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A Conversation With Steve Case: The 'Third Wave' and the Social Sector

June 23, 2016

Anyone of a certain age remembers when free America Online software — delivered on 3.5" floppy disks and then in CD form — seemed to arrive in the mailbox on an almost-daily basis. Although its genesis was in online gaming, the company soon evolved into an online services company and, by the early 1990s, was one of the leaders of the tech world, innovating and helping to build the infrastructure for the online world we know today. In the words of the company's co-founder and former chair, Steve Case, AOL was part of the "first wave" of innovation driven by the Internet.

By the early 2000s, a "second wave" of Internet-enabled innovation featuring apps and mobile phone technologies had sparked a new communications revolution, with companies such as Apple, Amazon, Google, and Facebook leading the way and birthing a new generation of billionaires. Even as this second wave was cresting, however, a third wave of innovation was forming in its wake. In his new book, The Third Wave: An Entrepreneur's Vision of the Future, Case lays out his vision of an emerging era in which almost every object is connected to the Internet and the network of all networks "stops belonging to Internet companies.…The entrepreneurs of this era are going to challenge the biggest industries in the world, and those that most affect our daily lives. They will reimagine our healthcare system and retool our education system. They will create products and services that make our food safer and our commute to work easier."

PND spoke with Case, who chairs the Case Foundation and, with his wife, Jean, is a signatory of the Giving Pledge, about what these changes mean for the social sector and how nonprofits, large and small, can partner with business and government to solve some of our most pressing challenges.

Headshot_steve_casePhilanthropy News Digest: What you have labeled the "third wave" of Internet-enabled innovation will affect many areas of interest to the social sector, including health and health care, education, and food and agriculture. Do you see this next wave of innovation as a boon for nonprofits and social entre­preneurs?

Steve Case: I think it can be. Obviously, there are different folks focusing on different things in different ways. And there will always be an important role for nonprofits to deal with issues that, frankly, only nonprofits can deal with. But some of the sectors you mentioned — health care and education, food, agriculture — I think there's a role there for entrepreneurs to build companies that can have an impact.

One of the big things I talked about in the book — and which the Case Foundation has been championing for years — is the importance of partnerships. Partnerships between startups and other organizations — whether it's other companies, nonprofits, or government — will become more important in the nonprofit sector generally and will have a significant and, I think, positive impact on some of the sub-sectors you mentioned.

PND: The Case Foundation has always emphasized the importance of working across sectors. How do you think the changes brought about by the third wave of Internet-enabled innovation will affect its own work?

SC: I think we'll continue on the path we've been on. We've been talking about some of the issues around cross-sector collaboration for the nearly twenty years the foundation has been around. In the last few years, we've focused on things like impact investing, inclusive entrepreneurship, leveling the playing field so every entrepreneur who has an idea has a shot, and we'll continue with those efforts and try to use all the levers available to us.

Jean [Case] has spent a lot of time on impact investing. Part of her focus is advocating for policy changes that actually free up and expand more impact investing capital. The kinds of things we're focused on at the foundation are very much in sync with the kinds of things I address in the book.

PND: The MacArthur Foundation, along with the Chicago Community Trust and the Calvert Foundation, recently launched a $100 million impact investment initiative in Chicago aimed at accelerating the efforts of organizations there to address a variety of educational disparities, the lack of access to healthy food in many neighborhoods, the shortage of affordable housing, and other critical needs. While $100 million is a lot of money, it's a relatively modest sum given the scope and scale of the needs. Is impact investing the future of social service funding?

SC: I'm not sure it's the future, but it's certainly part of the future. I wouldn't want to suggest it's a way to solve all problems. Obviously, it isn't. But it is a new lever, a new platform that will gain traction and will be very helpful in accelerating and maximizing social impact across the country and the rest of the world.

I would add that sometimes these investments can be catalytic; you can't just measure them by the actual dollars put in. When we started AOL thirty-one years ago, we raised $1 million in venture capital in our initial funding round, and it took us a while to really scale the company, but eventually we did. A decade ago, the Case Foundation invested a couple of million dollars in Network for Good and platforms like MissionFish (now part of the PayPal Giving Fund), and those investments have generated more than $2 billion dollars in contributions to thousands of nonprofits. So sometimes the investments have substantially greater impact than the actual size of the original check would suggest.

As I mentioned, sometimes the key is a partnership. Network for Good and MissionFish chose not to go it alone, but instead figured out how they could work together, pool some capital, and focus on specific issues they considered important. I think that's a good model, and having foundations looking at some of these issues in a broader, more integrated context is something we'd like to see more of.

We've done some work, for example, with the Kresge Foundation, which is doing a lot of different things in Detroit. One of the things it invested in, alongside Revolution, our investment firm, was Shinola, a Detroit-based maker of handcrafted watches. It's also making significant investments in rebuilding key parts of the city's infrastructure and is allocating some of its capital for direct investments in companies that can be catalysts for change, whether that's in the area of job creation, rebuilding neighborhoods, or driving economic growth in the city and the region.

PND: What, in your view, is needed to inspire more of these types of partnerships — and attract larger sums of money into impact investing experiments?

SC: In part, I think it's about awareness. A few years ago, most people I ran into didn't know about impact investing, or certainly weren't talking about it. It's also about building coalitions, which is why partnerships are so important. Some of it is engaging on the policy side. There are impediments that are holding back investment in the impact space, including some of the ERISA rules that were limiting or constraining some institutional investors — pension funds, typically — from making impact investments. One of the catalysts for the venture capital revolution three decades ago involved changes to the rules prohibiting large institutional investors from investing in venture as an asset class. When the rules were recently changed, it unleashed a lot of capital.

