Yesterday, President Obama officially launched the Office of Social Innovation and Civic Participation and the Innovation Fund (whether it is now call the Social Innovation Fund or just the Innovation Fund is unclear). He also named Melody Barnes to run the Innovation Fund. You can see video of the event here.
Interestingly, President Obama described how the fund would work in a way that I think would be a huge mistake and is not in line with indications we’ve had to date of the structure.
“We’re going to use this fund to find the most promising non-profits in America. We’ll examine their data and rigorously evaluate their outcomes. We’ll invest in those with the best results that are most likely to provide a good return on our taxpayer dollars. And we’ll require that they get matching investments from the private sector — from businesses and foundations and philanthropists — to make those taxpayer dollars go even further.”
The implication in this statement is that the Innovation Fund, with just $50 million, is going to set out on their own to find promising nonprofits, evaluate them and then make restricted grants to these nonprofits that will only be given if the nonprofits can find matching grants from the private sector. In other words the government run fund would identify the innovative organizations and then demand that private philanthropic dollars are matched against the Innovation Fund decisions.
This would be crazy.
If this is what the Innovation Fund is, then it is just a small foundation that isn’t really doing anything special. But I think President Obama doesn’t really fully understand the Innovation Fund.
Let’s instead look at what America Forward said about the announcement. America Forward is important because they are the group that made the policy recommendations that led to the Serve America Act, The Office of Social Innovation and the Innovation Fund. They have been the intellectual force behind these policy decisions.
Note how America Forward presents the structure of the Innovation Fund differently than President Obama:
“Administered by the Corporation for National and Community Service, the Fund will provide grants to existing grantmaking institutions that will in turn invest in growing innovative, results-driven nonprofits. Both grantmaking institutions and the nonprofit grantees will match the Fund’s investment, generally resulting in a 2:1 match.”
Whew! That’s much better. Under this model, the Innovation Fund is simply identifying smart private sector funders, making grants to the funders, who would then pick which nonprofits were innovative, effective and ready to scale. The government gets to put money to work via smart funders focused on effective solutions. They also get to watch the development of the grantees as they scale and will be in a great position to make significant funding decisions once some of the effective organizations have gone national. The case study for this is the successful scaling of Nurse Family Partnerships (by private sector funders) and the $8.5 billion that the 2010 federal budget calls for to fund these types of activities.
I think this is all really exciting. I think that the Innovation Fund is on the right track. It is great to see Melody Barnes assigned to run it. I believe that structurally the Innovation Fund will represent something new and serve as a conduit that helps start to streamline the capitalization of of effective organizations as they grow. I highlight President Obama’s (hopefully) incorrect description of the Fund to highlight 1) that the structure of the Fund is what makes it important, not the $50 million which frankly is not much money to start something like this and 2) to point out that as much as there are a lot of forces moving in the right direction to create more effective social capital markets, we’re still in the confusing market creation period. We’re going to get some things wrong. I hope we get the Innovation Fund right.
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Very confusing. I still have lots of questions, least of which is how Melody Barnes and her team will define high-performing recipients (grantees OR grantmakers). During this “market creation” period, it will be interesting to see what relative “outsiders” deem to be critical characteristics in the social capitalism field. And what success is supposed to look like.
Great point Betsy. This is what I was trying to get at a couple weeks ago when I argued that the Innovation Fund may usher in a set of standard metrics for evaluating venture philanthropy funders. I’m not sure the government is the best group to so this, but they’re the ones with all the money. I do have the sense that the Office of Social Innovation is very open to listening to the field.
Conflicted as to whether standard metrics will provide (needed?) structure to VP or strip away the market aspect, which just might be what makes it work.
Great post Sean.
The president says the fund will “invest in [high-performance nonprofits] to help them grow.” Does he/the fund know how? It’s encouraging to see the use of the word “scale” and “grow” in his remarks, but I don’t think many people, including the president, are thinking about how we address scale. It will not be by investing in promising program approaches. The growth potential of that investment money will get annihilated with the program spend. Investment in fundraising, development, marketing and advertising – all still pretty much criminal ideas in the sector – is the only way we will dramatically increase scale. But no one ever mentions that. We have to stop obsessing over investment in programs and start focusing on investment in the sales engines of nonprofits. It’s the only path to generating massive new, self-sustaining revenue streams to fund the innovative new programs.
The sector has to take market share from the for-profit sector to fund social progress. The only way it can do that is by building consumer demand. That’s where new capital should be invested. Ironically, investing precious new “growth” dollars in new program ideas only delays our ability to grow anything.
