Now, the Skoll Foundation is launching a Social Entrepreneur Search Widget:

The widget can be customized to include all or a selection of funders participating in the API. You can put the widget on your own website if you like by grabbing it here.

The main thing I like about the API and widget is that it surfaces a set of vetted social entrepreneurs. By creating a searchable set of social entrepreneurs that have gone through the due diligence process of well resourced funders, the API makes it easier for individual donors to piggyback on the research of others.

Let’s say that last year a donor read about the nonprofit OneWorld Health’s successful work with pharmaceutical giant Roche to develop a drug for a prevalent, but not profitable, disease. The story is compelling, but the donor wonders if the article is telling the whole story. A quick search of the Social Entrepreneurship API Widget would have revealed that the founder of OneWorld Health passed the due diligence of the Schwab Foundation for Social Entrepreneurs. The info from the Schwab Foundation even includes detailed information about The Innovation, The Strategy and The Entrepreneur (not all funders have added this info to the API). While this doesn’t guarantee a thing, it still puts the donor way ahead of the game in terms of evaluating whether OneWorld Health is worth supporting.

We live in a world with literally millions of nonprofits and many, many individuals working on social benefit projects that are not registered nonprofits. Shifting through these organizations is a daunting task for any donor. But luckily, there are thousands of foundations and other grantmaking entities with paid staff doing just this work. Unlike in for-profit markets where possession of important information helps secure profits, in philanthropy, sharing important information increases a grantmaker’s impact.

What’s interesting about the Social Entrepreneur API, as I’ve written before, is the way it allows for anyone to access a stream of vetted social entrepreneurs and mash the data up however they like. For instance, Tactical Philanthropy Advisors could build a web interface that displayed vetted grantmaking opportunities that took the API data and then limited the data to projects in need of at least $25,000 so that our high net worth clients would be delivered a pool of eligible, vetted social entrepreneurs that we could then help them look into more deeply.

Knowing that the Draper Richards Foundation or Skoll has funded someone does not automatically make them a good grantee. But it certainly helps to search for organizations within a universe of groups that have already been vetted by well resourced, smart funders.

How else might Tactical Philanthropy Advisors or other organizations use the Social Entrepreneur API?

1. Metrics used to evaluate nonprofit organizations or programs to determine if they should be supported.
2. Metrics used to evaluate the impact or performance of philanthropic investments.

I believe that for the most part, the first set of metrics should not and will not ever be standardized. Experience with for-profit evaluation shows that even with the evaluation advantage of money being both an input and an output, investors focus on different metrics for different companies. Even when analyzing the same company, different investors focus on different metrics.

There will never be a set of universal metrics that allow for good evaluation across nonprofit organizations.

However, performance metrics are different. With the simplifying situation of cash being both input and output, for-profit investing has completely standardized performance reporting. How good a for-profit investor will perform in the future can be debated. But historical performance is objective and factual.

I think philanthropic performance will likely converge on a standardized evaluation framework. I’m wondering if the new government backed Social Innovation Fund will be the trigger that sets this in motion.

According to the White House Blog, “The Fund will identify the most promising, results-oriented non-profit programs and expand their reach throughout the country.” However, according to the actual Edward M. Kennedy Serve America Act that created the fund, the Social Innovation Fund will:

Award competitive matching grants to social entrepreneur venture funds in order to provide community organizations with the resources to replicate or expand proven solutions to community challenges…

Now realize how different those two statements are. The first suggests the fund managers will identify high impact nonprofits. The second states the fund managers will identify high performing venture philanthropy funders. I believe that this second strategy is best and will be the one that wins out. See my remarks in the comments section of this post for more.

The Social Innovation Fund is currently only $50 million. But it will participate in creating a pipeline of organizations that may very well get much more government funding once they’ve grown. Note that the 2010 federal budget calls for $8.5 billion to support already scaled Nurse-Family Partnership, an organization President Obama cited when talking about the Social Innovation Fund.

In order for the government fund to identify great venture philanthropy funds, they will need to evaluate the historical performance of these funds. If it becomes clear that big, big money will become available to organizations that make it through the scaling process, venture philanthropy funds will begin to actively compete for the attention of the Social Innovation Fund.

If this happens, the Fund will be in a position to demand a standardized set of performance metrics from the venture philanthropy funds to whom they are providing matching grants.

These metrics might not be perfect, but they will be standardized. I would suggest that it is very much in the interest of the philanthropic field to define these metrics in advance and encourage the Social Innovation Fund to adopt them. If we don’t, we may very well be stuck with bad performance metrics being broadly adopted. They will prove difficult to change once they are in place.

So the task is before us. How should the Social Innovation Fund evaluate the historical performance of philanthropic funders?

Today, Social Actions, in partnership with The Skoll Foundation, PopTech, ideablob, and Civic Ventures, announced a new resource that will let people interested in social entrepreneurs “follow the smart money.” The resource is called the Social Entrepreneur API:

From the Social Actions press release:

The Social Entrepreneur API (Application Programming Interface) will be the first open database of information about social entrepreneurs who have won fellowships and awards from social enterprise funders.

The tool will allow philanthropists, investors, press, and fellow entrepreneurs to find social entrepreneurs based on keyword, location, cause area, population served, and a variety of other factors.

"The Social Entrepreneur API will provide an easier way for people to find, invest in, and support social entrepreneurs, as well as serve as a resource for social entrepreneurs to connect with each other and partner for greater impact," says Jill Finlayson, Marketing Manager for Social Edge.

