social impact bonds
I have to admit, June was a busy month for me with lots of travel and events, so I was less tuned into social media. Thus, I am offering a far from definitive list of the best reads from the month. But here goes…
New data on charitable giving and social fundraising, and a new effort to create a system to classify philanthropic activity made for some exciting developments. And because it wouldn’t be a great month in the world of social innovation without lots of debate, there is also plenty of criticism of philanthropists, philanthropic consultants, and business theory. It all made for a great month in the world of social innovation.
Below are my 10 favorite reads from the last month. But this month, more than ever, please add what I missed to the comments. And if you want to see a longer list of great reads, follow me on Twitter, Facebook, LinkedIn or Google+.
And you can see past months’ 10 Great Reads lists here.
- Good news for charitable giving, it looks like total US donations will go back to their 2007 peak of $350 billion sooner than originally thought. The post-recession rebound will happen sometime this year or early next, according to new data.
- And adding to the data about giving, the Nonprofit Tech for Good blog shares some great statistics about fundraising, social media and mobile.
- The Foundation Center has embarked on a bold project to create a robust classification system for philanthropy. They have created a draft “Philanthropy Classification System,” which is a “structure for describing the work of philanthropy consisting of subjects, population groups, transaction types, and approaches (support strategies)” and opened it to public comment. Their goal is to “unleash the ability of foundations to work far more efficiently with each other and with other sectors to achieve the kind of scale that can drive real change in the world.” It’s fascinating. Take a look and give them your thoughts.
- The Packard Foundation is one of the great examples of foundations that understand and support nonprofit organization building. They have created a great wiki on “Organizational Effectiveness” with resources for other grantmakers interested in supporting nonprofit organization building. And my favorite resource on the list is the article from Linda Baker, a Packard Foundation program officer, urging foundations to “be the duct tape” for nonprofit grantees. Ah, if only more philanthropists thought this way!
- But not all philanthropy news is good news. A report on the Walton family shows that the second generation heirs to the Walmart fortune have given almost none of their personal fortune to philanthropy, despite being the richest family in America. The report and the Forbes article about it raise some interesting questions about wealth and the obligation of philanthropy.
- One of the newest and most talked about ways to channel money to social change is the social impact bond. But what are we learning as the pay for success movement gains steam? Gordon Berlin from MRDC shares some insights from the New York City social impact bond and demonstrates how incredibly complicated this new financing tool really is. As he says, “The future of the Pay for Success movement rests on building on the lessons learned from the first efforts to implement these new and potentially transformative financing structures.” So we need to get beyond the hype and understand if this new financial vehicle really can work.
- And speaking of questioning hype, Jill Lepore, writing in The New Yorker, pens a scathing critique of Clayton Christensen’s Innovator’s Dilemma. She illuminates the danger of an omnipotent theory that allows no analysis or critique. She takes Christensen’s ubiquitous business theory of “disruptive innovation” to task, arguing, “Disruptive innovation is a theory about why businesses fail. It’s not more than that. It doesn’t explain change. It’s not a law of nature. It’s an artifact of history, an idea, forged in time; it’s the manufacture of a moment of upsetting and edgy uncertainty. Transfixed by change, it’s blind to continuity. It makes a very poor prophet.”
- Another writer peeling away the curtain on theory that holds no weight, Phil Buchanan admonishes consulting firm FSG and the Stanford Social Innovation Review for 1) not recognizing sooner that urging foundations to create individual institutional strategies around their unique positioning and activities is flawed, and 2) failing to acknowledge that many other thought leaders have been discussing that flawed strategy for years.
- As an introvert myself, I loved Frank Bruni’s piece in The New York Times urging politicians to take more time alone to reflect before barreling forward. As he puts it, “Some of the boldest strokes of lightning happen in isolation, where all the competing advice can be processed, where the meaningful strands come together and the debris falls away.” Amen!
