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10 Great Social Innovation Reads: February 2014

readingFebruary witnessed some dissatisfaction with the current state of funding for social change, but also some trailblazers playing with new financial vehicles. I always wonder whether true change to money for social good will come with the next generation. Do Millennials hold the key to fundamental shifts in how we finance social change efforts? We shall see.

Below is my list of the 10 best reads in the world of social innovation in February. But, as usual, please add what I missed in the comments. If you’d like to see an expanded list, follow me on Twitter, Facebook, LinkedIn, or Google+.

You can also find the list of past months’ 10 Great Reads here.

  1. As we work toward social change, its important to embrace the gray areas. Writing in the New York Times Simon Critchley takes us back to the 1970s BBC documentary series “The Ascent of Man” to make a point about the importance of uncertainty in our search for solutions. As he puts it, “Insisting on certainty…leads ineluctably to arrogance and dogma based on ignorance.” And Fay Twersky seems to agree when it comes to strategic philanthropy, arguing in the Stanford Social Innovation Review that “we need to challenge the certainty creeping into [philanthropy].”

  2. And speaking of changing philanthropy yet another study of Millennial philanthropists claims that this new generation of donors will be quite different than their predecessors. As Phil DeMuth writing in Forbes puts it, these new donors “are no longer interested in providing an annuity to some tax-deductible charity organization.” They want to see results, and they want to get in and get out.

  3. But Lucy Bernholz is frustrated by the pace of change, at least in how little the financial vehicles philanthropists use are changing. She argues that in this year’s list of the top 50 philanthropists  “the financial vehicles for philanthropy…look not unlike [those] in 1954 or 1914.”

  4. Tris Lumley from New Philanthropy Capital voices frustration as well, but with the general state of nonprofit finance. He puts forward a new model for the social sector that removes the “funder-centricity” of the “anti-social sector.”  Because, as he argues, “the result of this funder-centricity at its worst is that the social sector exists not for those it’s supposed to help, but in fact for those who work in it, volunteer in it, and give money to it.”

  5. There are some bright spots, at least in the United Kingdom. The country leads the way in the social impact bond trend.  Emma Tomkinson provides a map of social impact bond activity in the UK versus the rest of the world and the UK Centre for Social Impact Bonds provides a great site of resources on the new tool.

  6. And even here at home there are some trend setters, particularly the F.B. Heron Foundation, led by the visionary Clara Miller who also founded and led the trailblazing Nonprofit Finance Fund for 25 years. Clara has announced the F.B. Heron Foundation will account for the mission return of 100% of its assets. Unheard of and definitely interesting to watch.

  7. There is a constant tension in the nonprofit sector between funding new ideas and funding the growth of proven ideas.  Writing in the Chronicle of Philanthropy, Alex Neuhoff, Laura Burkhauser, and Bradley Seeman fall squarely on the side of growing proven solutions, arguing that in order to reach a higher performing nonprofit sector we must “follow the “recipes” that earned proven programs their stellar ratings.”

  8. There was much for Millennial changemakers to chew on this month. First, there is a growing drumbeat questioning the relevance and value of college. Does the higher education model really work anymore? It’s a fascinating question to contemplate. And Naomi Schaefer Riley does so in the “College Tuition Bubble.

  9. I’ve been on a real Steven Pressfield (author of The War of Art) kick lately. His worldview is that each individual was put on earth to create some specific greater good, but Resistance constantly fights to keep us from achieving it. If you need inspiration to overcome Resistance, read his post “How Resistance Proves the Existence of God.” Love it.

  10. And for those who are pursuing a life of social change despite the lure of a more traditional path, look to Thoreau for inspiration. For as Maureen Corrigan explains in her NPR review of a new biography of the man, “Thoreau’s youth seemed aimless to himself and others because there were no available roadmaps for what he was drawn to be…If Thoreau had committed to a professional career right after Harvard, his parents might have rested easier, but the world would have been poorer.”

