Note: I was asked by UnSectored, a community platform for rethinking social change, to write a post as part of their month-long conversation leading up to the William James Foundation’s Annual Gathering about how we sustain social enterprise. Below is that post. It originally appeared on the UnSectored blog where you can see the other posts in the conversation.
There is an awful lot of hype around the social entrepreneurship movement. Don’t get me wrong, I’m excited about the growing focus and energy around social change. But I think we need to take a step back and recognize that nonprofits have been working on social change for a really long time.
Often nonprofits get less airtime in the social innovation movement than their for-profit, social change counterparts. Perhaps that’s because the for-profit form of social change is new, so it seems more interesting, sexier, apt to create more change. And, of course, the idea that business can be reworked to address public goods is incredibly compelling.
But among the glorified world of social entrepreneurship, some are beginning to question the hype. Like Liam Black (“Letter to a Young Social Entrepreneur”) and Daniel Ben-Horin (“Between the Quick Exit and the Long Sojurn”)
Real social change is hard, long, exhausting work. As Daniel Ben-Horin says “This ‘making a difference’ stuff can be a real grind, as it turns out.”
And amid the hype around social entrepreneurship there is a tendency to dismiss those who were working on the long haul of social change before it was cool: the nonprofit sector.
The current hype around for-profit social entrepreneurship sometimes reminds me of the dot.com bubble, or the sub-prime mortgage speculation. We have to be careful of the hubris that accompanies new trends.
The nonprofit sector is an enormous part of our economy and has a long history of working towards social change. If we were to cast it aside completely, we’d lose the tremendous resources (money, people, mind-share) that are being invested in that sector every day. Without its oldest component, the broader movement to solve social problems is doomed. So instead of tossing it aside, let’s remake it, re-envision, restructure and reinvent it.
What does that mean? It means that the best and the brightest in the social innovation field need to figure out how to innovate in the nonprofit as well as for-profit sector. It means that the emerging social capital market creating financial vehicles for budding social businesses should also support social entrepreneurs in the nonprofit space. It means philanthropists should share investor prospects with impact investors, and vice-versa.
What’s more, innovation requires that investors interested in a social return own portfolios that include not only social businesses, but also nonprofit deals. Many more foundations should explore mission-related investing so that their money can go to both nonprofit and for-profit social change efforts. Nonprofits interested in growth should have access to capital and management expertise to scale. And a nonprofit that’s solving social problems should get just as many resources, respect and mind-share as a social business that’s doing the same.
In essence, we need an “unsectored” approach to social change.
Which means a shift in attitudes, laws, accounting standards so that social entrepreneurs are not restricted by outdated structures and incentives.
There’s no magic bullet for social change. But by focusing all of our energy on only one piece of the social innovation puzzle, we run the risk of less change — or none at all.
Photo Credit: unsectored.net
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.
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.
In the world of social innovation, May was most definitely about innovations in philanthropy and funding of social change. From social impact bond experiments, to hybrid foundations, to impact investing, to the Giving Pledge 2.0, there was much discussion and debate about how funders of social change should and are innovating. And that is very exciting because it is not enough for social entrepreneurs to push things forward, we desperately need new financial vehicles to fund those social change efforts.
Below are my ten picks of the best reads in social innovation in May, but as always, please add what I missed in the comments. If you want to see other things that caught my eye, follow me on Twitter, Facebook, LinkedIn or Pinterest. And if you want to read 10 Great Reads lists from past months, go here.
- First up is social impact bonds (or pay for success bonds), a very exciting, new way to fund nonprofits that achieve improved social outcomes that result in public sector savings. McKinsey released a new report on the potential for social impact bonds in the US. And Minnesota is one of the first states to experiment with these bonds with a $10 million pilot. Twin Cities Business magazine explores the idea and Kate Barr of Minnesota’s Nonprofit Assistance Fund gives an overview of the idea, resources and further conversation.
