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!

Tweet This Post

Today I want to turn my attention to the most recent post from Michael Edwards. Edwards is a former long time employee of the Ford Foundation and author of the philanthrocapitalism critique Just Another Emperor and the new book Small Change: Why Business Won’t Save the World.

In his post titled Why "Social Capital Markets" Could Be a Really Bad Idea, Edwards presents what I believe is an extremely limited view of social capital markets. I’ve very sympathetic to the concept that the social sector is different from the business sector and so social capital markets should not simply mimic financial markets. For instance, I particularly liked Jacob Harold’s piece in Alliance Magazine arguing that a robust social capital market might be more like a farmers’ market than Wall Street. But Edwards’ post today argues against a straw man.

The social capital market Edwards describes is a shallow, mechanical market that has little resemblance to how real markets work. For instance when Edwards suggests that social capital markets will dictate which causes are most important and writes "Who is to say that saving the rainforest deserves more support than ending gun crime or racism?" The answer is "No one". There is nothing about the concept of the social capital market that implies that certain types of social good are superior to other types.

When Edwards writes that social capital markets will force "nonprofits to compete with each other for scarce resources," what does he think that nonprofits are already doing? We certainly don’t have unlimited resources and last I checked, nonprofits were competing fiercely to convince donors to support them.

When Edwards writes "variations in… metrics may not reflect meaningful variations in performance, since two organizations may be dealing with similar issues but in totally different contexts," I would respond "Of course!" Sophisticated investors in traditional financial markets do not base investment decisions on simple mechanical rankings. In fact, financial professionals that purport to have a simple formula for producing investment returns are seen as charlatans.

Smart investors use metrics as inputs into the messy process of trying to select their investments. Markets are not driven by metrics and simplistic rankings. They attempt to absorb vast quantities of quantitative and qualitative information in order to allocate scarce resources. I’ll admit that some supporters of the social capital markets concept hope for a day where we can easily allocate resources based on standardized rankings, but that ideal has more in common with how centralized planning works (or doesn’t) than to financial markets.

It is critical that as we build robust social capital markets, that we create vibrant, human markets, not some sort of mechanical sorting machine. Readers who are interested in a more holistic view of financial markets, than the quantitative, machine-like caricature presented by Edwards might be interested in the book Investing: The Last Liberal Art by Robert Hagstrom. The book lays out the ways in which investing in financial markets requires the building of a "latticework" of information that is gathered and processed with mental tools borrowed from the fields of psychology, philosophy, biology, sociology and literature. I think the book offers a holistic, human based vision of capital markets that might shift your thinking about the potential for the social capital markets.

I’ve previously mentioned Hagstrom’s book (which is largely based on the investment philosophy of Warren Buffett’s right-hand man, Charlie Munger) when I rejected an overreliance on tools borrowed from the hard sciences in philanthropy evaluation and when I responded to Albert Ruesga’s worry that evaluation was the “math-anxiety” of philanthropy. Hagstrom is also the author of The Warren Buffett Way, which I drew on extensively last summer when I offered a “robust definition of high performance” for the nonprofit sector.

Tweet This Post

By Alex Rossides

Thanks to Sean for envisioning the future of social stock exchanges and for his recent write-up regarding the Social Impact Exchange as an early form of such exchanges, developed in partnership with Duke University and Robert Wood Johnson Foundation.

Sean helped clarify a key difference between for-profit stock exchanges and social exchanges – in the social sector there is no price per share and stock is not exchanging hands. But, the broader analogy holds of an exchange that matches buyers and sellers i.e. investor and nonprofit organizations with an explicit promise of standards and transparency.

Exchanges in the for profit sector are the focal points for capital marketplaces. One primary function of stock exchanges is to enable the efficient flow of capital to growing companies so they can finance their economic activity. The social sector does not currently have exchanges to enable a more efficient transfer of capital to scaling nonprofits to finance their social initiatives.

As Sean pointed out, the member-driven Social Impact Exchange is designed in part to help play this role in the area of growth capital. It has a number of collaborative funding venues to connect high-impact, growing nonprofits to funders, based on transparent investor information, such as its online investment platform, National Investment Fair and Business Plan Competition to be held at its June 2010 Conference.