The last factor is success. Momentum begets momentum. As people see more of these initiatives and companies succeed, it will encourage others to take a closer look. And as those people pursue it and begin to have some success, many of them will devote larger sums to it. Again, sometimes these things just take time.

PND: Collaboration can be a challenge for nonprofits — not that it's easy for anyone — in part because nonprofits tend to be the partner at the table with the fewest resources. Do you think the third wave does anything to change that dynamic?

SC: I think it does, in two respects. One is that technology, particularly the Internet, is an unparalleled platform for mobilizing action. Awareness first, and then action. There are plenty of examples, including the Arab Spring and the way many politicians now run their campaigns. So you've got technology leveling the playing field and giving everybody a voice, giving people the ability to aggregate many voices and create networks around ideas. That will only accelerate.

The other is this growing emphasis on partnership and policy — what I call the "Ps" of the third wave. While the focus right now may be more on the company side of things, those same kinds of principles are going to drive a lot of innovation and success in the social sector over the next ten to twenty years.

PND: Business isn't always viewed as the most trustworthy player when it comes to addressing social and environmental challenges. Some would argue that's because so many business leaders are eager to promote the idea that the sole function of business in a free-market economy is to maximize shareholder value. Is that a fair critique?

SC: The view that profit should be the only concern of business is the traditional, Milton Friedmanesque view of capitalism, and it's a view that many investors and CEOs share. But I think it's changing. The interest in and growth of things like impact investing demonstrates that. Benefit corporations didn't really exist five years ago. I don't know what the current number is, but there are probably a couple thousand registered B corps in the U.S., and their boards are charged with tracking and reporting against the company's impact or purpose, not just its profit. There's also a growing recognition among companies that younger people and the millennial generation want to work for companies that stand for more than profit and they want to invest in companies that stand for more than profit.

I understand the traditional critique of business. As I said earlier, I don't think business by itself can solve all social problems; there's a role for nonprofits, there's a role for government, there are roles for lots of folks in the social sector. But business can have a bigger role in solving some of the problems we face than it has in the past. It will require a different mindset on the part of business leaders, of course, and that's one of the reasons I'm excited about the momentum that is building around impact investing. I also think it will be helpful to a lot of communities around the country, and around the world, if there's a more inclusive approach to entrepreneurship and the playing field is leveled so that anybody with an idea for a business or social enterprise has a shot at making it a reality.

PND: What could persuade corporate leaders to adopt a double- or even triple-bottom-line view of the world?

SC: Many corporate leaders already have. While the majority of CEOs of Fortune 500 companies may still be focused on profit maximization, there's a growing recognition in corporate America of the importance of purpose and there are many conversations going on about how business can transition to a different, more socially and environmentally focused kind of model. I have no doubt that ten, twenty years from now there will be more companies focused on and tracking their impact in those areas and not just focused on profit.

PND: Obviously, technology will be a key driver of future innovation. But nonprofits, especially smaller nonprofits, often don't have the infrastructure in place to take advantage of it. Do you worry about a widening tech divide among nonprofits? And what, if anything, can be done to lower the barriers to participation for smaller nonprofits?

SC: That's a concern, sure, but I believe the continued development of a variety of different platforms will make it relatively easy for smaller nonprofits to take advantage of new technologies and will help level the playing field. I'm not particularly worried about that.

Earlier, I mentioned Network for Good as an example. A decade or so ago, Jean and I and others at the Case Foundation sensed that the Internet could be an important fundraising platform for nonprofits, but most nonprofits didn't have the expertise or the capacity to take advantage of the opportunity. Backing an initiative like Network for Good, which basically was a platform that all nonprofits could use and plug into at essentially no cost, was a way to provide those tools more broadly. Today, crowdfunding sites, platforms like Kickstarter and others, are doing the same kind of thing, and smartphones have been a game-changer in terms of leveling the playing field. In Africa, for example, a few years ago most farmers had no idea what the price of their particular crop should be or even what the weather a few days out was likely to be. But now, thanks to smartphones, farmers in Africa are empowered in ways that simply weren't possible before.

PND: In the book you talk about some of the things down-on-their luck cities and marginalized urban neighborhoods are doing to encourage entrepreneurial activity. How might that apply to social sector organizations working in those communities?

SC: There's remarkable momentum building around entrepreneurialism in many places. We've visited dozens of cities in our Rise of the Rest tours over the last couple of years, and I'll give you two examples based on what we saw. Seventy-five years ago Detroit was the most innovative city in the country, and then it kind of lost its entrepreneurial mojo, it lost 60 percent of its population, and then it went bankrupt. Now it's fighting its way back, which is most evident downtown. And a lot of that renewed economic activity has been driven by cross-sectoral partnerships between government, foundations, and business -- both small and large businesses. There's still a lot of work to be done, it's not going to happen overnight, but it's creating a new sense of hope in Detroit. There's a sense of possibility and opportunity there that didn't exist five years ago.

New Orleans is another example. Ten years ago, the city was reeling from Katrina and lots of people had left, many of them for good. Now, there's a great startup scene in the city and very encouraging things are happening in the school system, in part because city leaders and school officials, post-Katrina, are much more open to trying new things. You even have a couple of dozen education software companies in New Orleans, some of them started by former teachers.

So, there's no question we're seeing greater interest and more investment in Rise of the Rest cities. And it's not just Detroit and New Orleans; I could give you a couple of dozen other examples. But the important point is that these communities are more vibrant today than they were a decade ago, they are seeing more job growth, more economic growth, and they're providing better services. And when that happens, a lot of good things can happen. We can debate what the priorities are or should be, but at least now the residents of those cities are seeing investment grow for the first time in a long time, are seeing tax revenues grow, and have an opportunity to think about the best way to allocate those resources for the greater good. It's the way our system is supposed to work, and we're very excited to see it happening in many places around the country.

Matt Sinclair

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