Social Impact Bond--an innovative FINANCIAL TOOL to support social outcome

Question from Prof Z in the email: “Are the actions of government to support entrepreneurship in general enough or is there more that can be done to encourage venture development aimed at financially sustainable social impact?”

My follow-up Question: “Is it possible for government to develop social entrepreneurship by encouraging venture development aimed at financially sustainable social impact?”

I come across the website of “The Young Foundation”, and find “Social Impact Bond” ---a financial tool being developed in the UK (by the Young Foundation and Social Finance) to provide a new way to invest money in social outcomes. In my opinion, it is an innovative idea that combines the strength of government and venture capital.

(What is Social Impact Bond?http://en.wikipedia.org/wiki/Social_impact_bond)

SOCIAL IMPACT DIAGRAM

  Their key innovation is to link three elements:

• investments (by commercial investors or foundations);

• a programme of actions to improve the prospects of a group (for example 14-16 year olds in a particular area at risk of crime or unemployment); and

• commitments by national government to make payments linked to outcomes achieved in improving the lives of the group (for example, lower numbers in prison, and lower benefits payments).

Various versions of social impact bonds have been developed in the past by a number of people associated with the Young Foundation. More recently work has been done as part of the Innovation, Justice and Youth programme, building on concepts associated with ‘justice reinvestment'. The long term goal for Young Foundation is the concept being developed in collaboration with national and local government as well as foundations.

A pilot project has been implemented early this year.

“On the 18th March 2010, Social Finance announced the launch of the first Social Impact Bond with the Ministry of Justice.

This first issue will fund social organisations working to reduce the re-offending rates of short sentence male prisoners leaving Peterborough Prison. The Ministry of Justice has agreed to make payments to investors in the event that re-offending is reduced below an agreed threshold.

Re-offending is an area where preventative work could lead to a better society and save the taxpayer money. Of the 40,200 adults on short term sentences, an estimated 60% will go on to reoffend within a year of release, at a significant cost to the taxpayer and society.

During the Peterborough Prison pilot, experienced social sector organizations, such as St Giles Trust, will provide intensive support to 3,000 short-term prisoners over a six year period, both inside prison and after release, to help them resettle into the community. If this initiative reduces re-offending by 7.5%, or more, investors will receive from Government a share of the long term savings. If the SiB delivers a drop in re-offending beyond the threshold, investors will receive an increasing return the greater the success at achieving the social outcome, up to a maximum of 13%.”

The innovative idea of social impact bond is using government guarantee to give an incentive for investor; investment investors receive greater financial return as the social return improves. My question for this model is: both the public sector (government) and the venture capital has value system respectively, (Government value more of the social outcome and venture capital focus on financial return and cost-benefit assessment), who deliver the final assessment of the project(that the financial return based on)? How to make sure the opinion is unbiased? Is it necessary to hire an objective party (like an audit) to perform project evaluation?

The Hybrid Model -- A 2-Headed Animal

Hybrid Model for Nonprofits Hits Snags

This article highlights some successes and failures of hybrid models. One model it mentions is L3C model (a mix of LLC and 501c3). Here is a description of an L3C that I found elsewhere:

"The low-profit, limited liability company, or L3C, is a hybrid of a nonprofit and for-profit organization. More specifically, it is a new type of limited liability company (LLC) designed to attract private investments and philanthropic capital in ventures designed to provide a social benefit. Unlike a standard LLC, the L3C has an explicit primary charitable mission and only a secondary profit concern. But unlike a charity, the L3C is free to distribute the profits, after taxes, to owners or investors. "

Source: http://www.linkedin.com/news?viewArticle=&articleID=223342695&gid=1971652&type=member&item=32081918&articleURL=http%3A%2F%2Fwww.asmainegoes.com%2Fcontent%2Fprofit-or-not-profit-what-heck-why-not-both&urlhash=ToL_

It seems to me that the L3C is a way to legally formalize hybrids in that the charitable mission can override the most profitable option on the table. In other words, if the most profitable option is not also the option that provides the most social benefit, decisions may default to providing the maximum social benefit and foregoing some profit. As the New York Times article suggests, different people have different feelings on the matter.