Photo Credit: beggs

 

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10 Great Social Innovation Reads: December 2013

Town2In my eyes, December was about three main things: the After the Leap conference about moving nonprofits to manage to outcomes, predictions about how the social sector will evolve in 2014, and the impact of the second annual Giving Tuesday. Added to the mix were some demonstrations of the growing wealth inequality (a prediction for 2014 from many) and a dash of controversy about the beloved TED Talks. It all made for a very interesting month.

Below are my picks of the 10 best reads in the world of social innovation in December. But please add to the list in the comments.And if you want to see more of what catches my eye, follow me on Twitter, Facebook, LinkedIn, or Google+.

You can also find the list of past months’ 10 Great Reads here.

  1. I already linked to several people’s great 2014 prediction pieces in my 5 Nonprofit Trends to Watch in 2014 post, but Tom Watson’s Trends and Collisions That Will Challenge the Social Sector in 2014 in Forbes is particularly thought-provoking. He takes what he calls a “meta approach” by analyzing themes from big social sector thinkers and “adding a few morsels to the stew.”

  2. One of the predictions on both my and Tom’s list was that the growing wealth inequality will become increasingly obvious. Robert Reich helps this trend by providing a scathing critique of modern philanthropy, arguing that it is becoming less about solving wealth inequality and more about reinforcing it: “Fancy museums and elite schools…aren’t really charities…They’re often investments in the life-styles the wealthy already enjoy and want their children to have as well.” And Peter Capelli, writing on the Harvard Business Review blog, seems to agree, but on the corporate side. He takes issue with “companies that pay poverty-level wages or thereabouts to their employees [while] spend[ing] a good deal of effort to be good corporate citizens in other areas.”

  3. Some people claim the second annual Giving Tuesday was a great success with a 90% increase in day-of online donations over last year, but others, like Michael Rosen, argue that Giving Tuesday is not actually channeling new money to the sector.

  4. The first-ever After the Leap conference in December promoted nonprofit performance management. Perhaps the high point of the conference was Nancy Roob’s (head of the Edna McConnell Clark Foundation) stirring keynote pushing both foundations to fund outcomes management and nonprofits to demand it. The Stanford Social Innovation Review did a great interview with her where she makes many of the same points, and an interview with Mario Morino, the main organizer of the conference.

  5. Writing in The Guardian, Paula Goldman from Omidyar Network discusses how, with impact investing, the blending of social and profit motives is really starting to take hold: “Fifteen years from now…We’ll look back on a host of innovations benefitting millions of disadvantaged people – in education, in healthcare,…in solar lighting—and will have a hard time remembering the day when people viewed charity and business as working towards opposite goals.”

  6. Leon Neyfakh writes a fascinating expose in the Boston Globe about donor advised funds, which he claims is “where charity goes to wait.” $45 billion—more than the endowment of the Bill and Melinda Gates Foundation – currently sits idle in donor advised funds and that amount is growing fast. A huge financial opportunity for the sector.

  7. The Center for Effective Philanthropy released a new study about how much impact foundation CEOs think their philanthropy has had. Philanthropy heavyweights Paul Brest and Lucy Bernholz each give their take on the study’s findings.

  8. I have loved writer Steven Pressfield since I read his fabulous The War of Art last summer. His blog about the creative process is a fount of knowledge and inspiration. His post in December about envisioning and embracing the future in your industry applies to nonprofits too.

  9. The idea of networked approaches to social change has been around for several years and is gaining momentum. Writing in the Nonprofit Quarterly, Mark Leach and Laurie Mazur describe “the power and promise of networked approaches to social change…creat[ing] a force larger than the sum of their parts.” Definitely a trend to watch.

  10. And finally, I love it when someone steps back and asks some hard questions about something that everyone else assumes is amazing. Benjamin Bratton does just that about the beloved TED Talks, which he claims “dumb-down the future.”

Photo Credit: Imperial War Museums

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5 Nonprofit Trends to Watch in 2014

The_Crystal_BallAmong other obvious things, December is a time for reflection on the past year and predictions for the coming year. There have already been some great forecasts about what 2014 will bring the social change sector (here, here, and here). And as is my tradition, I want to add my thoughts about the trends to watch in the coming year. (If you want to see how I did in past years, you can read my nonprofit trends posts for 2011, 2012 and 2013.)

