February focused (at least in my mind) on innovations in philanthropy. A new growth capital fund for nonprofits, radical philanthropists, trends in charitable giving, and philanthropy’s role in creating the future. Add to that a bold move by a nonprofit to wrest a lucrative city recycling contract from a for-profit company, research on Millennials’ hopes for the future, and a call for presidential candidates to take a lesson from history. It was a great month.
Below are my picks of the 10 best reads in the world of nonprofits, philanthropy and social change for the month of February. And if you want a longer list of what catches my eye, follow me on Twitter @nedgington.
You can also see past months’ lists of 10 Great reads here.
- There was a really exciting development in philanthropic support of nonprofit capacity in February. Ten donors led by the Edna McConnell Clark Foundation joined together to form Blue Meridian Partners, which will award $1 billion worth of unrestricted, performance-based grants, via 5 to 10-year investments of up to $200 million per nonprofit. According to Edna McConnell Clark Foundation president Nancy Roob, this venture is a new way to invest in high-performing nonprofits, because as she puts it: “Without large, long-term investments of growth capital for organizations with proven results, we’ll continue to salve but not solve our big social challenges.” Yep.
- And speaking of innovations in philanthropy, Inside Philanthropy provides a really interesting profile of philanthropist Farhad Ebrahimi and his Chorus Foundation, which although a relatively small foundation is taking an unusual approach to environmental giving by using a spend-down plan, providing long-term general support grants, and practicing mission investing.
- In analyzing Blackbaud’s 2015 Charitable Giving Report and comparing it to other available data both in the US and Canada, Amy Butcher of The Nonprofit Quarterly finds some interesting insights about how philanthropy is evolving.
- But perhaps it isn’t evolving quickly enough. Minnesota Council on Foundations President Trista Harris recently attended the Abundance 360 Summit about the technology of the future and was disappointed at the lack of a philanthropy presence. As she puts it, “Change in the world and our communities is happening at a breathtaking rate, driven by access to infinite information and exponential increases in computer processing speeds. This accelerating rate of change makes the challenging work of doing good even more difficult. Foundations are trying to make the world a better place, but we are often using yesterday’s information to do so. What if we could predict the future and prepare for the realities that will soon impact our communities? I believe it is our responsibility, as philanthropic leaders, to learn the skills necessary to understand and create the future.”
- Pew Research does an excellent job of unearthing data that relates to the issues of the day. In February I was especially interested in their report that while Millennials are less confident than Gen X or Baby Boomers about America’s future, so were their parents and grandparents when they were young.
- And while we are on the topic of history…Every once in awhile New York Times columnist David Brooks really strikes a chord. In February he used his column to pen a letter to several of the remaining presidential candidates encouraging them to use a “Roosevelt Approach,” as Brooks describes: “Many Americans feel like they are the victims of a slow-moving natural disaster…it’s a natural disaster caused by structural forces — globalization, technological change, the dissolution of the family, racism. A great nation doesn’t divide in times of natural disaster. It doesn’t choose leaders who angrily tear it apart. Instead, it chooses leaders like Franklin Roosevelt and Dwight Eisenhower…they were…able to set an emotional tone that brought people together and changed the nature of Americans’ relationships with one another. During their presidencies, the bonds of solidarity grew stronger and the country more formidable. They were able to cultivate a deep sense of unity, responsibility and sacrifice.”
- Writing in the Stanford Social Innovation Review, Daniela Papi-Thornton, deputy director of the Skoll Centre for Social Entrepreneurship, is quite critical of what she calls, “Heropreneurship,” when social entrepreneurs who have little experience or training are generously funded to solve complex social problems. According to her: “Unfortunately, all too often, the people who get the funding to try their hand at solving global challenges haven’t lived those problems themselves….We’re wasting limited resources on shallow solutions to complex problems, and telling our students it’s OK to go out and use someone else’s time and backyard as a learning ground, without first requiring that they earn the right to take leadership on solving a problem they don’t yet understand.”
- Nonprofit Tech for Good offers a nice list of 36 apps and online tools for nonprofits.
- In an interesting decision, the Minneapolis city council voted to award the city’s 5-year recycling contract to a nonprofit, instead of the for-profit that manages recycling for most of the country. Writing in The Nonprofit Quarterly, James Araci sees an exciting trend: “It’s a smart move for nonprofits to shift perceptions of America’s waste from a commodity to be sold to countries like China to an engine of local job creation and environmental benefits.”
- And finally, head of the Nonprofits Assistance Fund, Kate Barr takes aim at the nonprofit overhead myth by encouraging nonprofit leaders to change their own language and thinking: “If we in the nonprofit sector want to bust the overhead myth and bring attention to the things that really matter, then it’s our responsibility to take the lead by communicating differently and better. In order to take that lead, don’t wait for the question to come in and then argue why the [overhead] ratio isn’t important or meaningful. We have to replace it.” Sing it, Kate!