The author, in vivid imagery, explains:

“But like Dr. Dolittle’s pushmi-pullyu, the animal that had trouble moving because its two heads could not agree on a single direction, the hybrid model for nonprofits is proving problematic. On occasion, the need to generate returns for investors overwhelms the social mission. In other cases, the business falters altogether and cannot support the nonprofit.”

In the case of failed hybrids, my question is: How can we be sure the hybrid model itself is at fault (as some of the folks in the article claim)? Couldn’t it be that any number of other scenarios which cause non-hybrids to fail are at play?

Decreasing Taxes to Spur Social Innovation

The articles this week highlighted the importance of finding ways to fund social innovation and enterprise. The "funding gap," as discussed in the article by Michael Chertok, Jeff Hamaoui, and Eliot Jamison, could be ameliorated by leveraging government power. The government determines tax regulations and policies, and one way in which it could potentially mitigate this funding gap is by lowering taxes on corporations. The government often does not have the money that the private sector has for investment. Innovation is high-risk, and it may not seem fair to have all taxpayers bear the burden of these risks. Moreover, because lots of money is involved in innovation, private investors must choose projects that they feel are likely to succeed. This fact may lead to the creation of more successful social innovations that can spur similar projects. Moreover, private investors have the ability to work with bottom-up approaches in ways that the government cannot. These private investors can look for solutions that are relevant in their communities as opposed to the government telling them which policies to abide by.

Despite some of the positives that come out of decreased taxes for corporations, can mechanisms be put in place to ensure that they follow through with projects that are socially conscious? Are these mechanisms even needed in the first place?

Anectdotal Evidence and Creating more "Effective" BoP Markets

Many social impact enterprises use anecdotes as evidence of their success, or to illuminate the annual milestones and achievements. As evidence by Ted London in his piece "Making Better Investments at the Base of the Pyramid", anecdotal evidence is limited in its scope and ability to measure the full impact of a social impact enterprise. He argues that social enterprises should strive to take account of the whole picture to evaluate both the 'major and minor effects" of an enterprises impact.

I agree with London, here and combined Geoff Mulgans argument stressing the need to begin to examine the areas where we can build "effective supply and demand social impact markets," anecdotal evidence could better be used to engage producers and consumers in the BoP market. "Effective demand means that someone is willing to pay for a service or an outcome. That 'someone' may be a public agency, a foundation, or individual citizens. Effective supply means that the service or outcome works, is affordable, and is implementable" declares Mulgans. I find that often times social impact enterprise fail to engage their constituents when promoting their success, using most of their marketing resources to attract new investors. Why not treat the constituent like an investor, where educating the constituents--really consumers-- would create greater network externalities for the enterprise itself. This approach has the potential to limit the need for in hiring members of the community to promote and educated benefits of that advantage of the products/services provided by the enterprise. The more consumers the greater the profit margin and ability to scale. Now its never that simple, but enterprises should not fail to see the power of the anecdote to attract new consumers. Not to mention its likely to be less expensive than initiating a traditional marketing campaign, involving focus groups, production teams and the like. I truly believe this approach will help to broader social markets of increasing the demand and supply all together.

Exploring BoP investment opportunities in my backyard

Over the last several weeks, we have been reading about opportunities for social entrepreneur at the so called "Base of the Pyramid" (BoP). This week we read the Harvard Business Review article, "Making Better Investments at the Base of the Pyramid." Every article on this topic have added a slightly different perspective, this particular article talks more about methods to access poverty alleviation of businesses serving this segment of the world's population.

The value at the BoP is undeniable, but is anyone wondering about the implications for U.S. social entrepreneurs aggressively pursuing opportunities to serve the BoA at the expense of our own communities? Just a thought. Poverty is real, even in America. This is not an attempt to persuade social entrepreneurs to focus domestically, but to acknowledge and collectively encourage people to explore poverty in the U.S.

Everything that I am, have seen, and experienced with poverty validates that I have an opportunity to improve the quality of people's live's right here in my own backyard. For others, seeing the pictures and the face of poverty from the aftermath of Hurricane Katrina was enough to concede that we have a lot of work to do right here on our own soil.