Here’s what I think we should watch for in 2014:

  1. Growing Wealth Disparity
    Evidence increasingly reveals that despite our best efforts the gap between the rich and the poor is widening, not shrinking. This growing disparity means that the work nonprofits do to address the ramifications of these inequities is in growing demand. The problems are simply too big and getting bigger every minute. At the same time government resources are shrinking so the greater burden for solutions is increasingly placed on the shoulders of the nonprofit sector. As problems get worse and money gets tighter the social change sector will take center stage.

  2. Greater Nonprofit Sector Confidence
    As the nonprofit sector is asked to do more and more, nonprofits will no longer be a “nice to have” but an absolute essential component of any way forward. We will move squarely away from the idea of “charity” and toward an economy and a mindset that fully integrates the social. No longer sidelined as a small piece of the pie, the nonprofit sector will be recognized for the undeniable and pivotal role it plays in our economy, our institutions, our systems. As such, the nonprofit sector will stop apologizing for the resources it needs to do the job. The sector will rise up and take its rightful place as a critical force in shaping a sustainable future.

  3. Increased Movement Toward High Performance
    As resources become tighter and we look to the nonprofit sector to solve mounting problems, public and private funders will increasingly want to see the return on their investments. And that can only be done by understanding what results a nonprofit is achieving. The growing push this year away from financial metrics and toward outcome metrics will continue to grow. Nonprofits will have to learn not only how to articulate the outcomes they are working toward, but more importantly, how to manage their operations towards those outcomes.

  4. More Capacity Investments
    And if we are going to get smarter about achieving results in the social change space, more donors will start to recognize that they have to build the capacity of that space. There is no end to the list of capacity-building needs of the sector.  From investing in more sustainable financial engines, to funding evaluation and performance management systems, to financing nonprofit leader coaching, philanthropists will increasingly recognize that if we are going to expect more from the nonprofit sector we must make sure they have the tools to do the job. A handful of savvy foundations and individual donors have already made capacity investments, and as those investments pay off, more donors will follow suit.

  5. Accelerated Effort to Enlarge the 2% Pie
    For the past four decades private contributions to the nonprofit sector have not risen above 2% of the U.S. gross domestic product. In recent years there have been attempts to grow that pie. And the big question whenever a new funding vehicle enters the space (like crowdfunding most recently) is whether it will be the magic bullet to shatter that glass ceiling. But we are not there yet. As social challenges continue to grow, the wealth gap continues to widen, and a new generation of donors comes of age, there will be increasing pressure to channel more money (not just the same money through a new vehicle) toward social change.

Photo Credit: John William Waterhouse

 

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Connecting Philanthropic Grants and Investments: An Interview with Geeta Goel

Geeta_Goel_croppedI’m out of the office this week, so in my place I am offering you two interviews this month. Tuesday was my video interview with Hope Neighbor.

And today I’m talking with Geeta Goel, Director of Mission Investing at Michael & Susan Dell Foundation. In addition to traditional philanthropy, Michael & Susan Dell Foundation makes program-related investments across its India-based microfinance, health and education initiatives, and its US-based education initiatives. Prior to the Michael & Susan Dell Foundation, Geeta spent more than 12 years with the Corporate Finance Group of PricewaterhouseCoopers in India, advising large Indian and multinational clients on joint ventures, mergers and acquisitions, business plans, and valuations.

You can read past interviews in the Social Innovation Interview Series here.

 

Nell: Why has Michael & Susan Dell Foundation decided to put an emphasis on program-related investments (PRIs)? How exactly does that particular financial vehicle further your mission?

Geeta: Our mission is to transform the lives of children living in urban poverty through better health and education. There are 2.4 billion people living below the World Bank’s poverty line of $2 a day, and more than 160 million children are suffering from malnutrition. To tackle those numbers and address deep-rooted complex problems, we need solutions that are both scalable and sustainable. And for that we need to tap into different and larger sources of funds – government and private. Program Related Investments (PRIs) are just one of several financial tools we use to further our mission.