Lucy Bernholz offered her take on Philanthropy 2173:

This makes it easier for funders to find entrepreneurs. For entrepreneurs to find other entrepreneurs. For aspiring entrepreneurs to find mentors. For networks to bridge networks. For potential partnerships to be formed or common problems to be worked on collectively. For researchers to look for patterns or entrepreneurs to look for gaps in service or systems thinkers to consider the kind of networks and infrastructure that supports (or doesn’t) these people.

It’s nothing short of putting philanthropic data in the cloud – which leaves it to all of us to figure out what cool things to do with it…

This also happens to be an excellent example of the Googlization of Philanthropy.

I’d love to see a similar database for foundation grantees (Grantfire has been working on this for sometime). One way to think about how this might look is by checking out Stockpickr.com. This site makes it easy for investors to search a database of professional investors’ stock picks (professional investors are required to disclose their investment positions once every quarter in the form 13F, much as foundations disclose grantees in their Form 990PF once a year).

Stockpickr.com lets you enter the name of a company you are interested in and pull up a list of the professional investors that currently hold the stock. It also displays a list of other companies that people own who own the stock you are interested in. This is similar to Amazon’s “people who like book X, also enjoy book Y”.

Facing more than a million nonprofits and a vast field of social entrepreneurs, we need smart ways to create filters so that the great opportunities do not get lost in the fire hose of information.

That’s why I was so amazed and interested to see our friend Kjerstin Erickson, the executive director of FORGE, on a bag of Doritos chips (a Pepsi product):

So here’s my question(s): Is Doritos using Kjerstin to sell chips? Is Kjerstin using Doritos to sell FORGE? Does it matter?

It seems to me that Doritos would never put someone on their bag of chips unless they thought doing so would sell more chips. I find it rather amazing (and wonderful) that Doritos marketing people (some of the top marketing people in the world) believe that associating themselves with the leader of a nonprofit startup can sell more chips.

I’m also impressed with Kjerstin’s savvy ability to leverage the power of Doritos marketing clout to “sell” her organization. As Nathaniel Whittemore points out today, the social sector has generally not been the best at branding:

Nathaniel writes:

A brand is about more than the logo. Brand is about how to distill complex concepts into associational chunks, and share with the world in the simplest terms the core of what we care about. Your organization’s brand is its DNA, a combination of description and inspiration that helps people identify your company or nonprofit as a fellow traveler…

The social sector has an incredible story to tell. In some way or form, every organization is imbued with a passion for a more equitable, just world. Every organization has programmed into its core the idea that the world can be a better place, and that problems created by people can also be fixed by people.

We live in a moment where people want that message. We want to believe in ourselves, and moreover, we want to believe in a more complex conception of ourselves. Big box brands and boutique brands aren’t going away, but in a world of such turmoil and instability, brands that make us feel anchored in values and connected to something bigger than ourselves are immensely important, and have the potential to keep the flame of entrepreneurship and justice alive in tough times.

Branding is about spreading an idea. It can be used to sell unhealthy snack food or it can be used to help African refugees. Quality products and services (both for-product and nonprofit) do not sell themselves. We need great products AND great stories is we want to have an impact.

So what’s philanthropy’s exit strategy?

One promising way to make the analogy work is to view government as philanthropy’s exit strategy. While the government might be wary to invest in a startup nonprofit with no proven results, they can much more confidently fund organizations that have grown along a path towards sustainable, evidence based effectiveness with the support of philanthropic funders. What’s interesting is that proponents of both liberal and conservative approaches to government’s social assistance responsibility can buy into this argument.

If you believe that the government has an obligation to provide extensive social benefit programs, than it is easy to see the attractiveness of the government locking in a pipeline of vetted social benefit organizations. But someone who believes the government should play a more limited role may find themselves attracted to the idea that private capital is funding the “venture” stage of social benefit experimentation and government funds are being deployed only to vetted, mature programs (and the programs are executed by “private” nonprofits rather than via government programs).

This of course already happens. The government is the major funder of nonprofit activity. But too often this funding comes as a result of effective advocacy from the recipients rather than via an intentional scaling process where early stage philanthropic investors view an eventual handoff to government funding as the exit strategy.

This brings me to an excellent new report from the Bridgespan Group (co-authored by Edna McConnell Clark Foundation head Nancy Roob) titled Scaling What Works: The implications for philanthropists, policymakers and nonprofit leaders.

The report begins:

Included in the $787 billion stimulus package and in the $3.5 trillion budget that Congress passed on April 2 are billions of dollars intended to fulfill President Obama’s commitment to advance government that “works” and “expand successful programs to scale.” The risk is that five years from now we look back and see that billions were spent without clear results. Consider the challenge: National, state and local governments not only have to identify promising programs and help them expand to scale – but they need to do it fast. Such urgency leaves little room, but lots of opportunities, for errors we can ill afford. To avoid these missteps, the public sector and the philanthropic and nonprofit sector must invent new ways of working together in close partnership.

The report examines EMCF’s work (along with other funders) to scale Nurse-Family Partnerships and the successful adoption of the model by the government:

The Obama administration can move forward with confidence because NFP’s leadership and its philanthropic funders have consistently been committed to proving the program works. Unfortunately, there are not nearly enough such evidence-focused investors. And, for the most part, neither government nor philanthropy is immune to favoritism in choosing the organizations and programs it funds. Both sectors, as well as American taxpayers, could benefit from a healthier respect for proven results.