My post is an effort to explore opportunities to serve the people at the BoP in our own country. What ideas do you have to investment in this population? How will you measure your success. One such example is Back on My Feet; a nonprofit organization that promotes the self-sufficiency of homeless populations by engaging them in running as a means to build confidence, strength and self-esteem.

Considering the impact

The Harvard Business Review article, "Making Better Investments at the Base of the Pyramid" made me reflect on our class discussion about unintended/unforeseen consequences of social innovations.  It's interesting that a venture that is geared toward positive change can also create negative effects that we don't realize, more specifically for the constituents directly receiving the products or services. 

Positively, Ted London talks about how Rama's involvement in VisionSpring helped to strengthen her relationship with her husband as they both were working together on the sales team. Conversely, their management team, using the Base of the Pyramid Impact Assessment Framework, was also able to recognize the potential strife that families in the community may feel toward women in non-traditional roles.  London's approach in and of itself is a social innovation as its a novel idea, is better than what is already being done, and certainly appears sustainable.  It's a social innovation that helps other social innovations succeed.

Image from: http://bop2009.org/ia.aspx

Throughout our readings and videos, I can't help but think about the men, women, and children and how they really feel about the innovations. This week we read about measuring social value using supply and demand, but I like how London also considers peoples' self-esteem, contentment, and aspirations. I believe that anecdotal information is a great way to assess the impact of an innovation on people.  It's really the only true way to tell if people are happy and how the venture is affecting their everyday lives. The numbers say a lot, but does that mean the innovation is really accepted? MIT Sloan business review touches on this idea in the article entitled "Innovation from the Inside Out."  It states: 

"Nurturing a new and lasting idea doesn’t result from analyzing market data. Aspiring creators must act on what nonprofits already know: you get the best answers by burying yourself in the questions."

They reflect on Muhammad Yunus' work as well. 

http://sloanreview.mit.edu/the-magazine/articles/2009/summer/50414/innovation-from-the-inside-out/

 

What if the community you are trying to help does not welcome the change? Could London's assessment tool be used to examine the population before even implementing the venture?

One System for Everyone?

The readings this week have focused on how to measure the impact of social innovations. While everyone agrees on the importance of metrics, no one seems to be able to say exactly what those metrics should be. Several conferences have been held in the last few years focusing on the measurement debate, referring to the need of measurement as everything from the elephant in the room to the next frontier of social enterprise. Social enterprises span a broad range of companies whose own goals and definitions of impact are very different. How can a universal system of measurement be applicable to this variety of organizations? At the Microfinance Impact and Innovation Conference this year, Jody Rasch, Senior VP of Data Governance Group spoke about the development of social performance ratings for microfinance groups. The presentation included several slides about standardized metrics and how to measure social impact and performance. Perhaps when dealing with one category of social enterprise, such as microfinance, specific metrics and tools for measurement can be successful. Yet, can these same systems of measurement be applied to other ventures? Many investors now require more rigorous metrics in order for ventures to be considered, and even governments and foundations are using metrics as a criteria for consideration. Will these new standards force social enterprises to be more diligent in their assessment of their impact? Or will new obstacles be created that limit the ability of smaller, more local organizations to compete for funding and investments? Larger businesses have more resources to put toward data collection and intricate systems of measurement and analysis. Larger businesses also tend to have further reaching impact, therefore their numbers may be more impressive. Smaller and newer ventures could be overlooked because they do not have the same impressive numbers either because they have less capacity to collect data or because their local initiatives do not intend to reach as many people as a global initiative.

Government and Financial Innovation: Putting their Tax Policies where their Mouth Is

Who likes to pay taxes? Anyone? Anyone? Bueller? Yeah, I didn't think so. But the fact is taxes pave our roads, defend our borders, and educate our children. Despite the many benefits we still have a strong aversion to paying any more than we have to pay. This creates murky waters for social enterprises that are looking for investors yet do not fall clearly into the US tax code as either a for-profit or non-profit.

