21 Apr 2011  Research & Ideas

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."

About the author

Carmen Nobel is senior editor of HBS Working Knowledge.

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Comments

    • Elizabeth Topp
    • Founder, shiftalliance

    As non-profits move to become more growth and results oriented, there is another form of institution rapidly on the rise: B Corporations. Certified B Corporations are a new type of corporation which uses the power of business to solve social and environmental problems. http://www.bcorporation.net/about All of this is another indication of the graying of the line between non-profit and for-profit organizations. Non-profits are emphasizing stronger values around effectiveness, efficiency and results-driven success, while for-profit organizations are adopting stronger values around purpose and social responsibility. Wisdom is defined as "pertaining to both means and ends." Both types of organizations seem to be broadening their focus to include both. I take this as a sign that we may be becoming wiser. Thanks for the article, and may we see more venture capitalists and philanthropists funding more B Corporations too. Elizabeth Topp

     
     
     
    • Gayle L. Gifford
    • President, Cause & Effect Inc.

    It makes my skin crawl to read phrases like "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." What do people think the social sector has been doing for the last 300+ years? Civil rights, women's rights, historic preservation, community development, clean water, land conservation, clean air, human rights, violence prevention, arts, music, libraries, dignity for individuals with disabilities -- the list goes on.

    I completely agree that large investments in building the capacity of nonprofits to generate sufficient revenues or generate and experiment with efficient back office models would be very welcomed in this sector. But do we have to put down all of the amazing work that has already been generated by past generations of social entrepreneurs and the philanthropists of all sizes that have funded them?

     
     
     
    • Benjamin Stockton
    • doctoral student, Intern'l School of MGMT

    In my studies with ISM and a lifetime of political science study and activism, I have noticed that lack of development over the recent 30 years is different than prior decades. We should not avert our eyes from the ugly realities of today and should not avoid the most important problems just because they are almost insurmountable. I see the three main causes of poverty and misery are: 1. the unfortunate actions of nation states in the hands of unsympathetic and exploitative elites, using violence, dramaturgy, manipulation of the law and secrecy to steal a people's wealth. 2. the re-distributive effects of some global institutions in moving wealth from lesser developed communities into the pockets of Western business people and Western politicians 3. the operation of an under-regulated capitalism and false democracy both in extracting wealth from LDCs by global corporations and in driving the gap in relative wealth within lesser developed communities from the poorest to the relatively richest members.

    I am hopeful that as the technological development and ubiquity of global communications continues the tragic spectacle will activate human sentiments that even we capitalists harbor and will bring us to mitigate our contributions to the misery of 2.5 billion people that are under our collective thumbs and those of our "agents" in the developing world.

    I am saying that we are collectively guilty and we can't continue down the old path. We have to regulate our global businesses better. More interventions Libya-style can be avoided if we don't accommodate people like Ghadaffy (my preferred spelling). We should not help dictators get and retain power in the first place, no matter the economic considerations.

    Within LDCs I tend to favor a micro venture capital approach where private firms (altruistically?) invest appropriate amounts in promising enterprises (distinguished from shopkeeping business). While not everyone can run a shop, everyone needs a job; entrepreneurs with a vision and capability can create more jobs with capital than they can with just hard work.

    But the role of the nation state in providing rule of law, well-regulated banking and competent infrastructure is the main limit on what can be done with capital. So, in terms of development that can be driven by Western altruists, please see item 1, 2, and 3 above.

     
     
     
    • Shankar
    • Member of Faculty of Commerce, Mizoram University, India

    Suggested model will add professionalism for non-profits in thoughts, plans and actions. Thus CSR could be fostered to organisations with better expectations of performance efficacy. Regarding overheads of Leadership, it can be diluted by spreading it across the achievements by the organisations' sponsoring CSR.

     
     
     
    • Abhishek Syal
    • Founder President, Act to Rise for Innovation in Special Education ( A R I S E )

    The problem with social sector generally is that generation of profits is looked at suspicion. This generation could be effectively utilized for R&D for developing key technologies for the cause.

    When I say generation of profits, I imply that the business activity can be carried out with projects that were built for the beneficiaries (which you donate), but others (public at large) can have access to that by purchase; if the tech in question provides value addition or comfort.

     
     
     
    • mo bjornestad
    • founder, safetfirst.com

    For-Profit with social value also seeks behavioral change via accountability, on a global scale. Http://www.SafeTFirst.com Status: seeking sponsor. initial thrust - RescueMe, enhanced 911 with a global network of volunteers to assist and do right - and stand up and demand honesty in word and deed. Then healthcare and aging in place Intrusion monitoring Remote medical services - Villages without Doctors I need assistance for launch in a few weeks MoBjornestad@gmail.com

     
     
     
    • Daniel Bassill
    • President, Tutor/Mentor Connection

    Few businesses could thrive on the inconsistent flow of money that non profit sector organizations are forced to work with. If new blended revenue structures emerge that enable social benefit organizations to generate investment capital and income as well as philanthropic investment, it may stabilize the revenue flow and enable many more organizations to grow from good to great, and then to stay great for many years.

    To me what seems to be new about this discussion is the potential for new organizational structures to emerge that can open new and more consistent revenue streams.

     
     
     
    • Anonymous

    Having worked for a social investment company for many years, the idea that social enterprises should focus on innovation is pretty silly. We are constantly innovating and must innovate because we carry twice the burden of a traditional company: we must be financially sustainable and meet social expectations -- a double bottom line. We know that financial accounting is an expensive yet critical function to any enterprise, but so is social impact measurement. So in our world, there is twice the reporting burden of a traditional business. In a non-profit structure you also lack access to equity capital which further necessitates innovation. Basically, if you're not innovating, you're not attracting grants or donations. But you need twice the money to get to sustainability because sustainability means constant innovation. It's a never-ending cycle of grant dependence unless your enterprise is very close to a for-profit model anyway.

     
     
     
    • Adam Fish
    • Finance Ocean

    It's great to hear about the work of the HBS Social Enterprise Initiative!

    I write about social investing from time to time and have spent some time in the field over the course of my career.

    What I have found is that "social investments" are all over the place in terms of social impact, financial return and risk. With traditional investing, you have a trade off between risk and return that seems to follow a logical curve, but with social investments, that curve is very disjointed.

    You have some investments that are high impact, high return and relatively low risk, which are great, but then you have some investments that are lower impact, lower return and more risk -- and yet people still are willing to invest because they are connected to that particular social cause.

    In a way, it's a very innovative way of distributing capital that follows an emotional or ethical motive rather than a logical one. I guess that doesn't sound too profound given the point of social investing, but I'm surprised that logic truly takes a back seat in so many cases (and not necessarily in a bad way).

     
     
     
    • Andrew Castro
    • Founder, Finance Bites (http://www.investing101hq.wordpress.com

    good post.

    there's probably another methods of raising cash for companies with social aspect.

    cheers!