September 11, 2008 – Pierre Omidyar turned eBay into the most successful company of the dotcom era. EBay likewise turned its founder into a multibillionaire, and in 1999, Omidyar set up a charitable foundation. But he tired of the nonprofit sector, and in 2004 he shuttered the foundation, instead launching Omidyar Network to fund both nonprofit and for-profit enterprises that create social value.
In three years, Omidyar Network’s model, which has invested $60 million in nonprofits and $45 million in for-profits, has been emulated by a new class of billionaire social investors. Just as eBay became a source of income for more than 1 million sellers, Omidyar hopes his mission-based fund can leverage the power of the marketplace for a new cause: to do good on a global scale.
Fast Company: What were the constraints in the nonprofit sector that pushed you to start investing in for-profit organizations?
Omidyar: One was the lack of good feedback mechanisms. How does a nonprofit know when it’s doing well? If the nonprofit is not making progress and it’s running out of money, its fund-raising message becomes, "Our work is not yet done, we need more capital." Whereas in the business world, you have lots of feedback mechanisms, including the discipline of the bottom line.
FC: How do you expect a for-profit organization to do good and still fulfill its core mission to make money?
Omidyar: Maximizing profit is a long-term proposition: You treat your customers well, so they stay your customers. By treating customers well because it’s good for your business, you’re also going to do good. I didn’t start eBay to pursue the social mission of building trust, but the company’s business model depended on having that effect. And there are a whole bunch of businesses like eBay, where if you’re achieving a financial impact, you’re also having the social impact that your business depends upon.
FC: Omidyar Network’s mission, to foster "individual self-empowerment," sounds deliberately vague.
Omidyar: My strategy for addressing big challenges like AIDS, poverty, and the environment is to help more people connect and work on issues they care about, not the issues I care about. If you make that happen on a global scale, where you’re leveraging the creativity of millions of people, it’s far more powerful than my sitting in an office in Redwood City, stipulating how I want to address some problem.
FC: What’s a recent investment that really demonstrates this mission of fostering self-empowerment, and how did you evaluate it?
Omidyar: There’s an online, peer-to-peer lending business called Prosper. It follows an arbitrage model that manages risk by pooling lenders and borrowers. We looked for three organizational attributes. The first is connection–Prosper connects people through a marketplace. The second is ease of access, which Prosper has because it’s on the Internet and it’s transparent. Finally, there’s ownership–a sense of having skin in the game. Prosper gives people a platform, but individuals self-organize into their own groups. If a borrower defaults on a loan, the pool of lenders loses the money. Early on, we didn’t think many for-profit companies would fit all three criteria, but we’ve found more than we expected.
FC: You seem to have adopted an open-source model, whereas the Gates Foundation apparently takes a more hierarchical approach.
Omidyar: To me, open source means giving people the tools they need to do whatever they think is right, because you trust they’ll generally do the right thing. It’s the right model to describe what we do. But I’m not advocating that the Gateses follow this model. Because of the scale of the funds that they deploy, they have to think about these things in a very different way.
FC: The open-source model distances you somewhat from your investments’ ultimate impact. How do you get a direct sense of reward?
Omidyar: It would inspire me greatly if we could bring the power of the marketplace–where individuals are pursuing their self-interests and at the same time making the world a better place–to millions of people. That’s far cooler than giving a bunch of money to eradicate some disease, because what do you do after that? Ours is a long-term proposition for the next 50 years, at least.
From Issue 113 | March 2007