- This month’s second annual meeting of those wealthy individuals who signed Bill Gates’ Giving Pledge (a public promise to give at least half of their wealth to charity in their lifetime) showed some real interest in impact investing, or using their money to make money while creating social change at the same time. Laura Tomasko argues why their interest in impact investing (both mission-related investments and program-related investments) is such an exciting opportunity. And Lucy Bernholz takes their interest in impact investing in another direction arguing that “this century’s great philanthropists should aim not just to match history’s great givers in their largess, but also in the creation of mechanisms and institutions that serve the future as well as their predecessors served the past.”
- Finally, in a very exciting move, the Obama Administration has proposed an expansion to the rules about how foundations can use program-related investments (low or no interest loans to social change organizations) and some community foundations are already getting into the game.
- And from the nonprofit side of the financial equation comes the Nonprofit Finance Fund’s effort to debunk the myths around endowments as a road to nonprofit financial sustainability.
- Financial sustainability must always be on the mind of social change organizations, as this cautionary tale from the North Carolina YWCA that had to close its doors because of poor financial management and oversight demonstrates.
- Has the drum beat against judging a nonprofit based on overhead costs gone mainstream? An op-ed in the LA Times argues that administrative costs are “no way to judge a charity.”
- At the Social Earth blog Thien Nguyen-Trung cautions against an overemphasis on growth among social entrepreneurs and instead argues for “impact offtakers” or an exit strategy for social entrepreneurs to hand off their solution to government or another larger entity instead of trying to reach scale on their own.
- And Patrick Lester seems to agree in his argument that it’s not enough to fund social change solutions: “Foundations and philanthropists need to step forward and fund not just innovation, but advocacy too–only then will our best ideas be taken to scale.”
- There were several articles about exciting, innovative approaches to solving food problems. From a $125 million loan fund for healthy food outlets in California, to urban farming in Detroit, to a very successful nonprofit grocery store in Portland, Oregon.
- In the Stanford Social Innovation Review Matthew Forti offers 6 things nonprofits should avoid in their theory of change (their argument for what they exist to accomplish).
Photo Credit: C. Frank Starmer
Every once in awhile an article comes along that is so honest and observant that it opens the door for a fundamental shift in thinking. Curtis White’s “The Philanthropic Complex” in the Spring 2012 Jacobin is such an article. White writes about how the politics behind American philanthropy compromise its ability to create real social change. His focus is the philanthropy that funds environmental organizations, but ultimately he makes a larger point about the limitations inherent in American philanthropy overall. I’m not sure I agree with everything White writes, but his unapologetic description of the politics of philanthropy is so raw that it is refreshing.
White begins by laying out the fundamental power imbalance between nonprofits seeking funding and the foundations that offer that funding. That imbalance is so dysfunctional that nonprofits cannot get enough and the right type of money that they really need to effectively solve social problems:
One of the most maddening experiences for those who seek the support of private philanthropy is the…difficulty of knowing why the foundation makes the decisions it makes…The closest thing to an answer you’re likely to hear is something like this: “The staff met with some Board members last night to discuss your proposal, and we’re very interested in it. But we don’t think that you have the capacity [a useful bit of jargon that means essentially that the organization should give up on what it thought it was going to do] to achieve these goals. So what we’d suggest is that you define a smaller project that will allow you to test your abilities [read: allow you to do something that you have little interest in but that will suck up valuable staff time like a Hoover]. Meanwhile, we’d like to meet with your Board in six months and see where you are.” And on you go one year at a time. But cheer up, you’ve made your budget for the year!
Part of this dysfunction, White believes, stems from the lack of wide-spread mission-related investing among foundations. Foundations in America are required to distribute 5% of their funds each year to nonprofit organizations. And the remaining 95% is invested to make as much profit as possible. In recent years the idea of “mission-related investing,” where a foundation actually invests that 95% in companies that align with the mission of the foundation, has been gaining favor. But the vast majority of foundations still don’t align their 5% with the 95%, or their “mission” with their “investments.” This strategic disconnect results in situations like the one the Gates Foundation faced last year:
The Los Angeles Times concluded a long investigation into the investment practices of foundations by revealing that the Gates Foundation funded a polio vaccination clinic in Ebocha, Nigeria, in the shadow of a giant petroleum processing plant in which the Gates Foundation was invested…This is prima facie evidence of a deep moral conflict not just at Gates but in all of private philanthropy. The simple fact is that most boards actually don’t know if their investments and their missions align.