The Exchange is designed however to facilitate the exchange of more than just dollars. Its two other equally important goals are to (1) serve as a learning community and forum to develop and share knowledge on scaling, and (2) serve as a common ground where members can help build the field of scaling together. The focus on more than capital is an example of how the unique qualities of the social sector may help create social stock exchanges in the future that differ from their brethren in the for-profit sector in ways that could be better suited to the goals of social progress.

In the social sector, exchanges can be built with a focus on collaboration and networks that compound our learning, magnify our financing and accelerate the development of marketplaces that drive social progress. Exchanges can become true community resources, that provide opportunities to jointly build necessary field infrastructure and enable organizations across the sector to work together to solve our toughest social problems. They can combine the action oriented transactional nature of exchanges, with joint knowledge and infrastructure building to create social sector marketplaces.

The Social Impact Exchange is an early attempt to do just that. Its structure consists of working groups where members can work together on important field initiatives such as developing investment standards for scaling organizations, supporting the work of growth intermediaries, identifying models that work in different issues, sharing knowledge, and creating new products and distribution channels for scaling which the field can leverage. It is designed to be a cross-sector initiative so that we all have a hand in creating a more effective marketplace for financing positive social change. 

Social stock exchanges, whether they are local, national, international or issue based, hold the great promise of combining collaborative, mission driven activities with marketplace structures to enable philanthropic capital to flow towards its greatest good. By 2033 let us hope that philanthropic capital distribution will be more results driven, based upon quality due diligence and business planning, better financial reporting, greater transparency, shared standards and enhanced accountability.

But, by 2033 social stock exchanges could also be nexus points for marketplaces where large numbers of funders aggregate to find high-quality organizations that they collaboratively fund in amounts large enough for nonprofits to execute multi-year strategies. They could be environments where business models of capital and information intermediaries thrive because they can more effectively broker capital rounds and information services, and where nonprofits that qualify can finally attract capital efficiently in one place based on the impact of their work.

To get there will be hard work and slower than we’d all like, but by working together we have an opportunity to realize a vision that enables us to make progress on our most difficult social problems and hopefully improve the lives of millions of individuals.

Tweet This Post

The Clearinghouse is interesting because of the way it offers some of the attributes of a stock exchange. There has been a lot of talk in philanthropy about social stock exchanges, but I’ve often found the implementation of this concept of little interest. This is because when most people think of a stock exchange, they think of the prices of stocks moving up and down as the primary characteristic. A social stock exchange which attempts to mimic the pricing elements of a stock exchange is interesting, but I’ve yet to see an implementation that is particularly exciting. Instead, stock exchanges are valuable not only because they publicly reveal prices, but because they have certain requirements for organizations to be listed and ongoing requirements to stay listed.

Once an organization is listed on a stock exchange, it must adhere to higher levels of public disclosure than a non-listed company. Being listed on a stock exchange is called “going public” and a listed company is a “public company” as opposed to a non-listed or “privately held” company.

This all matters to philanthropy because the organizations listed on the new Social Impact Exchange are offering public access to documents such as due diligence reports, business plans and the results of independent evaluations (it appears that currently there are not standard documents that all listed organizations must have, but see the documents listed for the nonprofit Ways to Work as examples).

My friend George Overholser, has often pushed back on my urging for nonprofits to share more information about themselves publicly. George’s point is that most nonprofits are the equivalent of privately held companies, who may be damaged if they share too much of their internal issues with the public. While I’ve generally thought that nonprofits should have a higher required level of transparency than privately held companies, George’s point has always resonated with me. With the advent of the Social Impact Exchange, we have the beginning of a mechanism whereby a nonprofit that is ready to “go public” can list their organization and in exchange gain access to a wider range of philanthropic investors.

In addition, the Exchange plans to only list organizations who have demonstrated extremely high levels of impact and scale readiness or have demonstrated a significant level of effectiveness, and are increasing their capacity for scale readiness (groups qualifying under each standard are identified separately). This means that if the Exchange can establish credibility for their vetting process, 1) organizations who get listed will gain a marketing advantage due to their “making the grade” and 2) donors can have an increased level of confidence in Exchange listed organizations.