Photo Credit: jwyg, cropped version of “Work with schools : after a book talk, showing boys gathered…” from New York Public Library
June was an amazing month in the world of social change.
Most notably, the long fight for marriage equality was won with the Supreme Court’s ruling in Obergefell v. Hodges. It is moments like these where the long, arduous road towards social change makes sense. But that wasn’t all that was going on in the busy month of June. From “new” tech philanthropy, to the orthodoxies of philanthropy, to the oversight of philanthropy, it was all up for debate. Add to that some fascinating new ideas for museums, new data on how Millennials get their news, and a fabulous new blog about the history of philanthropy. It was a whirlwind.
And if you want to see past 10 Great Reads lists go here.
- The biggest news by far in June was the Supreme Court’s 5-4 ruling in Obergefell v. Hodges making gay marriage legal. In the ruling opinion Justice Kennedy writes: “As some of the petitioners in these cases demonstrate, marriage embodies a love that may endure even past death…Their hope is not to be condemned to live in loneliness, excluded from one of civilization’s oldest institutions. They ask for equal dignity in the eyes of the law. The Constitution grants them that right.” While this is a huge win for equality, I think the two really interesting parts of the story are 1) how relatively quickly gay marriage went from banned to law and 2) the various actors that made that social change happen. Some argue that Andrew Sullivan’s 1989 landmark essay in New Republic started the intellectual case for gay marriage. This New York Times interactive map shows how gay marriage went from banned to legalized state by state over time. And Evan Wolfson, founder of Freedom to Marry, describes the decades long struggle of nonprofit reformers and their donors, including the Haas Fund in San Francisco, to make marriage equality happen.
- A new blog, the HistPhil blog, launched in June to much acclaim. There is an enormous need for a historical perspective as we work to make nonprofits and the philanthropy that funds them more effective. HistPhil has already begun to provide that in spades with excellent posts on the Supreme Court ruling, among many other topics you will see below.
- Sean Parker, co-founder of Napster and founding president of Facebook, launched a new foundation and wrote a controversial piece in the Wall Street Journal about his “new” vision for philanthropy. Some found his ideas full of hubris, while others found him to be “an articulate evangelist for tech philanthropy.“
- And if that wasn’t enough philanthropic controversy for you, there were two other debates waging in June. First was the response to David Callahan’s New York Times piece, “Who Will Watch the Charities?” where he argued that we need greater oversight on nonprofits and their funders. Phil Buchanan of the Center for Effective Philanthropy quickly shot back that while Callahan raised some important questions, he ignored the complexity of the sector and reform efforts already under way. And then the two got into an interesting back and forth. Finally, Callahan wrote a follow up piece for Inside Philanthropy. Good stuff!
- Along the same lines, the other point of debate in June centered around a Stanford Social Innovation Review article where Gabriel Kasper & Jess Ausinheiler attempted to challenge the underlying assumptions in philanthropy. But now that we have a new expert on the history of philanthropy on the block, Benjamin Soskis from the HistPhil blog gave us a more accurate historical perspective about just what is and isn’t philanthropic orthodoxy.
- Michael O’Hare, professor of public policy at UC Berkeley, wrote a great long form piece in the Democracy Journal arguing that museums could become much more relevant and financially sustainable if, among other things, they began selling their stored artwork. Crazy controversial, but fascinating, ideas.
- Writing in the Stanford Social Innovation Review, Matthew Scharpnick cofounder of Elefint Designs, argued that recent ProPublica investigations of the American Red Cross uncovered our double standard for nonprofits. As he writes: “We are asking organizations to meet competing demands—many of which are at odds with how they are funded. We want nonprofits and NGOs to solve problems as effectively as private-sector organizations, and we want them to do it without any of the advantages and with far more constraints.”
- The Ford Foundation announced a sweeping overhaul in their grantmaking strategy. They will now focus solely on financial, gender, racial and other inequalities, and double their unrestricted giving. Larry Kramer, president of the Hewlett Foundation, described how he is closely watching this historic move. And Brad Smith, president of the Foundation Center, offered a view of how philanthropy has approached inequality.
- The Hewlett Foundation’s Kelly Born provided some interesting thoughts about what a new Pew Research Center report about how Millennials get their news means for civic engagement.
- And finally, on an inspirational note, Steven Pressfield articulated how “artists,” or really anyone hoping to bring something new into the world (a painting, a novel, a solution to a social challenge), should think: “As artists, [we believe]…that the universe has a gift that it is holding specifically for us (and specifically for us to pass on to others) and that, if we can learn to make ourselves available to it, it will deliver this gift into our hands.” Yes.