White ultimately argues that because the wealth of philanthropy is built on privilege it is impossible for that wealth to bring about social change because that change might undermine the underlying power structure that created the wealth in the first place, “The great paradox of environmental philanthropy is this: How do institutions founded on property, wealth, and privilege…seek to address the root source of environmental destruction if that source is essentially the unbridled use of property, wealth, and privilege?”
White’s is a shocking, provocative, and controversial piece. And he probably takes his argument too far. American philanthropy has contributed to much positive social change over the centuries.
But what if White’s article helped to start an honest conversation about the need for more money to make real change, unbridled by politics and self-preservation? What if it helped encourage things like:
- Foundations unleashing billions more dollars to social change efforts by broadly employing mission-related investing.
- More philanthropists making larger, longer and more organization-building grants that actually make their grantees more effective and self-sufficient, instead of encouraging year-by-year dependence.
- Foundations getting out of the way of the organizations working on the ground to solve social problems by fully funding requests for the amount, type and use of money.
- More foundations becoming spend down foundations, where they have a plan for spending down their assets and eventually closing when they have achieved their social change goals.
- Nonprofits getting braver, bolder and more honest with their foundation funders about exactly what they need from them.
That’s my hope.
Photo Credit: Robert Minor, St. Louis Post-Dispatch (1908)
In this month’s Social Velocity blog interview, we’re talking with Jessamyn Lau. As Program Leader of the innovative Peery Foundation, Jessamyn helps shape the foundation’s strategy, develops programs, strengthens the foundation’s portfolio, and supports existing grantees. Jessamyn’s MBA from Brigham Young University and time spent with Ashoka U have given her the perspective and skill-set to help the foundation develop new methods to support and build the field of social entrepreneurship. Jessamyn is currently working with BYU’s Ballard Center to create the Peery Social Entrepreneurship Program (PSEP), a cross campus initiative providing opportunities for students and faculty to engage with social entrepreneurship through curriculum, experiential learning, and research.
You can read past interviews in our Social Innovation Interview Series here.
Nell: At the Peery Foundation you have done some really interesting experiments with social media, even adding an element of crowd-sourcing via Twitter to your strategic planning process. But recently you have gone back and forth about whether you want to continue your PFWhiteboard blog. What has your thinking been about how social media fits into the overall work of the Peery Foundation?
Jessamyn: One thing we know about social media is that it’s a good tool for is spreading the word about our partners and their work. 90% of what we post/tweet is about our portfolio partners. Every now and then we try to figure out how else to deliberately use social media. We’ve tried stuff that hasn’t worked (so we stopped doing it), and we’ve tried stuff that did seem to yield value for us and others. In general it’s still throwing spaghetti at a wall and seeing what sticks. Intuitively we think social media is a good thing for our creativity, learning, and listening, however, we don’t feel tied to it as a core part of our strategy or practice. When it makes sense we use it, when it doesn’t we don’t.
Nell: What do you think holds foundations back from using social media and embracing greater transparency? What do you think will make that change?
Jessamyn: The tricky thing with social media is it’s really hard to link it to outcomes. Even when tangible examples of outcomes are illustrated it’s often a first-mover advantage and not something that will produce the same results if everyone did the same thing. If foundations could see how social media directly led to more impact it would be an easier sell. It’s a similar story with transparency. Being transparent requires change, time, dedication and a certain amount of risk. Without a clear and strong argument for how that leads to more impact it’s easier not to take the risk and stay quiet.
Another issue is strategic planning, which, at times, can become more of a bane than a boon to foundations. When it comes to social media many foundations think they need a strategy and a full blown plan before they will start using it. As with many things it’s hard to know exactly how Twitter or Facebook will be useful until you give it a go and play around a
For the most part I think the change will only come with an increase of millennial philanthropists, foundation ED’s and program officers who come with a share-as-default mentality and bias towards creative experimentation in public.
