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The Shapeshifting of Jumo, Philanthropy, and Social Enterprise

August 25, 2011

(Bradford K. Smith is the president of the Foundation Center. In his previous post, he wrote about GOOD's acquisition of nonprofit social networking site Jumo.)

Escher_division_of_the_planeI Act I: Jumo International is registered in 2010 as "A NON-PROFIT ORGANIZATION THAT OPERATES A SOCIAL NETWORK CONNECTING INDIVIDUALS AND ORGANIZATIONS WORKING FOR GLOBAL CHANGE."

Act II: Jumo is successful in raising $3.5 million in foundation grants for charitable purposes during 2010 and 2011 to further its nonprofit mission.

Act III: August 17, 2011 - Fast Company reports Jumo's acquisition by the for-profit social enterprise GOOD.

The rapid shapeshifting of Jumo, the inadvertent angel investor role played by philanthropy in the process, and the example it may set for aspiring social entrepreneurs is a discussion worth having. I'll get back to that.

First, what doesn't worry me? Since we first blogged about the Jumo/GOOD deal, there have been lots of tweets and a handful of blog posts. Some have waxed eloquent about things like "social connective tissue," "dynamic content-driven engagement," and the like in focusing on the mission synergy that makes this such an intriguing merger. I have nothing against what Jumo and GOOD are trying to do in the world and may be able to do together. The more people that give a damn, care about people less fortunate than themselves, and want to do something about it, the better the world will be. Only a small number of people will ever become Peace Corps Volunteers, so creating ways for far larger numbers of them to engage, network, volunteer, and give online is vital.

But back to shapeshifting and its implications. Jumo is (or was) a 501(c)(3) nonprofit and as such, eligible for two types of support from a foundation: an outright grant or a program-related investment (below-market rate loan), both for charitable purposes. A for-profit start up, on the other hand, would have access only to capital from the foundation's investment portfolio (no charitable purpose required) in the form of private equity. There's no indication that foundations supported Jumo for the purpose of it becoming a for-profit; rather, it appears the grants in question got caught in the middle of Jumo's shapeshifting. Maybe future foundation grant letters of agreement should include language to deal with such changes in status?

The Jumo example doesn't appear to be too common…yet. But I would hate to see the 501(c)(3) status come to be seen as a kind of quick-and-easy way to get free startup capital en route to flipping one's organization into a for-profit enterprise, social or otherwise. I'm not saying this was Jumo's intention, but others could choose to interpret it that way and see it as an interesting strategy to emulate. Chris Hughes is a kind of role model for an entire generation of social entrepreneurs: after co-creating Facebook and helping to get Obama elected, why wouldn't he be? What he does, unintended or not, matters.

The conceptual lines may be blurring as we broaden our notions of how nonprofits and for-profits and things in between can contribute to the public good. Meanwhile, we still live in the real world of tax codes and institutional structures, and I'm not aware of any suggestion or proposal to allow foundation grant dollars to be used for anything with the word "social" in it. Shapeshifting is here to stay and now is the time to think clearly, creatively, and responsibly about how to deal with it. Thanks to Jumo for giving us a test case.

(Illustration: M.C. Escher, "Division of the Plane III")

-- Brad Smith

Comments

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Funding for nonprofits is entering a new era. You’re right. We need to develop guidelines for grants/loans that spells out what happens if an organization changes its structure (investment reverts to market-rate loans?). We also need to think ahead, about other possibilities, such as becoming an L3C or what happens to investors if the change goes the other way, from B-corp, say, to nonprofit? We don’t want to make it more difficult for organizations to adapt to change, just more transparent and thoughtful.

Brad - two other relatively recent, and significant examples - couchsurfing and TRUSTe. Big VC money raised on original NPO structure. And, I'd argue, the wave of healthcare conversions of 1990s was precedent setting for this.

Lucy

This isn't all that new as a test case: these kinds of things happen all the time. It's just higher profile than most. As you point out, Brad, the line between nonprofit and for-profit social enterprises is a thin one: we shouldn't be surprised that ventures move from one side of the line to the other.

I think there should be a presumption here of good will and judgment until proven otherwise. I think it's fair to assume that Jumo was not set up as a nonprofit or funded with grants with the a for-profit exit as the goal. The real question is not what was the case at founding or funding: it was the case when a decision had to be made. I bet it just might be that the decision was between Jumo failing in a blaze of glory or a smooth transition to Good (and Jumo disappearing gracefully or being reinvigorated with for-profit funding).

I've been through one of these deals: I was the CEO of a successful nonprofit social enterprise that sold out to a for-profit. We had to sell both our board of directors and the Attorney General of California that this was a good deal for society. Our case was that before the deal you had a single underfunded social enterprise inside a nonprofit. The for-profit buyer promised to invest more money in the venture and help a lot more disadvantaged people. The for-profit held up its side of the bargain.

And, the nonprofit that received the $5 million in proceeds? You know it today as Benetech. I think we held up our side of the bargain too!

I would presume the board and the AG involved (as Lucy points out, this became important in the health care conversions to ensure society got a good deal) made the best decision they could. I'm sure we'll learn more when the 990 comes out.

I suggest that we trust, but verify.

You make a lot of good points Jim and Benetech is one of the great "shapeshifting" success stories. My post was more to raise the questions and frame the issues for foundations as they find themselves in the role of venture capitalists --intentionally or un-. Trust is always my first option, but I suppose because of the nature of the JUMO-GOOD deal, there is very little transparency about this one. The deal is announced, perhaps to plug a leak, promoted as a something great, but no details can be released. And GOOD itself is a privately held company, with a beautiful website that contains no information about its governance or financial structure. There is a link there to a Wikipedia entry that has been flagged because "it is written like an advertisement and needs to be re-written from a neutral point of view." The Attorney General may know exactly how to value the intellectual property developed by JUMO -- source code, user profiles, clck-through data, etc.-- while operating as a 501(c)(3) organization. Then again in New York -- the home to decidely unsocial entrepreneurs like Bernie Madoff and the too-big-to-fail investment banks -- the AG has bigger fish to fry. As you say, trust but verify, assuming we ever have the information to do so.

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