social return on investment
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.
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.
In this month’s Social Velocity blog interview, we’re talking with Erine Gray. Erine is the founder of Aunt Bertha, an online Benefit Corporation that matches people in need with federal, state, county, city or nonprofit services to specifically address their situation. Erine studied economics at Indiana University, public policy at the University of Texas and spent the better part of eleven years consulting (six of which were spent helping governments operate more effectively).
You can read past interviews in our Social Innovation Interview Series here.
Nell: Aunt Bertha essentially exists to fix an inefficient system of connecting services to those who need them. It seems to me your model is at the heart of an ongoing debate about whether there are some public goods that simply cannot be turned into marketable items. Obviously you believe there is a market for you, but why? What sorts of public goods can be turned into a market?
Erine: I’ve always been kind of a public policy nerd and understand that government has a vital role in the social safety net. Having graduated from the LBJ School of Public Affairs, I understand that government programs don’t have the luxury of catering to a certain segment. Programs like Food Stamps (now called SNAP) and Temporary Assistance to Needy Families (TANF) don’t get to choose who they serve because they *are* the safety net.
The private sector is different. A consulting firm can choose to only serve telecommunications companies with 200 – 500 employees. A shoe store can focus on high-end running shoes. These types of organizations can survive if they hustle and convince enough people to become customers.
When you start to look at the amount of money spent by both government social service programs and charities, the figure is spectacular. It just takes a little research and a few clicks in Excel to see the enormous amount of money that is spent every year either telling people about these programs or determining whether or not people qualify.
If we accept, for a moment, that the public social safety net should exist (and I believe it should), we then must ask the question: is the public doing a good job of administering these programs?
I’ve spent the last 10 years working in this industry, with six of those years working on projects with city and state governments. My answer to this question would be: there’s plenty of room for improvement.
We don’t need to start over because government does some things very well. But we should break down the problem and see what should be outsourced to qualified vendors.
Should governments build their own marketing teams to tell people about their programs? Or should governments work with professional marketing firms to get the word out as needed? Should charities build their own fundraising software or would Blackbaud [fundraising software] do the trick?
Nell: The fact that you are a for-profit company is fascinating to me. Can you explain how your business model works and how you make money in a space that has traditionally been dominated by the nonprofit and public sectors? And do you envision those public-run services (like 211) eventually going away?
Erine: Aunt Bertha picks up where Uncle Sam leaves off by making it easy to find and apply for social services online and through mobile devices. Our service is and always will be free for people in need or those working on their behalf. Our users include everybody from the homeless (yes, they definitely have internet access in many cases), working moms, family caretakers, social workers and case managers.
We list every government and charitable program we can find on our site for free as well.
Many charities and government agencies don’t yet offer a way for people to apply online. We offer a software platform that allows them to accept and process applications online. Charities pay us a monthly fee for this service. Our customers are housing programs, churches, government agencies, charter schools or any other organization that provides need-based services to people.
In your question you refer to the 211 service, I would hope that there will always be a place for these call centers. The 211 call centers are staffed with committed volunteers that help people navigate very difficult circumstances, 24-hours a day. However, if Aunt Bertha is successful, more people in need will be able to find social service programs themselves (without needing to call someone). We believe that if more people find help themselves, the cost of running a government funded call center will go down – which is better for everyone involved.
Nell: Any social entrepreneur just starting out struggles with the question of whether to organize as a for-profit or nonprofit. How and why did you make your decision?
Erine: I went back and forth about this one. Our mission is to make human service information accessible to people and programs. To truly be successful at this mission, I believe we need to be a sustainable business.
With our software, governments and charities are saving money over the way they currently work. They are willing to pay us a monthly fee to help them provide a better service to people in need. We think this is a better approach and more importantly, we never wanted to be in a position where we are competing with our customers for donations. That’s why we chose to be a certified Benefit Corporation (a business that meets higher standards of mission and accountability).
Nell: How widespread is Aunt Bertha? How many people are using the service now and what are your goals for the future?
Erine: Aunt Bertha is available in every zip code in the United States. Our service is both on the web and available on most smart phone browsers. Although our service works everywhere, our focus so far has been in Texas – where we have a critical mass of programs in most zip codes.
So far we’ve helped more than 20,000 people find help and we believe we’re just getting started. Right now we’re focused on making our service as intuitive and user-friendly as possible. We think we’re on to something big, but we don’t want to skip the important steps of listening to our early adopters.
