In most respects, we—a diverse group of practitioners whose collective experience and expertise span the philanthropic and commercial sectors—are uncommon bedfellows. After all, what do bankers and lawyers know about human rights and social entrepreneurship? And what do nonprofit development officers know about financial markets?

Strangely, quite a lot when you find yourselves in the midst of a furious war of words at a conference focused on alleviating poverty. One side argued that the commercialization of social impact was an excuse for capitalists to make money off the backs of the poor. The other side argued that the nonprofit model was outmoded and, at times, detrimental to the development of a nascent economy.

We have come together with the hopes of attacking certain myths and stripping away misperceptions that both sides bring to the table.

Think of the immensity of Wall Street’s capital markets like an ocean and the more defined realm of philanthropy like a rocky shore. In biology, there is a word for the place where two ecosystems meet and create a distinctly new habitat. It is called an “ecotone.” A tidal pool, for instance, is neither land nor sea, but it has its own flora and fauna that allow a more protected, transition space to prosper.

The ecotone resulting from the convergence of philanthropy and Wall Street has been called many names, including corporate social responsibility, social benefit corps, responsible investing, or most recently, impact investing.

In a relatively short time span, the impact investment sector has moved from obscurity to headline news, garnering attention from large institutions such as JP Morgan, which claims that the new asset class could aggregate assets of $1 trillion in 10 years.

But traditional nonprofits often view social entrepreneurs as competitors looking to turn a profit by siphoning critical resources away from them through this new breed of impact investor. Meanwhile, Wall Street—the profit-maximizing machine—is waiting in the wings for an opportunity to turn fast money with no regard for mission.

Why does this matter? Because there are emerging companies that are neither traditional nonprofits nor likely to attract traditional commercial investments, yet they have the potential to improve the lives of millions of poor people through sustainable business models.

Consider this: 1.3 billion people in developing countries lack access to electricity. Nonprofits are providing assistance, but the scale of the problem (and hence, the financial requirements) dwarfs existing grant-based resources. Research and development risk, coupled with the perception held by many commercial players that serving low-income markets is not a profitable endeavor, limits the possibility of traditional commercial investors providing solutions. As a result, a new breed of enterprise is emerging to fill the gap—for example, “pre-pay” solar companies operating in Africa and Asia.

These enterprises, which may ultimately grow into profitable businesses at scale, are emblematic of the new ecotone we are describing.

However, traditional philanthropy takes a dim view of ventures that provide a return to investors for service provision to the poor. Meanwhile, Wall Street seeks to maximize profits for shareholders as quickly as possible, and it views philanthropy as something to be dabbled in upon retirement, after “real” money has been made in a business world that has traditionally excluded one-third of the planet’s population. Could there be a new paradigm emerging that defines a convergence whereby the strengths of sea and shore meet to create a new ecosystem, one that has the potential to sustainably serve the billions who have been excluded from the formal sector for generations, while building and preserving stakeholder—not just investor—value over the long-term?

Until this delineation is more clearly defined and appreciated by all, the ability to meet the needs of more of the poor will be hindered.

This article hopes to cover the most blatant misperceptions from each side. Once we’ve dissected them, our hope is that we can all step back and see the edges where flora and fauna shift from land to sea, and three distinct ecosystems appear—commercial, philanthropic, and impact investment.

Myth #1: Impact Investing Is the Same as Regular Investing

Let’s face it, Wall Street has one purpose and one purpose only: to make money.

While the perception is that Wall Street scoffs at the concept of impact investing, the reality is that it—like the waves of the ocean—will go anywhere profit potential exists.

However, the danger of Wall Street’s deep pockets lies in the destruction left behind when a tsunami of unprincipled, short-term capital is released on vulnerable social economies.

The microfinance revolution provides the clearest example of this. Compartamos, for example, started in 1990 as an NGO focused on alleviating poverty through microfinance, but decided in 2000 to register as a for-profit company. After it launched a highly successful and extremely lucrative IPO in 2007, others followed suit, leading to the perception that you could do good while also doing very well financially. So well, in fact, that microfinance was considered a new investment class and investors could expect returns in the 30-40 percent range.