The foundation has always sought to concentrate its limited philanthropic dollars to achieve direct, measurable, replicable and lasting systemic change. Early on we realized the power of markets as one lever for creating a more inclusive society. Free markets definitely increase access where it’s most needed. They can also help raise the bar for quality in terms of what customers expect and what they will pay for.

A great example is the microfinance sector in India. Today there are more than 30 million microfinance clients in India. These clients are accessing some $4 billion in credit to invest in income-generating assets such as trading businesses, tea/food stalls and livestock. We played a catalytic role in the Indian microfinance sector by influencing a market shift from rural to urban environments. Beginning in 2006 and continuing through 2009, we provided seed funding to some eight urban-focused MFIs. The success of these institutions helped prove that microfinance is a sustainable, scalable and investible asset class. There are now more than 25 MFIs active in urban India.

This scale has been achieved only because microfinance offers a market-based, sustainable solution that attracted private capital.

Nell: What methods do you use to find projects that make sense for a PRI, rather than a traditional philanthropic, investment?

Geeta: I love your question. It places things in perspective and in the correct sequence.

Our approach has been to first identify projects that can help achieve our desired mission (fighting urban poverty in order to improve children’s lifetime outcomes), and then decide an appropriate funding structure. This is in contrast to other organizations that have de-linked grants and investments; their grant strategy is distinct from their PRI strategy.

We view grants and investments, including PRIs, as part of the same toolset. When we are selecting any projects to fund, the main criteria are the level of their social impact, scale and sustainability. On sustainability, we ask a variety of questions pertaining to the project. Is there a strong business model, and has the product/service been tested? Can it generate revenue and remain true to the original intent? Will other funders—government, investors, and grant-makers, step in to help establish sustainability and scale? Are there adequate quality safeguards or do they need to be created?

The structure of our support is a complex decision emerging from these deliberations. The funding structure can be in the form of a grant, loan, equity or a combination. For instance we made an equity investment in Janalakshmi Financial Services when it was a start-up microfinance institution. We also offered grant support to their non-profit arm Jana Urban Foundation to conduct a detailed analysis of their client base. This helped Janalakshmi Financial Services to better understand the financial needs of their customers and offer additional products tailored to those needs, thus strengthening the company.

An example of a straight PRI is our support for Waterlife, a for profit company offering clean drinking water to low income customers in rural areas, to test the market in urban areas through a concessional investment structure. The goal of the project was to help Waterlife develop and scale an urban business model that would replicate its rural success, given the different challenges within an urban setting.

Nell: Only 1% of U.S. foundations make PRIs. What do you think holds other foundations back from experimenting with mission-related investing?

Geeta: You’re right. Our legal counsel often find themselves in an odd spot at foundation conferences, as we are in a minority group that does PRIs, and an even smaller minority that does direct PRI equity investments internationally. I can’t speak on behalf of other foundations, but based on my discussions over the last few years, I’ve witnessed that investing in market-based solutions is unfamiliar territory for most foundations. They are pushed outside their comfort zone.

Moreover, PRIs are more complex to design and structure than grants. We’re really looking at a culture shift in terms of staffing. PRIs require financial and investment skills that traditional grant teams might not necessarily possess.

Another possible reason is that for many philanthropists making a profit is viewed negatively. Anything that is grant based or in the non-profit space is seen as delivering a positive impact. Anything that is in the market-space is viewed as uncontrollable and exploitative. Lastly, I think it’s the risk of failure that holds back many foundations. Not only are PRIs more risky, their success or failure is transparent and easy to measure in more objective terms. At the foundation, we have seen the ways that PRIs and markets can support social progress. By setting up guardrails and standards, we have managed to contain the inherent risks of PRIs.

Nell: It seems like there is an enormous opportunity to connect impact investors and philanthropists, but that really hasn’t happened yet. How do we better pool philanthropic and impact investment capital for more social change?

Geeta: Traditionally, development efforts and markets have been viewed as two parallel tracks that are unlikely to converge. This has resulted in limited interaction between philanthropists (focusing on non-profits) and impact investors (focusing on for profits).