Nell: You recently did a fascinating blog post about how the social entrepreneurship movement is encouraging young people to think they can solve the world’s problems, without much real world experience. How do we balance Generation Y’s zeal to find solutions with their youth and lack of experience?
Jessamyn: I don’t think I know the full answer to that, yet. My opinions on this point are still developing as the Peery Foundation works closely with BYU to build a cross-campus social entrepreneurship program. I’m not sure the overall problem is too much zeal or youth, or even too little experience -all of these things provide incredible value in the right context. I think what’s lacking are clearer expectations and support for students to build self-awareness and deliberate preparation in their development as social innovators. As I said, I’m still figuring it out -watch the PF Whiteboard over the coming months for more on this.
Nell: The Peery Foundation is one of few foundations that do mission-related investments. How did you decide to move into that realm and what do you think holds other foundation back from MRIs?
Jessamyn: Our primary function is to support and serve the social entrepreneurs we work with. We try to keep our funding as flexible as possible. Peery Foundation funding is generally unrestricted and the structure of a grant is often co-crafted with the entrepreneur. We have come to realize that entrepreneurs with differing business models, or at differing life-cycle stages, need different types of capital. Once we believe in a SE and their model for addressing poverty we want to always be open to providing the type of capital that they need at the time they need it.
We’re still at an early stage in developing our capacity to provide debt and other funding outside of philanthropy. In our philanthropic funding we’re not paper heavy and our agreements are very trust-based. It was definitely daunting to explore this new realm of traditional investment due diligence and contractual agreements. So far we’ve found the kind of support we need to help us make the leap fairly painlessly through the Toniic Network, and from sources such as Silicon Valley Community Foundation and University Impact Fund, and still feel like we’re able to retain our low-paper, trust based partnership approach to the extent that makes sense.
Nell: In some ways philanthropy has been a bit left behind by the impact investing movement. Why do you think that is and do you think philanthropic giving and impact investing will become more integrated?
Jessamyn: The potential of impact investing is huge, though I’m not sure I agree with the statement that impact investing (ii) has left behind philanthropy (charitable giving from individuals, corporations and foundations totaled over $290B in the US alone for 2010, impact investing is estimated at $50-100B in 2011). Though there is a lot of attention and discussion surrounding impact investing, there are still relatively few organizations actively channeling dollars to ii. Even in the future (when I think ii will absolutely eclipse philanthropy by the numbers), I see ii and philanthropy as very complimentary. In many cases philanthropic capital prepares the way for ii dollars, or continues to fund pieces of a model (overhead or continuing innovation) that ii capital can not.
Indeed, there are many incredibly efficient and effective models of social entrepreneurship with models not conducive to impact investment capital – they will probably always rely on philanthropic dollars. There will always be an important role for philanthropy to play. Philanthropy is the ultimate risk-taking capital. We should not lose sight of this or think that ii is here to replace philanthropy.
Sean is a visionary leading the charge to transform philanthropy. He is CEO of Tactical Philanthropy Advisors, a philanthropy advisory firm. He is also the author of the very popular Tactical Philanthropy blog and writes a monthly column for the Chronicle of Philanthropy. He is a member of the World Economic Forum’s Council on Philanthropy & Social Investing and his insights on philanthropy have been referenced in The New York Times, Wall Street Journal, Washington Post, and Financial Times.
Nell: At the first Social Capital Markets Conference (SoCap) in 2008 one of the keynoters said “we’re not here to talk about nonprofits.” We’ve come a long way from there to this year’s devoted track around philanthropic capital and the nonprofit space at SoCap. Where do you think the initial hesitance to connect philanthropic and impact investing came from? And how do we continue to integrate the two worlds?
Sean: I think that one of the segments of people who are attracted to impact investing are people who think philanthropy doesn’t work. While I view philanthropic and for-profit social capital to be part of a single continuum of capital, many people seem to feel that they are fundamentally different. Like most new ideas, early adopters often think it is a silver bullet that will “change everything”. Some early adopters of impact investing or other forms of for-profit social capital wrongly believe that impact investing will replace philanthropy. I think this is a fundamental misunderstanding. Continuing to integrate the two worlds will require helping the various points on the capital spectrum better understand each other. At the end of the day, capital shouldn’t be viewed through an ideological lens, but should simply be deployed based on what sort of capital fits the situation.
