful.  You have to constantly make difficult decisions: Do I fall behind on the utilities so that I can buy school supplies for my daughter?  Who will babysit her while I spend 2.5 hours traveling by bus to and from an appointment to apply for food stamps?

If you look at the totality of these myriad decisions and trade offs that are made month after month, you start to realize that you are dealing with a budget--only instead of a financial one, it's a balance sheet that accounts for inflows and outflows of mental and physical energy.  And according to Sendhil Mullainathan and Eldar Shafir, this budget is the one that really counts.  In their new book, 'Scarcity: Why Having Too Little Means So Much,' they argue that when thinking about social programs, "We never ask, is this how we want poor people to use their bandwidth?...When we design poverty programs, we recognize that the poor are short on cash...But we do not think of bandwidth as being scarce as well."  At first, this sounds absurd: shouldn't the poor be thankful for the free and low-cost programs we offer them?  But if you step back for a moment, the answer becomes clear: of course they're thankful for them, but that doesn't mean they fit into their budget!