I think the phrase is misleading and could limit the potential for private investors to finance Pay For Success-like programs.

As I described in my column about Pay For Success, the primary innovation in the model is a contractually agreement between the government and an intermediary (which would then contract with nonprofit service providers) for the delivery of specific results. Instead of paying for program execution, the government instead would pay for results (such as higher test scores, a lower rate of ex-felons return to jail or a higher rate of welfare recipients reentering the work force).

Since government payments would only be triggered when certain results-based benchmarks were achieved, the intermediary would need to finance the program execution prior to receiving payment. In addition, the intermediary might never receive payment since successful results are not guaranteed. This means that the intermediary would need to raise capital (unless the intermediary was an endowed foundation, which I’ll discuss in another post) and this is where the “social impact bond” concept comes in.

In the case of the UK model, private financing was provided to the intermediary. If no successful results are achieved, the private investors will lose all of their money. If success is achieved, government payments will be triggered that will result in a return of capital plus an additional rate of return to compensate the investors for the risk they took. The rate of return will increase as the level of success increases.

This framework is not a bond. A bond is a loan that the borrower promises to repay along with interest payments. The mechanism used in the UK program is a performance based contract. This might sound like semantics, but if the Pay For Success program ever hopes to attract private financing at scale, it will need to look to Wall Street. When Wall Street looks at this framework, they will immediately recognize it as a high risk investment that has a significant potential of total loss of principal and bears no resemblance to a bond. Frankly, calling it a bond would be false and misleading advertising. A Wall Street firm marketing these instruments as “bonds” would be inviting an SEC investigation.

Now, I don’t believe at all that the UK program used the phrase Social Impact Bond in an attempt to be misleading. I’m certain that the private investors fully understood the type of investment they are making. But as these sorts of programs attract national interest in government and Wall Street, it is imperative that the financing aspects of the program be described correctly.

The Pay For Success program doesn’t only create a format for performance based contracts. It also specifically allows for outside financing to be obtained by the intermediary. But these two aspects should be understood as separate and distinct aspects of the program.

If the Gates Foundation acted as a intermediary, they could participate in Pay For Success and self-finance the deal. Enterprising intermediary may, over time, create a multitude of financing approaches to pre-fund their program costs. Some of these approaches may very well come in the form of loans or bonds. Theoretically, a for-profit intermediary entity could emerge and seek to raise equity financing (selling shares in itself to outside investors) to create the capital it would need.

Some day we might see true social impact bonds that are used to finance Pay For Success programs. But the phrase is incorrect and misleading when it is used a catch-all phrase to describe Pay For Success-like programs.

By George Overholser

As is so often the case with innovation, there are many perils to be wary of. I agree completely that Pay For Success can’t work without better methods for measuring impact. There is a real risk of building incentives around metrics that might sound good in a sound bite, but, under the harsh light of RCT social science, wouldn’t hold up. Also, as Melinda correctly points out, we could easily be surprised when, a la “freakonomics” behavioral economics, social metrics look good, but fiscal savings fail to materialize. I also worry about problems of teaching to the test, or, as my friend Nigel Morris used to call it, “monovariablitus”. And then there’s the problem of putting wealthy foundations into a position to call the shots, in a sense, for how taxpayer money is allocated. These are just a few of the many challenges.

All that said, I like to think of Pay For Success as being one of many innovations that can be tested and improved without causing great harm. Let’s not jump to judgment before getting some experience under our belts.

Perhaps we will end up thinking of this as trading one set of difficulties for another. Remember Churchill’s quote: “It has been said that democracy is the worst form of government, except for all the others that have been tried.”

For example, I certainly do not support the bludgeoning of smaller nonprofits with onerous evaluation requirements. But when the checks get big, (as they do with government), and when taxpayer money (not voluntary philanthropic money) is involved, it seems to me that we might have an obligation to raise the burden of proof, whenever it might be possible to do so.

Moreover, I have been persuaded by Jon Baron and others of two truths: (1) There exist highly proven and scalable interventions that are deeply undercapitalized relative to the good they can do, and (2) Under the harsh light of social science, it is clear that hundreds of billions of government dollars are spent each year towards programs that may have once worked, but, today, bring about no discernible change in the life course of the individuals who are served, as compared to randomly selected peers who are not served.

To me, there is a moral imperative to reallocate the “fund what once worked” dollars towards whatever “here’s what we can prove that works” programs may exist.

So while it is true that most programs, indeed most areas of social need, lack sound evidence-based stories of impact… some actually do have RCT proven programs that work. For those, Pay For Success seems like a good way to experiment.

Finally, I am optimistic that the cost of evaluation, both in terms of money and in terms of entangling operations, is dropping precipitously, and that we will therefore soon detect a growing number of high impact/proven programs. The reason: huge databases are now coming online that are a byproduct of running schools, jails, homeless shelters, emergency rooms, etc. Our ability to track individual outcomes, (while also protecting their privacy) is being revolutionized.