- If you want a visual that will blow your mind, check out Ezra Klein and Susannah Locke’s 40 Maps that Explain Food in America. Access to food is a core social challenge, and these maps lay it all bare.
Photo Credit: Spirit-Fire
February witnessed some dissatisfaction with the current state of funding for social change, but also some trailblazers playing with new financial vehicles. I always wonder whether true change to money for social good will come with the next generation. Do Millennials hold the key to fundamental shifts in how we finance social change efforts? We shall see.
Below is my list of the 10 best reads in the world of social innovation in February. But, as usual, please add what I missed in the comments. If you’d like to see an expanded list, follow me on Twitter, Facebook, LinkedIn, or Google+.
You can also find the list of past months’ 10 Great Reads here.
- As we work toward social change, its important to embrace the gray areas. Writing in the New York Times Simon Critchley takes us back to the 1970s BBC documentary series “The Ascent of Man” to make a point about the importance of uncertainty in our search for solutions. As he puts it, “Insisting on certainty…leads ineluctably to arrogance and dogma based on ignorance.” And Fay Twersky seems to agree when it comes to strategic philanthropy, arguing in the Stanford Social Innovation Review that “we need to challenge the certainty creeping into [philanthropy].”
- And speaking of changing philanthropy yet another study of Millennial philanthropists claims that this new generation of donors will be quite different than their predecessors. As Phil DeMuth writing in Forbes puts it, these new donors “are no longer interested in providing an annuity to some tax-deductible charity organization.” They want to see results, and they want to get in and get out.
- But Lucy Bernholz is frustrated by the pace of change, at least in how little the financial vehicles philanthropists use are changing. She argues that in this year’s list of the top 50 philanthropists “the financial vehicles for philanthropy…look not unlike [those] in 1954 or 1914.”
- Tris Lumley from New Philanthropy Capital voices frustration as well, but with the general state of nonprofit finance. He puts forward a new model for the social sector that removes the “funder-centricity” of the “anti-social sector.” Because, as he argues, “the result of this funder-centricity at its worst is that the social sector exists not for those it’s supposed to help, but in fact for those who work in it, volunteer in it, and give money to it.”
- There are some bright spots, at least in the United Kingdom. The country leads the way in the social impact bond trend. Emma Tomkinson provides a map of social impact bond activity in the UK versus the rest of the world and the UK Centre for Social Impact Bonds provides a great site of resources on the new tool.
- And even here at home there are some trend setters, particularly the F.B. Heron Foundation, led by the visionary Clara Miller who also founded and led the trailblazing Nonprofit Finance Fund for 25 years. Clara has announced the F.B. Heron Foundation will account for the mission return of 100% of its assets. Unheard of and definitely interesting to watch.
- There is a constant tension in the nonprofit sector between funding new ideas and funding the growth of proven ideas. Writing in the Chronicle of Philanthropy, Alex Neuhoff, Laura Burkhauser, and Bradley Seeman fall squarely on the side of growing proven solutions, arguing that in order to reach a higher performing nonprofit sector we must “follow the “recipes” that earned proven programs their stellar ratings.”
- There was much for Millennial changemakers to chew on this month. First, there is a growing drumbeat questioning the relevance and value of college. Does the higher education model really work anymore? It’s a fascinating question to contemplate. And Naomi Schaefer Riley does so in the “College Tuition Bubble.“
- I’ve been on a real Steven Pressfield (author of The War of Art) kick lately. His worldview is that each individual was put on earth to create some specific greater good, but Resistance constantly fights to keep us from achieving it. If you need inspiration to overcome Resistance, read his post “How Resistance Proves the Existence of God.” Love it.
- And for those who are pursuing a life of social change despite the lure of a more traditional path, look to Thoreau for inspiration. For as Maureen Corrigan explains in her NPR review of a new biography of the man, “Thoreau’s youth seemed aimless to himself and others because there were no available roadmaps for what he was drawn to be…If Thoreau had committed to a professional career right after Harvard, his parents might have rested easier, but the world would have been poorer.”