Erine: We were fortunate enough to have been accepted as an ATI company this year and it has provided us access to coaching, introductions and inexpensive office space. ATI is a joint initiative between the City of Austin, the State of Texas and the University of Texas and it feels like they’re all behind us. Whenever you can be in an environment where more and more people are rooting for you it’s always a good thing.
The Unreasonable Institute was a very memorable experience for us. I had a chance to live with 21 of the world’s most interesting social entrepreneurs and words can’t describe what I learned during that experience. I highly recommend people check out the site and try and figure out a way to get to know as many people associated with the Unreasonable Institute as possible. They’re making a big dent in the world.
We recently raised capital after bootstrapping the business for the first two years. We’re very excited about our future. Our investors so far have liked the audacity of our mission. We think we can organize the world’s social service information so people and programs can find what they need in seconds. And because we sell software-as-a-service in a huge industry, we’re an attractive investment with a scalable model.
Most importantly, we’re starting to see – in real-time – the supply of and demand for social services. That’s never been done before and we hope that this data will allow some amazing things to happen. It’s hard not to get behind this goal.
With a national election, hurricane Sandy, and Giving Tuesday, November was a busy month. All three events encouraged reflection about social change. And at the same time we had some pretty interesting arguments for how two of the sectors supporting social change (philanthropy and government) needed to shift as well. All made for a fascinating month of reading.
Below are my top 10 picks for what was worth reading in November in social innovation. And as always, please add what I missed to the comments. And if you want to see an expanded list, follow me on Twitter, Facebook, LinkedIn, Pinterest or ScoopIt.
You can see the 10 Great Reads lists from past months here.
- Even though hurricane Sandy hit at the end of October, much of November was spent cleaning up and reacting to the powerful storm. Patrick Davis reflects on what our reaction in natural disasters says about human nature.
- And from Sandy we moved into the national election where, once it was over, there was much to learn. First Lucy Bernholz marvels at Nate Silver (the statistician that very accurately predicted the outcome of the election) and wonders what the corollary is in the philanthropic world. She asks “Who will be the first big philanthropist to put predictive analysis to the test in the social sector?” And apparently there is much to be learned from the Obama campaign’s email tactics during the campaign.
- November also saw the launch of “Giving Tuesday,” an online effort to kick off the philanthropic season, just as Black Friday and Cyber Monday are the beginning of the commercial Christmas season. While it seems like a great, innovative idea, Tim Ogden disagrees arguing that it won’t “materially affect giving in any positive way.”
- It looks like it’s time to get tough with foundations. The PhilanTopic blog argues, “No More Free Rides: Foundations Need to Increase General Operating Support Now.” Amen to that! And GlassPockets, the Foundation Center’s online effort to increase foundation accountability and transparency now has 50 foundations participating, representing $138 billion in assets and more than $6.5 billion in annual giving, or 15% of all U.S. foundation giving.
- And the government has work to do as well. Former Social Innovation Fund Director Paul Carttar writes a call to action about what government can do to more effectively encourage social innovation.
- The drum beat for nonprofits to measure outcomes continues. Writing on the Stanford Social Innovation Review blog, Mollie West and Andy Posner encourage nonprofits to go the way of business and government and start using The Math of Social Change.
- And there is a really interesting new development in the ongoing effort to compare and rate social change organizations. The Social Impact 100 Index was unveiled in November. Modeled after the S&P Index in the financial markets, this effort by the Social Impact Exchange analyzes and picks the best 100 nonprofit investments for donors. It will be very interesting to see how this effort evolves and whether it transforms the nonprofit rating space.
- Despite a tough economy, charitable giving rose slightly in 2011. But the real news is that online giving has grown to a $22 billion industry.
- And speaking of fundraising in the online world, social media has completely disrupted the old model for how a nonprofit engages a donor, so says Julie Dixon and Denise Keyes. And Kivi Leroux Miller agrees.
- On the Managing the Mission Checkbook blog, Kate Barr cautions that nonprofit sustainability isn’t just about revenue, it’s about 1) working to achieve your mission 2) integrating a successful business model and 3) adapting and changing. Agreed!