What makes all of this so relevant right now is that this afternoon the Serve America Act will be signed. The Act includes the creation of a Social Innovation Fund that:

…awards competitive matching grants to social entrepreneur venture funds in order to provide community organizations with the resources to replicate or expand proven solutions to community challenges, including a new focus on leveraging public private partnerships in small communities and rural areas. (Examples of service organizations that were launched by social entrepreneurs include Teach for America, City Year, Citizen Schools, Jump Start, Working Today, an organization that provides affordable, portable health benefits to 100,000 Americans, and the SEED school, the nation’s first public urban boarding school.)

This fund is basically a government venture philanthropy fund that will co-fund privately vetted and funded deals (rather than picking the organizations themselves). This vehicle can help the government and philanthropy work together to create a pipeline of vetted, evidence based social benefit programs. The end result is better, more cost effective social benefit programs that are designed using private capital and only funded with tax payer dollars once the programs are mature and proven.

Nurse-Family Partnership is the classic case study of a nonprofit going to scale (seriously, you can read the Bridgespan case study of NFP here). Beginning in 1996, NFP took their evidence based program and began to replicate it around the country. They now offer services in 28 states and have over 16,000 families enrolled in their program.

Homeboy Industries is the largest gang intervention program in the country offering many services around their core mission to place at-risk and formerly gang-involved youth in productive jobs. But while they are the largest program in the country, they offer services exclusively in Los Angeles. During the session, founder and executive director Father Greg Boyle explained that they have intentionally resisted the many offers to replicate their program in other cities. However they do act as a model for other programs and help other programs get started. Since “scale” is the constant buzzword of social entrepreneurship in particular and philanthropy in general, it is interesting to hear the counter argument.

One of the reasons scale is pursued in the for-profit space is that many fixed costs diminish as an organization grows. Therefore, the bigger an organization gets, the more profitable it can be. But one of the implications of the fact that philanthropic knowledge is valued differently than for-profit knowledge, is that Father Boyle is “winning” when he helps other groups copy his program. The social impact that Homeboy Industries achieves accrues to the public in the same way the impact that other programs create does. This means that unlike in the for-profit space, where Father Boyle would have to own the other programs to benefit from their success, in the social sector we all win when anyone wins.

So does scale make sense?

In many cases I think it does. But given the assumption that many people make that scale is the obvious goal, I think it is important that we examine when going to scale makes sense and when helping other people steal your ideas is a better strategy.

Luckily this is an idea that is gaining traction. Nathaniel Whittemore wrote yesterday about Scale vs. Diffusion in a report from his Global Engagement Summit yesterday (Did I steal his idea or have I been thinking about this post since the CEP conference? Does it matter?). And the March edition of Alliance Magazine had an article comparing “replication” vs. “propagation”. Alliance Magazine has made access to the article free for Tactical Philanthropy Readers. Check it out here.

But thanks to Nathaniel Whittemore from the Social Entrepreneurship blog at Change.org, we all get to stand around in the hallways at Oxford and listen in on some great conversations. Nathaniel has posted a series of short videos that capture him talking with some of the leaders of the movement who were walking about the conference.

Below you’ll find Paul Carttar, a co-founder of Bridgespan. Nathaniel also spoke with (click on the name to see the video):

• Victoria Hall of OneWorld Health
• Shari Berenbach of the Calvert Social Investment Foundation
• Elmira Bayrasli of Endeavor
• Steve Hardgrave of Gray Ghost Ventures
• Dev Appanah & Elnor Rozenrot of LGT Venture Philanthropy & Innosight Ventures
• Daniel Lubetzky of PeaceWorks

SWF09 Interviews: Paul Carttar from Nathaniel Whittemore on Vimeo.

I don’t pretend to think New Profit has the answer in the important debate about what causes systemic change, but we’re honored to weigh in on a topic we’ve spent a lot of time thinking about. Thanks, Sean, for provoking and facilitating this discussion.

New Profit believes that many solutions to our country’s most entrenched social problems already exist. But many of the social entrepreneurs who have created these innovative solutions lack access to the financial and human resources to grow their enterprises, as well as the connections to policymakers at the city, state, and federal levels that could help them scale their solutions.

What’s the result of this situation? The nonprofit sector today largely consists of “mom and pop shops”—the vast majority (91%) operates with an annual budget under $1 million. And the social problems we face persist.

We see our role as a funder as identifying the best solutions to social problems, then providing these solutions with the financial and strategic support needed to grow their social impact. At New Profit we’ve decided not to become subject matter experts. We don’t subscribe to any one point of view on education reform, healthcare efficiencies, or workforce development strategies. Instead, we believe entrepreneurs hold the insights and are best suited to design and grow their innovations. Like venture capitalists, we look for leaders and innovations with the potential to create fundamental, widespread change. We then provide financial capital (multi-million dollar growth capital grants over four to six years), access to networks (other funding sources, experts in content areas, policymakers), and necessary strategic assistance (management consulting, portfolio managers) to help each entrepreneur grow their solution to new communities and to drive their own strategy for scale through policy, creating markets, or another widespread change strategy.

So where does systemic change come in? We’ve realized that scaling great organizations alone won’t be enough to solve the persistent social problems we all face today. To realize transformative change we’re going to need to improve the environment in which all nonprofits operate. New Profit believes this means building effective social capital markets, and, connecting policymakers at the city, state, and federal levels with solutions to social problems, as well as a range of other strategies. For these reasons, in addition to working with a portfolio of innovative organizations, we’re also working with a coalition (see America Forward), and a broader network of colleagues, to inform policy, improve capital markets for social innovations, and advance a national dialogue about how we can support and grow what works.

By George Overholser and Sean Stannard-Stockton

It is time for the Financial Accounting Standards Board (FASB) to incorporate the concept of “philanthropic equity” into its standards for nonprofit accounting.  

