A Peek Behind The Donor Class Curtain

By: Mark D. Belcher, Partner

As Development Professionals, our job is to generate resources to assist our organizations in moving the needle on some cause and usually for a specific purpose.  Pretty vague, right?  It’s not easy to capture the scope and impact of what each of you does every day, in some cases, just to keep the lights on.  Your passion is what makes Development such a simultaneously rewarding and maddening endeavor.  Often times, we are all focusing so intently on the next gift, the next prospect, the next event, or stewarding visit that we don’t take time to explore the horizon to see what is coming over the hill.

In light of that, I’d like to share some thoughts with you on the future, particularly as it relates to major donors – be that individuals, foundations, and even corporations, to some extent.

Social Finance
So, what is Social Finance? Why does it matter? In a nutshell, Social Finance is a big tent gaining popularity in the Donor Class that includes Social Impact vehicles, Social Entrepreneurship, Venture Philanthropy, and a host of other terms you will encounter in the coming months and years.  In short, many donors and their advisors are beginning to look at philanthropy well beyond simple donations and more as investments.

Why Does Social Finance Matter?
There are more ways to deploy social capital now than at any other time in history.  No longer is a philanthropic individual, family, or institution limited only to making grants to nonprofit organizations in order to make a difference.  A burgeoning industry of savvy project managers and entrepreneurs now seek out funding opportunities and organizations committed to accomplishing multiple goals within a double or triple bottom line business model, focusing on a combination of profit and social and environmental measures.

Longer term, the evolution from traditional grant-making to the use of Social Finance vehicles indicates a new reality:  Just as we see in popular culture, many have lost faith in the establishment institutions to address the societal ills of our time.  The collective thinking is that neither government nor commerce alone can solve homelessness, indigent healthcare needs, lower income housing issues, water shortages or contamination, rampant drug use and addiction, or domestic abuse, to name a few.  In the past, society has turned to the nonprofit sector to provide the safety net for those less fortunate.  Unfortunately, despite their hard work and passion, many have failed to move the needle or have evolved into large bureaucracies rather than solution providing entities. On the other end of the nonprofit spectrum, even when not stymied by bureaucracy, we have seen duplication hinder progress, where too many organizations attempt to solve the same problem, diluting efficacy and fragmenting funding sources.

The flaw lies within the expectation.  We ask nonprofits to solve the problems that government and corporations have been unable to solve, and to do so with fewer resources.  This article from Stanford Social Innovation Review outlines the issues well. As Dan Pallotta, author of Uncharitable and a revolutionary nonprofit executive, notes, the Latin root of ‘profit,’ profectus, means ‘progress.’ Thus we have named this section as the ‘Non-Progress’ sector.  We have set up the sector to fail.  As part of the evolution, we now refer to the combined efforts of all sectors to solve our largest and most pressing problems as “ESG Solutions” – Environmental, Social, and Governance.

A few examples of ESG Solutions are:

  • Social Enterprise Investment and Lending
  • Conscious Capital Investment and Lending:  Think Whole Foods, Ben & Jerry’s, Tom’s shoes, FEED – not necessarily double or triple bottom line models, but socially conscious business models that can demonstrate impact.
  • Impact Investing & Social Venture Funding:  Invest in projects that often combine multiple, collaborative operators – government, corporate and nonprofit.
  • Socially Responsible Investing (SRI):  Generally refers to scrubbing a portfolio of stocks or creating a fund according to an investor’s preference – no sin stocks, all boards have a woman appointed, careful eye to foreign investment based on human rights or environmental concerns, etc.
  • Venture Philanthropy:  Grant-making focused on project management and outcomes.
  • Program Related Investment (PRI):  Method for larger foundations to deploy capital from the corpus, not just in grant-making, to invest in projects (often like impact investments where government, corporate and nonprofit entities collaborate) they believe will make a difference.
  • Community Investing & Microfinance:  Think Professor Muhammad Yunus, the pioneer of microcredit economic theory, the winner of the 2006 Nobel Peace Prize, and founder of Grameen Bank.
  • Social Impact Bonds:  Bonds focusing on state and local government to fund programs addressing social ills. They vary from municipal bonds in that the outcome must meet a social measure in order to pay out.

What Does Social Finance Mean for the Traditional Grant-Maker?
There exists more than one lever to pull to solve a community problem, to address lackluster nonprofit project management, and/or to encourage collaboration and end duplication.

What Does Social Finance Mean for the Traditional Nonprofit?
Nonprofits must compete for funding from a new class of social investors and evolve from traditional fundraising and stewardship to a culture of raising capital and managing investor expectations.  In order to compete and win, nonprofits must show expertise in operations and project management to secure funding and report progress to social investors.

What Does Social Finance Mean for the Person or Group Seeking to Solve a Problem About Which They Care Deeply?
No longer restricted to the best nonprofit that suits your needs.  The new models for deploying capital encourage creativity, collaboration, and entrepreneurial thinking.

I hope that this gives you some insight and a peep behind the curtain of where our next generation of philanthropists is migrating. As wealthy individuals prepare their fortunes for the future, they also are beginning to prepare their heirs to retain, grow, and distribute those resources in a manner that reflects their own.

Are you prepared to help them on that journey?