However, as we move towards recognizing that markets can bridge some of the existing inequalities in access and outreach, there is a definite need for increased connections between philanthropists and impact investors. A few organizations are now consciously working towards this end, especially the ones that are championing a sector based approach to creating and catalyzing markets, like FSG, Monitor Inclusive Markets, and Mission Investors Exchange.

And with impact investments set to reach between $400 billion to $1 trillion over the next decade (JP Morgan Global Research) there should definitely be greater collaboration between the two worlds. This needs to begin with defining “common ground” amongst the two stakeholders.

Today, we do not have an agreed definition of impact and how to measure it. This is a good starting point. Once we have this common terminology and performance assessment framework, appropriate forums and a structured approach to sector level change will go a long way in increased collaboration amongst donors and impact investors.

Nell: Michael & Susan Dell Foundation is obviously at the forefront of program-related investing, but what about other innovative financial vehicles? What is the foundation’s view on philanthropic equity investments (investing in growing or strengthening nonprofit solutions)? Is there promise in those kinds of investments?

Geeta: As I said earlier, we are very focused on our mission and the guiding principles of impact, scale and sustainability. We are open to adopting different tools and approaches that help advance the mission. Right now we are focusing our energies on traditional grants and PRIs.

Philanthropic equity investment is a fairly new concept that definitely holds promise. They are a one-time grant to nonprofits that help strengthen the capacity of the organizations and make them more sustainable. We do not rule out such investments. For the foundation, the key factors to evaluate the option of philanthropic equity are measurable and comparable outcomes and in-built mechanisms for quality and cost efficiencies. In non-profits, these are difficult metrics to achieve, but not impossible, especially as the development world ups the ante on measurement, transparency, and pay for success. We believe that strong governance, transparent reporting and incentives for achieving greater impact at lower costs will go a long way in building the field for philanthropic equity investments.

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Shifting More Money to Social Good: An Interview with Hope Neighbor

I am out of town this week, so in my place I am offering you two interviews this month in my ongoing interview series.

First, as promised, is my video interview with Hope Neighbor, CEO of Hope Consulting and author of the Money for Good reports exposing a $15 billion opportunity to direct more private money to high performing nonprofits.

This is the first video interview I’ve done, and I am very grateful to Hope for being the guinea pig. You’ll notice that unfortunately there is no video of Hope, only her voice and a picture of her with her fiance. That’s because we couldn’t get her computer’s camera to cooperate (you’ve gotta love technology!). But the interview is still well worth a watch because Hope has really interesting insights about how donors approach giving and how we might be able to change some of that.

So take a look:

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Shifting More Money to Social Good

Hope NeighborI’m really excited to announce that, as promised, I’m starting to move the Social Velocity Interview Series to video interviews, via Google Hangouts (for those interviewees who are willing). I launch next week with an interview, on the Social Velocity Google+ page, with Hope Neighbor, CEO of Hope Consulting and author of the Money for Good reports exposing an $15 billion opportunity to direct more private money to high performing nonprofits.

In 2010 and 2011 Hope, and her team of partners (like GuideStar and Charity Navigator) and funders (like The Gates Foundation and The Hewlett Foundation), conducted comprehensive studies of donor behavior, motivations, and preferences for charitable giving in order to understand how to effectively influence giving behaviors.

Money for Good I found that 90% of donors say how well a nonprofit performs is important, but only 30% of donors actively try to fund the highest performing nonprofits. So there is a disconnect.

In Money for Good II, Hope and her team set out to figure out what it would take to change donor behavior and direct more money to high performing nonprofits. What they found is that more information about performance and more “Consumer Reports” style reporting could encourage more donors to switch their giving to higher performing nonprofits.

This is all fascinating and helps inform the on-going question, “How do we funnel more money to social change?” Needless to say I have lots of questions for Hope.

Here is my list of questions for Hope, but I imagine since it’s a conversation the questions will evolve:

  1. With Money for Good you are hopeful that we can change donor behavior and shift more money to high performing nonprofits. But what will it take beyond providing more (and better information) to donors? How do we create incentives for donors to change?