I should note that some people in the nonprofit sector are put off by this vision because of the direct analogies to financial markets. However, it should also be noted that in the world I envision, funders are focused on actually supporting nonprofit organizations rather than treating them as contractors who are paid to execute the funders’ vision.

The Donor Landscape in 2033 is Bright
Originally published March 1, 2008 in the Financial Times

Philanthropy is undergoing a transformational shift. While most donors continue to give in the same ways they have for 100 years, the vanguard of philanthropy is busily reforming the fabric of the charitable sector.

Often referred to as the “social capital markets” and characterized by a model of giving that mirrors the financial markets, this emerging model is still in its infancy. Since you can create only that which you imagine, I thought I would take a quick trip 25 years into the future to see what philanthropy might become…

For many donors, the year 2033 does not look a whole lot different from 2008. Many people simply write checks to charities and devote the bulk of their giving to non-profit organizations in their community.

But for some donors, the landscape is radically different. The “social stock exchanges” that became popular between 2011 and 2019 now include all but a few large non-profits and many small but ambitious start-ups.

These exchanges compete for non-profit listings. Exchanges include big national networks with some international organizations, down to small local exchanges.

The business of giving money away is particularly different for large private foundations and smaller “impact-oriented” foundations. Instead of expecting non-profits to solicit them for grants, these foundations’ “impact committees” and “program analysts” spend their days looking for and researching potential grantees. Given the considerable information disclosure required by the exchanges, much of the information required for grantee research is available online. Third-party evaluation firms provide regular reports on listed non-profits and these reports are a valuable input for the foundations.

While the cost to non-profits of conforming to the exchanges’ information disclosure requirements is steep, once listed they find grant dollars come looking for them rather than the other way round. Exchange-listed non-profits tend to have small fund-raising groups that focus on “donor relations”. They market the non-profit by attending “road shows” where they have the chance to make their case.

In the early days of the social stock exchanges, many funders and non-profits worried that the passion and joy of giving would be swept away, given the exchanges’ resemblance to financial markets. But the truth proved to be something else entirely. As funders became comfortable with the idea that sharing information with other donors provided greater social impact, a sense of community and camaraderie developed that set the social exchanges apart from the traditional financial markets.

Non-profit presentations at the regular “road shows” were frequently interrupted by spontaneous conversations in the audience as funders debated the potential of each non-profit and canvassed for other people to join them in sponsoring their favorites. Working together, funders often organized big public funds that they would then direct at specific social problems. The non-profit competition for these funds was fierce but even those not funded felt the competition had helped them to improve.

Now in 2033, more and more individuals of moderate incomes are becoming interested in the social markets. Most Americans now have a donor-advised fund, since all big banks offer a zero-minimum, no-fee account that can be linked to your checking account. A quick search on Google Finance gives individuals access to multiple third-party evaluations of exchange-listed non-profits. International giving is even coming into vogue for the small donor now, so many “donor funds” managed by the largest foundations offer low-cost access to a basket of top-rated non-profits within particular causes.

The early 2030s are a good time for funders and non-profits in the US. Funding innovations are featured in the financial press and for-profit firms are constantly working to develop products and services for the social capital markets. But recently there has been some consolidation among the exchanges and some local non-profits fear funding will dry up for organizations without national scope. The default on a $1bn bond issued by a non-profit offering vaccines in Africa has sent shockwaves through the markets, and other non-profits have seen the availability of credit dry up. There are challenges in 2033 but it is an exciting time to be a philanthropist.

By John MacIntosh

I joined SeaChange Capital Partners after a career in venture capital. In my experience on the inside, the venture capital market is a dynamic system where three key “actors” (managers, directors and funders) struggle through a fog of uncertainty with

• closely aligned interests (in terms of mission and time frame);
• a clear delineation of roles, rights and responsibilities; and
• transparency in communication.

The system is supported by trust, explicit contracts, underlying legal and accounting frameworks, and an ecosystem of accountants, lawyers, and intermediaries.

Viewed from the outside, this system has attractive features like “close monitoring”, “supportive funders”, “long-term commitments”, “clear metrics and measures”, “accountability”, and “rigorous due diligence”. Not surprisingly, a number of nonprofit organizations have tried transplanting some of these into their work.

Unfortunately, the transplanting strategy fails to appreciate that these things have emerged and are sustained in the venture capital market because of the more fundamental background context. As “emergent properties,” they cannot be successfully transplanted into the nonprofit world without certain enabling conditions. Moreover, these “things” are verbs describing the actors’ response to their environment, not nouns that can be picked up and used: due diligence is a process, not a checklist; reporting is a ongoing activity, not a “dashboard”; accountability is a function of accepting roles, rights and responsibilities, not something acquiesced to up front; etc.