Without equity to shield them, America’s nonprofits are systematically undercapitalized. Since 1970, only 144 of them have grown to surpass $50 million in annual revenues. During the same time period, 46,136 for-profits have broken through the $50 million mark. Even small nonprofits, the backbone of our social purpose sector, are plagued by a chronic hand-to-mouth existence that can only be overcome if equity can find its way to the balance sheet. Achieving scale, gaining the necessary size to tackle systematic social problems, are buzzwords of the social sector. But until nonprofits and philanthropists understand the role of equity in the building of world class organizations, true scale will be a farfetched goal for most nonprofits.

Yet the financial concept of equity is wholly absent from nonprofit accounting, as is the firm-nurturing role of equity stakeholder. We believe that this absence is a major reason why so few high-performing nonprofit firms are able to achieve national prominence and impact, and why so many smaller nonprofits fall on hard times from which they never emerge.

President Barack Obama has called for the creation of a “Social Investment Fund Network that invests in ideas that work, tests their impact, and expands the most successful programs.” The idea, first suggested by the nonpartisan social entrepreneurship advocacy group America Forward, has taken form within the recently proposed Serve America Act, which is sponsored by both John McCain and Barack Obama. An FASB-backed nonprofit equity accounting treatment would go a long way towards helping the Social Investment Fund Network identify scalable social enterprises as well as remain accountable to taxpayers for investment results.

Recognizing the distinction between revenue and equity is critical to building great organizations. Revenue is cash flow delivered to an organization in exchange for execution: delivering goods and services. Equity is cash flow delivered to an organization for the purpose of building the organization. Without the ability to account for philanthropic equity, it is simply not possible to distinguish between donations that keep a nonprofit running and those that are intended to build the organization.

For-profit investors recognize the critical role of equity and judge the performance of firms via measures such as “return on equity” (ROE). Warren Buffett is widely known to emphasize the importance of investing exclusively in firms that have a long history of achieving high levels of ROE. A philanthropic equity treatment would provide social impact metrics analogous to ROE – not just what happened with this year’s budget, but what is accomplished throughout the life-cycle of the nonprofit firm. Without the life-cycle perspective provided by an equity approach, the concept of enterprise-building investments rapidly becomes nonsensical.

A new equity-like methodology, called the Sustainable Enhancement Grant (or SEGUE), has already been deployed successfully among several high performing nonprofits to help bring them the accounting transparency they need to attract equity-like philanthropic donations. It has been well vetted by leading law firms and accounting firms. Now it is time to build SEGUE concepts into FASB guidelines.

Witness VolunteerMatch, a high-growth, high-performing nonprofit that is not yet self-sustaining. Last year, VolunteerMatch facilitated 16.2 million hours of volunteer work. At a $19.50 per hour value of labor, this represents $315 million of social benefit per year that likely would not have taken place, were it not for the existence of VolunteerMatch. They did this on an annual operating budget of just $3.1 million.

VolunteerMatch obtains revenue from three ongoing sources:  fees from corporations that use its services to manage their own volunteering programs; fees from nonprofits that pay for premium recruiting; and contributions made by visitors to VolunteerMatch.org. At current scale, these three sources of revenue fall short of covering VolunteerMatch’s annual operating costs.

VolunteerMatch’s executives believe that if they can raise $10 million in up-front “philanthropic equity,” they will be able to grow their organization three-fold over the next four years, to a level where their ongoing sources of revenue begin to generate a surplus.

Similar to a venture capital-backed for-profit, VolunteerMatch would “burn through” $10 million of equity growth capital while erecting a customer-supported business. With equity capital in hand, they would not be forced to begin each year anew, begging their supporters for major donations. Instead, their ability to produce social impact would be in their own hands and their equity investors would see the social return on their investment compound year after year. An equity accounting methodology highlights not only the opportunity for immediate impact at VolunteerMatch, but also provides a framework for donors to track the organization’s progress towards their sustainable growth goals.

If we are to build a high-functioning nonprofit economy capable of achieving significant impact on a large scale we must change nonprofit accounting to make the results (both positive and negative) of philanthropic equity investments apparent to everyone.

Once we have the needed financial tools, the next step will be the use of syndicated capital campaigns similar to those seen in the for-profit private equity field. This sort of equity-like syndicated campaign is already being created by organizations such as SeaChange Capital Partners and the Edna McConnell Clark Foundation. But it will require an official change in nonprofit accounting for this concept to really take off.

There is too much at stake for donors to continue giving more than $300 billion a year without a better understanding of which nonprofits are using their money to build sustainable organizations and which are not.

The need for philanthropic equity accounting has never been so urgent. Regardless of whether you support the idea of a Social Investment Fund Network, it is critical that taxpayer-funded investments be made within a rigorous and accountable framework. With the official recognition of philanthropic equity, we will establish a framework within which a new generation of high-performing, well-capitalized nonprofit institutions can thrive.

George Overholser is founder and managing director of Nonprofit Finance Fund Capital Partners. Sean Stannard-Stockton is a principal at Ensemble Capital Management and the author of the blog Tactical Philanthropy.

• Paul Brest, president of the Hewlett Foundation
• Matthew Bishop, US business editor of The Economist magazine who coined the word “philanthrocapitalism”
• Jed Emerson, one of the founders of the movement towards understanding “blended value” or the fact that both nonprofits and for-profits create both social and financial value
• Jim Fruchterman, CEO of Benetech
• Jacqueline Novogratz, founder and CEO of Acumen Fund

That’s only a handful of the incredible group of people on the Council. Now the World Economic Forum was founded by Klaus Schwab who also founded the Schwab Foundation for Social Entrepreneurship. There’s no doubt that the world view of the World Economic Forum is centered around the idea that business and business thinking is a force for good. I’m not surprised to see that Michael Edwards, formerly of the Ford Foundation and author of Just Another Emperor: The Myths and Realities of Philanthrocapitalism, is not on the council.