Photo Credit: kadorin
In this month’s Social Velocity blog interview, we’re talking with Chris Earthman, Executive Director for the Aragona Family Foundation. For the last 8 years Chris has also worked for Austin Ventures, the largest venture capital firm in the Southwestern US. Chris has over 15 years of experience at the intersection of nonprofit and for-profit enterprises, including helping to establish the Micron Technology Foundation (NYSE: MU), the corporate social responsibility vehicle for the largest private employer in Idaho.
You can read past interviews in our Social Innovation Interview Series here.
Nell: As head of a regional family foundation, how do you and your board view some of the innovations happening in the social sector like impact investing, social entrepreneurship, etc.?
Chris: I find it refreshing that innovation is happening in our sector, though I’m a little surprised at the slow rate of uptake among funders. The family foundation I currently run is a spend-down foundation, and that’s a decision our trustees made consciously in order to see the fruits of social investments now vs. spending significantly less in order to maintain a corpus indefinitely. There is ample discussion out there among funders, but (and I’m as guilty as anyone) very rarely much action to back it up. We’re trying to selectively dip our toe into the water in terms of funding social innovations, infrastructure, ecosystem improving organizations, selective M&A activity among our grantees and discussing the idea of mission-related investing.
Nell: Speaking of mission-related investing (where a foundation invests part of their corpus into for-profit social enterprises that give both a social and financial return to the foundation), it’s a pretty radical concept for most foundations. What do you think it would take for the idea of mission-related investing to take off for smaller foundations across the country?
Chris: Let me preface my comments with the fact that we are a spend-down foundation and therefore have not made a meaningful investment allocation to mission-related investing, so I’m by no means an expert here. However, I think there need to be more visible intermediaries and investment products targeting the social impact market. We’ve seen some great progress over the last few years with groups like Sonen Capital, but it’s still a very nascent industry. One of the biggest barriers we’ve come across is the difficulty in quantifying the social return in a format that is comprehensible to trustees. That is starting to change with ratings intermediaries like GIIRS, but recognition and uptake are essentially non-existent among most of the foundations that I interact with. I know that you and many others have opined on the progress here, but it’s still not something that is on many regional/ smaller Foundation’s radars. It may take a few forward thinking Foundation trustees to step up and take a chance to show others that it’s ok to think outside of the endowment model mindset.
Nell: Much of your non-Foundation time is spent working for a venture capital firm where the idea of Mergers and Acquisitions is second nature; however this is a fairly uncommon concept in the nonprofit world. Do we want to see more of it in the nonprofit sector and if so, how do we make that happen?
Chris: Given the fragmentation of the nonprofit ecosystem across the country and the large proportion of small organizations , I think there is certainly an opportunity for more instances of Mergers and Acquisitions (M&A), particularly in cases where organizations need to grow above the $500K/ yr threshold. However, my experience is that TRUE collaboration—the accretive kind where you can quantify cost savings and/or program growth and ultimately better outcomes/ social change—is very rare in the nonprofit world simply because there are few external catalysts to get the discussion started and ultimately finished.
We’ve funded a few different M&A efforts over the last couple of years and my takeaway is that the M’s work much better than the A’s. I hate to keep pointing the finger back at myself and fellow funders, but there is a certain level of risk aversion where we’d rather ensure a successful purchase of additional direct services vs. really giving organizations what they need to grow. I’ve seen too many truly innovative nonprofits unable to successfully scale past the $300-500K/yr revenue threshold because of the required organizational capital required to make that pivot.
But I’m by no means idealistic here. While M&As sound sexy, there are many times where poor execution, interpersonal dynamics, Board conflicts, bad timing, or any number of external factors out of your control result in an outcome that may actually harm the organizations seeking to gain efficiencies through scale and collaboration. There are integration costs, donor overlap, brand/ identity battles, etc. that always take much more time, effort, and money before you see any of the accretive results that initially drove the decision to bring the organizations together. The same goes for the appetite of funders to backstop Executive Director salaries and/or fund transaction costs related to a merger discussion. In my opinion, lack of funder appetite is probably one of the biggest barriers to more M&A in our sector.
Nell: As a rule foundations are less interested in making capital investments in nonprofit organizations (funding things like infrastructure, systems, technology, evaluation). Why do you think that is and what can help move philanthropists to understand the need for capacity capital?
Chris: I think there are two reasons:
- The idea of “expressive philanthropy” is fairly well ingrained and many folks start out their philanthropy work wanting to “put their stamp” on a particular cause or portfolio of organizations. The challenge is that many foundations knee jerk into a risk-averse grants process that may or may not fit with their place in the ecosystem. Part of this is based on the endowment model of funding, which more often than not results in a formal, tedious grant application process. This may not be the best way to identify and screen potential grantees!