An alternative to transplanting venture capital strategies to the nonprofit field would be to create – even if artificially and imperfectly – the background conditions that might enable these things to emerge.

Imagine that I’d like my $100 million foundation to function like a venture capital firm.

The transplanting strategy would be to study some leading venture firms, adopt their diligence checklists, investment agreements and dashboards, and exhort my team to “be more active”, “take the long-view” and “think like investors”.

An enabling strategy on the other hand recognizes that since venture capital practices have emerged as-needed to make equity investments, they might also emerge if my foundation were required to make as-equity-like-as-possible grants.

For example, I could construct bylaws limiting my foundation to ten grants each to be funded for twenty years (i.e. effectively perpetual) by the income from $10 million of assets; each grant could be ended early only if another funder took over the remaining obligation; and program officers would have incentives tied to the long-term (5-7 year) performance of grantees.

In response, my foundation might naturally begin to act more venture-like without any explicit directive to do so:

• We would be really careful about due diligence because of the limited number and long-term nature of our grants. We would try to find organizations with missions, values, leadership, directors, and co-funders that we felt confident about over the long-term;
• We would be wary of making grants without governance rights, such as a board seat, restrictions on changes in the mission or leadership, and limits on the growth of the funding base;
• We would be explicit about how to measure the “performance” of each grantee given the requirements of the incentive scheme.

Other features of venture capital might be less likely to emerge:

• Would nonprofits agree to be funded on our terms? Probably only if the funding was meaningful and they had developed real trust in our people. (So to get things done, we would need to behave.)
• Would a secondary market develop for our grants? How would funders reluctant to pay for “overhead” or “capacity building” feel about paying us for our right to make a series of “great” grants in the future? Would we really pay other funders to relieve us of the contractual obligation to make a series of grants to a poorly performing grantee? (Imagine the headlines written by the nattering nabobs of nonprofit negativity!)
• Would the incentive program allow for risk-taking? Would people stick around for 5-7 years? Would the inability to rotate grants leave the team bored and uninspired?

I am confident that enabling venture capital practices would be more successful than transplanting them—but I probably wouldn’t do it. In fact, it seems fanciful to voluntarily restrict my potential activities when the distinctive characteristic of philanthropy is freedom.  (If you only have to give away 5%, why agree to do more?  If you could otherwise rotate grants and change strategy, why not leave the option open?  If measures are imperfect, why make them truly high stakes?)

Unfortunately game theory shows that when self-control and commitment are difficult, “bridge-burning” can be the only viable strategy. (Does anyone doubt these are problems in the nonprofit sector? I struggle with them every day.) Unfortunately, it takes courage, self-knowledge, and conviction about your goals, so I don’t expect a revolution any time soon. Most likely, for-profit practices will continue to be transplanted ad-hoc into often inhospitable terrain with mixed results. But hopefully, a few brave souls will burn some bridges and see what emerges.

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.

The Fund has announced 11 intermediary grantees, who will select subgrantees to receive the final funding. The full list is here.

In the official comment that I submitted to the Fund back in January, I offered a number of recommendations including:

• The Fund was overestimating the availability of conclusive evidence in the nonprofit sector and should not restrict funding to organizations that already have such evidence.
• The goal of the fund should be to fund and build the evidence base of the next Nurse Family Partnership (a nonprofit widely seen as being a model of an organization that has conclusive evidence of effectiveness).
• That the debate over whether the Fund should support “innovation” or “effectiveness” was a false dichotomy because an approach to philanthropy which focuses on providing growth capital and funds for building a nonprofit’s evidence base is itself a little used and innovative approach.

So I was thrilled to see that in the press release announcing the grants that while most of the subgrantees have yet to be selected by the intermediaries, the Fund says that the eight pre-selected grantees “have evidence of effectiveness along a continuum of preliminary, to moderate, to strong.”

In addition, the largest grant, fully 20% of the total funding, went to the Edna McConnell Clark Foundation, the funder which is most closely associated with providing the support to help grow Nurse Family Partnership. If any funder is going to focus on funding and building the evidence base of the next Nurse Family Partnership, it is Edna McConnell Clark.

Finally, the Fund seems to have rejected calls for them to fund truly early stage “innovation” and recognized that effective organizations that are building their evidence base are themselves innovative. The Fund’s grants also do not seem to reflect a traditional, government bureaucracy driven effort to “earmark” funds for preferred contractors, as some pessimists have worried. And the grants did not go to “business as usual” grantmakers and nonprofits.

While the list of intermediaries may be familiar to philanthropy insiders, grantees like Edna McConnell Clark, New Profit and Venture Philanthropy Partners (who collectively were awarded almost 40% of the total funds!) each appeared on a very short list of of organizations I wrote about early last year who “invest in nonprofits” and see their role as funder as identifying great and potentially great organizations and providing them the funds they need to grow and thrive. So I was thrilled once again to see the Fund describe their grantees as funders who, “share a track record of success at identifying and growing high-performing nonprofit organizations.”