Photo Credit: beggs
I’m out of the office this week, so in my place I am offering you two interviews this month. Tuesday was my video interview with Hope Neighbor.
And today I’m talking with Geeta Goel, Director of Mission Investing at Michael & Susan Dell Foundation. In addition to traditional philanthropy, Michael & Susan Dell Foundation makes program-related investments across its India-based microfinance, health and education initiatives, and its US-based education initiatives. Prior to the Michael & Susan Dell Foundation, Geeta spent more than 12 years with the Corporate Finance Group of PricewaterhouseCoopers in India, advising large Indian and multinational clients on joint ventures, mergers and acquisitions, business plans, and valuations.
Nell: Why has Michael & Susan Dell Foundation decided to put an emphasis on program-related investments (PRIs)? How exactly does that particular financial vehicle further your mission?
Geeta: Our mission is to transform the lives of children living in urban poverty through better health and education. There are 2.4 billion people living below the World Bank’s poverty line of $2 a day, and more than 160 million children are suffering from malnutrition. To tackle those numbers and address deep-rooted complex problems, we need solutions that are both scalable and sustainable. And for that we need to tap into different and larger sources of funds – government and private. Program Related Investments (PRIs) are just one of several financial tools we use to further our mission.
The foundation has always sought to concentrate its limited philanthropic dollars to achieve direct, measurable, replicable and lasting systemic change. Early on we realized the power of markets as one lever for creating a more inclusive society. Free markets definitely increase access where it’s most needed. They can also help raise the bar for quality in terms of what customers expect and what they will pay for.
A great example is the microfinance sector in India. Today there are more than 30 million microfinance clients in India. These clients are accessing some $4 billion in credit to invest in income-generating assets such as trading businesses, tea/food stalls and livestock. We played a catalytic role in the Indian microfinance sector by influencing a market shift from rural to urban environments. Beginning in 2006 and continuing through 2009, we provided seed funding to some eight urban-focused MFIs. The success of these institutions helped prove that microfinance is a sustainable, scalable and investible asset class. There are now more than 25 MFIs active in urban India.
This scale has been achieved only because microfinance offers a market-based, sustainable solution that attracted private capital.
Nell: What methods do you use to find projects that make sense for a PRI, rather than a traditional philanthropic, investment?
Geeta: I love your question. It places things in perspective and in the correct sequence.
Our approach has been to first identify projects that can help achieve our desired mission (fighting urban poverty in order to improve children’s lifetime outcomes), and then decide an appropriate funding structure. This is in contrast to other organizations that have de-linked grants and investments; their grant strategy is distinct from their PRI strategy.
We view grants and investments, including PRIs, as part of the same toolset. When we are selecting any projects to fund, the main criteria are the level of their social impact, scale and sustainability. On sustainability, we ask a variety of questions pertaining to the project. Is there a strong business model, and has the product/service been tested? Can it generate revenue and remain true to the original intent? Will other funders—government, investors, and grant-makers, step in to help establish sustainability and scale? Are there adequate quality safeguards or do they need to be created?
The structure of our support is a complex decision emerging from these deliberations. The funding structure can be in the form of a grant, loan, equity or a combination. For instance we made an equity investment in Janalakshmi Financial Services when it was a start-up microfinance institution. We also offered grant support to their non-profit arm Jana Urban Foundation to conduct a detailed analysis of their client base. This helped Janalakshmi Financial Services to better understand the financial needs of their customers and offer additional products tailored to those needs, thus strengthening the company.
An example of a straight PRI is our support for Waterlife, a for profit company offering clean drinking water to low income customers in rural areas, to test the market in urban areas through a concessional investment structure. The goal of the project was to help Waterlife develop and scale an urban business model that would replicate its rural success, given the different challenges within an urban setting.
Nell: Only 1% of U.S. foundations make PRIs. What do you think holds other foundations back from experimenting with mission-related investing?