Nell: The SoCap session on nonprofit rating systems like Charity Navigator and GiveWell demonstrated that there is still quite a divide between GIIRS (the impact investing rating system) and nonprofit rating systems. What is your sense of this? Do you think there is potential to somehow combine GIIRS (or something else) and nonprofit rating systems so that there is one comparable impact measurement system?
Sean: I would guess that any truly effective impact measurement system should be functional across both for-profit and nonprofit activity. A good impact assessment system wouldn’t care about the tax status of the entity producing results, it would just care about the results and the cost of obtaining them. That being said, I think evaluating a nonprofit organization is really quite different from evaluating a for-profit organization. So even if we have a unified impact assessment framework some day, I would guess that organizational assessment will utilize different systems and approaches for nonprofit and for-profit organizations.
Nell: How would you like to see the conversation about connecting philanthropy and impact investing evolve at SoCap11? What are your hopes for next year’s conference?
Sean: I’d like to work to profile more examples of ways that for-profit and philanthropic capital worked together to produce social impact. Our session on Evergreen Lodge at this year’s conference looked precisely at this question, but I’d like to see more examples. I’d also like to see examples of ways philanthropic entities have used for-profit investments or subsidiaries well or for-profits have effectively used philanthropic activities to drive profit and social results. However, one of the most important goals is simply getting the different players into the same room and getting them to come to understand each other better. While Kevin Jones and I had a good time talking about the Social Capital Markets as a meeting ground for the Barbarians and Byzantine, in reality none of us are barbarians.
Nell: Beyond SoCap where do you think the important conversations about unlocking philanthropic and government capital for social impact are happening?
Sean: This is an interesting question. SoCap is special because it is one of the only (the only?) conference that is specifically about capital for social impact without regard for sector. But versions of this conversation are happening around Grantmakers for Effective Organizations, The Social Innovation Fund, online and in a different sort of way at the PopTech conference.
Nell: At the last general session of SoCap Woody Tasch of the Slow Money movement said he doesn’t think mission-related investing will ever be adopted by the majority of foundations. What are your thoughts on that?
Sean: Social Responsible Investing, the practice of screening out stocks of tobacco companies, defense contractors and the like from investment portfolios, is not practiced by a majority of investors. Yet, SRI is very mainstream and has significantly altered the behavior of publicly traded companies. Today, SRI mutual funds are one of the fastest growing areas in money management. So I don’t think that the majority of funders have to adopt mission related investing for the concept to be deemed a success. It should be noted that SRI took a good 20 years or so to go mainstream. So it could be some time before mission related investing is considering mainstream.
Nell: And more broadly, what do you think it will take to change how philanthropists (both foundations and individual donors) use money to support social impact? How do we make more donors builders instead of just buyers?
Sean: Today, I think that very few people in the social sector really understand what “philanthropic equity” is and how capital differs from revenue. Nonprofit accounting does not acknowledge that capital even exists in the sector. Nonprofits can only book cash coming into their business as revenue or a loan. There’s no official way to account for equity-like capital. So I think that there needs to be a pretty major education effort to get the whole sector very clear on how fundamentally different it is for a funder/donor to “invest” philanthropic equity in a nonprofit vs paying a nonprofit revenue to execute programs. Personally, I don’t think much progress will be made until nonprofit accounting changes. Until that happens, it doesn’t matter much what we call “growth capital”, it is all just revenue to the nonprofit.
One of the sessions of the RISE Social Entrepreneurship track was a panel of investors who fund social entrepreneurs (both nonprofit and for-profit). One of the panelists was Scott Collier, Managing Director of Triton Ventures. Scott has been a venture capital investor since 1991, serves on the board of the Entrepreneurs Foundation of Central Texas, and is working to engage Austin’s funding community in social innovation. In the RISE panel Scott was on, a conversation began around mission-related investing, the missed opportunity currently facing foundations, and how a new move by the Gates Foundation may be opening up a whole new pool of funds to social entrepreneurs. I asked him to write a post on this. It follows here.