Since the grants are only going to intermediaries (funders) at this point and the final grantees will only be announced later, we can only use the eight pre-selected grantees to get a glimpse at the sort of organizations who will eventually get the money and represent what the Fund must see as their “model subgrantee”.

Those pre-selected grantees include College Summit, Year Up, Latin American Youth Center and KIPP. While these subgrantees will be familiar to philanthropy insiders, they are in fact disruptive innovators who are seeking to apply innovative solutions to solve social problems while focusing heavily on building their evidence base around what works and what does not.

In my comment to the Fund, I wrote that while the nonprofit field today lacks a large number of organizations who have conclusive evidence of impact, the Fund could help set an example of evidence-base building that other funders may replicate. I argued that this process could help create a nonprofit sector teaming with organizations deploying proven effective solutions.

While philanthropy insiders may debate the relative conclusiveness of the evidence base of the subgrantees I list above, they represent the vanguard of organizations who believe that measuring their effectiveness and deploying their resources into the programs that they know work is the best approach to achieving impact. If the social sector was teaming with organizations like these subgrantees, we would live in a significantly different and better world.

No single project, least of all the Social Innovation Fund, will single handedly change the world. But if the Fund’s approach leads to more funders following the approaches of groups like Edna McConnell Clark, New Profit and Venture Philanthropy Partners, I do believe that philanthropy will change for the better. Their tactical approach to investing in nonprofits is by no means the only way that philanthropy should approach social change. But it is currently a deeply underappreciated key to the development of a far more robust and effective nonprofit field.

(On a more personal note, I’d also like to congratulate the group REDF, led by my friend Carla Javits, for receiving one of the 11 grants. Like all of the intermediaries, REDF clearly believes that their role is to identify and invest in effective nonprofits.)

But investing is different. Investors often are the ones chasing the best investment opportunities. It is simply an issue of supply and demand. While there are lots of companies and nonprofits who want to sell things to consumers or raise money from donors, there are a limited set of really good investment opportunities. This fact is frankly recognized in the financial markets where investors are constantly searching for great investment opportunities and then competing with other investors to secure a piece of the deal.

It seems to me that we are on the verge of an inflection point in philanthropy where the supply of philanthropic dollars is increasing just as it becomes more widely recognized that nonprofits are not all equal in their ability to achieve results and platforms are being developed to showcase the select group of nonprofits which offer potentially outstanding philanthropic investment opportunities.

If the social investing framework flips the direction of the “chase” from money to philanthropic opportunities, the landscape of philanthropy will look quite different. I first wrote about this concept in a 2008 Financial Times column where I discussed what philanthropy might look like in the year 2033. I suggested that “investment ready” nonprofits would likely list themselves on some sort of “exchange”:

The business of giving money away is particularly different for large private foundations and smaller “impact-oriented” foundations. Instead of expecting non-profits to solicit them for grants, these foundations’ “impact committees” and “program analysts” spend their days looking for and researching potential grantees. Given the considerable information disclosure required by the exchanges, much of the information required for grantee research is available online. Third-party evaluation firms provide regular reports on listed non-profits and these reports are a valuable input for the foundations.

While the cost to non-profits of conforming to the exchanges’ information disclosure requirements is steep, once listed they find grant dollars come looking for them rather than the other way round. Exchange-listed non-profits tend to have small fund-raising groups that focus on “donor relations”.

We can see some of these themes playing out at the Social Impact Exchange conference being held in New York this week.

In a recent post title “Money Chasing Ideas” Lucy Bernholz reflected on how many social entrepreneurs find it easier to raise for-profit funding than philanthropic capital:

“…the reason it was easier for the entrepreneurs to pitch VCs instead of foundations was simple – the commercial funders were there. They were at the meetings, mixing it up with entrepreneurs, inviting pitches, taking meetings on sidewalks, etc. The foundation executives – much harder to find.

This has nothing to do with social impact, social returns, or appropriate business models to produce social and financial returns. It has to do with who is out looking for ideas to support and who is waiting for the ideas to find them.”

There will always be a need for fundraisers to seek out donors to solicit donations from just as there will always be a need for sales people to find customers. There will also always be a need for unproven nonprofits to desperately seek growth capital funding just as early stage companies try to get in front of angel investors and venture capitalists.

But I think smart funders who want to invest in the growth of outstanding nonprofit organizations are going to need to restructure their process so that the thrust of their work revolves around proactively locating great philanthropic opportunities rather than passively wading through grant applications.