The Social Impact Exchange is more than just a list of nonprofits. It also hopes to be a hub for related research, publishing, education and training as well as an annual conference, business plan competition and regional meetings.

While this effort is still in its infancy, I think the organizers have gotten some key elements right. With the high profile funding from Robert Wood Johnson Foundation and the involvement of Duke University, the Social Impact Exchange is one to watch.

Tweet This Post

To the cynical person, trusting someone is equivalent to being naive. Trusting someone can be criticized as demonstrating a lack of rigor. But it turns out that trust is at the core of what makes systems function.

From a recent Forbes article titled The Economics of Trust:

Imagine going to the corner store to buy a carton of milk, only to find that the refrigerator is locked. When you’ve persuaded the shopkeeper to retrieve the milk, you then end up arguing over whether you’re going to hand the money over first, or whether he is going to hand over the milk. Finally you manage to arrange an elaborate simultaneous exchange. A little taste of life in a world without trust–now imagine trying to arrange a mortgage.

Being able to trust people might seem like a pleasant luxury, but economists are starting to believe that it’s rather more important than that. Trust is about more than whether you can leave your house unlocked; it is responsible for the difference between the richest countries and the poorest.

"If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia," ventures Steve Knack, a senior economist at the World Bank who has been studying the economics of trust for over a decade…

How could that be? Trust operates in all sorts of ways, from saving money that would have to be spent on security to improving the functioning of the political system. But above all, trust enables people to do business with each other. Doing business is what creates wealth.

One thing we know is that philanthropy is a dysfunctional system. Resources do not flow to those who can best utilize them. While I’m all for the efforts to quantify the effectiveness with which various organizations deploy resources so that we might better direct our giving, it is just as important that we inject more humanness into the workings of our field.

Trust isn’t a human weakness that analytical donors must overcome, it is a fundamental attribute of functioning systems. According to Forbes, the financial system would collapse without trust. Maybe more trust is just what we need to build a functioning social capital market.

Tweet This Post

A different sort of model is playing out in Los Angeles on Wednesday. The Social Innovation Fast Pitch event being held at the University of Southern California, features nonprofits that have been vetted by USC, Social Venture Partners-Los Angeles and the Social Enterprise Institute.

The Social Innovation Fast Pitch is not just an event where 10 nonprofit leaders give their 3-minute elevator pitch to compete for $20,000 grants in front of an audience of 350 people. It’s really a professional development program for social entrepreneurs that builds skills they’ll use every day. It teaches them how to talk to people about their organization in a much clearer, more compelling way. What we’ve observed is that too often, the message gets stale, and people tend to use too much jargon. They may not be clear about their “ask”, or may put themselves in a box by focusing their “ask” only on money or on assumptions they make about their audience. In addition, they just don’t get the feedback from listeners about what they like and connect with – or don’t like. These organizations are doing amazing, innovating and impactful things, but from some of the applications, you’d never know it!

The program addresses these ineffective communication habits head on. This year, 22 nonprofits were selected from a pool of 65 nominations to go through the 2-month training program. We recruit dozens of volunteers from the business community to provide group coaching in multiple practice sessions, and also pair each nonprofit leader with 1 or 2 of the coaches to mentor them between sessions. Of course, what often happens is that the feedback prompts them to look at bigger, strategic questions about the organization. The difference over a short period of time is truly amazing! Program participants tell us that – based on what they’ve learned – they change the way they talk about their organization in almost every setting: to people they just meet, to the media, to their boards, and to funders.

This year’s event runs from 4:00 – 7:30 pm on Wednesday, November 11, 2009 at USC. In addition to the 10 presenters, the program features Andy Rappaport, a venture capitalist and social entrepreneur, who will share his views on social change and risk-seeking philanthropy. The program is co-hosted by Los Angeles Social Venture Partners, the Social Enterprise Institute, and the University of Southern California.

For more information or to register for the event click here.

I’m particularly intrigued by the concept, because it mirrors the way I speculated that nonprofit funding might occur in the future in a column I wrote for the Financial Times in early 2008.

