Building a social innovation market by design
When it comes to social—or impact—investment, the UK government is seen as a world leader. Building on groundwork laid by the last Labour administration, and driven by a desire to enable innovative nonprofits to provide better and cheaper public services, the Conservative-Liberal Democrat coalition government has been determinedly putting in place enabling forces; the most well-known is Big Society Capital. This wholesale bank is mandated to develop a sustainable social investment market, and it has £600 million in capital from disused bank accounts and bailed-out banks. The money will be invested in social investment finance intermediaries—the private organisations that will put up the capital for Social Impact Bonds, or SIBs (pioneered in the UK, and now replicated in New York City by Mayor Bloomberg), and other pay-for-success models.
So the supply side of social investment looks healthy in the UK. But what about the demand side? Any market depends as much on a pipeline of great entrepreneurs seeking investment as it does on a supply of capital. Although the UK has a well-established, passionate, and innovative nonprofit sector, research shows that it 1) lacks the necessary scale or appetite to take on repayable finance, and 2) lacks the robust impact measures needed to persuade investors to fund it.
Compared to the “big bet” it made on Big Society Capital, the UK government has put precious little into building the demand side of the market: the innovators it wants to deliver these public services, financed by social investment. At Impetus Trust, we use venture philanthropy to build the scale, capacity, and outcome measurement skills of brilliant nonprofits, and we see investment readiness as an indicator of success.
We also track examples of best practice around the world and have followed the US’s Social Innovation Fund (SIF) since its inception. Our recent briefing paper argues that, through its innovative funding model, the SIF is building investment-readiness in the US nonprofit sector, despite not having a mandate to do so. We show that the UK government could use elements of the SIF’s models to drive investment-readiness and deliver much better value for taxpayers.
The SIF model—in which grants are given via intermediaries to nonprofits on the frontline, with government money leveraged 1:3—is truly innovative in the context of government grantmaking. It also provides expertise in scaling and capacity building to the front line—something government officials simply can’t. The UK government does provide “capacity-building” grants to nonprofits, but there is no evidence that these are spent in ways that build long-term resilience and reduced dependence on grants.
SIF’s demand that beneficiaries show their deepening impact is unique, and they provide a route to the kind of outcome measurement that gives investors confidence of social and financial return. The SIF’s funding also outstrips the amount that the UK is putting into the demand side of the social investment market (discounting the millions spent on “building the sector’s capacity” over the years). In the US, $150 million of federal money has been matched by $350 million of state and private money, providing phenomenal value for taxpayers and building the fundraising capacity of local nonprofits.
Paul Carttar, the SIF’s first director, told Impetus that the SIF model has garnered significant attention in Washington, DC, and that federal departments with more significant budgets are interested in replicating the Fund’s features with their nonprofit grant recipients.
Our conclusion is that, as a by-product of its desire to drive social innovation, the SIF model may well drive a class of investment-hungry and, crucially, investment-ready nonprofits. The focus on building the resilience of a whole organisation, deepening social impact, and evidencing this will create sophisticated nonprofits that can specify the outcomes they produce and match these to commercial opportunities in the public or private sector. For attractive propositions, the investment is likely to appear without the government needing to massively stoke the supply side.
Impetus is recommending that the UK government builds on the US experience, and consolidates some of its disparate grant streams into one fund with the explicit goal of driving long-term sustainability and investment-readiness. This should be distributed via intermediaries with a track record of doing just this and should require that they match fund. This way of funding is far more likely to identify social innovators with a scalable model and a desire to take on investment as they grow. If Big Society Capital’s money is to be put to use in the way it was intended, the UK government needs to work harder—and smarter—to ensure that the right organizations are ready.