Geeta: You’re right. Our legal counsel often find themselves in an odd spot at foundation conferences, as we are in a minority group that does PRIs, and an even smaller minority that does direct PRI equity investments internationally. I can’t speak on behalf of other foundations, but based on my discussions over the last few years, I’ve witnessed that investing in market-based solutions is unfamiliar territory for most foundations. They are pushed outside their comfort zone.
Moreover, PRIs are more complex to design and structure than grants. We’re really looking at a culture shift in terms of staffing. PRIs require financial and investment skills that traditional grant teams might not necessarily possess.
Another possible reason is that for many philanthropists making a profit is viewed negatively. Anything that is grant based or in the non-profit space is seen as delivering a positive impact. Anything that is in the market-space is viewed as uncontrollable and exploitative. Lastly, I think it’s the risk of failure that holds back many foundations. Not only are PRIs more risky, their success or failure is transparent and easy to measure in more objective terms. At the foundation, we have seen the ways that PRIs and markets can support social progress. By setting up guardrails and standards, we have managed to contain the inherent risks of PRIs.
Nell: It seems like there is an enormous opportunity to connect impact investors and philanthropists, but that really hasn’t happened yet. How do we better pool philanthropic and impact investment capital for more social change?
Geeta: Traditionally, development efforts and markets have been viewed as two parallel tracks that are unlikely to converge. This has resulted in limited interaction between philanthropists (focusing on non-profits) and impact investors (focusing on for profits).
However, as we move towards recognizing that markets can bridge some of the existing inequalities in access and outreach, there is a definite need for increased connections between philanthropists and impact investors. A few organizations are now consciously working towards this end, especially the ones that are championing a sector based approach to creating and catalyzing markets, like FSG, Monitor Inclusive Markets, and Mission Investors Exchange.
And with impact investments set to reach between $400 billion to $1 trillion over the next decade (JP Morgan Global Research) there should definitely be greater collaboration between the two worlds. This needs to begin with defining “common ground” amongst the two stakeholders.
Today, we do not have an agreed definition of impact and how to measure it. This is a good starting point. Once we have this common terminology and performance assessment framework, appropriate forums and a structured approach to sector level change will go a long way in increased collaboration amongst donors and impact investors.
Nell: Michael & Susan Dell Foundation is obviously at the forefront of program-related investing, but what about other innovative financial vehicles? What is the foundation’s view on philanthropic equity investments (investing in growing or strengthening nonprofit solutions)? Is there promise in those kinds of investments?
Geeta: As I said earlier, we are very focused on our mission and the guiding principles of impact, scale and sustainability. We are open to adopting different tools and approaches that help advance the mission. Right now we are focusing our energies on traditional grants and PRIs.
Philanthropic equity investment is a fairly new concept that definitely holds promise. They are a one-time grant to nonprofits that help strengthen the capacity of the organizations and make them more sustainable. We do not rule out such investments. For the foundation, the key factors to evaluate the option of philanthropic equity are measurable and comparable outcomes and in-built mechanisms for quality and cost efficiencies. In non-profits, these are difficult metrics to achieve, but not impossible, especially as the development world ups the ante on measurement, transparency, and pay for success. We believe that strong governance, transparent reporting and incentives for achieving greater impact at lower costs will go a long way in building the field for philanthropic equity investments.
There were some really great articles and discussions in the social change space this past month. From new attempts to put philanthropy under the microscope, to analyses of Silicon Valley’s contributions to social change, to the difference between market innovations and social innovations, to Millennial giving, there was a lot to think about.
Below are my picks of the 10 best reads in the world of social innovation in September. But please add what I missed in the comments.
The 10 Great Reads lists from past months are here.
- Silicon Valley has been getting into the social change game, but some aren’t impressed with their contributions so far. David Henderson takes Silicon Valley to task for focusing their technology “innovations” only on broken nonprofit fundraising models (Google’s announcement in September of a new fundraising app, One Today, is an example of what he’s talking about). And Charles Kenny and Justin Sandefur seem equally unimpressed arguing that Silicon Valley’s view that technology can end global poverty is “wildly overoptimistic.”