Tweet This Post

In the article, David (a consultant to grantmakers and nonprofit agencies and the former Director of Evaluation and Knowledge Development at the Edna McConnell Clark Foundation, a key practitioner of social investing) puts forth an excellent argument for what social investing is and what the implications of the approach are for the social sector. I encourage you to read the full article.

David starts with three “Unpleasant Truths”:

Unpleasant truth number 1: While nonprofits work incredibly hard, with passion and dedication, and often in incredibly difficult circumstances to solve society’s most intractable problems, there is virtually no credible evidence that most nonprofit organizations actually produce any social value.

Unpleasant truth number 2: Because so few nonprofits are willing to face this fact and ask themselves whether they are doing any good at all, or even as much good as they may be doing harm, we cannot rely on direct service nonprofits to fix themselves without a serious push.

Unpleasant truth number 3: In general, nonprofits do what their funders tell them to do. When funders make demands, more often than not the vision, mission, goals and objectives of nonprofit organizations give way. As the saying goes, We are what we eat. . . . and most nonprofits are what their funders make them.

He then goes on to give examples of a number of organizations who he says are actually destroying social value (either by spending money that results in no positive change or actually encourages the opposite of the intended outcomes – such as a violence prevention program that has been show to actually increase violent behavior).

David believes (as I do) that a social investing approach can greatly increase the social value production of the nonprofit sector and he lays out an inclusive definition of social investing:

• the use of rigorous selection criteria to choose nonprofit organizations to support,
• structuring investments to strengthen organizations in which investments are made in order to enhance their ability to provide effective services reliably and sustainably at high levels of quality,
• tracking performance and providing non-financial supports as indicated, thus helping these agencies become more effective and efficient in helping the people they serve to measurably improve their lives and life prospects,
• diminishing transaction costs to help these organizations stay focused on achieving their respective missions, and
• helping nonprofits to build reliable revenue streams that will support them sustainably at the appropriate level of scale — before terminating the investment.

As part of the selection criteria for investing in a nonprofit, David believes that social investors must ask the following questions:

• Who, exactly, is the organization serving and what are their needs?
• How many and what percentage of the people they serve finish the programs or receive a large enough and long enough exposure to services so that they can benefit?
• What empirical basis is there for believing that an organization’s program(s) and service(s) are effective — that is, producing outcomes for the people they serve?
• What are those outcomes, what are the indicators used to assess them, and what is the rate of success for program participants in reaching them?

This is where the rubber hits the road. According to David:

“In my experience, the majority of nonprofits cannot answer these questions… in this new age of accountability, nonprofits that cannot answer these questions will find it harder and harder to attract funding from social investors. And social investors will increasingly represent the larger sources of revenues flowing into the nonprofit sector… Social investing, if widely adopted, will help channel funding streams that are directed by measurable performance rather than feel-good stories, habits of giving and rank sentimentality. And social investing has the potential (yet to be realized) to advance a selection process that either forces poor performers to evolve and improve, or weeds them out.”

I agree with David on the way he has described social investing and the implications of it being widely adopted as an alternative to traditional charitable giving. I greatly applaud the clarity with which he describes the process. However, I must also reject the nihilistic claim that most nonprofits and the social sector as a whole is not currently producing social value.

To put this claim in context, realize that 8% of US workers are employed by nonprofits and the sector receives and spends roughly $1.5 trillion in revenue each year. Now I believe that the amount of social value creation in the nonprofit sector can be significantly increased. I believe that currently, as a country we are getting far less social value per dollar spent than we would if social investing became a dominate approach in philanthropy. But just because we have limited evidence of impact does not mean that the sector is not producing positive social value.

I point out this disagreement because I think that David’s starting point is shared by many analytical thinkers who hope to create a more robust social capital market. But I believe that painting this picture of the current social sector actual impedes the development of social investing because it 1) Flies in the face of the experience that most donors and nonprofit employees have and allows them to then dismiss the need for social investing and 2) It greatly lowers the bar to lay claim to being a successful social investor. If in fact the social sector is currently creating no social value, then any investment that creates social value, even a minimal amount, could be seen as having been successful.

David is a super smart guy. He’s also not afraid to say what’s on his mind, such as when he suggested earlier this year that I did not have a “smidgeon of knowledge” about evaluation and that I needed to get a “solid grounding” in social investing issues before I wrote any more about it(!). He’s also a member with me of the Alliance for Effective Social Investing.