Dan, I agree re: investing in programs vs organizations. However, I’d disagree with you that the need is for investing in “the sales engines of nonprofits”. What an organizations uses “growth capital” for is up to the organization and it might not be the sales engine.
Sean,
Sean,
My fear is that “growth capital” will be used to fund program growth. That isn’t sustainable. Once the capital’s been spent to grow the program, there’s nothing to maintain it. This is a ubiquitous and chronic problem with foundation grants, for example. If, alternatively, the “growth capital” is used to fund the growth of revenues, then we can sustain the program growth. “Sales engine” might not capture the breadth of opportunities to fund growth, but you know what I mean; development/fundraising/new community wealth ventures, etc.
There was another strategy offered to US Gov in 2006 for development of social enterprise as a soft power initiative. In this model the social fund has a wider range of citizen inclusion and rather than seeking matching funds at the project level, offers private social investors the opportunity to contribute to the overall fund. I put the same idea forward this year as a suggestion for the UK Social Enterprise Summit on a SE discussion forum.
“Project funding should be placed as a social-benefit fund under oversight of an independent board of directors, particularly including representatives from grassroots level Ukraine citizens action groups, networks, and human rights leaders.
“This program provides for near-term social relief for Ukraine’s neediest citizens, most particularly children who normally have least possible influence and no public voice. Over a few years time, the net cost financially is zero. Every component is designed to become financially solvent, through mechanisms of cost-savings and shared revenue with other components. One component, Internet, provides essential communications infrastructure as well as a cash surplus to be used to offset any lingering costs of other components such as childcare, and otherwise goes to a permanent social benefit fund under oversight of the aforementioned independent, citizens-based non-government board of directors.
“Any number of other social enterprises can be created. Furthermore, any number of existing for-profit enterprises are entirely free to contribute any percentage of profits they wish to increase the proposed initial $1.5 billion social investment fund. If for example the total fund comes to $3 billion, that amount would generate at least $300 million per year in a hryvnia deposit accounts at any one of several major Ukrainian banks, to provide ongoing funding to continue to create and expand social enterprises.
“This strategy places adequate funding for social benefit under control and management independent of government and the very obvious vicissitudes and conflicts inherent therein.
“This is a long-term permanently sustainable program, the basis for “people-centered” economic development. Core focus is always on people and their needs, with neediest people having first priority – as contrasted with the eternal chase for financial profit and numbers where people, social benefit, and human well-being are often and routinely overlooked or ignored altogether. This is in keeping with the fundamental objectives of Marshall Plan: policy aimed at hunger, poverty, desperation and chaos. This is a bottom-up approach, starting with Ukraine’s poorest and most desperate citizens, rather than a “top-down” approach that might not ever benefit them. They cannot wait, particularly children. Impedance by anyone or any group of people constitutes precisely what the original Marshall Plan was dedicated to opposing. Those who suffer most, and those in greatest need, must be helped first — not secondarily, along the way or by the way.”
Growth capital can be defined as “money that helps to pay the bills while an organization learns to become compelling”.
Its not just about building a sales engine. Its not just about getting the program perfect. Its not just about being efficient, or paying folks enough so they won’t burn out. And its not just about paying for evaluation to strengthen the proof story.
Its about working backwards from a sort of homeostasis, where all of these elements combine in a way that compels all involved (beneficiaries, employees, funders) to want to repeat what they’ve done.
The SIF will be something very special if it can be managed in a way that sticks to this growth capital (I like to call it Philanthropic Equity) role.
Otherwise, its just another check-writer with a small staff, looking for programs to fund for a while.
George,
You’re correct that the term needs a good definition. I’ve always thought of it as the money an organization needs to grow – to scale to some meaningful fraction of the problem it’s addressing. In that respect, it seems to me, nothing is more important than building the revenue engine, because if an organization builds that, and revenues grow, it has all of the money it needs for all of the other things on your list, and it isn’t dependent on any other single entity for it.
Ironically, the very NGOs that are trying to “teach the poor to fish,” so to speak, have to be given the resources to be able to fish for themselves.
Great discussion. I think it is useful to think of ‘growth capital’ in the social sector as strategic philanthropy aimed at scaling promising social enterprises to the point where they are big enough to reliably fund their ongoing social impact.
Or, another way to think about it is the amount of upfront philanthropy needed to build a nonprofit organization that is strong enough it won’t need to come back for more…