In my recent interview with Paul Carttar, the director of the Social Innovation Fund, Paul said that “The goal of the Fund is not just to fund great organizations. What this is really all about is changing how capital is allocated in the philanthropic sector.” He also stressed the importance of the “learning communities” that the Serve America Act calls on the Fund to create to help spur the creation of a marketplace to connect smart funders and great nonprofits. Scaling What Works is exciting because it is the first independent project that I’m aware of that will attempt to leverage the attention being paid to the Fund to encourage more support for providing growth capital to effective nonprofits.

The program is being funded by 21 of the highest profile funders in the country (see full list here). While some of the funders have already been involved publicly in the Social Innovation Fund, many of the organizations have not made public comments of supports and so their involvement in this project is hugely validating for the Social Innovation Fund model.

The objectives of Scaling What Works include:

• Serve as an intermediary and information broker between the field of philanthropy and the public agencies involved with the Social Innovation Fund.
• Expand the number of donors nationally who are prepared to support the evidence base, capacity and growth of promising nonprofit organizations.
• Support collaboration and knowledge sharing among the network of intermediaries being funded by the Social Innovation Fund so they can most effectively invest their resources and importantly “so the lessons they learn are translated for the broader field.”

The Social Innovation Fund’s $50 million in annual grantmaking only represents 0.017% of annual charitable giving. But then the annual grantmaking of the Gates Foundation, the biggest foundation in the world, only represents 1% of annual charitable giving. That means that any philanthropic project that hopes to have systematic impact must incorporate strategies for leveraging or influencing outside financial resources.

I think Grantmakers for Effective Organizations understands this concept perfectly and their president Kathleen Enright confirmed as much when she told me via email, “Scaling What Works holds the potential to contribute to the overall capacity and effectiveness of hundreds of grantmakers and thousands of nonprofits far beyond those directly involved in the Social Innovation Fund.”

In other words, Scaling What Works is about extending the reach of the Social Innovation Fund so that the impact of its $50 million in grants reverberates far beyond the circle of organizations that receive direct support from the Fund.

By Adin Miller, Adin Miller Consulting

Just ahead of its deadline for Social Innovation Fund applications, the Corporation for National and Community Service (the Corporation) announced that Paul Carttar will serve as director of the Social Innovation Fund. Sean has a great profile and overview of his conversation with Paul yesterday. Nathaniel Whittemore has another worthwhile profile here.

It’s been a busy week already for the Corporation. In addition to Paul Carttar’s announcement, the agency also published its Open Government Plan yesterday and today will close the application window for the Social Innovation Fund with possibly several hundred proposal received.

One of the predominate reasons so many of us have focused on this $50 million initiative is the opportunity it represents to significantly affect philanthropy by making it both more transparent and reshaping how it distributes funding.  In my opinion, though, the Corporation – through its unusual position as a funder of funders – has already missed a few significant opportunities to affect the sector through transformative collaboration and increased transparency. Hopefully, Paul Carttar’s announcement portends an opportunity to recapture these opportunities.

The first key missed opportunity came with the letter of intent process for the Social Innovation Fund. The Corporation received over 200 letters of intent from a broad range of funders. The stated purpose was to help the Corporation “better estimate the volume of potential applications” (see the Corporation’s 3/8/2010 Frequently Asked Questions (PDF) and it purposely declined to release a list of those funders that had submitted letters (see the same FAQ and Suzanne Perry’s post yesterday in the Chronicle of Philanthropy.

One of the more frequent questions I got during the application window came from organizations looking to partner, leverage their funding resources, and exponentially grow their potential impact. By publishing the list of funders submitting letters of intent, the Corporation could have demonstrated true innovation in the grantmaking process. It could also have had a profound impact by encouraging funders to build collaborations and partnerships in advance of the application deadline, especially for efforts that would have focused on low-income and rural communities not significantly served by philanthropy. Instead potential funders were left in the dark by this lack of transparency.

Interestingly, such transparency early on the process would have been in line with the Corporation’s focus on increasing data transparency outlined in its Open Government Plan (PDF) published yesterday. The Open Government Plan specifically shows that the Corporation will provide “program descriptions and contact information for [its] grantees and project sponsors [that] will make it easier for programs to collaborate and individuals to get involved.” (page 6)

The second missed opportunity relates to the Corporation’s Social Innovation Fund review process. The guidelines stress the importance for applicants to discuss and shed light on their own grantmaking reviews and processes. Yet, the Corporation’s proposal review process remains too vague. For example, the guidelines mention that a team of experts will serve as the review panel. This is one of the major black hole areas in philanthropy: who are the proposal reviewers and what expertise do they bring to the table. The Corporation could have led by example by publishing its list of reviewers and their expertise and truly becoming transparent. In this example, it can still do so.

The last critical opportunity looms ahead and I hope that in this case the Corporation will proactively step ahead under Paul Carrtar’s direction. Sean’s post included a key question on whether the Corporation would make the Social Innovation Fund applications public. Those applications will include key details and information on how foundations practice the art of grantmaking and reviewing proposals, a key area that remains mostly hidden behind closed doors.