What a great month March was. Just as the weather started to turn to Spring (I hope it did where you are too), there was a whole host of great reading to digest. From analysis of the new breed of philanthropists, to controversy about contest grantmaking, to mission investing progress, to tips and guides on nonprofit finance, leadership and financial advocacy, there was lots to read.
Below are my picks of the 10 most interesting reads in the world of social change in March, but as always, please add to the list in the comments.
You can also see the 10 Great Reads lists from previous months here.
- Call me biased, but I think the biggest social change news in March was the launch of the Performance Imperative, a detailed definition of a high-performance nonprofit, by the Leap Ambassadors (of which I am one). Many reviewed the new tool, including Phil Buchanan from the Center for Effective Philanthropy who wrote that nonprofit performance is a “moral imperative.” And if you want to learn more, there is a webinar drilling down on the PI later this month.
- Who says online debate never results in change? There was a big discussion on the Chronicle of Philanthropy‘s site this month over the Council on Foundation’s plans to hold a “Shark Tank”-like contest for nonprofits. Many felt this contest would be a step backward, forcing nonprofits to perform for money, so the Council scrapped the contest and created instead a panel discussing the positives and negatives of contest-style grantmaking.
- F.B. Heron Foundation CEO, Clara Miller (formerly of the Nonprofit Finance Fund) is a true nonprofit finance visionary, and this month the Foundation passed the halfway mark on their goal of putting ALL of their capital toward mission. And writing in The Guardian, Tim Smedley would seem to agree with their goal when he makes the case for mission investing.
- Chris Gates (from the Sunlight Foundation) and Matt Leighninger (from the Deliberative Democracy Consortium) wrote a fascinating letter to the editors of the Chronicle of Philanthropy taking issue with Diana Aviv’s comments on recent Independent Sector research about technology and nonprofit institutions. Gates and Leighninger argue that there is great opportunity in technology if nonprofits embrace it effectively, as they put it, “It is true that the rise of the Internet is forcing institutions like governments, foundations, nonprofits, and professional associations to rethink how they operate. They have to adapt to the needs and goals of 21st-century citizens or perish. But ultimately, people want the same things they always have: to belong to a community, to have a voice, and to make an impact…if institutions can provide those things in this interconnected time, they will thrive.”
- American educators and education funders have focused in recent years on science and math to create a more effective and competitive American education. But Fareed Zakaria, writing in the Washington Post, thinks that’s a big mistake, “As we work with computers (which is really the future of all work), the most valuable skills will be the ones that are uniquely human, that computers cannot quite figure out — yet. And for those jobs, and that life, you could not do better than to follow your passion, engage with a breadth of material in both science and the humanities, and perhaps above all, study the human condition.” Amen!
- The fourth installment of Tom Watson’s on-going series about the changing face of American philanthropy focuses on the class of new, entrepreneurial philanthropists, those young, tech wealthy donors who are pushing for data-based social change. And Pascal-Emmanuel Gobry takes it even further arguing that “effective altruism,” what he calls this data-centered approach to philanthropy, is only one potential method of investing in social change, not the only or best approach. As he puts it, “making the world a better place is an inherently speculative behavior — if we knew how to do it we’d have already done it. Therefore the most prudent collective thing to do is to try a very wide swath of different approaches rather than a single one.” And as one of these new philanthropists, Facebook founder Mark Zuckerberg’s investment in Newark public schools continues to come under fire.
- The National Committee for Responsive Philanthropy put out a fantastic report on the need for more philanthropic investment in nonprofit leadership development. This should be required reading for every philanthropic and nonprofit leader in the country.
- The National Council of Nonprofits developed a guide for nonprofit leaders to advocate for their funding rights, particularly around indirect rates, with government funders.
- And there were lots of great tips and tools this month for becoming an effective financial leader. The Nonprofit Finance Fund released a list of tips to help “keep business and finance an integral part of decision-making.” And Kate Barr offered 6 Takeaways from the Nonprofits Assistance Fund’s annual Nonprofit Finance and Sustainability Conference.
- Finally, Jocelyn Wyatt from IDEA.org argues that general funding for nonprofits is the “future of innovation”. Yes please!
Photo Credit: BibBornem
Note: Fifth and last in my list of guest bloggers this summer is Laura Tomasko. Laura is a network developer at the Council on Foundations, where she follows trends related to private capital for social good. Here is her guest post:
Perhaps like some of you, I dedicate a good portion of my internet reading to blogs like Social Velocity, Re: Philanthropy, and Philanthropy 2173. When I am browsing a blog unrelated to nonprofits, philanthropy, and impact investing, I do a double take when I come across a topic from my professional sphere.
