Searching for Better Practices in Social Investing
Social change requires innovation, not just in organizational practices but in funding practices, as well. This was a key message at "Social Investing: Emerging Trends in a Changing Landscape," a recent panel discussion at Harvard Business School in which several professional philanthropists explored how best to support social change.
In order to garner the capital necessary to foot the bill for social change, nonprofits need to think less about traditional grants and more in terms of innovation--and so do the organizations that fund them.
This was a key message from professional philanthropists as they explored "Social Investing: Emerging Trends in a Changing Landscape," a recent panel discussion hosted by Harvard Business School's Social Enterprise Initiative. They also touched on growing trends including venture philanthropy and social impact bonds.
"In general there's dissatisfaction with traditional philanthropy and a search for 'give us better practices,' " said Nancy Roob, president and CEO of the Edna McConnell Clark Foundation (EMCF). Joining her on the panel were Matt Bannick (HBS MBA 1993), managing partner of Omidyar Network, a philanthropic investment firm in Redwood City, California, and Mario Morino, cofounder and chairman of Venture Philanthropy Partners (VPP), based in Washington, D.C.
Panelists agreed that the goal for philanthropy should be to help an organization scale to the point that it can sustain itself.
"I'm hearing an underlying common philosophy," said moderator Professor Herman "Dutch" Leonard, who serves as cochair of the Social Enterprise Initiative. "First, the focus is on impact. Second is taking that impact to scale. And the third element is that whatever is needed, that's what we'll do. Form follows function."
The panelists explored the benefits and potential pitfalls of "venture philanthropy," the term for applying the techniques of venture capitalists in funding nonprofits and other socially focused organizations. The model differs from traditional grant-giving in that rather than simply writing checks to worthy applicants, venture philanthropists proactively find opportunities and develop them.
"A big part of the model is first seeking out the entrepreneur and the opportunity and then, and only then, figuring out what the capital mix is," said Omidyar Network's Bannick, a former senior executive at eBay. "We live in a world where entrepreneurship drives massive change in the private sector, and we feel that can be true in the social sector."
The leadership challenge
As is the case with venture capitalists, venture philanthropists are often instrumental in choosing new leaders for the organizations they fund. Bannick noted that persuading nonprofits to focus on leadership can be especially challenging for investors; nonprofits often look at executive leadership as an overhead expense, rather than as an opportunity for growth. "You're not going to scale unless you have fabulous leadership," Bannick said. "We think it's important to invest in leadership in the social sector to help those organizations to fulfill their potential."
VPP's Morino stressed the importance of getting to know the community you're trying to help. Understanding the needs of potential fund recipients "means talking to everyone from thought leaders to gang leaders," he said. "You have to have the same discipline and rigor, but you also have to take the time to understand the ecology and ecologies they function in, and to help the leader navigate through those to success."
Morino also noted that while there are many similarities between the goals of a venture-funded start-up and those of a grassroots community organization, investors need to be very mindful of the differences. For one thing, a nonprofit tends to grow much more slowly than, say, a cloud computing company.
"I think the [venture philanthropy] model really does work," he said. "It's long term and makes it hard to see short-term results. But we can show mounting evidence that when you put in significant capital, you're patient with that capital, and you bring very talented executives into the mix, you can help organizations change their effectiveness and their view of what's possible."
Bannick agreed that investors should curb the need for speed when shifting their focus from financial gain to social change.
"At eBay my biggest mistakes were when I didn't move fast enough," he said. "At Omidyar Network my biggest mistakes have been those decisions for which I didn't reflect enough before acting."
As to why it makes sense for philanthropists to adopt a venture philanthropy approach over a traditional approach, the panelists explained that grant-givers and their recipients often don't have any specific plans for growth. "Traditionally, capital flow has had nothing to do with outcomes and performance," said EMCF's Roob, "or you're being asked to produce outcomes that have nothing to do with your core mission."
The panelists added, though, that success can be difficult to measure in the nonprofit sector, especially compared to the financial gains of a for-profit start-up. "There's a real problem of figuring out what constitutes impact," Morino said.
Roob added that the end goal is always self-sufficiency on the part of the funded entity. "When we exit our investments, over a 10-year period we've helped an organization get from one level to another level, and it is able to sustain itself without an additional investment."
Social impact bonds
The panelists also briefly discussed the idea of social impact bonds, in which private investors agree to foot the bill for a program, but then work with the government to decide how to measure the program's success. If the program succeeds accordingly, then the government pays the investors back with interest. If not, then the investors lose. The idea has garnered much discussion in the United States since President Obama proposed spending up to $100 million on social impact bond pilot programs when announcing the 2012 budget in February.
While the idea of a government payback might encourage philanthropy among otherwise gun-shy private investors, Morino warned that a social impact bond program will work only if the government and the investors truly understand what constitutes success for any given community organization—lest the organizations be forced to meet mandated goals that don't really make sense for their communities.
"It's a great idea, but you've really got to do your homework," he said. "No Child Left Behind screwed up a lot of schools."