The first meeting of the Council will be at a conference being held in Dubai (see some of the unbelievable pictures of Dubai here. 25% of the world’s construction cranes are hard at work building a shocking array of projects). The conference proceedings are strictly off the record, but I’ll certainly be blogging about my general reactions and my trip to the Persian Gulf.

I believe that the role of business thinking in philanthropy, the concept of Philanthrocapitalism, and the future course of social entrepreneurship are all topics still very much up for debate. More than anything, I think the topics are cursed by a rather limited agreed on set of definitions and the fact that people on each side of these issues seem to inherantly distrust each other.

I’ve never sought to be a spokesperson for “business thinking” in philanthropy. Personally I believe that like many issues in life, the issues up for debate here are not black and white and we must seek to identify the elements of value in various world views.

From today’s Wall Street Jounrnal:

An unanswered question in the takeover of Fannie Mae and Freddie Mac is what happens to the social goals mandated for the agencies by Congress — which include boosting homeownership and funding apartment construction for low- and moderate-income families…

…Regulators say efforts to meet the social goals will continue as Fannie and Freddie operate under government conservatorship…

But the details of how these goals will be met and how Fannie and Freddie will balance their social goals with the need to shore up their finances remain to be worked out…

…The future of Fannie and Freddie’s social mission is at the heart of a debate brewing in Congress over the fate of the two companies. Democrats invoke the goals in defending the companies against critics.

But some Republicans say the two companies should be privatized and their social mandates ended. “There is no validity in taking a for-profit private company and forcing a nonprofit social mission on it,” says Texas Rep. Jeb Hensarling…

…The companies have a mixed record when it comes to meeting social goals through residential mortgage business. Fannie and Freddie helped boost homeownership by moving away from “one-size fits all” underwriting. For instance, they began allowing first-time home buyers to make down payments of as little as 3% and borrowers to count court-ordered child support payments as income, notes Michael Shea, executive director of Acorn Housing Inc., a nonprofit that focuses on homeownership.

But Mr. Shea and others say the companies have sometimes let their drive for profit get in the way of responsible lending. As they lost market share to subprime lenders and others making risky loans, Fannie and Freddie responded by increasing their exposure to riskier mortgages, both through their traditional guarantee business and the purchase of residential mortgage-backed securities backed by subprime mortgages and Alt-A loans, a category that includes mortgages made to borrowers who don’t fully document their income and assets. Some of the loans underlying the bonds counted toward the companies’ housing goals. Such investments have played a key role in the companies’ financial troubles.

It seems that at the end of the day, these for-profit companies put their profit motive ahead of their social mission. Is it reasonable to expect anything else from a for-profit company? I’m a big believer in aligning incentives. The movement to create B Corporations is a good step to creating for-profit companies with social missions in a way that better aligns incentives. But in the meantime, I think the failure of Fannie Mae is exhibit #1 for anti-philanthrocapitalists. However, it is an interesting footnote that much of the criticism of philanthrocapitalism come from people whose political beliefs have in the past aligned them in support of Fannie Mae (whose political support has generally come from political liberals). Personally I think it is important that philanthropy recognize philanthropic tools (such as for-profit mission driven enterprises) as simply tools and not something that we come to view as integral to our philanthropic philosophy.

(Nothing in this post should be considered investment advice. At the time of publication my firm, Ensemble Capital Management, held no positions in Fannie Mae or Freddie Mac.)

The Forum was started in 2001 with a recession looming as a way to engage donors on international issues that are often abstract. In a recession, donors often pull back from causes that do not offer the immediacy of local issues. What I find interesting about the Forum is that the stated goal is to get the attendees to work together. About half have been giving for 7 years or less, while the other half are mostly multi-generational donors.

To measure the impact of the conference, Forum CEO Jane Wales says that their greatest metric is tracking how influential the attendees become in each others’ future giving. 83% of attendees from last year’s Forum say that an attendee they met was instrumental in a giving decision they made after the conference.

There’s a lot that I believe is brand new in today’s philanthropy, but I agree 100% with Amanda Moniz’s statement from yesterday:

In order to grapple honestly with the strengths and weaknesses of beneficence, it is important to recognise that new and better practices are often old methods that have been revived…

I just happen to think that concept is being applied incorrectly to the debate we’ve been having. A famous phrase of wisdom in financial markets is the often ignored warning to never believe that “Its different this time”. I’m glad to see that at the Forum we have a venue for new philanthropists to learn from multi-generational donors and vice versa.

You have to subscribe to the magazine to read most of the articles. But the SSIR is currently offering their five most read articles of 2007 for free:

Creating High-Impact Nonprofits

Conventional wisdom says that scaling social innovation starts with strengthening internal management capabilities. This study of 12 high-impact nonprofits, however, shows that real social change happens when organizations go outside their own walls and find creative ways to enlist the help of others.

Microfinance Misses Its Mark

Despite the hoopla over microfinance, it doesn’t cure poverty. But stable jobs do. If societies are serious about helping the poorest of the poor, they should stop investing in microfinance and start supporting large, labor-intensive industries. At the same time, governments must hold up their end of the deal, for market-based solutions will never be enough.