Let me acknowledge that I spent the first few years of my career as a grant writer, so I completely understand the time and effort that go into these proposals. This experience informs (or biases) my “anti-process” grantmaking strategy wherein we prefer to put the “search cost” onus on myself as a funder and try to respect the time and effort of the ever lean development dollars being spent by grant seeking organizations. It may sound like an arrogant “don’t call us, we’ll call you” approach to grantmaking, but I’ve found that making the grant process donor-centric vs. grantee centric allows the system to operate more efficiently.
- While philanthropic dollars should be fungible, the ability to restrict funds creates a tiered system of revenue for grantees. It always strikes me as a little odd that funders get so hung up about funding direct services vs. infrastructure and overhead and restrict their funding to such a degree. Ask any VC how their portfolio companies use their investments and you’ll find more often than not it pays for the critical growth functions like Sales and Marketing. You can’t grow without infrastructure, and unfortunately our current giving culture is much less amenable to that. I’d even go so far as to say the framework/ process that most funders use to select their grantees are, by their very nature, skewed towards less risk and greater restriction. Therein lies one of the structural problems in our industry. Even something as simple as separating the motivation of our giving (“we really like your yy program initiative…”) from the structure of our giving (“…so here’s an unrestricted grant to spend where you feel it is most needed”) makes a huge difference for the lives of our grantees. It also shows the Executive Director that you value their ability as a manager to make decisions from the inside.
Nell: How do we get funders to get take more risk with their investments and be willing to fund things that have a higher risk, like growth capital, mergers, research & development, but could result in huge social payoff?
Chris: Similar to my earlier comments about impact investing and grant processes, I think funders need to see more celebrated instances of both success AND failure. Another solution is using less restrictive grant processes that are a better fit with the size and scope of your particular foundation. The fact that you can restrict grants does not automatically mean that you should. Until we embrace the idea that its ok to take a risk with our funding (and have a process that embraces this), even if it doesn’t turn out the way we planned, we’ll be much closer to creating an environment ripe for some of the larger social change that motivates our philanthropic giving in the first place.
Just a few years ago, the only measure for a nonprofit’s effectiveness was the percent they spent on overhead expenses. If a nonprofit spent a magic 20% or less on non-program expenses they were deemed worthy of donations. This destructive way of evaluating nonprofit organizations has been losing favor over the last few years as rating agencies like Charity Navigator have recognized the need for a broader evaluation of nonprofit effectiveness. New measures have started to include outcome and impact elements.
But all of this begs the ultimate question which is how do we create a system for measuring and comparing nonprofits across the many social issues and operating models that make up the sector? Because however faulty the overhead percentage measurement was, at least it allowed a comparison of apples to apples. You could see how one nonprofit stacked up against another. But if each nonprofit organization is now creating their own theory of change, and their own outcome and impact measurements, how do we compare those to another nonprofit’s outcome and impact measures?
Enter a host of efforts to solve that very problem. One of these efforts is Markets for Good. They aim to create an infrastructure for evaluating nonprofit effectiveness based on outcomes and impact. You can watch their video explaining their efforts below, or if you are reading this in an email click here to watch the video.
And there are many other efforts to move the nonprofit sector toward measuring outcomes instead of spending practices. These include Idealistics, GiveWell, Philanthropedia among many others. But it’s not clear yet how any of these efforts will be able to analyze and compare the effectiveness of social change efforts because there are many pieces to that puzzle.
To truly be able to evaluate and compare the effectiveness of social change efforts, we have to:
- Encourage nonprofit organizations to develop a theory of change, because you can’t measure whether an organization has created change if they have no idea what they are trying to change in the first place.
- Give nonprofits resources with which to measure whether their theory of change is actually coming to fruition. Measuring outcomes and impact takes time and money.
- Separate a single nonprofit’s efforts to create change from other forces working on the same social problem so that we can understand the effectiveness of a single organization.
- Create a standardized system for comparing the ability of one nonprofit organization to create change to another’s ability to create change.
- Connect such a system for measuring nonprofit effectiveness to systems already being created for for-profit social entrepreneurs (like GIIRS) so that those with money to invest in social change efforts can compare the social return they would get in a for-profit and/or nonprofit setting.