This week our class focused on capitalization vehicles as well as measurement techniques for social enterprises. The ambiguity of social innovations and tax code structure often leads to investors putting their money into either for-profit investments or donating to charity leaving social innovations in the dust.

What to do about this quandary? In the article "The Funding Gap", Michael Chertok, Jeff Hamaoui, and Eliot Jamison talk about the massive effect government's have when it come to shaping individual's investment habits. The United Kingdom took the lead in 2005 by creating a category called the Community Interest Company (CIC) .

CIC's operate as a non-profit / for-profit hybrid that is legally bound to benefit the community and not just churn a profit. According to the CIC Annual Report the UK approved applications for 1,296 CIC's for fiscal year 2009-10. The UK has a population of about 61.5 million people. It could be argued that if the US had a similar tax code that 6,469 CIC's would have been approved based on population considerations.

Imagine how much money would flood into the social enterprise arena with a CIC code!! Hope Consulting estimated that the United States has a $120 billion market demand for investments that also serve a social purpose. (Read more about this in their May 2010 study " Money for Good ") A tax code similar to the UK's CIC would be a good start in actualizing that $120 billion potential.

Leveraging the tax codes is just one step in convincing potential funders to invest. Savy investors want metrics showing the effect of their investment. Here were not just talking about ROI, we're talking social impact. There are numerous suggestions on how to measure social value. Ted London at the Ross School of Business at the University of Michigan has published in the Harvard Business Review about considering how a social venture changes an areas Economics, Capabilities, and Relationships for Sellers, Buyers, and Communities. The Acumen Fund has produced metrics to help value a social venture. However, it will take time and collaboration before a tested set of best practices are adopted widely by the community.

If you were deciding to invest in a social venture what metrics would motivate you to invest? As a graduate student, I will be working to get out of debt for years to come. However, I am attracted to investments that have sound financial stability with a history of R&D investment. I would be looking for the GE of social innovation, but maybe that's me as a risk averse investor unsavvy investor. I would expect that the managers of VC firms focusing on social impact would be attracted to much different criteria than myself. We do have one thing in common though. Neither of us want to see our dollars go to waste, but rather fuel the development of ventures that seek to better the world.

Do We Need Numbers to Assess Social Impact?

I do not agree with the assessment tool Ted London proposes in his article Making Better Investments at the Base of the Pyramid to measure organizations’ performance and social impact.  I agree with the idea that business, non profits, and other organizations who deliver products to and purchase goods from the base of the pyramid cannot rely on measures such as tasks completed or milestones achieved.  I find Ted London’s framework extremely useful to set the long term objective in an organization, or to identify and enhance the positive effects, or to find and avoid the bottlenecks.  Nonetheless, I think his framework is weak and inconsistent to measure social impact and performance. 

In my opinion, Ted London’s framework has five flaws:

1.       It is not clear in how to determine which effect would be a major one and which a minor one. It seems that you have to make that calculation by intuition or according to your personal interpretation.  Usually, these kinds of calculations lead to personal biases.

2.       Let’s suppose that you have two major effects and one is positive and the other one is negative, how do you determine which one is the most important one?  It can be the case that each stakeholder has a different weight for those effects. Well, which is the good one? How do you know that? In a large organization with many stakeholders this method would be chaotic to make decisions.

3.       The framework has zero objectivity. You have to determine if an effect is positive or negative. The problem is that social issues can have many interpretations.  What is good for me, it is not necessarily good for you and vice-versa. There is always a trade off in resources. For example, in the case of VisionSpring, the new glasses affected positively elderly artisans and negatively young ones and the author thinks that the effect for younger artisans is a minor one. How does he know that?

4.       In trade and economic transactions, there is an infinite chain of effects. How do you enlist the all the positive and negative effects? It is a complex system and you would have many effects interconnected; how do you determine which are important and which are not?

5.       Finally, I agree that the organization has an impact in the community, but what is the scope of the community? How do you define “this is going to be my community”? A community could be only the neighborhood or the village, or a city, or a social community related to a church for example.

I think the three measure dimensions the article proposes (economic, capabilities and relationships) cover a wide spectrum, but they are not properly defined. They try to range over many aspects and at the end they are very ambiguous.  