The eventual Social Innovation Fund grantees applications could be obtained through the FOIA process. The Corporation’s practice, however, has been to not publicly provide applications not funded by the agency. And yet, this is exactly the rich trove of information that will help transform the philanthropic sector through transparency.

The Corporation’s Open Government Plan calls for it to build a learning enterprise. “In order to increase the effectiveness of the Corporation, its grantees, organizations, communities, and individuals in tackling social problems, we need to strengthen our ability to gather and share knowledge, tools, and effective practices. This includes rethinking how to share information online and making it easier for the public to find and use tools that they need. The Social Innovation Fund provides an excellent opportunity to begin modeling more effective ways to share innovative practices in more effective ways.” (page 16)

I hope in this case that the Corporation will take a giant leap forward and provide access to the broader data collected by the agency through the Social Innovation Fund.

So who is Paul Carttar? Paul co-founded The Bridgespan Group in 1999, and subsequently worked for New Profit, Inc., The Monitor Group, and the Ewing Marion Kauffman Foundation.

You can get a sense for the way he thinks in an article he co-authored for the Stanford Social Innovation Review titled “Zeroing in on Impact”. You can see him in person in this video interview he did with Nathaniel Whittemore of the Social Entrepreneurship blog at the Skoll World Forum last year.

My interest in the Social Innovation Fund has largely focused on the role the Fund can play in changing the way that philanthropic capital is allocated in the US. While most charitable donations are distributed almost randomly based on personal connections and effective fundraising appeals, the Fund is using an evidence-based approach in an attempt to channel philanthropic capital to top performing nonprofits.

While some people have wondered why a Fund that has a budget of $50 million can have such a big impact. I’ve argued that the Fund provides a set of carrots and sticks to help influence other foundations to funnel money to top performing nonprofits and that the whole exercise helps model a more effective approach to giving with the stamp of the White House legitimizing the concept.

But at various times since the Fund was created, government officials have made comments that are seriously at odds with my view of the Fund. For instance when launching the Fund, president Obama said that his domestic-policy adviser Melody Barnes and members of the very small Office of Social Innovation would “fan out to every region in the country to search for grant candidates.”

I was frankly horrified by this comment because it implied that the main goal of the fund was simply to provide additional funding to great nonprofits. So I was greatly relieved when during my conversation with Paul he emphatically said:

“The goal of the Fund is not just to fund great organizations. What this is really all about is changing how capital is allocated in the philanthropic sector.”

To accomplish this goal, Paul talked to me about the way he intends to use the “learning communities” that the Serve America Act calls on the Fund to create to help spur the creation of a marketplace to connect smart funders and great nonprofits. While philanthropic “marketplaces” are a trendy concept and something that has been attempted in many online formats, the Fund has the opportunity to act as a “market maker” who can inject $50 million+ per year into such a market to create the transactional volume that will draw others to participate.

One of my key questions to Paul was whether the applications to the Fund will be made public. While the Fund expects to only make grants to 5-10 intermediary grantmakers, they have received over 200 letters of intent from funders who plan to apply. These documents are rare and precious insights into the rigor (or lack thereof?) of some of the countries smartest, most cutting edge grantmakers. While Paul was unwilling to commit to making the applications public (he cited legitimate concerns about the grantmakers’ privacy) he did explicitly say “How we leverage this universe of applicants is a key question because they are a real asset.”

At the end of the day, Paul is just one person. He won’t make or break anything. But he’s got the right sort of credentials and the right sort of attitude. At the end of our conversation Paul pointed to what I think is the key to the whole thing when he said:

“I absolutely believe that the key problem we are facing is a capital market problem”

In other words, Paul believes that the fundamental issue on which the Fund can move the needle is improving the way in which philanthropic capital is allocated in our country. And that issue, is what Tactical Philanthropy is all about.

So today, I’m happy to announce the Smart Money Award.

The Smart Money Award is about bringing recognition and praise to funders who are willing to embrace the idea that sometimes, in order to maximize your impact, it is best to “follow what works.” The award celebrates funders that decide to lead by following the good work of others, helping to scale up or replicate an already proven initiative developed by someone else. We hope to remove any stigma associated with the concept of following, and instead highlight how it can be a powerful “next practice” in philanthropy.

“Smart Money” and “Following” are concepts I believe are powerful, but missing, elements in philanthropy. I blogged about my view on these concepts in a post titled Signaling, Smart Money & Philanthropy.

At the workshop, we awarded the first Smart Money Award to the W.K. Kellogg Foundation for their $16 million grant to support a project of the Buffett Early Childhood Fund. Commenting on the grant at the time it was made, Kellogg president Sterling Speirn said he “saw no reason to start from scratch when a good approach to advocacy and education was already in place.”

In announcing the award at the workshop, we gave the certificate pictured above and a check for $50 to Kellogg vice president Anne Mosle who explained the rationale behind the grant saying “we don’t believe we have to lead everything.”

