Builders, Buyers & the Social Innovation Fund

Coffee On Friday afternoon, Nathaniel Whittemore of the Social Entrepreneurship blog sent me an email questioning the enthusiasm in my recent post about the Social Innovation Fund (SIF). Nathaniel is someone whose opinion I greatly respect and his points of contention were very valid. So I sent him back a detailed response, which (with his permission) I’ve decided to republish here.

Nathaniel’s email to me made the following points:

  • Nathaniel argued that the SIF grants were run of the mill, writing “The government just gave College Summit $3 million more dollars, about 20% of their annual budget. Big whoop.”
  • He argued that the SIF did not do anything unique and different.
  • He asked why I was focused on the intermediaries funded by the SIF rather than the subgrantees who would ultimately receive the grants.

In response I wrote:

When you write “the interesting thing about your argument is almost more about who were the intermediaries (and their approach to philanthropy) rather than who they’ll ultimately fund.” That IS exactly the whole point.

First, a quick pair of definitions (these are from a paper titled Building is not Buying by George Overholser):

  • Builder: A donor who provides money to a nonprofit organization with the intent that the money be used to build the nonprofit organization.
  • Buyer: A donor who provides money to a nonprofit organization with the intent that the money be used by the nonprofit to deliver products and services to the nonprofit’s beneficiaries.

(These roles are similar to the for-profit roles of investors and customers where Builder=Investor and Buyer=Customer, with the one difference being that Buyer’s buy goods and services that are delivered to other people rather than Customers who stuff for themselves).

The government has historically almost always played the role of Buyer. That makes sense. They are spending tax payer dollars so that products and services can be delivered to people who need them and thereby enhance the “public good.”

But the Social Innovation Fund is different. It very explicitly does not give money to nonprofits. It gives money to other funders. It has said it will select those funders based on their demonstrated “track record of success at identifying and growing high-performing nonprofit organizations.”

This means the SIF is the government trying to  be a Builder rather than a Buyer. BUT, the SIF was designed with the idea that the government probably isn’t the best entity to play the Builder role. So instead, the SIF is charged with identifying and funding other funders who have a demonstrated track record of being excellent Builders.

Why does this matter? Because today we are faced with a nonprofit sector that is populated with undercapitalized, underperforming nonprofits. Nonprofit quite literally live in a “starvation cycle” whereby they are constantly asked by Buyers to deliver products and services, but rarely are supported by Builders who will provide the resources they need to build and enhance their organization. What this means is that Buyers, including the government, don’t get nearly as much as they should for their money.

Imagine a for-profit sector that had customers, but no investors. You go to buy a cup of coffee, but the local shop uses a really old machine and sources only halfway decent beans. They also don’t spend much on training their baristas, so even though the people who work at the coffee shop are hard working, nice people, they simply haven’t been given the tools they need to succeed.

To make matters worse, in the nonprofit sector Buyers actually have the ability to restrict their gifts and tell the nonprofit that they simply are not allowed to use any part of the money the Buyer gives them to improve their organization. Local coffee shops can often succeed without a significant investor by devoting a portion of the revenue they receive from customers to buying better equipment, better beans and training their employees. But in the nonprofit sector, the customer/Buyer actually dictates what the nonprofit organization can use their money for! The typical donor actually wants the nonprofit to spend as little as possible on equipment, training, supplies, etc and instead just pump out as much of the halfway decent coffee (to jump back to the local coffee shop) as they can with existing infrastructure.

The SIF attempts to change all that. The SIF is the government saying that Builders are needed too. But the SIF faces a serious challenge because MOST funders in the philanthropic sector also refuse to play the role of Builder. MOST funders act as Buyers and restrict their grants so that the nonprofits they “support” can use little to none of their grant dollars to invest in their organizational infrastructure.

And then we have the gall to wonder why nonprofits aren’t more effective. What a joke.

But the SIF seems to have correctly diagnosed the problem. While funders who explicitly focus on playing the role of Builder are rare, the SIF has properly identified and chosen them as the funders best positioned to help the government finally play a Builder role.

While I’m not familiar with the approaches of every grantee (intermediary funder) of the SIF, I do know that the SIF says they want to fund Builder type funders (those who  have a “track record of success at identifying and growing high-performing nonprofit organizations”). And each of the four organizations I do know, New Profit, Edna McConnell Clark, Venture Philanthropy Partners and REDF (which collectively received 44% of all the SIF funds) all rank as some of the leading practitioners of the Builder approach to philanthropy! So the SIF didn’t just get the concept right, they executed correctly!

In your email you say “The government just gave College Summit $3 million more dollars, about 20% of their annual budget. Big whoop.” But that’s not at all what happened. The SIF gave a Builder funder a chunk of cash and that Builder chose College Summit to fund. Not just to pay them, as a Buyer would, to deliver more of their programs, but to invest in Building the strength of the College Summit organization.

This means College Summit can get better at what they do. Not just do more of what they already do, but improve and grow so they can do exponentially more of what they do and do it better.

While College Summit and a few other subgrantees were “preselected,” the SIF actually had the guts to really follow through on the idea that the grantees (the intermediary funders) were the best ones to select which nonprofits are best positioned to receive Builder grants. The majority of the SIFs grants were distributed based on the SIF’s analysis of the grantees (intermediary funders) ability to identify and grow great nonprofits, not on the SIF’s assessment of each potential subgrantee (which have yet to be chosen by the intermediary funders).