- And speaking of social change and business, Daniel Goldberg makes a very interesting (and helpful) distinction between “market innovations” (“an opportunity for profit that also happens to help people…and [is] effective precisely because [it] so cleverly ride[s] the market wave”) and “social innovations” (which “produce value by filling gaps left by the market…a business opportunity in the classic sense, but a systematic market failure that required a social purpose to address”). Much of impact investing, he argues, falls into the first camp, whereas social impact bonds fall into the second.
- It is crazy (and terrifying) how the wealth of America is increasingly concentrated in a small group of people at the top. The rate at which it is happening is mind blowing. The 400 richest Americans are worth $2 trillion, which is a $300 billion increase from last year and double what it was a decade ago. And in 2012 the top 10% of earners brought home more than 50% of the total U.S. income, which is the highest level ever recorded. Kind of depressing, isn’t it?
- But there is hope. Clara Miller, formerly head of the Nonprofit Finance Fund and now head of the F.B. Heron Foundation, is one of the leading visionaries in the social finance space. Her recent article is a must read and explains the dangers of nonprofit growth without adequate capital and what funders can do to prevent it.
- Paul T. Hogan, VP of the John R. Oishei Foundation, argues that funders should focus on building nonprofit organizations: “The development of the nonprofit organization provides plenty of factors to evaluate and many outcomes to strive for. It can also satisfy the funder’s obligation to effectively steward resources insofar as an organization is being helped to last for the long term and have a much greater chance of effectively achieving its, and therefore the funders’, goals.” Oh, if only more foundation leaders thought that way!
- Pablo Eisenberg writes a fairly vehement rant against philanthropy for being an increasingly closed loop. He argues that their insularity “keeps philanthropy from solving serious problems” and that we need “foundations and big donors to realize they don’t have all the answers. Nonprofits should have a greater role in driving the agenda.”
- September saw the annual Social Capital Markets Conference and one of the interesting things to come out of it was a new Community Capital Symposium that immediately preceded SoCap this year. CoCap brought non-accredited investors (with a net worth below $1 million) and social entrepreneurs together to talk about community-focused investing. It’s an interesting financial innovation to watch.
- Over the month of September, GrantCraft, a project of the Foundation Center, ran a 4-episode podcast series talking about and with Millennial philanthropists as a complement to the Johnson Center NextGen Donor Report about Millennial giving that came out earlier this year. Fascinating stuff.
- And then on the tactical side, HubSpot offers some great insight on What Millennials Really Want From Your Nonprofit’s Website.
- I always love urban food innovations, perhaps it’s because they are addressing several social problems at the same time (urban decay, obesity, economic decline, environmental degradation). And so I was interested to see that urban rooftop farming is a new trend.
Photo Credit: UWW ResNet
Since today is Halloween I wanted to continue a tradition I started last Halloween of providing a list of resources about nonprofit innovation. I’ve created the list below by culling from our constantly evolving and much larger list of resources on the Social Velocity website. Below I’ve handpicked the tools I think are most useful for wielding the money sword, connecting to the larger social innovation movement, and finding inspiration. Please add to the list in the comments of this post.
Wielding the Money Sword
- Nonprofit Growth Capital, Building is not Buying
- The Nonprofit Starvation Cycle
- Social Impact Bond Initiative
- Creating a Financing Plan
- The Enormous Opportunity of Capacity Capital
- Financing Not Fundraising
Connecting to the Social Innovation Movement
- Accelerating Social Entrepreneurship in the Age of Austerity
- Clinton Global Initiative
- Grantmakers for Effective Organizations Conference
- Harvard Social Enterprise Conference
- NextGen: Charity
- The Nonprofit Management Institute
- Nonprofit Technology Conference
- Skoll World Forum on Social Entrepreneurship
- Slow Money
- Social Capital Markets Conference
- Social Enterprise Summit
- Social Good Summit
- Social Impact Exchange
- Social Innovation Summit
- Getting to Maybe: How the World is Changed
- How to Change the World
- The Power of Unreasonable People
- Making Good
- Work on Purpose
What have I missed? What books, conferences, articles, tools do you find inspiring and insightful? Add to the list in the comments.