One of those non-work related blogs that I read is Popville, which chronicles activities in Washington, DC neighborhoods. This July and last, two local businesses sought financing through crowdfunding platforms, and reached out to Popville readers for support. Both cited the community focus of their enterprises as reasons to financially support their efforts. What ensued in the comment thread of both posts provides a snapshot into how those outside of the philanthropy and impact investing field understand and discuss crowdfunding, charitable giving, and investing with the intention to generate social and financial returns.
Last year, a local business named Pulp posted to Popville to request “donations” to improve the store and website, including repairs to fixtures, new paint, windows, and other related costs. Even though they said they wanted donations, Pulp actually sought no-interest loans, a distinction clear on their Clovest crowdfunding page but not on Popville. Confusion and opinions swarmed the comments section as people tried to figure out whether Pulp wanted a donation or a loan, and shared their musings on the whole situation.
This July, another local business, Three Little Pigs (TLP), used Popville to promote their Kickstarter campaign, accurately requesting donations for infrastructure improvements to enhance the business that will allow them to build a community space on their third floor. In exchange for donations, TLP offers gifts, like a pound of maple-cured bacon, to donors.
The comments to both posts provide insight into how local residents react to financial requests from community-focused small businesses. Such requests may increase given the passage of the JOBS Act and the Securities and Exchange Commission proposed rules that allow non-accredited investors to get an equity stake in a local business through crowdfunding platforms.
Here are common themes about local businesses raising money on crowdfunding platforms raised by commenters:
- Is This Charity?
While both businesses used words associated with philanthropy to appeal to the charitable sense of local residents, neither provides a charitable tax benefit to the readers. This created confusion and commenters wrote in to ask whether the business would provide a tax benefit or repay the money. One Pulp commenter asked, “Does anyone know what the tax implications are to this approach? I doubt they realize the tax-exemption you typically see with donations to non-profits. Or do they? Could this be an interest free loan as well as a tax-free donation?”Questions such as this one suggest that those using crowdfunding platforms to raise money need to clearly state what they ask of their potential supporters and what they will get in return. For example, they should distinguish between how the funding will benefit the community and whether it is a charitable donation, a donation without a tax benefit, or loan.
- Should You Donate to a For-Profit?
Many commenters bemoan the idea of a for-profit business asking for donations instead of raising the necessary capital through the sale of goods and services. There seems to be an expectation that the business should either flourish or fail based on the value of the good or service, and donations should not supplement either course. While some were happy with the idea of donating to a for-profit, most did not support the concept.
- What About Traditional Financing?
Several wondered why the businesses did not get loans through banks or pay for these expenses using a credit card. Others supported crowdfunding as a way to get around the hurdles of traditional financing. While one TLP commenter in support of traditional financing noted, “There are plenty small business loans and lines of credit they can apply for at the mentioned banks,” one in favor of crowdfunding stated, “If you can’t meet every requirement, the major banks will usually turn you down due to high risk.”
The confusion and concern that arose from these two crowdfunding experiences suggest that language matters and concepts like crowdfunding and impact investing are still new to people accustomed to distinguishing charity, which generates social benefit, from business and investing, which seek to generate financial revenue.
In addition to local businesses on crowdfunding platforms, mainstream media use language associated with charity to describe impact investing activities. An interesting example is coverage of the bridge loan that Laura and John Arnold made to the National Head Start Association during the 2013 government shutdown. Covering the story, the New York Times uses the headline, “$10 Million Gift to Help Head Start Through Shutdown” and Politico writes, “Philanthropists pledge $10 million to restore 7,000 Head Start seats.”
Tucked within both articles, after terms like “donation” and “gift,” are brief mentions that the money might be paid back as a no-interest loan if government restores funding after the shutdown. However, to those scanning headlines and not reading the entire article, it is not clear that the Arnolds have made an impact investment in the form of a bridge loan to the Association.
With increased interest in social entrepreneurship and impact investing, many use charitable language to describe financial transactions ranging from donations to impact investments. Until the concept of impact investing becomes as mainstream as charitable giving, taking the time to distinguish between the two could increase awareness, and eventually adoption, of both traditional and untraditional forms of financing for social good.
Language matters and those raising capital from local residents, as well as those in the media writing about these transactions, should differentiate between the desired financial transaction and its charitably-minded purpose. Crowdfunding may bring impact investing to new audiences, and let’s make sure that the message gets there clearly and accurately.
Photo Credit: zeh fernando
February 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.
- 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].”
- 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.
- 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.”
- 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.”
- 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.
- 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.
- 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.”
- 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.“
- 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.
- 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
I’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.
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.
I’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:
- 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?
- 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%?
- 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?
- 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?
- 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!
In 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.