  2. Money for Good estimates that $15 billion could shift to high performing nonprofits, but that is only 5% of the total private money flowing to nonprofits. And only 12% of all money flowing to the nonprofit sector comes from the private sector, so we are really only talking about shifting 0.6% of all the money in the sector to high performing nonprofits.  Is that piece of the pie worth the kind of donor behavior change effort required? What about expanding the overall pie (only 2% of the annual Gross Domestic Product has historically gone to the nonprofit sector)? Is there any hope of growing the 2%?

  3. Where does impact investing fit in all of this? Typically only 5% of a foundation’s money is directed to social change efforts. What about the opportunity to encourage foundations to tap into their corpus and do more program-related and other mission-related investing?

  4. 

How do we ensure that more information means better information? What if low performing nonprofits simply start mimicking high performing reporting? How do we ensure that accurate performance evaluation is conducted and reported across the sector? And how do we fund that?

  5. What about the problem of donors misconstruing information? For example, if nonprofits provide more financial information, and donors still have a bias against overhead spending, could that just shift more money to nonprofits with lower overhead, not necessarily higher performance?

Watch for the interview on the Social Velocity Google+ page next week.

And stay tuned for more video interviews soon!

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10 Great Social Innovation Reads: September 2013

10 Great Social Innovation ReadsThere were some really great articles and discussions in the social change space this past month. From new attempts to put philanthropy under the microscope, to analyses of Silicon Valley’s contributions to social change, to the difference between market innovations and social innovations, to Millennial giving, there was a lot to think about.

Below are my picks of the 10 best reads in the world of social innovation in September. But please add what I missed in the comments.

And if you want to see an expanded list of interesting reads, you can follow me on Twitter, Facebook, LinkedIn, or Google+.

The 10 Great Reads lists from past months are here.

  1. Silicon Valley has been getting into the social change game, but some aren’t impressed with their contributions so far. David Henderson takes Silicon Valley to task for focusing their technology “innovations” only on broken nonprofit fundraising models (Google’s announcement in September of a new fundraising app, One Today, is an example of what he’s talking about).  And Charles Kenny and Justin Sandefur seem equally unimpressed arguing that Silicon Valley’s view that technology can end global poverty is “wildly overoptimistic.”

  2. And speaking of social change and business, Daniel Goldberg makes a very interesting (and helpful) distinction between “market innovations” (“an opportunity for profit that also happens to help people…and [is] effective precisely because [it] so cleverly ride[s] the market wave”) and “social innovations” (which “produce value by filling gaps left by the market…a business opportunity in the classic sense, but a systematic market failure that required a social purpose to address”). Much of impact investing, he argues, falls into the first camp, whereas social impact bonds fall into the second.

  3. It is crazy (and terrifying) how the wealth of America is increasingly concentrated in a small group of people at the top. The rate at which it is happening is mind blowing. The 400 richest Americans are worth $2 trillion, which is a $300 billion increase from last year and double what it was a decade ago.  And in 2012 the top 10% of earners brought home more than 50% of the total U.S. income, which is the highest level ever recorded. Kind of depressing, isn’t it?

  4. But there is hope. Clara Miller, formerly head of the Nonprofit Finance Fund and now head of the F.B. Heron Foundation, is one of the leading visionaries in the social finance space. Her recent article is a must read and explains the dangers of nonprofit growth without adequate capital and what funders can do to prevent it.

  5. Paul T. Hogan, VP of the John R. Oishei Foundation, argues that funders should focus on building nonprofit organizations: “The development of the nonprofit organization provides plenty of factors to evaluate and many outcomes to strive for. It can also satisfy the funder’s obligation to effectively steward resources insofar as an organization is being helped to last for the long term and have a much greater chance of effectively achieving its, and therefore the funders’, goals.” Oh, if only more foundation leaders thought that way!

  6. Pablo Eisenberg writes a fairly vehement rant against philanthropy for being an increasingly closed loop. He argues that their insularity “keeps philanthropy from solving serious problems” and that we need “foundations and big donors to realize they don’t have all the answers. Nonprofits should have a greater role in driving the agenda.”

