Ten years ago, on August 4, 2010, Bill Gates and Warren Buffett formally announced that they and 40 other families and individuals had signed The Giving Pledge — a commitment to giving at least half of their net worth to philanthropic causes. They invited others to do the same. As of this writing, 209 signatories from 22 countries have pledged over $500 billion.
Conceived in the immediate aftermath of the 2008–09 global financial crisis, The Giving Pledge has been rightly hailed as a breakthrough in philanthropic initiative on a global scale. But a decade on, and in this moment of crisis, it is worth asking what amendments to The Giving Pledge might make it more effective in the future.
As we all are aware, the most direct economic impact of the Covid-19 crisis has been on workers and small businesses in affected countries. In ascending economies (those with above-replacement-rate fertility and a real-GDP growth rate of greater than 2%, adjusted for commodity-price volatility), workers and small- to medium-sized businesses have suffered disruptions as trade volumes have plunged in almost all categories, and as economically vital industries such as tourism, retail, and energy have been severely impacted. Currency fluctuations add to the existing economic uncertainties. Many venture capital and private-equity funds are choosing to exit riskier markets, accelerating trends toward retrenchment and withdrawal from ascending economies.
The immediate cost of these shocks is obvious. Less obvious are the ripple effects that will extend into the future, as a generation of the most capable and determined entrepreneurs abandon otherwise promising ventures. Significantly, they redirect efforts away from an enterprise that, we would argue, has improved more people’s lives than any other category of human endeavor: market-creating innovation.
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What is market-creating innovation?
Last year, writing with Clayton Christensen and Karen Dillon, one of us (Ojomo) published an article in this magazine that introduced the term. Market-creating innovators target non-consumers — that is, the segment of the population who would benefit from owning or using a product but cannot, because they can’t get access to it or don’t have the time, money, or expertise needed to use it. Market-creating innovators are often entrepreneurs whose insights and strategies arise from their daily exposure to the problems to which they are trying to solve.
Most commercial innovation aims to provide demanding, high-end customers with products that deliver better performance than previously available products. These innovations typically do not expand the market. Instead, they sustain it — and in doing so, as Christensen, Dillon, and Ojomo put it, they “are a critical component of the economic engine and are necessary for companies and countries to remain competitive.”
In contrast, market-creating innovations transform complex and expensive products into simpler and more-affordable ones, making them accessible to a wider segment of the population. Market-creating innovations, time and again, have created widespread growth and prosperity for many — whether in ascending markets or in un- or underserved communities in high-income countries.
Market-creating innovations create social value in a very specific but important way: Rather than expanding the frontier of human progress, they expand its scope. As the great Austrian economist Joseph Schumpeter put it, “Queen Elizabeth [I] owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.”
Where sustaining innovations advance performance, market-creating innovations advance participation. This principle holds not only for the acquisition of silk stockings but also for access to heart surgery and the prevention of needless blindness; the ability to transfer funds and buy life insurance; and, the simple ability to make a phone call to a loved one. What is more, as one of us (Auerswald) has described in prior work, market-creating innovations generate platforms on which entrepreneurs continue to build. These contributions, and many others like them, are why we contend that market-creating innovation has improved more people’s lives than any other category of human endeavor.
Times of crisis have often proven to be excellent moments to start, and to invest in, market-creating innovation. In a study conducted shortly after the 2008 financial crisis, the Kauffman Foundation found that half of Fortune 500 firms were founded during recessions. While our current crisis is fundamentally different from most in the past, in this regard it is likely to be similar: A potential window exists for risk-tolerant, philanthropically motivated investors to provide critical capital to enterprises with capable and creative leadership; a sound business model that addresses real and underserved market need; and the ability to pivot and create vibrant new markets. And in that regard, there can be no better way for the Giving Pledge to extend and expand its legacy than for it to inspire action-at-scale to support the next generation of market-creating innovators.
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How? The line of argument we have advanced so far suggests a simple idea that we believe could have far-reaching implications. Philanthropically motivated individuals and organizations could consider responding to the current global crisis by committing to allocate either 2% of all of their philanthropy, or 2% of assets under their management, to investments in market-creating innovations.
That 2% figure is inspired by the U.S. Government’s most successful program to support market-creating innovators: the Small Business Innovation Research (SBIR) Program. While a 2% goal may seem small in relation to the Giving Pledge’s 50% goal, the legacy of the SBIR program has demonstrated that a firm commitment of even 2% of aggregate resources to support market-creating innovators is among the highest-leverage investments a society can make. While the SBIR program focuses on technology-based companies, the program’s emphasis on commercialization aligns with our own focus on disruption and market-creating innovation. Previous recipients of SBIR awards, awarded amounts ranging from $100,000 to $1,000,000 at early stages of their growth, include the U.S. technology giants Symantec, Qualcomm, and iRobot.