Photo Credit: dimland
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
In this month’s Social Velocity blog interview, we’re talking with Kate Barr, Executive Director of Nonprofits Assistance Fund, whose mission is to foster community development and vitality by building financially healthy nonprofit organizations. Kate has led the organization’s growth as a premier resource for training, strategic financial counsel, and financing for nonprofit organizations in Minnesota. Kate enjoys helping nonprofits consider the relationship between their mission and program goals and their financial and organizational strategy. She frequently writes and speaks on nonprofit financial and strategy and is lead blogger for Balancing the Mission Checkbook.
You can read past interviews in our Social Innovation Interview Series here.
Nell: Nonprofits Assistance Fund is all about helping nonprofit leaders become more financially savvy. Why do you think strategic financial management is so important for nonprofit leaders and what holds some nonprofit leaders back from achieving it?
Kate: I think about it this way: if strategic direction in general is important for nonprofit organizations, then strategic financial management is equally important as a component of that direction and vision. When a nonprofit develops a strategic plan they are also adopting a financial strategy. Too often, though, that financial strategy is underdeveloped because the vision and strategic goals don’t incorporate the business model that’s required to support the plan. At Nonprofits Assistance Fund we unpack the financial aspect of a nonprofit business model into four inter-connected components: revenue mix; cost of effective programs; infrastructure; and capital structure. I see the biggest obstacle to understanding financial strategy is the singular focus that many nonprofit leaders place on revenue, revenue, revenue. If we could just raise enough money, they think, it will all work out. In reality the business model is more complex than that. The extreme revenue pressures that many nonprofits have faced over the last few years have uncovered the vulnerability of business models. Fortunately, savvy leaders are stepping back to understand the strengths and weaknesses of their financial strategy and being more intentional about identifying and creating a business model that can work.
Nell: A few months ago you wrote a rebuttal to the Center of Philanthropy’s recent survey that claimed nonprofit managers lack solid financial knowledge. What would you say is the actual extent of financial knowledge among the leaders of the nonprofit sector? And what can we do to improve it?
Kate: Yes, I was critical of the study because the findings were based on an extremely narrow test of knowledge to define financial literacy. As we said in the column, the report did not make a connection between the “lack of financial knowledge” based on the survey and the health and vitality of the nonprofits and their missions in the community. Frankly, the fact that so many nonprofits have been able to respond to huge increases in demand for service without going over the cliff is testament to some pretty remarkable financial skills. The direct answer to the question, though, is that the financial knowledge is mixed. Anyone with financial management responsibility needs to understand the terminology of nonprofit finance and know how to read and make use of financial information. Leaders of nonprofits need to have both technical knowledge – what I would categorize as financial management skills – and leadership capacity to navigate changes to their business models. There has been a lot of progress in building financial management skills as the field has become more professionalized. There are many training opportunities for skill building, both in person workshop and online learning (including Nonprofits Assistance Fund’s training workshops and webinars). Financial leadership capacity requires more than a few classes. It takes experience, knowledge, and guts to align mission, strategic plan, and financial structure in a way that build sustainable community impact. I think the ideal nonprofit leader combines passion for the mission with excitement for the business challenge.
Nell: There is a phenomenon in the nonprofit sector that when business people join a nonprofit board they often leave their financial and business acumen at the door fearing it could muddy the charitable work of the organization. Why do you think this is and what can we do to overcome that tendency?