What do you think? Is social investing needed? Will it lead to a more effective nonprofit sector? If you work for a nonprofit, are David’s criteria for social investments questions that you feel are relevant and important items for you to be able to answer (I certainly do)? If you are a funder, would you describe yourself as practicing social investing? If not, why have you chosen to use another approach and what flaws are their with the social investing approach?

Tweet This Post

Something big is happening at Fort Mason in San Francisco. In just two short years the SoCap conference has emerged as one of the few must attend events for people interested in the social capital markets. SoCap doesn’t feature awards, dinners and lots of vendor booths. Instead it is full of fast moving breakout sessions where up to half the time is taken up with questions from the audience. At the end of the session at which I presented about building a new narrative for the social capital markets, I only half jokingly suggested that I and the other panelist move to the audience and audience members like Dennis Whittle of Global Giving, Jocelyn Wyatt of IDEO, Janice Schoos of Growth Philanthropy Network, Tris Lumley of New Philanthropy Capital take our place and run the session for a second time with a new take.

One of the fascinating aspects of the SoCap conference is the way the starting point for conversations seems to be for-profit organizations. In fact, my greatest criticism is that it almost seems that someone threw a social change conference and forgot to invite the nonprofits and foundations. I don’t believe that the “philanthropic capital markets” are separate from the “social capital markets”. There is a single spectrum of capital that runs from pure philanthropic grants to pure market rate investments. But all of that capital results in positive or negative social impact.

Personally, my interest is focused on how philanthropic capital can be provided to nonprofits to produce social impact. But that’s just my entry point for exploring the social capital markets. People like SoCap organizer Kevin Jones might be more interested in how for-profit or “low-profit” enterprises can affect social change, but again that’s just a frame of reference for viewing the integrated social capital markets.

What I found most engaging about the conference was the way it represented a different world view than so many philanthropy conferences. I had a conversation with a leading philanthropy scholar a few months ago about how we might map various philanthropic approaches. He suggested that one axis along which various philanthropic world views fell should be labeled Constrained Vs. Unconstrained (He was not referring to the definitions of those labels that are circulating in political circles. His use probably more closely reflected the terms’ use in optimization problem solving). To this professor’s way of thinking, “Constrained” philanthropy assumes that there are a set number of inputs we can use to create social impact. Our job is to optimize these inputs to create the most social value. “Unconstrained” philanthropy on the other hand believes there are an unlimited number of inputs and the range of potential outcomes has no bound.

To me, the SoCap conference represents Unconstrained approaches to social impact. Almost every session focused on questions of “how might we build something that doesn’t yet exist?” At many traditional, “Constrained” philanthropy conferences, the sessions focus on identifying what the rules are and how we might best play by them.

Something’s happening in philanthropy. Something important. SoCap seems to be drawing together a group of people who aren’t interested in limits and are looking for ways to turn things up to eleven.

Tweet This Post

What’s interesting to me is that there are a number of sessions on the relationship between philanthropy and services. Kari Dunn Saratovsky of the Case Foundation is organizing some of these sessions and she writes today about the philanthropy/service connection.

There’s been a lot of buzz this year about a renewed opportunity for collaboration between philanthropy and government. At the conference, I’ll be speaking on a panel along with Sonal Shah, director of the White House Office of Social Innovation & Civic Participation as well as representatives from Public Allies and the Points of Light Institute. We’ll have a conversation about the potential for collaboration, but I’ll be keeping in mind the comment made after the Council on Foundations conference by Kristin Ivie (also from the Case Foundation), when she wrote, “As with any partnership, we know that working with Uncle Sam may not always be sunshine and lollipops…”

I’ve been given some sample questions that we’ll be discussing for the panel and I’d like to post them here to solicit your input. Your answers will help me formulate my own thoughts and I may very well quote some of your responses as I did when I solicited input for my panel at the Center for Effective Philanthropy conference. Remember, the session is tomorrow afternoon, so get your answers in fast. Thanks!

