Matthew Bishop and Michael Green have recently written an excellent article for the Innovations Journal titled "The Capital Curve for a Better World". The article is part of a volume prepared for the Tech4Society hosted in Hyderabad, India and offers compelling insights on social entrepreneurship and technology from leaders in the field (view the table of contents or full publication). Bishop and Green are also the authors of the recently-penned Philanthrocapitalist Manifesto, which proposes a number of 'radical' policy changes for the UK.
I recommend reading the entire article, as it spans important issues and opportunities around financing social innovation. There are several examples that illustrate the essential building blocks of a social capital market, and how they have - or can - be implemented successfully. A key theme is linking finance to the right kind of organization structure at the right time - and that this requires a more sophisticated understanding of social impact and metrics. On a related note, intermediary organizations can and should play a vital role in connecting demand and supply for social investment, but there is more work needed to build the right incentives and funding to establish and sustain these intermediaries.
Here's some of the key sections that stood out for me.
The "capital curve" for commercial businesses as they move from start-up finance to venture capital and, finally in some cases, the public debt and equity markets, is now well understood. Overall, the finance sector does a good job of matching the right kind of capital to the best prospects for profitability. The social sector needs an explosion of innovation and new thinking to follow suit, including developing its own well-functioning capital curve. This process, in which the philanthrocapitalists have a crucial role to play, will require a wide-ranging debate about the respective roles of for-profit, government, non-profit and philanthropic capital, so that these sectors work together more effectively in ways that play to their strengths and minimize their weaknesses.
Where The Money Is
Describing the capital curve for social innovation can help, not least by addressing the widespread misunderstandings that the different sectors have of each other. Government, for example, often tends to view the philanthropic/non-profit sector more as a source of cheap funds and other resources than a source of socially entrepreneurial innovation. For-profit companies often look at partnerships with non-profits as a public relations activity rather than as an opportunity to improve their long-term profits through win-win collaborations that combine the financial clout and organizational reach of the corporation with the deep insight into social change of the non-profit. Non-profits are too often happy to take the money from either or both and chug along.
The result is so many missed opportunities for the sectors to work together and add value to each other. Cultural norms and legal restrictions have often held back institutional investors (including philanthropic endowments) from urging the companies they invest in to focus more on long-term value creation and profit maximization. Philanthropic endowments have only slowly started to see the potential to achieve their missions by investing in securities that help the organizations they back to achieve social goals while offering below market but above zero financial returns. Governments have often denied the private sector, both for-profit and philanthropic/non-profit, a meaningful seat at the table at high-level discussions of how to solve the biggest problems facing the world (while often allowing the for-profit sector to “buy” access to governmental processes through
lobbyists and campaign finance).
Risk and Return
The for-profit world didn’t crack the capital curve question because it is innately smarter; the for-profit capital curve is just easier because it involves a fairly straightforward combination of financial risk and financial return. At one end of the curve is the high-risk, high-return combination provided by angel investors and venture capitalists; at the other is the low-risk, low-return mixture of the investment-grade bond investor.
The social innovation capital curve is far more complex because of the difficulty of measuring the social return on investment. Philanthropists and governments are both looking for social returns, with governments, it is widely understood, having much less appetite for risk than philanthropists. So far, so straightforward. That would suggest a capital curve in which philanthropists take on therole of venture capitalists (hence the term “venture philanthropy”), funding ideas with high risks but potentially high social returns, while governments focus on scaling up social innovations that have been proven. However, the difficulty in measuring social returns means it is hard to say with much confidence whether that is what either philanthropic foundations or governments actually do.
Getting Ahead of The Curve
The greatest weakness of these “good-brokers” [intermediaries] is that they are underfunded, not least because philanthropists and indeed governments too often regard investing in infrastructure as inferior to funding programs that have a direct impact on the needy. However, the infrastructure of virtue’s intermediaries may actually ensure that those direct programs deliver a far higher social return on investment—in which case they would be a high impact social investment.
The second area is to accelerate the ability of some ideas to move from relying on philanthropic capital and government grants into a for-profit activity that can be taken to large scale by the for-profit capital markets. Here, microfinance demonstrates the possibilities.
The third area is to improve the transition along the curve from high-risk, high-return philanthropic capital to large scale, less risk-tolerant government funding.
Another opportunity is the use of financial innovation to provide market incentives for social innovation using government capital. Measuring social impact better allows those who care about social impact to put their money where their mouth is, creating an incentive for innovators to deliver novel solutions by paying them when they deliver.
Another interesting new idea is the social impact bond being developed by Britain’s Social Finance, another new social investment bank. The idea is to attract private capital into solving a deep-rooted problem that is soaking up public money. Take, for example, re-offending by released prisoners, which costs the British government millions of pounds a year. A social-impact bond could raise money to pay for the expansion of organizations with the expertise to reduce re-offense rates. The more money the organizations save the government, the higher the return the bond would pay investors. This goes beyond a standard public-private partnership, which is expected to provide the same service as the state, but
more cheaply. The social-impact bond would reward better social outcomes and not merely cut costs.
When we continue to manage social issues, social issues manage to continue. As the Brothers Heath say in “Switch” TBU – true but useless, unless we move from managing issues to creating solutions. If the plan isn’t to work through the complex issues one step at a time, philanthropists should be looking to move their money somewhere else. But money alone isn’t the path to a solution for persistent, growing social issues (money may actually be contributing to the issue by supporting ill conceived programs and outdated practices). The solution lies in the time consuming, labour intensive relationship building that has been relegated to fund development departments. Maybe if relationship building was every staff member’s, every board member’s, every stakeholder’s responsibility, we would achieve the kind of traction to radically change our approach.
By tom on Jul 13, 2010