Kate: I’ve seen two different dynamics when this happens with board members: wishful thinking and misunderstanding. The wishful thinking problem arises when board members believe that nonprofits operate outside of the market and that their good work can be performed with minimal cost and simple revenue streams. The misunderstanding is just another version of the “nonprofits should operate more like businesses” myth. Nonprofits are businesses. This “advice” underestimates the complexity of nonprofits as business enterprises. Board members can’t be effective unless they understand how the enterprise works and what the board’s role is in planning and governing. Overcoming this tendency starts with board leadership and carries through recruiting, orientation, and ongoing board development. The executive director or CEO has an important role to work with the board chair or governance committee to prepare and support board members’ ability to understand and build the business.
Nell: One of the most exciting developments in the last year or so is the growing interest in and experimentation with social impact bonds, or pay for success bonds, a public/private funding vehicle for nonprofits based on outcomes. Minnesota has already begun to experiment with a $10 million pilot. What, if anything, has Minnesota learned so far and what do you see as the future for this new financial vehicle?
Kate: There is a lot going on in efforts to develop models and financial structures to pay for results, including social impact bonds, pay for success contracting, and the Minnesota pay for performance pilot. The Minnesota state legislature approved a $10 million state appropriation bond to test a pay for performance approach for some state funded programs. The Minnesota pilot is the first experiment to use an actual bond offering as the financial structure. The advisory committee started meeting early this year and has just issued a Request for Information for nonprofit service providers in workforce development and supportive housing. What we’ve learned so far in developing the Minnesota pilot is that every question leads to three more questions. Part of the complexity stems from the goals. In each of the models in development there are actually multiple goals: identifying program designs that work; saving the state money; attracting new funds; and sharing or transferring financial risk. Any one of these goals requires capacity to deliver and appropriate measures for success. Combining all four goals, as most of the models do, creates something of a bear to design and evaluate. Some of the open questions in Minnesota include: the methodology for the economic measure of success; the role of evaluator; the time-frame for measuring and valuing ROI to the state; access to the data that will be used for monitoring; the market for the bonds; and the appropriate level of risk for nonprofits to bear. The Minnesota pilot does not transfer the financial risk to the bondholders in the same way as the SIB model so there is also a working capital gap for the service providers. We are assessing what will be needed for our loan fund to help with that. As for the future, while there is great enthusiasm for these ideas and pilot projects we have to keep in mind that this is all still early stage with lots of lessons to be learned before we even know if these can attract significant new funds.
Nell: One of the big debates in the nonprofit sector centers around a distinction between program and administrative (or “overhead”) expenses. Rating agencies are just starting to realize that this distinction is damaging to the nonprofit sector. But how do we really move beyond this and get a majority of funders, regulators and others to recognize the danger of evaluating nonprofits based on how they spend money versus how they achieve results?
Kate: Is this even really a debate anymore? There’s pretty universal agreement that the functional expense ratio doesn’t measure nonprofit effectiveness, efficiency, or accountability. The challenge now is communication and education. This one ratio has so dominated every nonprofit financial measurement that we are forced to try and undo decades of practice. Nonprofits bought into the ratio, too, and reinforced it with pie charts and donor messages about how “every dollar goes to program”. Is it any surprise that donors listened and believed us? It took years to create the “standard” that expense ratio is the most useful measure for nonprofit financial results. Unfortunately it’s going to take time to re-educate. We have to start within the nonprofit field itself. There are still many nonprofits that promote their low overhead ratio in fundraising because, they claim, it helps them to attract and retain donors. It’s easy to calculate and communicate. Rather than battle the monster that we helped to create, I think we need to change gears, replace the ratio with more meaningful information about impact and financial health, and raise expectations for results. I really appreciate that Financial Scan, the new product from Guidestar and Nonprofit Finance Fund, doesn’t even include the functional expense ratio on the financial health dashboard or accompanying analysis reports. None of the other ratios – that are much more useful – are quite as simple, though. We’re going to be having this “debate” for some time to come.
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
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