How Nonprofits Get Really Big

Since 1970, more than 200,000 nonprofits have opened in the U.S., but only 144 of them have reached $50 million in annual revenue. Most of the members of this elite group got big by doing two things. They raised the bulk of their money from a single type of funder such as corporations or government—and not, as conventional wisdom would recommend, by going after diverse sources of funding. Just as importantly, these nonprofits created professional organizations that were tailored to the needs of their primary funding sources.

Social Entrepreneurship: The Case for Definition

Social entrepreneurship is attracting growing amounts of talent, money, and attention. But along with its increasing popularity has come less certainty about what exactly a social entrepreneur is and does. As a result, all sorts of activities are now being called social entrepreneurship. Some say that a more inclusive term is all for the good, but the authors argue that it’s time for a more rigorous definition.

A New Era for Business

More and more business leaders recognize that their company’s future is increasingly intertwined with the needs and demands of society. What many executives don’t understand is how best to manage that changing relationship. In this article, McKinsey & Company consultants provide a model for incorporating sociopolitical issues into the strategic decision-making process.

Today’s podcast is with Heather McLeod Grant and Leslie Crutchfield, the authors of the new book Forces for Good: The Six Practices of High-Impact Nonprofits. Forces for Good examines the characteristics of nonprofits that are achieving high impact. Heather’s been an advisor to the Center for Social Innovation at Stanford, as well as to many nonprofits. She holds an MBA and worked at McKinsey, consulting with for-profit companies. Leslie is a managing director at Ashoka, a research grantee at the Aspen Institute, and a philanthropic advisor to foundations and high net worth individuals.

During the podcast Heather and Leslie discuss the importance of nonprofit groups engaging in political advocacy, the difficult in measuring impact (and the flaws in Charity Navigator’s system of measuring efficiency), the need for nonprofits to engage their volunteers, and the ways in which nonprofits can learn from Web 2.0 companies.

If you post comments and questions in the Comments section, Heather and Leslie will respond.

You can read some background about the book and both authors here.

• Launch Podcast

Click on the link below to read the transcript…

Sean Stannard-Stockton:

Hello, and welcome to the Tactical Philanthropy podcast. I’m Sean Stannard-Stockton, author of the Tactical Philanthropy Blog and Principal and Director of Tactical Philanthropy at Ensemble Capital. My guests today are Heather McLeod Grant and Leslie Crutchfield. Heather and Leslie are co-authors of the newly released book, “Forces for Good. The Six Practices of High-Impact Nonprofits.”

Heather’s been an advisor to the Center for Social Innovation, Stanford, as well as to many nonprofits. She holds an MBA and worked at McKinsey, Consulting for for-profit companies. Leslie is a managing director at Ashoka, a research grantee at the Aspen Institute, and a philanthropic advisor to foundations and high net worth individuals. Thank you both for taking the time to speak with us.

Heather: Thank you.

Leslie: Thank you Sean.

Sean: Heather, why don’t we start with you. Why don’t you tell us a little bit about the book? I’d especially like to hear your thoughts on why measuring nonprofit impact is still a new field. The nonprofit sector’s been around for a long time. Why is it that we are still trying to figure out what makes a nonprofit actually have an impact?

Heather: Sure. Well the book is really about the six practices that some of the best nonprofits in America have used to scale their impact. So when we set out to write it, we wanted to identify the highest performing social sector organizations that have gotten to scale in really the last 30 to 35 years. We deliberately went through a rigorous methodology and selected 12 groups that we studied for several years. And then, from our research, we distilled these six practices.

So the six practices are the things that we’ve identified that have helped these organizations increase their impact. We really think that they are practices that the rest of the sector can learn from. In particular, those social entrepreneurs, like the Ashoka Fellows, and other nonprofit leaders who want to understand how they can be much more effective in their work and really, again, increase their impact.

I think one of the big challenges in the field today, as you’ve pointed out and as you write about a lot in your blog, is this lack of measurement. We faced this in our research. When we first set out to identify the 12 organizations, we immediately came up against the problem of a sector that lacks a common metric, as the for-profit sector does. So Leslie and I joke that Jim Collins had it easy, because when he wrote “Good to Great,” he could go out and look at stock market performance as the agreed upon metric of success or effectiveness, if you will.

Well, in the social sector, we don’t have that single metric, so we ended up using a very different approach in our research to identify the high impact organizations, more of a crowdsourcing approach involving a peer survey and lots of in-depth expert interviews. What we realized is that there are a couple of challenges around measurement. One is this question of kind of apples to apples measures. So, when you’re looking at an organization in the environmental field, how they measure their impact or their success is going to be very different from how an organization in, say, the education field measures its success, or in the arts field, or in housing and community development. So, there’s this problem of relativism between fields in the sector.

Secondly, as Jim Collins points out, in the business sector money is both an input and an output. So — he writes about this in “Good to Great and the Social Sectors”, and we believe it’s true — in nonprofits, money is only and input, not an output. So in business, you put capital into the company and then you measure your return on investment by profit, or total return to shareholders. So money is both the input and the output. In nonprofits, you use the money to fund the organization’s work, but that’s not how you measure your impact, because obviously, these organizations are filling in for market gaps. There’s this challenge again around money being only an input in the nonprofit sector.

That’s why we think that groups like GuideStar and Charity Navigator — many of the metrics that we look to right now are well intentioned but misguided, because they are only looking at things like budget size or overhead ratios as the measure of success. Right? They’re looking at how much money you spend on your program versus your administration. What we’re saying is that doesn’t tell us anything useful about their effectiveness. It only tells us about their efficiency. Efficiency is not necessarily correlated with impact, as we found in our research.