- Communicate the results of those measures to philanthropic and social investors so they can make more informed, more results-focused investments, whether those be to nonprofit or for-profit social change organizations.
To me, comparing the ability of organizations to create social change is an enormous nut to crack. But it is an incredibly worthy endeavor. I applaud Markets for Good and the many other efforts working to create a system for understanding and comparing social change efforts. It will be fascinating to watch this space develop.
Photo Credit: KJGarbutt
In this month’s Social Velocity blog interview, we’re talking with Adin Miller. Adin is the Senior Director for Community Impact and Innovations at the Jewish Community Federation and Endowment Fund. In this role, he develops new strategies and programs to bring about change and impact within JCF’s mission. Adin focuses on defining metrics to document impact, maximizing measurable impact and increasing the visibility of the organization.
You can read past interviews in our Social Innovation Interview Series here.
Nell: You have always been on the funding side of social change. How do you think philanthropy must evolve in order to add to, instead of detract from, the new energy around social innovation?
Adin: I actually believe the philanthropic sector is embracing social innovation, although at a slower rate than we expected. Our modern version of philanthropy, which traces its roots back to the formation of private foundations and federated systems over 100 years ago, has had many examples of supporting innovation and taking risk. However, I believe the growth and demand for metrics, data, and measures of success and impact may have unintentionally tamped down the sector’s willingness to take risk through innovation.
The Bay Area community is identified with entrepreneurship and innovation. That same ethos is also evident within the nonprofit sector (for example, see The Joshua Venture’s profile of it’s 2012 applicant pool (PDF)). The Jewish Community Federation and Endowment Fund has embraced this ethos by providing funding to support social innovation in new and established organizations. I have also advocated for a broader embracing of innovations in how we fund in order to further support new approaches.
By embracing the energy around social innovation, I can engage new donors in our efforts while also providing the means to support an evolving ecosystem of organizations that make up our local Jewish community. In some sense, I believe philanthropy’s resistance to the new energy around social innovation seems misplaced. Harnessing that energy can be an effective tool in a comprehensive strategic philanthropic approach.
Nell: You are fairly passionate about connecting traditional philanthropy to the emerging world of impact investing. Why is it critical to bring the two worlds together?
Adin: I believe our current societal challenges and the continued shift by government away from social, safety net, and education services requires that philanthropy look beyond the confines of simply applying a 5% spend rate on a private foundation’s net investment assets. The general principle of impact investing encourages philanthropy to make better use of the other 95% of assets it manages. Whether structured through Mission-Related Investments, Program-Related Investments, or emerging fields such as social impact bonds, philanthropy has the opportunity to put more of its resources into action to support social change efforts and grow them in scale.
Community foundations and federated systems (such as my employer, the Jewish Community Federation and Endowment Fund), in my opinion, have the greater opportunity to embrace impact investing. They directly engage individuals through donor-advised vehicles, supporting foundations, or annual fundraising appeals, and have the unique opportunity to also encourage individual social impact investing that compliments and aligns with their individual charitable giving and philanthropic behavior. The market opportunity is big and when it’s finally realized, will have a much bigger disruptive impact on how philanthropy functions and supports social change.
Nell: In your current role at the Jewish Community Federation and Endowment Fund part of your charge is “to define and develop metrics to document impact.” Determining social impact is such a holy grail in the social change sector. How do you go about defining and measuring impact in your work?
Adin: As an institution, the Jewish Community Federation and Endowment Fund is looking to better understand and track its ability to affect social change. The need for and supply of data have been hallmarks of the current disruptive state of philanthropy. But, I’m also cognizant that we cannot overwhelm our grantees with outsized and overwhelming data requests. As such, we’re methodically working with our funded organizations and community donors to identify the key data points we should be collectively tracking to measure effectiveness and impact.
For our large-scale initiatives – such as our Reducing Barriers and Increasing Access to Participation in Jewish Life initiative – we have adopted a Collective Impact approach and the specific intention to work with partner organizations and community members to define shared goals and intended impact. We have also positioned our new grantees to set aside funding for smaller-scale efforts to assess and measure their effectiveness. I expect that my team and I will continue to work with grantees and partners to craft the right recipe to allow us to effectively measure impact while also emphasizing the impact may take years to become evident.
Nell: You have been involved with social change both as a staff member at funding institutions and as principal of your own consulting firm. What role do you think consultants play in the social change ecosystem?