• What stands in the way and what opens the path to fully realize the vision for service and civic engagement?
• How can interests of government and philanthropy be better aligned? What’s the low hanging fruit for aligning philanthropic resources with the provisions of the Kennedy-Hatch Serve America Act or the Social Innovation Fund specifically?
• What is the mechanism for achieving maximum impact with scarce resources? How do we go from conversation about this alignment to strategic philanthropy/investments?
• What does a merged strategy mean for the sector’s short-term and long-term goals? What do we lose? What do we gain?
• Are we taking advantage of social innovation as we look toward the future? Do things like social media and other innovative tools change our paradigm for understanding what works or how to best leverage resources? Is our view of philanthropy taking into account the democratization of philanthropy? Self-organizing? The information revolution?
• Does this work ensure that the endgame means changes in the lives of the most vulnerable in our society? Do our investments ensure participation from diverse groups and do so in equitable, accessible ways? How do we measure success for children, families, and communities?

Tweet This Post

One of the recent entrants is UnitedProsperity.org. At first glance, it looks like a Kiva.org knock off. But there is a hugely important difference. Whereas Kiva.org helps people make loans to entrepreneurs in developing countries, UnitedProsperity.org helps people guarantee these types of loans.

A loan guarantee means that the donor is essentially providing collateral so that a local bank will make a loan to the entrepreneur. The amount of the guarantee is less than the amount of the loan. If I make a loan of $100 to you, I might have a certain degree of worry about getting paid back. But if a third party puts up $20 in collateral so that even if I don’t get paid back I still recoup $20, than I will worry less and be more likely to make the loan. In theory, this means that UnitedProsperity.org can offer a leveraged opportunity to donors where every $100 in loan guarantee money they put up results in $500 in loans being made by local banks.

That’s nice in theory, but the setup assumes that there is local capital available in the developing world but that it is not being lent out due to risk aversion. So I asked UnitedProsperity.org CEO Bhalchander Vishwanath about this issue:

Bhalchander: There is enough capital on the ground to be freed up. In fact banks in most developing countries lend much less as compared to banks in the developed world. Some banks may be even over-liquid – i.e. They have more savings deposits than lending. Guarantees definitely free up that capital.

Having said that I would state the direct delivery of new capital to emerging Microfinance Institutions is also important as banks in some countries may not engage effectively with microfinance institutions and Kiva plays a very valuable role there.

Overall I see our approach and Kiva’s approach complementary in making capital available to poor entrepreneurs.

All of this is a great example of a concept I wrote about last October: The Securitization of of Philanthropy. I wrote the post as the world financial markets teetered on the edge of collapse, due in large part to misappropriate securitization of loans in the for-profit market place. In the post I discussed how grantmakers can inject “first loss capital” into nonprofit debt financing deals to help grantees. Noting the irony of advocating for securitization given the state of financial markets I wrote:

Like all tools, structured finance can be used in inappropriate ways. As El-Erian points out in his book, the “securitization” of home loans (pooling them and reselling the loans to investors) was a positive development. However, misaligned incentives encouraged excessive risk taking that is now coming back to haunt the mortgage markets. Structured finance is a powerful tool and powerful tools can be dangerous, but I think the development of social capital markets towards more sophisticated forms of structured finance is inevitable. Let’s work on getting it right.

I think UnitedProsperity.org has a fantastic concept. Let’s hope they get it right!

Tweet This Post

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.

Tweet This Post

New Philanthropy Capital gets that “field building” is just as important as “firm building” at this point in the market formation cycle of the social investing paradigm. To that end, NPC is working on building an Association of Nonprofit Analysts.

From NPC’s description of the concept:

Nonprofit analysis is a diverse and fragmented field:

• It is done by all sorts of people (such as grantmakers, venture philanthropists, auditors) …
• … who analyse all sorts of organisations (such as charities, social enterprises, credit unions) …
• … looking at many different facets (such as finances, management, effectiveness)…
• … using many different methods (such as SROI, balanced scorecard, social audit).

This is not a unified field, and it is too diverse and inconsistent to be called a profession. Outside the third sector, there is little awareness that nonprofit analysis even takes place, and outside their own organisations, there is little support for people who assess third sector organisations.

The Association of Nonprofit Analysts (ANA) could address this need. It would be an international organisation made up of individuals and organisations dedicated to the analysis of nonprofits.