If we had a better capitalized nonprofit sector, a philanthropic sector that included a far greater proportion of Builder funders, then Buyer funders – and importantly the government, given the Buyer role it typically plays –  would have more robust, higher performing nonprofit organizations from which they could Buy social good.

Using the coffee shop analogy, this would mean that Buyer/Customers could finally have access to coffee shops that used top of the line equipment, fresh roasted, top quality beans and were served by well trained baristas.

As far as I’m concerned, the SIF hit the ball out of the park today. They did NOT simply shovel Buyer money at some cool nonprofits. They did NOT simply allocate the money based on a bureaucratic earmark process. They actually executed on their mission of providing Builder funds. When we talk about their $50 million being small, it is because we are measuring it against all donated dollars. But when we measure it as a proportion of total Builder dollars, $50 million is serious cash.


  1. As one of the independent expert reviewers for the selection of SIF intermediary grantees (but not speaking for SIF, of course), I agree 100% with your post, Sean. SIF is designed to magnify social sector innovation and capacity by leveraging public funding and private philanthropy through skilled intermediaries. SIF not only increases funding for high-performing nonprofits, it supports the development of a robust nonprofit capital market that can guide funding to the most productive uses. These first awards have real transformative potential.

  2. Thanks Steve. Always nice to hear that my external opinion resonates with the internal communications.

  3. Rachael Barrett says:

    Thanks Sean for continuing the conversation on SIF (from beginning…to….). However, much I like the builder, buyer argument, it does feel like same old…so, while they may have hit one out of the ballpark, it is a foul ball. Full count, let’s see the intermediaries take another swing.

    Will Edna McConnell Clark put more money behind Nurse Family Partnership or will they help seed other community based approaches to helping low income moms that are already in practice but have not had the benefit of any long term analysis of their impact? Maybe a program like Healthy Families (funded by NYS) is as effective, but more efficient than NFP?

    I cannot wait to see what happens next.


  4. Me too, Rachel. Regardless of whether my take on the SIF is correct or not, there is still a LOT of work to be done.

  5. Christina Hend says:

    CNCS should be doing all this middle work. The people in the middle just lobby for a percentage, Congressional favor for their friends(sign on with them) and get federal jobs under the dems. Some just got those.

    Intermediaries actually cost the groups. For example, intermediaries based on legacy legislation funding got education for CNCS VISTA while they serve, but all other CNCS aren’t allowed. This may be the same with the second job.

    50 million is a lot, bu they wanted more like the education 650,000,000. It’s earmarks for pals.

    • I sure hope you’re wrong Christina. But other people have this same worry. I do think that the selected intermediaries can do the “middle work” of identifying high performing nonprofit better and more cost effectively than the government.

  6. Matt Klein says:

    Sean – Thanks for your post – you are right on (not that unusual!)…. I run Blue Ridge Foundation New York, which is one of New Profit’s collaborating funders on the SIF grant. I’m also a big fan of George Overholser and love how he clearly articulates the build/buy distinction.

    It seems that people sometimes overlook that SIF since its inception has been about growing high performing organizations and this purpose is spelled out in the authorizing legislation; the administrative rules and funding approach necessarily follow in the same vein. The word “innovation” in the title of the fund leads people, I think, to assess SIF’s actions according to their own view of what’s “innovative.” If one’s definition is along the lines of “never been done before / unique / wacky / high risk / totally new” then it’s easy to be disappointed. But the legislation really doesn’t contemplate that as the funding orientation.

    My own view is that the innovation to focus on (in addition to the deployment of build capital by government) is the potential for SIF to deliver more value for public dollars than traditional government funding processes. This will be the case if the SIF’s sub-grantees ultimately “out-perform” peer organizations focused on similar issues that are significantly funded through government contracts. If this happens, and if government dollars in traditional channels are then redirected to these higher value efforts, SIF will be a successful innovation.

    • Thanks for the comment Matt. I wouldn’t be surprised if the “Innovation” title was needed to sell the Fund. “What Works” doesn’t have the same ring.

      My view is they shouldn’t be mutually exclusive. That’s why the tagline for Tactical Philanthropy Advisors is “innovative, effective and joyful philanthropy.”

  7. Geri Stengel says:

    Like you, I am happy to see “builder” funding increased. Nonprofit capacity-building has long been ignored (your coffee shop analogy hits the mark). SIF’s funding of grantees who understand the importance of capacity-building is excellent.

    The organizations that won are certainly exceptional. As one of the expert reviewers, I’m only human and I was disappointed that the organization I thought had the most transformational model didn’t win. However, I know there will be other competitions where their light will shine the brightest.

    • Thanks for the comment Geri. It drives home the importance of the SIF releasing the applications of organizations they did not select. Although I understand that they promised they wouldn’t.

  8. Your article is extremely well written and clearly to the gist of the matter. Very seemingly, an endowment is different from a common donation. It certainly takes both to make the non-profit world go ’round, but I’m glad to see Builders are on the rise.

    The larger donors understand the build/buy, and need to. I am hopeful that donations of all types pick up this year and that many of the venerable charities survive.
    Bobby Vassallo