  7. September saw the annual Social Capital Markets Conference and one of the interesting things to come out of it was a new Community Capital Symposium that immediately preceded SoCap this year. CoCap brought non-accredited investors (with a net worth below $1 million) and social entrepreneurs together to talk about community-focused investing. It’s an interesting financial innovation to watch.

  8. Over the month of September, GrantCraft, a project of the Foundation Center, ran a 4-episode podcast series talking about and with Millennial philanthropists as a complement to the Johnson Center NextGen Donor Report about Millennial giving that came out earlier this year. Fascinating stuff.

  9. And then on the tactical side, HubSpot offers some great insight on What Millennials Really Want From Your Nonprofit’s Website.

  10. I always love urban food innovations, perhaps it’s because they are addressing several social problems at the same time (urban decay, obesity, economic decline, environmental degradation). And so I was interested to see that urban rooftop farming is a new trend.

Photo Credit: UWW ResNet

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Moving Social Finance Forward: An Interview with Ted Levinson

Ted LevinsonIn today’s Social Velocity interview, I’m talking with Ted Levinson. Ted is the Director of Lending at RSF Social Finance, a San Francisco-based financial services non-profit dedicated to transforming the way the world works with money. Levinson manages RSF’s flagship $75 million Social Investment Fund which provides debt capital to US and Canadian social enterprises.

You can read past interviews in the Social Innovation Interview Series here.

Nell: RSF Social Finance is really the leader in the social finance market, you’ve been doing this long before anyone started talking about a “social capital marketplace.” Given that long history, how do you view the current state of the social capital market? Are we where we need to be to funnel enough and the right kinds of capital to social change efforts? And if not, how do we get there?

Ted: RSF has a twenty-nine year operating history, but it’s still early days for the field of social finance. The industry is at the same stage of development as natural food stores were thirty years ago – we’re established, we’re growing, we’re doing good work, and yet we’re still considered a fringe movement. I believe we are on the cusp of mainstream acceptance which will mean a much broader audience of impact investors (especially young people and unaccredited investors) and far greater demand for social capital from the growing number of social enterprises that are just now becoming investment-ready.

There’s been a shift in society’s view of natural food stores – we’ve overcome our fear of the bulk bins and now all grocery stores look more like natural food stores. I expect the same thing to happen with our conventional financial institutions which are just now beginning to pay attention to social finance.

What the field really needs is to expand the financial products available to social enterprises and address some of the existing gaps. Frustrated social entrepreneurs may disagree, but I think the angel capital and large-scale venture capital spaces are meeting the needs of for-profits. Incubators, business plan competitions and seed funds are providing modest amounts of funding to emerging non-profits and for-profits. RSF and some of our friends including Nonprofit Finance Fund, Calvert and New Resource Bank are addressing the middle market market.

The big voids in social finance include:

  • True “risk capital” for non-profit social enterprises. We need more foundations willing to place bets on high-potential organizations.
  • Bigger finance players or (better yet) a more robust consortium of social finance organizations that can band together to meet the $5 million + needs of high growth social enterprises such as Evergreen Lodge, Playworks and other organizations that are reaching scale.

I believe the field will get there but we’re playing “catch-up” now and social entrepreneurs are an impatient bunch.

Nell: RSF does something pretty revolutionary in that you combine philanthropic giving with impact investing, whereas these two sides of the social capital marketplace have not yet really found a way to work together in any large scale or significant way. Why do you think that is? And what needs to change in order to encourage foundations and impact investors to work more closely together?

Ted: We call our approach of combining debt and philanthropic dollars “integrated capital,” and we think it’s going to have a profound effect on impact investors, philanthropists and the social enterprises it serves.

Most non-profit social enterprises rely on a combination of earned revenue and gift money. There’s no reason why a single transaction can’t bridge these two forms of capital. With integrated capital we can leverage philanthropic grants or loan guarantees to push high-impact loan prospects from the “just barely declined” category into the “approved” category. In fact, even some for-profit social enterprises are eligible for this. Our loan to EcoScraps – a fast-growing, national, composting business was made possible by a foundation that shared in some of RSF’s risk.