Now obviously we had fun with this. But we are quite serious about the award. We believe that “following” can actually be an act of true leadership, as is so compelling demonstrated in this video:

Link to “Leadership Lessons from Dancing Guy”.

So where do we go from here? Our plan is to launch a simple website explaining the award and soliciting nominations for future awardees as soon as possible. Our goal is to announce the next award on June 26, the anniversary of the announcement of Warren Buffett’s 2006 gift of over $31 billion to the Gates Foundation—perhaps the largest act of philanthropic “followership” ever made.

I’ll keep you updated on this project as we move forward. Keep in mind that this was something that we hatched in about 45 minutes in a group of people who for the most part didn’t know each other. But the audience members at the Monitor workshop did chip in another $50 to fund our next award. So we’ll keep operating under the assumption that we’ll find what we need along the way and see what happens!

The informal working group designing the Smart Money Award:

• Sean Stannard-Stockton, Tactical Philanthropy Advisors
• Lance Fors, SV2
• Gabriel Kasper, Monitor Group
• Kelvin Taketa, Hawaii Community Foundation
• Mayur Patel, Knight Foundation
• Eugene Kim, Blue Oxen Associates
• Edward Wexler-Beron, Monitor Group
• Bob Hughes, Robert Wood Johnson Foundation

However, for some time GuideStar has been looking at ways to offer visitors more evaluative information. Now, they’ve launched TakeAction @ GuideStar.

Click here to visit the new website.

The site seeks to help donors select which nonprofits to fund, objectively making available rating information from GiveWell, GreatNonprofits, Philanthropedia and RootCause.

One interesting aspect of the new platform is that it reorients the way in which users seek information. GuideStar, like many nonprofit databases, has traditionally assumed that users are looking for information about a specific nonprofit. Their search interface prompts people to enter an organization name. This format makes sense if we assume that users are checking to see if an organization is compliant and has no red flags. But if a donor is seeking the best organization, they need to search by cause area since they presumably do not already know the organization they are looking for. The TakeAction platform reorganizes the GuideStar database by cause area.

One more step towards helping donors make smart decisions about their giving, even if it doesn’t quite turn GuideStar into “the one platform to rule them all”.

By George Overholser

• Someone recently defined nonprofit “mid-caps” as organizations with revenues in the $5 million to $25 million range.

We need to keep in mind that the definition for for-profit mid-caps is 200 times as big:  revenues in the $1 billion range.

This matters because there are metaphors flying around that we need our nonprofit mid-caps to provide more financial disclosure to the “capital market”, just like for-profit mid-caps.

This is the equivalent of asking a guy who owns a couple of pizza restaurants ($5 million in revenues) to begin publishing detailed quarterly public reports of his financial and quality assessment results.  Problem is, his office is the kitchen table, and he needs to get up at 6am every morning to roll the dough.

Wall Street is the wrong metaphor for an online “nonprofit capital market”.  Wall Street only works for companies that are literally hundreds of times bigger than typical nonprofits.  Wall Street companies get easy access to equity, precisely because they are already so advanced that they can afford to provide exceedingly high levels of financial transparency.  But the vast majority of firms (for-profit and nonprofit alike) are nowhere near the size required to afford the cost of making these types of disclosure. That’s why the vast majority of firms are capitalized privately, by intimate investors who get to know them personally.

Let’s not kid ourselves into thinking that strategic equity-like investments should be made based on the snippets of data that an exhausted executive director posts on a web site.

If information is to be shared online, the better metaphor is Amazon.  The better information to share is more akin to marketing information than to investor information.  Keep it simple:  What am I buying with my donation?  What gets done as a result?  What does it cost?  And… for those very few that have gone through the arduous and expensive process of scientifically documenting impact, yes, what is the impact?

DonorsChoose is a great example of this.  Check it out:  a highly intimate and transparent giving experience that has no need to share information about the financial health of the DonorsChoose enterprise, management team, strategic plan or theory of change.

Simply “asking harder” for information does not address the issue.  The problem is not one of candor.  Rather, the data does not exist, and cannot be afforded by such small and stressed-out organizations.  Asking harder merely adds to the trauma.

If a prospective investor comes along, who is prepared to write a big equity-like check, then have a face-to-face meeting, so that real due diligence can take place.  In the meantime, I would love to see online marketplaces focused on products and services… like Amazon and DonorsChoose!

By Steve Goldberg

I’m struck by the inherent futility of fundraising. Like Sisyphus endlessly rolling that rock up the mountain, a fundraiser’s job is never done. Every day they face the same implicit question: “What have you done for us lately?” Although some organizations have supplementary funding sources, for most nonprofits most of the time, it comes down to fundraising.