Commercial capital began to flow into microfinance institutions around the world, and representatives of traditional Wall Street capital became board members of these so-called impact institutions. The focus very soon became obsessively narrow: Maximize return to investors in the short term. Of course, many donors, impact investors, and development finance institution leaders who we might have expected to object, went along for the ride as well, lured by the seemingly limitless capital and easy profits.

The result? Disaster. The microfinance sector was nearly decimated in many key emerging markets, millions of over-burdened borrowers saw their household finances destroyed, and the unbanked saw their access to capital significantly decreased. In other words, many economically disadvantaged people found themselves in a worse position than they were before.

It’s no wonder philanthropists were angry. The irrational exuberance of the “microfinance bubble” represented a Wall Street tidal wave, blowing way past the transitional ecotone, and destroying the trust and support of the philanthropic land dwellers.

Myth #2: Wall Street has no place in philanthropy.

But just because a tidal wave is a threat to land doesn’t mean we can or should do away with the ocean all together.

Wall Street certainly has its role. We cannot underestimate the infrastructure for things like IPOs (leveraged successfully for development purposes by BRAC Bank Ltd, for example), the power of virtually limitless capital sources, and not least the value of social philanthropy fueled by old-fashioned corporate profiteering. So why would we spend precious philanthropic dollars to help an eventually profitable business get started? Because access to capital is critical for small business owners to feed their families, create jobs, and provide opportunity for the rest of their community to grow.

It follows that if a values-focused bank—such as Triodos Bank, Vancity, or Grupo ACP—successfully spurs economic development, then formerly impoverished people would no longer need philanthropic dollars.

Myth #3: All Nonprofit Endeavors Can and Should Be Market-Based

As Dan Palotta aptly noted in his 2013 TED talk:

The nonprofit sector has to be a serious part of the conversation. But it doesn't seem to be working. Why have our breast cancer charities not come close to finding a cure for breast cancer, or our homeless charities not come close to ending homelessness in any major city? Why has poverty remained stuck at 12 percent of the US population for 40 years?

Palotta, along with many others, argue that the nonprofit model strips those who want to help others of a fundamental advantage: financial incentive. How much should someone who saves millions of lives be paid? Certainly not any less than someone who sells millions of cans of soda or bottle caps or dry erase markers.

Following this logic, some believe that philanthropy’s time is past, because most philanthropic endeavors could—even should—become market-based. Tom’s Shoes, for example, is a for-profit company that, for each shoe it sells, provides free shoes to children in the developing world. Alex’s Lemonade Stand sells lemonade to fund pediatric cancer research.

So, perhaps if every nonprofit simply created a successful product to finance its cause, there would be no need for fundraising? Or in other words, could the corporate model ultimately solve the world’s problems?

Not so fast. For every successful commercial company, there are thousands more that have failed. And indeed, in every struggling community, the problems are more complex and interconnected than a pair of shoes or a water pump can address. Expecting nonprofits—which are focused on tackling a complex social problem—to compete with normal market players is not only unfair, but also can serve as a distraction from the true problem they have set out to solve.

Furthermore, while we certainly agree that nonprofits need to consider all methods of sustainability, there will always be some situations where straight philanthropy (the transfer of wealth from those who have to those who have not) is the most efficient method of solving a problem—emergencies, for one, but also whenever there is an impacted population, or issue that is too nascent to attract the latest corporate mission focus or budding social entrepreneur.

Myth #4: The Philanthropy Model Is Morally Better

As Bono recently noted in his TED talk about the good news on poverty, the number of people who live in extreme poverty has dropped from 43 percent in 1990 to 21 percent in 2010. So perhaps it “worked,” and just continuing forward with the same outpouring of aid will finally combat the problem.

Not so, says Dambisa Moyo, author of Dead Aid. Her book argues that the more than $1 trillion in development assistance provided to African nations in the last 50 years has created a culture of dependency and corruption.

The World Health Organization (WHO), for example, discovered that some communities were disrespectful of free services, which is why it now often insists that the benefitting community raise at least half of the capital of a project before the WHO will put its effort behind it.

Some commentators, like Moyo, argue that nonprofit organizations harbor paternalistic attitudes, believing that they know what is best for their recipients rather than providing opportunities so that clients can make choices—even if those choices were not the ones that the “do-gooders” would make.

