Asking Questions About Sustainability, Scale, and Systems Change

 

People with fewer resources pay more for credit, if they can access it at all. We founded Community Credit Lab (CCL) in Seattle, Washington, to help underserved communities access affordable credit, and on October 4, we gave out our first zero percent interest loans, supporting foreign-educated nurses in becoming registered nurses in the US. We made the choice to offer small dollar, consumer loan products at zero percent interest after extensive interviews with King County stakeholders: nonprofits, community organizations, credit unions, foundations, investors, people within the public sector, and corporations. Given our mission and focus, zero percent interest resonated with the organizations whose opinions we prioritize most.

But when we interact with prospective donors about our model, we’re accustomed to hearing the following questions: What is your strategy for systems change? For sustainability? For scaling?

These are standard, uncontroversial questions. We’ve asked them ourselves from the other side of the table, first in business school, then as investors and as philanthropic funders. And we have answers. We explain that we’re working to change a system that prices financial risk (even if that risk is only perceived) and which therefore places an undue interest burden on underserved communities by communicating our data and learnings transparently, especially where more relevant in the public sector. When it comes to sustainability, our zero-interest model means revenue generation must be a matter of grants and donations, at least in the short term, though we are thinking about opportunities for cross subsidization across future lending products (and we recently developed a model that incorporates a management fee while still paying investors 1 percent, net of fees, and lending at zero percent). And as for scale, we don’t yet know whether our approach will be to go deep within King County or wide across many counties and states—nor whether to scale directly or in partnership—but we hesitate to spread ourselves too thin in early stages.

However, while we always learn from discussions with donors, investors, and prospective partners, designing for people means prioritizing our mission. As we search for the balance between designing for underserved communities in the short term and planning strategically for scale, sustainability, and systems change in the long term, we’ve noticed that, for nonprofits, expectations of scale, systems change, and sustainability can often be at odds with each other (and with human-centered design).

Scale requires a competitive approach to growth, for example, while systems change requires collaboration, transparency, sharing, and collective adaptation. And while nonprofits are often advised to adhere to “business” standards of sustainability, businesses often prioritize long-term scale over short-term sustainability. Finally, in our current phase, sustainable revenue generation strategies (beyond donations and grants) would only be possible by extracting from the communities we seek to serve, something we strive to avoid.

The answer is not a zero-sum choice, but rather a flexible approach that combines techniques, learning from the places where these principles come into conflict, and discovering emergent solutions to our stakeholders’ problems. We will go through each, in turn, describing the principles we’ve developed for managing the tensions between them and how we see them applying to our sector from our current point of view.

Sustainable Like a Business?

The nonprofit sector is often exhorted to become sustainable as soon as possible, to think “commercially,” like a business. Yet many commercial ventures prioritize scale over sustainability, emphasizing the ability to “revolutionize an industry” irrespective of costs. Uber can sustain an operating loss of $3 billion in 2018, for example, or WeWork can lose $219,000 every hour because revenue multiples are perceived as leading to higher valuations at later investment rounds and economies of scale are perceived as leading to future sustainability. Perhaps WeWork should have thought more like a nonprofit with a strong focus on mission and obsessive interrogation of cost structure.

What kind of “business” thinking should nonprofits emulate? Nonprofits need to focus on people, not profit, but thinking more “commercially” could actually mean delaying sustainability in order to focus on designing, piloting, and pivoting to serve people. Flexible funding can allow for constructive iteration in order to build out models that work; as with VC-funded startups, what is unsustainable in the short term might build the foundations for long-term change.

In our field of financial services, for example, many credit unions, community development financial institutions (CDFIs), and banks all rightfully prioritize sustainability: They have a commitment to protect the interest of their investors, depositors, and members (as well as legal obligations to state and federal regulators). When it comes to Community Credit Lab, we worry that emphasizing our own sustainability could lead to an outsized focus on longevity, even mission drift towards extracting from the people that we seek to support. What use is sustainability if it means charging exorbitant rates of interest rather than prioritizing underserved communities with products tailored to their needs and access points?

Scale: Collaboration or Competition?

Encouraging nonprofits to design for scale from inception—or aiming to “reach” an arbitrary number like one million people—can be an incentive to utilize resources effectively. But scale can become the primary goal at the cost of designing for people. In the corporate sector, ironically, human-centered design remains the genesis of many successful companies, since solving a problem cost-effectively with a minimum viable product primes a company for future scale (think Airbnb increasing its focus on photos and human interaction or Embroker urging “Ignore the noise and focus relentlessly on customer results.”). Focusing on growth above all prevents tailoring appropriate solutions in the short term while working towards scalable solutions in the long term. 