Integrated capital is possible because RSF works with individuals and foundations that have overcome the prevailing view that how you invest your money and how you give are distinct activities. We’re also fortunate to work with an enlightened bunch of people who recognize that philanthropic support for social enterprises isn’t a crutch or a sign of a failed enterprise.

Our work at RSF is driven by a belief that money ought to serve the highest intentions of the human spirit. Conscientiously investing money, giving money and spending money can all further this goal.

Nell: What do you make of the emerging social impact bond movement? Is this a social finance vehicle that you think will work?

Ted: I’m deeply hopeful and deeply skeptical of the future of social impact bonds. I’m hopeful because our government is notoriously risk-adverse and slow to adopt new ways of improving education, reducing recidivism, or curbing our runaway health care costs. I think spending money on early interventions could go a long ways towards improving these fields societal challenges, but paying now to save in the future is at loggerheads with the short-term view which prevails in politics. Social impact bonds are a clever way to push the risk on to investors who are willing to take a longer view for the potential of a big upside.

I’m also a fan because social impact bonds are an alternative to the financial engineering which brought us collateralized debt obligations. They demonstrate that Wall Street doesn’t have a monopoly on financial innovation.

That being said, I’m skeptical that this market can ever reach a stage where transactions costs can drop enough to make it economically viable. Bringing together the multiple parties that are required for such a transaction (the government, the investor, the non-profit, a monitoring entity, a social finance organization, an attorney and possibly a foundation) just seems unaffordable to me.

Nell: What sets the nonprofits and social enterprises you invest in apart? What characteristics do you look for in the investments you make?

Ted: All of our borrowers fall into one or more of three focus areas – sustainable food systems, the environment and education & the arts. These borrowers all have capable, committed management who recognize that financial sustainability is a prerequisite for lasting change. Our best borrowers have strong communities supporting them whether it is donors, customers or suppliers.
Evaluating these stakeholders is a key component of our underwriting process at RSF.

Our experience demonstrates that performance improves when social enterprises engage all of their stakeholders. RSF’s long-standing support of fair trade is an example of this commitment. We also regularly expect borrowers to solicit their community members to join RSF’s investor community as a precondition to approval. We take community seriously at RSF!

Our borrowers are all addressing major social or environmental problems such as a lack of adequate housing for developmentally disabled adults (Foundation for the Challenged), inefficiencies in the wind industry (FrontierPro) and poverty and environmental degradation from rice farming (Lotus Foods.) As social enterprises, they’re primary activities are DIRECTLY making the world a better place. We believe our borrowers have the potential to scale their organizations and make a real dent in these problems, or become a model for others to do the same.

For example, we were one of the first lenders to Revolution Foods when they were operating out of a defunct fast food restaurant in Alameda, CA. Today they deliver over 200,000 healthy meals a day to public school children.

Similarly, we think DC Central Kitchen’s model of combining culinary training for adults with barriers to employment with a robust meals business (they deliver 5,000 meals a day to schools and homeless shelters) is a winning approach that can be replicated throughout the country.

Nell: Some have argued that nonprofit leaders lack a level of sophistication when it comes to financial strategy and use of financial tools. Obviously you find nonprofits and social enterprises that are able to effectively employ sophisticated financial vehicles, so how do you respond to that argument?

Ted: Rather than argue I prefer to let the results of our borrowers speak for themselves. DePaul Industries, for example, is a $30 million non-profit that employs over a thousand disabled Oregonians. The Portland Business Journal ranked them one of the most admired companies in the state and they did this all with 98% earned revenue. Network for Good processes over $150 million of online donations every year while Digital Divide Data has a decade of year over year revenue growth in the field of impact outsourcing.

I see no lack of financial sophistication in the non-profit sector. I do, however, see a lack of risk-taking, which can sometimes be misinterpreted as unsophistication when compared with the for-profit world. It’s a shame this mentality is so pervasive because of the importance and urgency of the work that so many non-profits do. Many icons of industry have biographies filled with risky expansion, leverage, false starts and failures. We need to de-stigmatize failure in the non-profit sector and adopt that same boldness which has led to so many of the biggest successes in the commercial world.

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