In my opinion, it would be better for an organization to identify first its objective, if it has a single one or if it has many.  Then, they should select some variables or indicators to measure the accomplishment of those objectives over time. For instance, in the VisionSpring case they should set as objectives to increase women and elderly income, and focus into evaluating only these two through a couple of variables.  It is tough to measure social impact and I cannot figure out another way to do it, it is difficult to define which is the scope we want to measure. There are too many variables to take into account and the criteria to define which are important and not is hard to define. As well, I am reluctant to the idea of not using numbers to measure social impact. Do you think we need numbers and variables to measure social impact? I think yes we do.  In any case, conceptually I like more the approach to social impact developed by Geolff Mulgan, who understands social innovation as an interaction of supply and demand.

Look in the Books?: Assessing Progress in Social Innovation

As social innovation becomes more mainstream and continues to become a viable alternative to pure non-profits by linking the private and non-profit sector, a reoccurring issue that continues to arise is how we measure the success of these ventures. With more hybrid models that blend business practices with alleviating social ills, success can no longer be measured by simply looking at profit and revenue models. There must be a broader discussion that examine the potential costs and benefits of these projects and find ways to make them sustainable in a competitive market, while continuing their mission of doing good for society.

For many people, these two worlds do not naturally blend - the ol' oil and vinegar problem. For others, the hybrid model allow social innovation to be sustainable, efficient and cost effective. As social innovators and entrepreneurs continue to play a more dominant role in shaping society, methods to measure the success and impact of these organization and projects must continue to evolve.

One organization tackling just this challenge (or should I say opportunity) comes out of the UK. Called Social Innovator, it was begun by a collaboration between the National Endowment for Science, Technology and the Arts (NESTA) and the Young Foundation. They connect organizations and individuals working in the field and have great resources on their website for exploring growth and opportunities in social innovation. One such resources compiles an extensive list of potential markers and matrices that can be utilized to evaluate progress and potential areas of growth for social innovation. Social Innovator puts forth that the tools of evaluation already exist and are being used, however, application in the social realm has been lacking because of different interest:

"One reason why this field has failed to make progress is that there is often confusion between three different tasks for metrics: to provide funders or investors with data on impact; to provide a tool for organizations to manage their own choices internally; to better understand long-term processes of social change and impact. Although these purposes overlap, any one metric cannot do all three of these tasks simultaneously, and there are direct conflicts of interest between the players involved in each of these."

Social Innovator has compiled a list of these potential markers and how they can be applied to social innovation. This examines tool from financial and accounting practices and cost-benefit analysis to surveying practices and social impact assessment. These measure seek to determine financial viability as well as impact on society to determine the sustainability and the need to continue certain programs. With these measures in place, governments can then reward projects with great impact who are financially secure, while helping those whose benefit outweigh their cost on a social level, but may need help on the funding side. We must also broaden our perspective on what constitutes social innovation. As many of these entrepreneurs blend practices and ideas that have been in existence for some time, the tools we use to evaluate them should also look to what has come before and move them to a higher level of use.

A few questiosn to ponder: Should more weight be placed on one side of the spectrum over the other (financial considerations over social good)?

Often, environmental regulation looks at externalities and passive use cost and benefits associated with decisions to regulate. Can these methods be used in the realm of social innovation? Can social good be taken into account when speaking of accounting?

Improving the Hybrid Model: Less Integration

In a piece from the Stanford Social Innovation Review entitled, “the Funding Gap,” we are introduced to the hybrid social venture. According to the article, social entrepreneurs choose to build their ventures as hybrids (two coordinated organizations—one for-profit and the other not-for-profit) in order to give themselves access to both philanthropic and commercial capital. The article underscores some of the pitfalls of the hybrid model, but does not delve into the intricacies of the model’s shortcomings. A recently-published article from the New York Times that has already been referenced by a fellow blogger this week, entitled, “Hybrid Model for Nonprofits Hits Snags”, offers several examples of recently formed hybrid ventures that have encountered difficulty and points to reasons why the hybrid nonprofits it offers as examples have struggled. Two of the hybrid ventures it discusses, the partnership between a charitable foundation, GlobalGiving, and a private company, ManyFutures, and a similar partnership between a nonprofit that supports artisans worldwide and a private company that connects artisans around the world with retailers, encountered trouble because the private arms of their partnerships could not generate returns for investors. Based on this article from the Times and the piece from the Stanford Review, the inability of the private partner in a hybrid social venture to take off and thereby provide a strong source of funding to its nonprofit affiliate seems to be a common problem.