When it comes to financial products and services designed to support underserved communities, Mission Asset Fund (MAF) has an exemplary model of adaptation as it scales, specifically their approach to partnership with nonprofits. With the support of a patient and strategic group of funders and the lessons and experience from the last 10 years, MAF has developed relationships on a national scale to build contextual lending circles designed in partnership with local nonprofits. MAF’s lending circles are available at zero percent interest and support people to build credit with a flexible use of funds that is capable of filling gaps as MAF’s nonprofit partners and their respective communities see fit. MAF has successfully balanced the pressure to scale with the design of a solution that is still capable of being contextually appropriate based on the geography and communities of focus.

How Much Time for Systems Change?

Understanding is the first step in changing a system, but it can take years of immersion to comprehend a system’s relational interconnections, feedback loops, power dynamics, and leverage points. Designing for change also takes time: Tools and approaches like mapping the system, the impact gaps canvas, and Acumen’s course with Omidyar on systems practice acknowledge the importance of trust established over time. As we’ve worked through an initial stakeholder mapping, needs analysis, and exploration of cycles that increase inequality with respect to lending, we’ve come to understand that entering a new ecosystem is difficult; we must be patient in order to build relationships, trust, and mutual respect. Pressuring early-stage nonprofits to plan for systems change from inception can be counterproductive if it denies them the time needed to learn, understand, focus on relationships, and build trust.

The financial sector is ripe for systems change, and the Credit Builder’s Alliance (CBA), for example, models how to build relationships, adapt based on new learnings, tailor their solution to newly relevant gaps, and remain focused on the mission “to move people from poverty to prosperity through credit building.” CBA discovered that the capability for nonprofits to report loan repayments is a major systemic barrier to building credit and their solutions design for time and resource efficiency of streamlining this across many nonprofits. All major bureaus (Experian, TransUnion, and Equifax) reporting requirements are stringent and difficult for small organizations to navigate on their own – CBA supports this by filling gaps in the system through their Credit Reporting, Training, Convening and now through a loan fund that allocates capital to mission-aligned nonprofit organizations working to change the system collectively. Due to the extent of the gaps CBA is filling, their membership is more than 500 organizations and continuing to grow as organizations join a collective movement towards change. It’s possible to work towards changing a system through collaboration with a clear understanding of gaps and the nuances of inherent challenges, but this understanding can only be established through time and experience.

Flexible, Emergent Strategy

As important as it is to think about sustainability, scale, and systemic change, start-ups—whether businesses or nonprofits—need the flexibility to adapt and navigate organically towards their north star, whether that be an IPO or a shared, collective mission. We don’t believe in silver bullets, but “emergent strategy” describes a growing field of strategic practice encouraging focus on collective, organic approaches designed with the interests of communities at their core (as well as an adaptable framework for thoughtfully approaching scale, systems change, and sustainability). But the flexibility of systems-based approaches and “designing for scale” also requires “emergent” funding, or funding not restricted by the need to scale immediately, demonstrate initial sustainability or stick to a systems change plan that may not ultimately be relevant. This call is not new, but unrestricted funding remains rare, in practice.

A venture capital mindset understands the need for funding designed to support an idea with the flexibility and runway needed to test and adapt as opportunities and challenges emerge, with the ultimate goal of competitive scale. Within the nonprofit sector, we are urged to build relationships with other organizations, actively engage with other stakeholders, and seek feedback, rather than compete and build barriers to entry. A conscious mix of both collaboration and iteration is essential.

It’s possible to think of success not as profitability, but rather as a strategic exit that has satisfied the criteria of relevant funders or investors. Given that there’s no such thing as an IPO in the nonprofit sector, isn’t the equivalent philanthropic public offering literally that — a public offering? What would it look like for the end goal (or exit strategy) to be a release of intellectual property, expertise, learnings, failures, and data to others in the public, nonprofit, corporate, philanthropic, and financial sectors that may be able to incorporate and adapt it productively?

Is that systems change? Is that scale? Whether or not it’s sustainable for a single organization, the most important question is whether it helps people effectively.

Read more stories by Ryan Glasgo & Sandhya Nakhasi.