THE BLOG
02/20/2013 01:47 pm ET Updated Apr 22, 2013

Compassionate Capitalism Canards Called Out

On May 10, 2011, Vinod Khosla, Sun Microsystems founder and a big-dollar social impact investor, told The Economist*: "I wanted to see if I could have a social impact. I quickly realized that any non-profit activity I could do would be no more than a drop in the ocean. Most non-profit organizations are completely ineffective...I decided that I needed to look for scalable solutions...which meant capitalist solutions. Proving the capitalist tool as a solution for poverty is high on my priority list."

Khosla's views are, more or less, the doctrinal tenets underpinning the social impact investing sector. Heartfelt good intentions and smart investment plans explained with hare-brained canards.

A not uncommon -- but commonly wrong -- assumption, Khosla confuses risk-taking innovation with an organization's tax status. Doctors without Borders, KIVA, Grameen, BRAC and thousands of other nonprofits in all sizes and shapes are de facto innovation labs inventing and reinventing pathways to social and economic justice.

He incorrectly claims nonprofits are unscalable. Nonprofit Stanford University (where Khosla earned his MBA), the nonprofit Catholic Church and the nonprofit Metropolitan Museum of Art predate and will predictably outlast for-profit Sun Microsystems. Globally, civil society is a $1.3 trillion industry employing 40 million workers (if a nation-state, the Republic of Social Change would have the seventh-largest GDP in the world).

Nonprofits are "completely ineffective," claims Khosla. Really? In comparison to what? British Petroleum? AIG? Subsidized American agribusiness? If Khosla means nonprofits have not (yet) solved all the world's problems, let's at least give the social sector credit for not creating them in the first place.

Khosla's plunge into social impact investing, he says, was driven by his commitment to "prove the capitalist tool as a solution for poverty." Sorry, it's been done. At the turn of the last century, the Industrial Revolution became the single biggest anti-poverty program in the history of Humankind, increasing the world's average per capita income ten-fold. In our own time, state capitalism has lifted 600 million Chinese out of abject poverty.

Khosla started out to "see if I could have a social impact." A noble sentiment to be applauded. But to whom does he answer besides his accountant? Impact investors are solo actors, deciding for ourselves how much money we want to make and how we want to make it. Are we selfless pioneers or self-absorbed profiteers?

Listen to Bamboo Finance USA CEO Keely Stevenson about the soul of an impact investor:

Investing in social justice doesn't make you a change agent any more than owning hospital stocks make you a doctor. It does make you a better person. Respect Kholsa for matching his money to his moral compass.

Whether you side with Khosla or with E.B. White ("The trouble with the profit system has always been that it was highly unprofitable to most people"), ideological debate distracts us. Let's be informed impact investors without being misinformed social commentators.

*This post previously misattributed Mr. Khosla's quote to the New York Times.