By creating a network of practitioners, the Association would help to create a basis for nonprofit analysis to be recognised as a profession. In the long term, this could mean the Association serving as an accrediting body.

The initiative is inspired by the idea that by enabling analysts to share best practice, they will be able to help nonprofits to make the biggest possible impact. By enabling analysts to learn from each other and promoting the use of standard, useful, powerful analytical tools, the organisational analysis of nonprofits should become more effective, which in turn means that nonprofits themselves should strive to be more effective.

To kick start the Association, NPC is hosting a conference in London on May 19 that I’m deeply disappointed to say I can’t attend this year.

The event will draw together professionals from a range of fields to discuss the subject of nonprofit analysis, and to explore the possibility of creating the Association of Nonprofit Analysts. The conference will have three aims:

• To create excitement and energy around the analysis of nonprofits as a discipline;
• To start a journey towards agreed principles for analysing effectiveness;
• To nurture a group of analysts who will become the core of the new Association.

This is the first conference that we know of that is dedicated to exploring nonprofit analysis, drawing individuals together from all over the world and from all sorts of organisations. It is an exciting opportunity for anyone who is interested in assessing charities and other third sector organisations, and it is an important first step towards creating an Association of Nonprofit Analysts.

I hope you get a chance to attend the conference! At least I get to see the folks at NPC since they’re members of the newly formed Alliance for Effective Social Investing (of which I’m a committee co-chair).

Tweet This Post

The article is titled: Learning From the Farmer’s Market

The global financial crisis has shaken our faith in markets. Wall Street, the City of London and other financial centres asked governments for complete freedom in the capital markets. They claimed it would create value for society. Instead, it has destroyed value, and lives. This begs a question: where does that leave those of us who call for philanthropy to act more like a market? If markets fail the private sector, why should they work for civil society?

In fact, the financial crisis makes it all the more urgent to build a smarter, more open infrastructure that enables donors to make good philanthropic choices. The financial crisis has brought with it urgent need: lost jobs, increased poverty, and distraction from critical environmental issues. It has also brought a reduction in available resources – from both government and private donors. It has never been more important to help funders make good decisions and reward the highest-performing non-profits.

The first image that comes to many people’s minds when they hear the word ‘market’ is the floor of the New York Stock Exchange: frantic traders yelling into phones, countless monitors streaming arcane financial data, a floor strewn with scraps of reports and analysis.

I would like to offer an alternative image: a community farmers’ market.

Jacob argues that there are four points about farmer’s markets that philanthropy can learn from:

• First, and most critically, farmers’ markets offer open information.
• Second, buyers at farmers’ markets are focused on finding value for money.
• Third, farmers’ markets offer simple, intuitive infrastructure that enables smart, safe transactions.
• Finally, farmers’ markets offer a culture of frank friendliness.

You can click here for free access to the full article.

My take away: Markets are ancient, natural systems. There is no doubt that markets are a superior system for fairly distributing resources when compared to command and control economic policy. The current crises is not a condemnation of markets in general, but of certain rules (or the lack thereof) that came to dominate the market over time. This isn’t the first time and it won’t be the last, that excesses of various types severely disrupt the market’s functioning.

We are currently in the process of destroying that which was poisoning the system. Just as we always do, we will (over time) discard those parts of the system that did not serve us well, find new elements that we hope will work better and integrate them into a new system. This won’t be “markets 2.0”, it will be something like “markets 99.0”. We’ve been doing this for a long time.

Jacob does us a great service by evoking the image of the Farmer’s Market to remind us that the core principals of markets is not financial derivatives, overpaid executives and excessive debt, it is people coming together to exchange those things which they value dearly.

Tweet This Post

Let me validate many of the comments here based on our experience launching and taking GlobalGiving to scale.

George is right that it takes $10-30 million to get something like this to scaleability and sustainability. And, per George, I am also convinced that one reason that we have succeeded thus far is that we treat growth capital separately from donations to projects from a financial (and operational) management point of view.

Chuck is right that it takes multi-year funding from a consortium of funders to make something like this work. Chuck’s success is also testimony to the power of a strong lead funder. So far, we have been fortunate enough to have patient capital from a group of leading foundations, without which we would not be here. (Though without a doubt, this patience will be tested by the current economic climate, even though we grew by over 200% last year.)

