Social Business Models for the
New Economy
David Greco, President & CEO
Social Sector Partners
AGENDA
• Key Funding Trends
• Social Investing Models
• Investment Readiness
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A RAPIDLY CHANGING SECTOR
•
•
•
•
•
•
Technology & Data
Big Money
Government
Market Solutions
Impact Investing
Regionalization & Collaboration
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TREND #1: EFFICIENCY
Aim is to improve the flow of money that is
currently in the social sector:
• The Overhead Myth
• Real Cost Project
• Nonprofit Overhead Project
• Office of Management & Budget (OMB)
Guidance on overhead rates
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RECENT EXAMPLES
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TREND #2: MORE MONEY!
Aim is to increase the size of the pie by
bringing private capital into the social sector:
• Social Impact Bonds
• Pay for Success
• Impact Investing
• Slow Money, Patient Capital
• Hybrids, B Corps, L3C’s
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NONPROFIT ‘CAPITAL’ MARKET
Source: National Center for
Charitable Statistics, April 2016
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U.S. CAPITAL MARKETS
And yes, that
is to scale Source: Securities Industry & Financial
Markets Association (SIFMA)
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THE IMPACT OF IMPACT INVESTING
If we could move 0.5% (one half of one percent) of money
from the private to the social sector, that would mean an
additional $335 billion for social sector organizations!
$335Billion in New Money!
U.S. Capital Markets
= $66.9 Trillion
Nonprofit Capital
Market = $1.8 Trillion
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AGENDA
• Key Funding Trends
• Social Investing Models
• Investment Readiness
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SOCIAL INVESTMENT MODELS
• Philanthropic (PRI, MRI)
• Pay for Success / Social Impact Bond
• Impact Investing
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PHILANTHROPY BEYOND THE GRANT
Regular
Investments
MissionRelated
Investments
Programrelated
Investments
Grants
Primary
purpose
Financial
gain
Financial
and social
gain
Charitable
benefit
Charitable
benefit
Investment
profile
Maximum
risk-adjusted
financial
return
Usually at or
near market
return
Modest
financial
return; almost
always below
market
Zero financial
return
Constraints
“Jeopardizing investments”
are subject to penalties
“Charitable purposes” must
satisfy IRS requirements
PROGRAM RELATED INVESTMENTS
Program-related investments (PRIs) are investments made by foundations to
support charitable activities that involve the potential return of capital within an
established time frame.
Make Foundation funds available for charitable purposes (like grants)
BUT
Generally come back to the Foundation, with some interest – generally below
market rates (unlike grants)
AND
Can never be made for the primary purpose of financial gain (unlike regular
Foundation investments)
MISSION-RELATED INVESTMENT
Mission Related Investments (MRIs) are investments of a
foundation's endowment assets in opportunities that align
with its program goals.
Financial investment made with the intention of:
(1) Furthering a foundation’s strategic goals
(2) Obtaining a financial return (at or near market rate)
PAY FOR SUCCESS &
SOCIAL IMPACT BONDS
• Pay for Success (PFS) is an approach to contracting that
ties payment for service delivery to the achievement of
measurable outcomes. The movement towards PFS
contracting is a means of ensuring that high-quality,
effective social services are working for individuals and
communities.
• Social Impact Bonds (SIBs) are a mechanism by which
to shift financial risk from service providers to investors,
with investors underwriting service providers’ based on
their ability to deliver on positive social outcomes.
Source: PayForSuccess.org
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HOW PAY FOR SUCCESS WORKS
1. GOVERNMENT identifies a critical social issue with historically
poor outcomes such as recidivism, chronic homelessness, or early
childhood education.
2. PRIVATE FUNDERS such as foundations, banks and businesses,
provide upfront capital to a high-performing social service provider
that is helping a specific at-risk target population.
3. SERVICE PROVIDERS deliver services to key at-risk
communities, in an effort to reach or exceed predetermined outcomes
for success.
4. EVALUATORS rigorously measures outcomes to ensure providers
achieve impact.
5. GOVERNMENT repays private funder’s initial investments only if
project is successful in achieving positive outcomes.
Source: Third Sector Capital Partners
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PAY FOR SUCCESS/
SOCIAL IMPACT BONDS
PFS/SIB CONSIDERATIONS
• Need for Upfront Capital: Most service providers
are not in a strong enough financial position to
deliver services for several years with no
dedicated revenue.
