Social Impact Investing Will Be the New Venture Capital

Authors: Sir Ronald Cohen (co-founder of Bridges Ventures and Social Finance UK, chairman of Big Society Capital) and William A. Sahlman (Harvard Business School) · Published: HBR.org, January 17, 2013, part of the HBR–Bridgespan Group Insight Center on Scaling Social Impact · URL: https://hbr.org/2013/01/social-impact-investing-will-b

One-line: The social sector’s biggest barrier to scale is its funding model, not a lack of money. Impact investing, including social impact bonds, can do for social entrepreneurs what the professionally managed venture-capital partnership did for business in the 1960s and ’70s.

Saved to Kyle’s Apple Note “Things To Internet” (c. 2013–2015): two consecutive passages, copied verbatim, about new finance for social good.

Summary

The diagnosis. Governments are “straining to fund their commitments,” and social entrepreneurs “are stultified by traditional forms of financing”: donations and grants that don’t let them experiment or grow. The money exists. The US social sector has $700 billion in foundation assets and 10 million nonprofit workers, “yet there are massive inefficiencies in capital allocation.” Donors “starve organizations and entrepreneurs by refusing to cover overhead.” The authors cite a 2000 UK Social Investment Task Force finding that most social organizations have “barely three months’ worth of working capital,” and say nothing has changed in the 12 years since. As they put it, a VC shown a plan to grow a business “without spending a penny on overhead” would “show him or her the door.”

The analogy. The professionally managed venture-capital partnership of the mid-1960s and early 1970s pulled in pension and endowment money on the right time horizons, and “Entrepreneurship has never been the same.” Impact investment, they argue, is at the same threshold.

The evidence of change (the two passages Kyle saved):

We’re already beginning to see innovation. People are developing new securities that link social performance to financial returns. There are new experiments — models that use the tools of finance to try things in different ways — sometimes creating income streams from novel concepts, like funding cancer research. There are also hybrid organizations like the Acumen Fund, Bridges Ventures and Root Capital that channel patient capital to high social return investments around the world. There are even organizations like Endeavor and Social Finance that help entrepreneurs gain access to global capital markets to fuel growth in employment and social impact.

Within the last two years, government agencies in the U.K., U.S., Australia, Canada and Israel at the national, state, or even county levels have begun exploring the potential of social impact bonds. These are financial instruments that pay an investor if the cost or incidence of something (foster care or prisoner recidivism) is reduced, with comparable or better results, than a government program. If so, the investor makes money; if not, they lose money.

The prescription. The field needs early success stories, the way venture capital had DEC, Intel, Scientific Data Systems, Teledyne, Genentech, Apple and Tandem. With “some $200 trillion in financial assets” (McKinsey) and low interest rates, instruments like social impact bonds that return “about 7%,” deliver a high social return and carry limited downside could offer “returns that are uncorrelated with equity markets” and pull capital toward social entrepreneurs. “Things will change rapidly over the next five to ten years.”

Full text

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Connections

• Impact Investing: the 2013 bull case, written from inside the field. One author co-founded two of the organizations it names.
• Venture Capital: the essay’s organizing analogy is the institutional VC partnership as the innovation that made entrepreneurship fundable.
• Philanthropy: the critique of overhead-starving donors and grant-based funding as the thing that keeps social organizations small.