Mario makes a fundamental point: “In contrast with the private sector, there is a great need for the “philanthropic investor” to be engaged, even directly involved, and emotionally affiliated.”

The bottom line is that there is currently no single bottom line for all philanthropic funders- even the most advanced ones. The $64,000 question is whether this is even possible – either theoretically or in practice. The good news is that there are some great people working on this (including many of the commentators on this post.) I hope they succeed. But the jury is still out, and I predict that much additional experimentation will be needed in the years ahead before we find the right approach(es).

Tweet This Post

On one hand, I don’t believe it’s wise for a funder to withdraw completely from the “What sorts of programs work?” discussion. Many programs simply don’t work, and the state of knowledge about effective programs is very poor – just because a program has raised a lot of money, has an excellent reputation, or even has excellent people working on it doesn’t mean it’s an effective program. “Investing in nonprofits” has to include separating better from worse nonprofits, and I believe part of that evaluation should include what they do and whether there’s a case for it as an effective program.

That said, we see our primary role as identifying excellent charities with strong track records and funding them – definitely not as “subcontracting out” our own programs based on our own theories of change. More thoughts on this idea here and here.

I’ve taken the liberty of posting below the content of the first link Holden refers to in his last sentence. This post was in response to a question I had emailed him in April 2008:

Sean asks (via email):

What’s your view on whether funders should do research on techniques and then fund organizations that use those techniques or do research on organizations and let them decide on techniques? I was intrigued with your education research post, but was wondering if it might make more sense to find smart dynamic nonprofits who will figure out the best techniques to use and change strategy as more information becomes available.

My literal response is that it depends on the funder’s priorities and techniques – I don’t think there is much to be gained by debating the approach “funders” should take in the abstract. But I want to share how we deal with this question, as naive funders (i.e., not experts in the issues) aiming to serve more naive funders (i.e., individual donors), because we do have a specific philosophy on it and we’d appreciate feedback.

My ideal is to fund at the highest level I can have confidence in, i.e., delegate as many decisions as possible to to someone who I feel confident will make those decisions well.

So, my ideal would be to donate not to a charity, but to another funder. If a major foundation, such as the Gates Foundation, could convince me that they consistently make decisions using (a) a strong process, (b) good reasoning, and (c) subjective/philosophical values that are close to mine, I would give to them and let them do the rest (and get rid of our own, now redundant overhead). This was one of the first things we tried when GiveWell was still a part-time volunteer club. What stopped us was that we couldn’t find a single foundation that publicizes substantive information about how it makes its decisions, why it chooses to do A instead of B, and what evidence there is regarding its past and likely future impact. We couldn’t be confident in the institutions without such information; we couldn’t think of a way to get them to share information, since such institutions generally don’t have incentives that we can affect. So we moved on to trying to find great charities.

Again, the goal was ultimately to find a great organization – one that’s better at what it does than we could ever be, and can make its own compelling, evidence-based case for its effectiveness – and give with no strings attached. In some cases, we found exactly this: for example, the Nurse-Family Partnership’s outcomes evaluation is available via peer-reviewed publications, its basic model is clearly described on its website, and it provided documents to fill in gaps in our understanding. PSI was a similar case: after some independent checks on its estimates, we felt we could trust its process as a whole, even for activities we haven’t researched.

In other causes, the strongest applicants could provide some pieces of the puzzle, but not the full top-down case for why their approach was the best available. That’s where we had to start looking on our own for information about what approaches are likely to work, and pick organizations that fit with what we had found. There’s a spectrum here. KIPP gave us about 60% of what we needed to have confidence in it, and after some independent analysis, we ended up feeling that it was our best bet. By contrast, our Cause 2 (global poverty) applicants gave us so little to go on that we ended up betting on an approach, more than an organization.

Between blind faith and micromanagement is conditional confidence: trusting an organization to make decisions because of an evidence-based case that they can make them well. That’s our ideal; when it isn’t available, some degree of micromanagement (i.e., picking an organization based on its approach) seems preferable to blind faith.

Tweet This Post