So we write about this a lot more in the book, about this challenge of measurement, and about needing to shift the debate in the sector to really focusing on outcomes or impact, rather than just looking at efficiency.

I guess the last thing I would say is we realize this is a challenge. It’s particularly difficult because often times, as we discovered in our research, social change takes a long time to see or to appear. Sometimes you need to be looking at the success of an organization over a 10 to 15 year time period. It’s not as short a time span as quarterly returns or the time scale that the financial markets use to track.

Additionally, there’s an issue of causality, because many of the groups we studied are real leaders in their fields. They build coalitions. They advocate. They change business behaviors. It’s not necessarily — it’s sometimes difficult to separate out who in this field has been the leader. Nevertheless, we believe, despite all these challenges, we really do need to move in the direction of looking at impact as the right measurement, rather than efficiency.

Sean: I think, as you both know, I agree with you 100 percent on this issue of examining inputs as opposed to outputs. I wrote about that in a Financial Times column, in which I cited your article, and talked about Charity Navigator. One way to think about what they’re doing, and this is what you already touched on, is this idea that because input, the costs, are easier to measure, that therefore, that is where most of the focus has been on. And yet, I think that we all agree, that it’s really the output, the impact, that makes — that’s the whole reason a donor’s giving to an organization in the first place.

When you think about individual donors, or readers of the Tactical Philanthropy blog, who maybe can’t do the kind of survey methodology that you did in trying to identify who — where should I be giving? Who are the high impact nonprofits? How can an individual donor even begin to scratch the surface of this issue? Leslie, why don’t you take this question and just tell us, how can we — other than just simply looking at the 990 or the cost inputs — what can a donor do to funnel their money in the right direction?

Leslie: Sure. Well, we believe that donors, whether they’re billionaires giving away millions every year or just everyday citizens who are supporting charitable organizations through their churches, their synagogues, or their local community groups, can actually use the six practices that we identified in the book to guide their gift-making. We believe these six practices really are useful as a proxy for judging which organizations are having, or really have the potential to create very significant results.

So, for instance, one of the practices that we write about in the book in the first chapter, called Advocate and Serve. One of the most interesting things that we found among the nonprofits that we’ve studied is that they all eventually engaged in both providing direct services — giving food to the hungry, building houses for the poor — as well as advocating for policy and lobbying for larger awareness about their issues. So they sort of refused to choose between just being an advocacy group or just being a direct services group.

For instance, in the field of women’s issues, you see groups like the Junior League, which engage legions of volunteers to serve in battered women’s shelters and lead clothing drives, and on the other end of the spectrum, you have NOW — National Organization for Women — which fights for things like abortion rights and equal pay for women. They’re both trying to advance the cause of women, but they go about it in very different ways. The best nonprofits end up doing both. Donors and volunteers who give their time — which is in many ways as valuable as money — to nonprofits should look to see the ones that are leveraging their services and engaging in policy.

Frankly, a lot of people shy away from this, even in this country where we have an open democracy. It’s perfectly legal for nonprofits to lobby and advocate for policy reform. We encourage donors to look for it even if it could be confusing from the outside.

Another thing that readers of the “Financial Times” column can consider is, when they’re thinking about giving their time as volunteers — President Clinton writes about this in his recent book that just launched, “Giving.” We all have so many ways that we can give to charitable organizations. One in two Americans volunteer — American adults volunteer in this country. We found some really great success practices that sort of distinguish some of the great nonprofits from others. It really has to do with how they engage these volunteers.

They don’t just treat volunteers as a source of free labor or a check; they really engage them in the mission of their organizations. Probably lots of your readers, people in this country, have participated in a Habitat for Humanity house build or a similar type of event. Great nonprofits really try and find ways to create meaningful experiences. If the nonprofits that you work with or care about aren’t doing that, you could go back to them and say, “Let’s find ways so that I can have a more meaningful engagement.”

Sean: You know, the last guest on this podcast was Robert Egger, who is kind of pushing the nonprofit primary project.

Leslie: Sure, we know Robert. In fact, he was a field expert for our panel of experts in the hunger area.

Sean. Sure, and just looking at the various ways that — the various approaches that the nonprofits you identified work with, DC Central Kitchen seems to line up with many of those. I was interested by this idea that you have that the best nonprofits are going to engage in policy advocacy. That’s something that Robert is pushing for on a field-wide basis. Yet, there’s a lot of resistance to it, that, “Well, we all don’t have things in common. And we really shouldn’t be sticking our nose into these political issues.” Why is it that you think that nonprofits who do this are more effective? Shouldn’t they just be focused on their specific issue and really on the nuts and bolts of getting things done?

Leslie: Well, it’s interesting. What you’re pointing out, with the challenge with DC Central Kitchen and it is endemic to the entire sector. There’s a lot of confusion, and frankly, uncertainty and fear around lobbying and policy and advocacy. It — you know, there’s a lot of stereotypes that go along with it. You have this image of fat cat lobbyists on K Street doing big lunches with politicians. It has sort of a sleazy aura to it.

And yet, whether you’re a corporation or a nonprofit, if you believe in the causes you’re involved with than you sort of have — we believe you have a responsibility to go and engage in the debate. We have a free, an open country and many of the nonprofits that we studied really overcame the same fears and uncertainties that lots of charitable organizations have today.

Just one example, America’s Second Harvest, which is the nation’s network of food banks, so DC Central Kitchen is a member of America’s Second Harvest. That organization and all their member food banks, for decades, really didn’t engage officially in policy advocacy at all. And then what happened was, in the 1990s under welfare reform under President Clinton, you saw a movement to eliminate many of the programs that really sustain hungry people in this country, food stamps, EITC, and other programs.