I was recently fortunate to be on a RISE panel with a great mix of entrepreneurs and venture investors turned philanthropists, private foundation founders and social investors, all talking about investment in social enterprises. The discussion emphasized the grant-making functions of the foundations represented on the panel and the exciting ventures that these grants were supporting. However, as often happens, there was no discussion about the potential for social impact investing by the investment functions of these organizations if they were to allocate a portion of their investment capital to activities that could produce both a financial return and a social impact.
I mentioned that this seemed to be a missed opportunity since the investment function of U.S. foundations manages about $550 billion whereas the grant-making function manages a much smaller amount: about $45 billion a year. This would seem to imply that small program-related or mission-related investment allocations out of the $550 billion under management could represent much greater impact investing potential than would similar allocations of grant funds. I also mentioned a cautionary tale as revealed in an LA Times article in 2007, where it was pointed out that the Gates Foundation, the world’s largest private foundation, was investing for a financial return in companies whose business practices were causing harm to individuals that were at the same time receiving benefits from NGOs supported by Gates Foundation grant funding. Given that investment dollars comprise such a much larger sum, such returns-only investment practices could be undermining the value of grants, resulting in questionable net positive impact if viewed holistically.
What I failed to add to this conundrum is that the Gates Foundation has now recognized the opportunity to be a thought leader in making social enterprise investments out of their investment capital. Below is an excerpt from the Gates Foundation website explaining features of their pilot $400 million PRI initiative.
Q. What is the [Gates] foundation’s new approach to Program-Related Investments?
A. We are working with a range of partners to use Program-Related Investments (PRIs) to deepen the impact of our work. We believe that investments are the right instruments to use in situations in which our program strategies are best served by partnering with revenue-generating enterprises, such as NGOs, financial institutions or companies. These entities may not be able to access investment capital from the private markets because the markets or entities that serve the poor may be perceived as too risky or costly to serve, or investors don’t have good information to assess the opportunities. By providing investment capital directly or by reducing risk to investors, we can help our partners access the capital they need to grow and demonstrate to the market that financially viable opportunities exist that serve the needs of poor or otherwise disadvantaged persons. We know we can’t solve all problems with these types of investments – grant-making remains critical for those sectors that can never generate revenues or be addressed by market forces.
We have established a pilot program with an envelope of $400 million to invest in a range of investment opportunities. The capital for PRI investments or guarantees will be provided by this special $400M pool which will be managed by the CFO’s office of the foundation. Out of this pool, we will invest in PRIs that directly and meaningfully contribute to the achievement of the foundation’s charitable purposes.
Q. What types of investments will the foundation do?
A. We will evaluate a full range of investment opportunities that could include:
- Debt investments such as loans to NGOs, financial institutions or companies;
- Equity investments such as investments in venture capital funds or (less commonly) purchases of shares in companies;
- Guaranty investments such as bond back-stops, credit guarantees, or insurance.
- Any PRI opportunity must closely align with our program strategies, from increasing financing for agricultural smallholders in Africa, to supporting charter school facilities expansion, to increasing investment in global health technologies.
I spoke with a colleague who is close to Gates Foundation CFO Alex Friedman, who launched this PRI program, and he told me that a key part of the pilot launch was to organize a new group whose financial returns would not impact the performance objectives of the office of the CIO. This was intended to free the new PRI group to focus more on social return than on financial return.
It is certainly exciting news that this $400 million, representing roughly 1% of the Gates Foundation’s capital under management, is now available for both financial and social return when invested in partnership with social entrepreneurs. However, what may be even more exciting is that the intention of the move is to encourage other private foundations to do likewise and for Gates to thus be a catalyst for multiples of the $400 million to show up in the market as risk capital for social enterprises. Could this be the beginning of large pools of capital available for direct impact investing, social venture funds and private equity funds, and the creation of a true continuum of capital availability in what is today a very nascent social capital market?