For the more than 90% of nonprofits that raise less than $1 million each year, fundraising is essential just to maintain baseline operations. And no matter how great the need or effective the nonprofit, program growth isn’t possible without increased fundraising. As we think about moving the needle of social change, it seems short-sighted to expect fundraising heroics to bear most of the burden.

An insightful article in the MIT journal, Innovations, by Matthew Bishop and Michael Green, authors of Philanthrocapitalism, offers “a fundamental rethinking” about “how to finance the growth of a good idea into a world-changing social innovation.” In “The Capital Curve for a Better World,” Bishop and Green make a persuasive case that “the next frontier in raising the efficiency of social innovation has to be the capital markets for good,” and that “a concerted effort is now needed to design an effective and efficient capital curve for social innovation.”

The authors envision “a productivity miracle in the social/citizen sector,” that could enable effective nonprofits to become more than “islands of excellence,” and break through the limits of “successful, but not successful enough, organizations”:

The challenge is (1) “to figure out which forms of money—grants, debt, equity, government funds, for-profit funds, paying customer—are most effective at which stage along the journey from good idea to having massive social impact,” and then (2) “to … put in place [the systems] to ensure that the resources that exist are available to the most promising ventures at different critical junctures.”

This framework suggests an emerging discipline of “moving money” that holds out hope for reducing our over-reliance on fundraising. Fundraising relies on building relationships with prospective donors and telling engaging stories about the nonprofit’s work.  It represents the personal connection of philanthropy, one that’s inherently time-consuming and labor-intensive. Moving money is data-driven: it depends on creating new value from market intelligence.

Fundraising is useful for even small donations, but spending time and effort to move money around only makes sense for sizable, usually aggregated funding looking for investment opportunities that individual donors can’t find on their own. If nonprofit capital markets became more adept at moving money, it could reduce the need to repeatedly raise new money in small amounts.

Hewlett Foundation president Paul Brest advanced the idea in 2007 that “information about an organization’s performance can usefully guide investment decisions.” A 2008 Keystone Accountability study explored how online markets “can serve as not just a convenient way of donating money but also a means of encouraging effectiveness by directing money to the highest-achieving organizations.” But a 2009 Hewlett-funded analysis of 55 online platforms concludes that “the limited evaluative analysis that has been developed is not reaching, or failing to influence, a large proportion of donors.”

An ecosystem of money-movers is still evolving, comprising intermediaries (SeaChange Capital Partners, Global Philanthropy Network), analysts (New Philanthropy Capital, Root Cause), rating organizations (Charity Navigator, GreatNonprofits), sector leaders (Alliance for Effective Social Investing, Social Capital Markets), and advisors (Tactical Philanthropy), to name a few.

More than $300 billion in private philanthropy doesn’t raise itself every year, and fundraising doesn’t have unlimited capacity to increase the amount of money to fund nonprofits. As the social sector looks increasingly to “scaling what works,” the state-of-the-art of moving money must keep advancing, too.

• The final Social Innovation Fund guidelines recognize the limited availability of evidence in the social sector.
• The guidelines lower the minimum grant size to broaden the range of grantmakers who can apply.
• The Social Innovation Fund offers a chance for smart grantmakers to demonstrate effective philanthropy on a national stage and influence public perceptions about philanthropy.

Last month, the Social Innovation Fund released a draft of the guidelines they would be using to distribute grants and solicited public comments. They received over 200 comments and I hosted a number of those comments publicly here at Tactical Philanthropy.

To a large extent, the final guidelines have not changed dramatically. However, the Fund did make two key changes and attempted to clarify the level of evidence they expect from nonprofits receiving funds (the level of required evidence was at the heart of the comment I made on the draft guidelines).

This is what the Fund had to say about the level of evidence they expect:

While the final guidelines still express an preference for nonprofits that have strong evidence that their programs work, the summary of the guidelines says that the Fund expects grantmaking intermediaries that it funds to:

In addition to the shift in language around evidence, the Fund is making two changes based on public comment:

• A lowering of the minimum grant award to $1 million from $5 million in the draft NOFA.
• The elimination of an explicit preference for intermediaries that have already selected their subgrantees at the time of application.

The lowering of the minimum was the subject of a number of the comments hosted here on Tactical Philanthropy, notably those authored by Adin Miller and Eileen Ellsworth.

My reading of the new releases and the public comments made by the people running the fund is that they get the tension that exists between requiring evidence and funding innovation and that they appreciate the fact that very few nonprofits exist today that have a rigorous base of evidence that prove their effectiveness.

I think that the Fund is off to a great start. I applaud the vast majority of the choices made in designing the fund. I hope very much that grantmakers who pride themselves on supporting and scaling innovative nonprofits will apply to be a Fund intermediary. Not just because they could use the additional funds, not just because it will help clarify the link between private philanthropy and public sector funding, but because the Social Innovation Fund offers an opportunity to showcase an effective approach to philanthropy on a national stage.