So America’s Second Harvest had this huge network of food banks and all the volunteers and supporters that fund and work with the organization. They said, “We have to get involved with this. Otherwise, we’re going to see food stamps zeroed out. We’ll see the EITC cut.” That’s the Earned Income Tax Credit program cut. ‘We’re not going to be able to do our job of feeding hungry people.” Instead, they fought to just not only keep those programs but expand them. Since America’s Second Harvest — and many of the other groups involved with fighting against hunger, like FRAC and like The Center on Budget and Policy Priorities — they worked together in coalition to protect and actually expand these programs so that more hungry people could be served. Now, across the America’s Second Harvest network, it’s taken for granted that they’re going to be involved in policy advocacy, because on the ground, they saw more food, more agricultural products — pasta, beans, rice — coming through their doors so they could do their jobs better.

We write a little bit in the book about how some of these organizations were able to change their mindset. But we will say, it’s a common issue. We believe it can be overcome even if an organization didn’t start out thinking that way.

Sean: We have time for one last question, and Heather, I’d like to direct it to you, with your background in consulting to both nonprofits and for profits. One of the things that I run across, and myself coming from the business side of investment management, is a that a lot of times people who have their entire careers, or most of their careers, in the nonprofit sector have, what I think is a misperception, that for-profit businesses are run through very extensive data analysis or financial management. But in fact, when you think about really outstanding companies like Apple or Starbucks or Google, I’d argue that their success is really predicated on their focus on mission, not so much through number crunching or bottom line analysis. When you think about the characteristics of success that you identify in your book, how and why are they different from just the best run for-profit companies?

Heather: I think that’s a really interesting question and I think, in particular in my work, I’m very interested in this question about what we can learn from the other sectors. I think we’re seeing those lines begin to blur and break down as more nonprofits start for-profit subsidiaries or social enterprises, as more for-profits become concerned about social responsibility. Certainly, this is the focus of the Center for Social Innovation at Stanford, where I work.

What’s interesting to me, when we set out to look at these organizations, we had sort of — we had our — Leslie and I joke, we had our MBA slash consultant hats on. We went in looking for the classic management silos, if you will, around marketing and financial efficiency and brand, and in the nonprofit sector, things like building your board and so on. These kinds of myths of for-profit management applied to the nonprofit sector, if you will, don’t always hold up. So if you just took the kind of business school textbooks around what makes for a well-managed company, and applied it to nonprofits, you’d be missing half the picture.

What we found is actually something quite different and quite interesting. We actually think that the nonprofits we studied in many ways have more in common with Web 2.0 businesses, for example, then they do with the IBMs or Microsofts. For one thing, these organizations are all incredibly mission-led, as you’ve already pointed out, that the mission is front and central. They are about a cause. They are also about building movements, or networks. So they build social networks, as we explore in the “Inspiring Evangelist” chapter, where people get really involved and care about the cause of this organization so that they become advocates for the cause. So these nonprofits are really empowering people to take action on their own.

Additionally, they build nonprofit networks. They work through a kind of network structure rather than a kind of more traditional corporate command and control structure.

In addition to working with businesses, I think another great example of these nonprofit organizations actually engage the corporate sector in helping change their behaviors and making markets work more efficiently. What we found was quite surprising, that these nonprofits are actually very leading edge, that they are showing us new forms of managing, engaging people, and having impact that are not really textbook examples we’ve inherited from the corporate sector.

In many ways, I think it would be interesting to have a Google or an Apple, as you suggested, sit down and talk to some of these nonprofits, or even a FaceBook or Wikipedia, and explore some of the commonalities there. I think these nonprofits really are showing us a new way, not just for the private sector, and how the private sector can be more socially responsible, but they’re also showing us a new way and coming up with innovative examples for government. We think policy leaders in government need to be looking to these most innovative nonprofits for new solutions to problems that have plagued us for decades.

Leslie: You mentioned companies like Apples and Starbucks and Googles. All those companies are led by quintessential entrepreneurs, right? Steve Jobs, Howard Schultz, Larry Paige and Sergey Brin. Entrepreneurs, in the end, really aren’t driven by profit either. The true entrepreneurs want to build things. They want to see great companies grow. Steve Case, the founder of America Online, who wrote the forward to our book, they didn’t get in it necessarily for the profit. They got in it because they love the technology. They’re revolutionaries in their fields.

It’s the same thing with nonprofit leaders. All or the leaders that we write about in “Forces for Good,” they’re social entrepreneurs, whether they would call themselves that or not. They’re entrepreneurs, but they just put themselves in the charitable sector. They have social purpose organizations. You’re point about those companies being mission driven. Our nonprofits are obviously mission driven.

We actually think they take it a step further. In “Good to Great” Jim Collins writes about the level five leader, right? Great corporate leaders put the interest of their company even above their own individual ego needs. Well, in the nonprofit sector, we see it kind of layer out — we joke it’s the level six leader. Great nonprofit leaders not only put the interest of their company or organization ahead of their own ego, they put the entire cause ahead of their individual organization.

Sean: Right.

Leslie: So, for instance, with the Heritage Foundation, it wasn’t about necessarily getting Heritage’s name out there, it was about building this conservative movement, which led to the Republican takeover in Congress in the ‘90s, and a number of other wins for the Right.

Sean: That certainly makes a lot of sense. And so the entrepreneurialism may be what makes mission focus.

This has been the Tactical Philanthropy podcast. You can visit us at tacticalphilanthropy.com. You can learn more about Heather and Leslie, and buy a copy of their book at forcesforgood.net. Thanks so much for listening.