• No Outcome. No Money: Providers risk not
being repaid if they do not achieve the preagreed upon outcomes in a Pay for Success
(PFS) contract.
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SOCIAL / IMPACT INVESTING
• Investments made into companies,
organizations, and funds with the intention
to generate social and environmental
impact alongside a financial return.
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BUSINESS MODELS AND
ACCESS TO CAPITAL
Traditional
Nonprofit
Hybrid/Social
Enterprise
Social Driven
Business (B
Corps, L3Cs)
Socially
Responsible
Business
Traditional
Corporation
Traditional
Philanthropy
Venture
Philanthropy
Impact
Investors
Socially
Responsible
Investors
Market
Investors
Social Impact
Impact Then Profit
Market Rate
Return
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PATIENT CAPITAL
• Patient capital investing bridges the gap between the
efficiency and scale of market-based approaches and the
social impact of pure philanthropy. Patient capital has a
– high tolerance for risk,
– has long time horizons,
– is flexible to meet the needs of entrepreneurs, and
– is unwilling to sacrifice the needs of end customers for the
sake of shareholders.
• At the same time, patient capital ultimately demands
accountability in the form of a return of capital.
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AGENDA
• Key Funding Trends
• Social Investing Models
• Investment Readiness
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INVESTMENT READINESS
• Impact investing has made significant progress
unlocking and mobilizing capital. Now, impact
investors see a more pressing issue, which they
refer to as the “pipeline problem” – that the
supply of impact capital is greater than the
investment-ready opportunities for deploying it.
Source: Rockefeller Foundation, “Growing supply and demand together:
Ten priorities for the impact investing industry”
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ASSESSING YOUR
INVESTMENT READINESS
Outcomes
Driven Strategy
Ability to
Handle Risk
Real Cost
Where are you going?
What are you trying to
achieve?
How much risk can
you take? Can you
pursue opportunity?
What is you fully
loaded cost of doing
business?
Can you measure your
outcomes? Evaluate
the success of your
programs?
What is your
unrestricted liquidity?
Do you have access to
capital?
Do you have a
revenue/business
model that get you
there?
OUTCOMES DRIVEN STRATEGY
• What does success look like?
• Impact Thinking – Starting with the end in
mind
• Outcomes Measurement capabilities
• Program Evaluation and Metrics
• Accountability and Adaptability
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ABILITY TO HANDLE RISK
• Liquid Unrestricted Net Assets (LUNA)
– the amount of cash, receivables and
liquid investments that is free and clear of
any restricts or liabilities.
• Risk or Change Capital – investments in
the business model and capacity of the
organization.
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THE ROLE OF RISK CAPITAL
Business Model Revenue
REVENUE
Profitability
Expense
Deficits
Point of
Sustainability
Valley of Death:
Where ill-planned
and ill-funded
ventures fail
Profits
Start-Up
Proof of
Concept
Surplus:
Reinvested towards
future growth and /
or improvement
Expansion
Sustainable
Operations
Adapted from the Lifecycle of a Venture, UC Davis Center for Entrepreneurship
REAL COSTS
• Like any corporation, nonprofits need to cover
the full cost of business:
Program
Expenses
Operating
Expenses
Working
Capital
Fixed
Assets
Reserves Debt
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EXERCISE: READINESS
STOPPING COUNTERPRODUCTIVE
ACTIVITIES AND BEHAVIORS
1.
What can you do to make sure that you achieve the worst
result imaginable with respect to being investment ready.
2.
Is there anything that we are currently doing that in any way,
shape, or form is on the list? Be brutally honest!
3.
What first steps will help us stop what we know creates
undesirable results?
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RESOURCES
• Finance for Good - http://financeforgood.ca/
• Global Impact Investing Network (GIIN) - https://thegiin.org/
• Harvard University Social Impact Bond Technical Assistance
Lab (SIB Lab) - http://govlab.hks.harvard.edu/
• Mission Investors Exchange https://www.missioninvestors.org/
• Nonprofit Finance Fund - www.payforsuccess.org
• Rockefeller Foundation https://www.rockefellerfoundation.org/ourwork/initiatives/social-impact-bonds/
• Third Sector Capital Partners - www.thirdsectorcap.org/whatis-pay-for-success/
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For more information:
David Greco
President & CEO
Social Sector Partners
Email: [email protected]
Website: www.SocialSectorPartners.com
For a copy of this PowerPoint, check
cnmsocal.org/501conference next week.
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