October 2010
Article
Harvard Business Review

The Emerging Capital Market for Nonprofits

By: Robert S. Kaplan and Allen S. Grossman

Format:Print

Abstract

Many of our largest and most successful companies today did not exist 50 years ago. During this same time interval, companies that ranked among top in the 1960s have disappeared, been merged out of existence, or become much smaller presences in the U.S. industrial scene. These shifts in fortunes are vivid examples of the private sector's cycle of Schumpeterian creative destruction. In contrast, the list of the largest nonprofit organizations has remained stable over decades. Large nonprofits do not disappear and few new ones—Habitat for Humanity and Teach for America are among the exceptions—scale to national size. Schumpeter's cycle apparently does not operate in the social sector. This paper proposes that the disparity arises from the nonprofit sector's historically immature infrastructure and poor mechanisms for channeling funds from donors and foundations to the most effective nonprofits and away from underperforming ones. We illustrate how innovative information and financial intermediaries, using new measurement approaches tailored for the nonprofit sector, have recently arisen to help direct funds to the most effective nonprofits. These innovations have the potential to enable the sector to become far more responsive, effective, and efficient in creating positive social impact at a national scale.