Why Can’t We All Get Along? Between the Devil and the Deep Blue Sea

Where does that leave us? There is and always will be a need for nonprofits that run purely off good will and philanthropic dollars. However, if you are giving out free T-shirts, you are destroying the ability of that economy to have a T-shirt industry.

So there is a line—an ecotone—where nonprofit aid shifts from helpful and necessary, to harmful. It is the moment when recipients have the ability to take partial ownership of solving their own problems, and don’t.

That is where we believe the middle ground of impact investing should come into play. The shift from philanthropy to market forces cannot happen overnight, so the transition must occur through grants and patient capital.

Once again, the end goal is not to make extreme returns or to eliminate philanthropy. The goal is to foster a successful transition toward self-sustaining, healthy markets. Who knows, perhaps there will eventually be a “sea change,” and even Wall Street will measure value not only in the sense of narrow, short-term financial gains, but also in the sense of long-term social equity that enables a level of broad economic prosperity not achievable in the zero-sum interpretation of capitalism we have experimented with to date.

Back to the conference:  The dispute occurred between different factions within poverty alleviation—in essence, people on the same team. Foundations were accused of “blocking” the flow of capital by insisting on metrics and diligence before giving grants. Hardworking nonprofits were insulted by the added burden of reporting metrics when they needed to be focused on helping those in need. Meanwhile social entrepreneurs and impact investors were stunned when commercial players told them their businesses will never “scale” enough to be worthy of commercial investors. Finally, commercial players were tired of being called members of the “dark side” just because they generate wealth.

This is why it is important to understand the impact space as a middle ground—an ecotone—between the traditional philanthropic space and the traditional commercial space. It’s a continuum, and it is high time for the dialogue to shift from one of morals to one of tools.

When you shift the dialogue to one of tools, basic logic applies. For example, when it comes to implementing progress in the commercial space, there are hundreds of financial tools available. To name a few, there are personal loans, small business loans, home equity loans, bank loans, crowdfunding, angel investors, venture capital, private equity, and initial public offerings (IPOs). And once there are enough players hitting the IPO space, a whole new set of financial tools open up—from index trading to mutual funds to exchange traded funds, from asset backed securities to credit default swaps.

In contrast, the philanthropic space has four tools: donors, foundations, endowments, and a burgeoning area known as donor-advised funds. Some forward-thinking foundations are building small consortiums such as Big Bang Philanthropy, a group of foundations that assist one another in certain aspects of diligence, reporting, and metric-gathering. In short, the financial tools of philanthropy are quite limited and pale in comparison to the commercial space.

When it comes to the impact/social enterprise faction, both the philanthropic tools and the early-stage tools of the commercial space are available. However, the impact space has hardly produced the volume of IPOs to warrant the next set of commercial tools to open up to it.

Our goal in shifting this dialogue to one of tools is to take a step back and look at poverty alleviation as a process, growing from heartfelt charity to partnership, and ultimately, to a relationship as equals.

So long as floods, plagues, wars, and other natural disasters exist, there will be communities that we would never reach through any means other than generosity and caring. Yet there is a point—one that is hard to define, but we know it when we see it—where philanthropic support is paternalistic, creates dependencies, and becomes harmful.

It is at that moment when the impact investors and social entrepreneurs must step in. It is a hybrid space, and its purpose is to grow nascent markets. Rather than giving eyeglasses freely to a community, we instead develop a method of providing low-cost eyeglasses that the community can purchase. This ensures mutual care of the product; it also provides jobs in the local community.

When the tiny seeds of market-driving solutions grow into regular, reliable sources of income, financial capital will naturally pool in those places where value is sustainable.

The reality of the era we currently inhabit is change and disruption. We cannot expect to achieve our 21st-century objectives using 19th- and 20th-century business and philanthropic models.

Instead we can learn, innovate, and adapt to a new breed of poverty alleviation that will require a lot from all of us—changes in mentality, changes in our expectations of financial return, changes to our governance structures, and changes to our existing regulatory systems.

Ultimately, the key is to be clear on the objectives and the role each player is taking in the emerging new ecosystem. And we appreciate all of you for the part you are playing in this evolutionary change. Now let’s work together to build a new future without extreme poverty.

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