Adin: Consultants have the opportunity to bring their wider field of vision, built through multiple and diverse interactions with clients, into play. In some respect, consultants serve as ambassadors of thought and action that can bridge institutions in the social change ecosystem. When I managed my own consulting firm I had the privilege of learning about crosscutting issues and approaches that I could then bring into my interactions with clients. There is a tremendous amount of quiet coaching and mentorship that happens as a consultant and that’s the entry point by which I could advise as well as gently push clients to consider additional paths to achieve their missions and goals.
Nell: Before moving from consulting to the JCFEF you were active with your Working In White Space blog, but you haven’t been as active on the blog recently. What role do you think social media plays in social change and how do you stay engaged with it from within an organization?
Adin: Oh, I very much miss my blog. Writing is undeniably a muscle that requires constant use and dedication, and my own ability to do so took a dramatic hit over the past 12 months. Nevertheless, I believe in the power of social media and blogging to share experiences, push ideas along, and test out theories. In my current work, I’ve encouraged my team to find their own voices and become engaged in social media and blogging. The opportunity to exchange ideas in public is a key element of how philanthropy professionals can further extend the effectiveness of their efforts while also raising the transparency quotient so needed in the sector.
On a personal level, I still try to maintain an active profile in social media (mostly Twitter – I’m @adincmiller – but Google+ , LinkedIn and Facebook as well) where I push along interesting content. I follow about 80 different philanthropy, social media, and impact investing RSS feeds that give me a great window into current debates and trending issues. And I continue to coach and push for greater communication through social media platforms.
There was much discussion in August about money. We heard that foundations should be more open to risk and should engage with nonprofits to find the best solutions. And we found out some fascinating information about how Americans give. And there were some exciting developments in the newest social sector funding vehicle, the social impact bond. What a great month!
Below are my top 10 picks for what’s worth reading in August in the world of social innovation. But please add what I missed to the comments. And if you want to see more of what catches my eye, follow me on Twitter, Facebook, LinkedIn or Pinterest.
You can see the 10 Great Reads lists from past months here.
Here’s August’s 10 Great Reads in Social Innovation:
- It looks like social impact bonds are starting to take off in America. This innovative social financing partners private investors, public bonds and nonprofit organizations to solve social problems. Goldman Sachs has gotten on board with a $10 million investment in a New York City program to reduce prison recidivism rates.
- Writing in the New York Times, Georgetown University professor Peter Edelman breaks down the factors contributing to a 15% poverty rate in America and what needs to change to improve it.
- I can’t tell you how many times I hear complaints from nonprofit leaders that social media won’t really improve fundraising. Try these on for size. Geri Stengel (guest posting on Beth Kanter’s blog) shows how the Genocide Intervention Network found major donors through social media, HubSpot offers 7 Creative Ways Nonprofits Can Use Social Media to Drive Donations and Kivi Leroux Miller explains How Social Media and Fundraising Fit Together.
- Guest blogging on the PhilanTopic blog, Derrick Feldmann argues “We need donors who are truly willing to embrace risk and invest significant dollars in potential solutions that may not yield immediate results but get us closer to our ultimate objective, even if it’s only by demonstrating what doesn’t work.” Amen to that! And Rodney Foxworth seems to agree.
- On the Stanford Social Innovation Review blog Sheetal Singh writes that there is a new active, engaged citizen movement in America, but that nonprofits are missing the opportunity to participate. She argues that “nonprofits need to realize that the “new citizens” are no longer passive recipients of their services; they demand engagement and inclusion. If nonprofits don’t adapt to this paradigm, they will be left out of the conversation.”
- One of my new favorite bloggers, Mark Hecker, does it again with a great post encouraging nonprofit and government leaders to be “fearless” in setting goals that will knock social change out of the park.
- A new study by the Chronicle of Philanthropy reveals how Americans give to charity. It turns out you give more if you have less or live near those who have less. But there is much more data to explore on their website. Fascinating.
- Forbes uses the World Wildlife Fund of The Netherlands as a case study to demonstrate the Five Steps to Growing Your Social Impact.
- Lucy Bernholz takes issue with foundation application processes and calls instead for a model “where foundations and nonprofits are working together – from idea generation through proposal, implementation and assessment – to actually solve problems.” Wow, imagine that.
- The Gates Foundation blog demonstrates how support of public libraries is a critical part of transforming developing countries.
Photo Credit: Library of Congress Archives
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