The principle underlying this proposal is straightforward. To advance development, capital investment needs to be not only well-intentioned but well-directed. At times of crisis, reactive philanthropy can, at its best, do no more than return the world to where it was and at its worst, result in distortions or negative unintended consequences. In contrast, transformative philanthropy capitalizes upon such moments to advance societal development in fundamental ways. The best, and most lasting, way to do so is by investing in people, not projects. Furthermore, investments that support societal development are most effective when they encourage entrepreneurially inclined individuals to focus on productive ventures.
Philanthropically intended investment can uniquely catalyze market-creating innovation. That’s not only because it is an activity fraught with uncertainty and requiring patience, but also because it is one where social returns have the potential to substantially exceed private returns. The analogy to early-stage technology is instructive here. For over half a century, economists have recognized that financial markets for the support of technology entrepreneurship are anything but “efficient” — whether we define that term in an idealized, theoretical sense or in a day-to-day practical sense. Initiatives such as the SBIR program have followed from this research-based understanding.
Particularly in ascending economies, where the problem of non-consumption is most prevalent, market-creating innovators face systematic obstacles that are, if anything, greater than those faced by technology entrepreneurs. Capital markets within ascending economies are widely known to suffer from a phenomenon known as “the missing middle”: the systematic undersupply of growth-stage capital due to high-levels of intrinsic uncertainty, weak local financial systems, shortages of able mentors, and poor incentive structures. Such realities are well known to finance professionals.
But these capital market imperfections can create huge opportunities for both effective government support and transformative philanthropy. Since its founding nearly forty years ago, and currently funded at a level of $3 billion per year, the SBIR program has been among the highest-value future-directed initiatives supported by the federal government. The SBIR program’s success establishes a large-scale public precedent for targeted and strategic investment in early-stage entrepreneurs. Learning from these efforts and building a coordinated future-facing structure fueled by private dollars would be a powerful vehicle for the transformational philanthropist.
What signals the value created by these market-creating innovators? The market. Individual entrepreneurs certainly benefit, and that is as it should be — there have to be incentives that drive their work. But, most importantly, market-creating innovations lead to the expansion of large-scale systems and social capacity. Those are vital benefits. As Jennifer Pryce, President and CEO of Calvert Impact Capital, has put it, “If we are going to make a dent in the large-scale global challenges we face — income inequality, access to quality-basis services, climate change — we need to shift market attitude and behavior by focusing on scalable solutions. We need to change the mindset focused on augmenting philanthropy to one that views sustainable business models as the way of the future, a large market opportunity that investors cannot ignore.”
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The world of 2020 is structurally different from that of the mid-twentieth century. An array of technological advances over the past seventy years, beginning with the digital computer, have democratized opportunities for individuals to exercise leverage. In our era of networked power and ubiquitous digital experience, change — again, for better and worse — is more likely to come from the under-appreciated edges of the economy and society than from traditional centers.
In our historical moment, philanthropists can aspire to a higher role than is captured by the mantra of “solving the world’s most challenging problems.” While that aspiration is certainly laudable, it risks over-emphasizing our own capacity to “solve” problems and fails to acknowledge the intrinsic complexity of the systems in question — placing projects before people, metrics before meaning, and the gratification of immediate action over the patience required for lasting doing.
To be relevant in the future — and to have real impact — philanthropists will have to put real skin in the game, by exposing themselves to investment risks. This is what the next generation of entrepreneurs and ascending economies need — committed partners who have committed to weathering storms with, but not for, them. They need creative patient investors, like those who sign The Giving Pledge, who are not focused on short-term extractive strategies.
No amount of measurement can take the place of real and irreducible exposure to risk. Accepting this reality elevates philanthropic work by recognizing its seriousness as well as its limitations. Philanthropists are most transformative when they offer differentiated resources, time, and connections; and entrepreneurs are most successful when they are directly exposed to the local challenges they are seeking to address, and can bring their ideas, determination, and lived experience to the partnership. Transformative philanthropy goes beyond a tabulation of the number of dollars given to a dynamic accounting of how gifts can build capacity in people. It looks for fulcrums and levers — the most important of which is market-creating innovation.
The authors dedicate the article, and the initiative it proposes, to the memory and legacy of Clayton Christensen.
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August 04, 2020 at 08:26PM
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