When the private partner of a hybrid venture encounters financial difficulty, it may entirely fold, or be taken over by a larger private firm. Under either one of these scenarios, it is extricated from its nonprofit partner, leaving this latter entity in the lurch. How can the hybrid model be improved so that hiccups by the private partner of a hybrid social enterprise do not spell doom for the entire venture? Perhaps if the two partners were not entirely integrated, the model would be more successful. The partners in the hybrid ventures we read about in this week’s readings shared common boards of directors and operational structures. When this is the case, the two partners have no option but to share a common fate. What if, however, a hybrid venture was established with discrete boards and systems of operation? Sure, if the private partner failed, the nonprofit partner would still take a major funding hit and face the question of how to raise capital independently. Its owners and operators, however, would not be financially bereft and demoralized after just having lost a good portion of their assets. They therefore would most likely still possess the resources and the wherewithal to stay afloat. Perhaps, then, the best practice for hybrid partners is cooperation rather than integration.

For two entities to form separately, but concurrently, with an agreement to cooperate and share assets would be challenging. It would require constant communication between the partners and a strong sense of common mission. I would be interested to explore the extent to which something like this has been attempted.

What is the White House's Stance in the Impact Assessment Debate?

Our readings this week focused on Capitalization and Impact Assessment for Social Innovation. While reading the struggles and theories associated with properly assessing social enterprise ventures, I wondered what the role of the American government was in this conversation. Specifically, I wondered if the new White House Office of Social Innovation and Civic Participation (SICP) and its Social Innovation Fund (SIF) had taken a stance on the issue. Has the SIF, which, in the words of our First Lady, seeks to “find the most effective programs out there and then provide the capital needed to replicate their success in communities around the country,” established criteria to properly gauge what is and is not a successful social innovation (Lee 2009)? Has it found a way to effectively determine whether social enterprise firms have effectively “demonstrated results and are ready to spread across the country to meet community needs” (Lee 2009)?

Time will tell. The SIF, started in 2009, is still in its infancy, so it may be too soon to judge its selection criteria and results. In addition, it is difficult to determine the details of its selection criteria as its website speaks mostly in generalities in this regard. It lists the following as goals by which it governs its funding efforts:

· Leverages a 3:1 private-public match

· Sets a higher standard for evidence

· Empowers communities to identify and drive solutions

· Creates an incentive for grant making organizations to more effectively target funding to solutions that generate real impact (Corporation for National and Community Service n.d.)

However, in true political fashion, the website lacks the details behind how it gauges “real impact” and is elusive in its definition of the “strong track records” that it requires its grantees to possess (Corporation for National and Community Service n.d.).

Despite this ambiguity, as alluded to in the Stanford Innovation Review article, which lists Government Policy as one of the long-term undertakings important to the success of social innovations, the SICP and SIF’s mere existence is a step in the right direction on the path to an environment in which social enterprise efforts are properly measured and funded (London 2009).

Those interested in learning more about the White House's efforts should check out their site: http://www.nationalservice.gov/about/programs/innovation.asp. After reading up on the organization, feel free to comment on your thoughts about their effectiveness and how their presence benefits the Social Innovation/Enterprise sector.

Sources:

Corporation for National and Community Service. n.d. http://www.nationalservice.gov/about/programs/innovation.asp (accessed 11 16, 2010).

Lee, Jesse. The White House Blog. 05 06, 2009. http://www.whitehouse.gov/blog/what-is-the-social-innovation-fund/ (accessed 11 16, 2010).

London, Ted. "Making Better Investments at the Base of the Pyramid." Harvard Business Review, 2009: 10.