| ||||
The Harvard Business School Initiative on Social Enterprise is embarking on a new intellectual endeavor to understand a fast-changing and fertile arena — the Social Capital Markets.
For years, money given to nonprofits has been thought of as charity, says Jed Emerson, Bloomberg Senior Research Fellow in Philanthropy, who will spearhead the effort along with Allen Grossman, Bloomberg Senior Lecturer in Philanthropy. But a new understanding is emerging: these dollars, while charitable, are still capital investments of precious resources. "The question then becomes: can we extract bedrock lessons from the for-profit world and apply them to philanthropy?" Grossman says.
It's a question ripe for research, given the changes sweeping the Social Capital Markets. For one, a new breed of donor is altering the terrain: Internet moguls, entrepreneurs, and other business leaders who have created wealth in their lifetime. "They look at how they created value in the for-profit marketplace and want to take a similar approach with philanthropy," Emerson says. Joining this group are baby boomers, who will be recipients of an unprecedented intergenerational transfer of wealth over the next 40 years.
"These are people entering their retirement years very engaged," Emerson says. "They are not going to be happy just writing a check and going to the annual dinner." Finally, says Grossman, there's growing pressure from the government and other funders for "outcome-based" funding — a process based on nonprofits achieving certain goals. "It comes down to people questioning the system in which we've invested hundreds of billions of dollars and asking, 'Is it working in an optimum fashion?'"
| ||||
Venture Philanthropy
Grossman asked that question himself during his six years as president and
CEO of Outward Bound, plunging him into the Social Capital Markets arena.
When Outward Bound received an $8-million grant for a new educational
initiative, Grossman was determined to grow and sustain the organization.
He asked numerous foundations about criteria necessary to receive
additional funding. "The answers were not always clear," he says.
"In the business world, if you succeed you will be rewarded with
additional capital. In the nonprofit world, I simply didn't understand the
pathway to success."
Grossman's quandary led to his coauthoring a groundbreaking 1997 Harvard Business Review article "Virtuous Capital: What Foundations Can Learn from Venture Capitalists." In the article Grossman and coauthors Christine Letts and William Ryan suggest that foundations can learn from venture capitalists since both face similar challenges: selecting the most worthy recipients of funding, relying on young organizations to implement ideas, and being accountable to the third party whose funds they are investing. They identify relevant venture capital practices — such as helping management develop and execute strategies, measuring investment performance, and maintaining a long-term relationship — that would benefit both foundations and nonprofits.
The article helped catalyze the thinking of many in the nonprofit field and illuminated and encouraged an evolving approach to philanthropy. A growing number of organizations are engaging in "venture philanthropy," ranging from The Entrepreneurs' Foundation in Silicon Valley to New Profit, Inc. in Boston.
"Now we want to go further and ask, 'How can we look at the Social Capital Markets more systemically to see what kind of changes might be helpful for philanthropy?'" Grossman says. Drawing on the expertise of HBS faculty in finance; negotiation, organizations and markets; and entrepreneurship, Grossman will examine how the terms and conditions of the distribution of capital have an impact on nonprofit management and organization performance. He will also research how the availability of capital at various stages of an organization's evolution affects growth.
"If we don't start thinking differently there's a potential for crisis in the nonprofit sector," Grossman says. With for-profits rapidly entering nonprofit territory, he explains, nonprofits need to be able to compete on a level playing field. "So much of their ability to compete is based upon the availability of capital and how they acquire it."
| ||||
Social Return on Investment
Jed Emerson has also been deeply engrossed in the Social Capital Markets as
executive director of the Roberts Enterprise Development Fund (REDF) in San
Francisco. Created by George Roberts, one of the founders of the New York
investment firm Kohlberg Kravis Roberts & Co., REDF has been a pioneer in
developing VC-like ways of measuring "social return on
investment" (SROI).
REDF invests substantially in a small portfolio of local nonprofits, each a market-based enterprise such a Juma Ventures, which recruits high-risk urban youth to work in Ben & Jerry's shops. They closely monitor employees' progress and also try to quantify the costs each represents to society. They then track how that cost structure changes due to the nonprofit's intervention. "If employees go off welfare and start earning wages and paying taxes, there's an inverse relationship. They end up contributing to society," he says. "We are trying to find out what are the investments needed to achieve social value." REDF recently hired a full-time financial analyst, formerly with J.P. Morgan, to help build models for SROI.
REDF also practices venture philanthropy through efforts such as targeted business analysis and venture committee assistance for investees. "These nonprofits are competitive enterprises — Rubicon produces high-quality cakes, for example — that just happen to employ folks that the rest of the labor market often won't hire," he says. "We don't operate on a charity basis because if you do it's difficult to manage a good business."
At HBS, Emerson will be looking at how investors in the Social Capital Markets understand valuation without clear-cut metrics by which they can assess their ROI. "In other words, how do you know you have achieved what it is you said you wanted to?" he says. He will also research how others across the country are trying to develop and advance such metrics.
"For decades people have said there is just no way to measure nonprofit value creation. How can you value a forest or a clean ocean or living in a nonracist society? But I think there are ways we can begin to talk about value in terms that tell us whether or not we are moving in the right direction."