Investing in Systemic Change

“Along with government lowering risks for investors, what they can do is to improve investors' potential returns” [1]

 The government’s relationship towards the social sector had been predictably a top-down one wherein not-for-profits served as Guinea Pigs (testing labs) to government programs, evaluating and testing new ideas that have the potential to be scaled. Cross sector partnerships between businesses, private investors, social enterprises, etc. and the government to systematically harness social change was an alien concept. Public enterprises were known more to be stifling innovation rather than actually stimulating them. However, just as the boundaries between the not-for-profits and businesses and social enterprises blurred, governments globally started understanding the need to tap in to the power of private enterprise too, to drive public benefit. Soon, it became imperative that a systemic change was needed for the social sector to function like a well-oiled machinary. Systemic change overcame the barriers of individual sector activity, and compelled each actor, especially the government, to find innovative ways to interact more effectively with their private counterparts.

   Public enterprises thrive on the advantage of scale. With huge resources at their disposal, they have the ability to tackle social problems at a macro level. However, their bureaucratic structures and “the value for public money” debate do not completely allow them to be experimental agencies at the micro level. Private players on the other hand are flexible organizations equipped to run ideas on untested waters, sometime multiple ones at a given time. Though they are risk averse entities in capital markets, private players are wary while investing in social enterprises, mostly due to the fuzziness associated with measuring social returns. In lieu of the current situation, I believe governments can take the following steps so it can stimulate an atmosphere of systemic change wherein individual stakeholders of change act considering their context in the ecosystem.

·         Incentivize impact: Taking Social Impact Bonds to the next level, investing equally with private investors in implementing a perceived high risk investment will secure the private sector and incentivize the sector to invest in more such projects. For example, Under the Yozma investment scheme, the Israeli government invested in socially innovative tech companies alongside private investors. This incentive of hedging risk drove investors' potential returns and therefore balanced their risk-adjusted returns [1].

·      Experimentation: Since the government is known to scale projects rather than to conduct small pockets of experimental ventures, the government could deploy the resources into these micro prototypes through social enterprises (private or otherwise). Funding experimental efforts would lead to rapid testing of innovations on the field and learning from the results. Prof Z’s Coffee Shop example is a case in point. The owner wanted to set up a mega youth training facility cum coffee shop for the youngsters in the city. After investing in just enough to test coffee sales outside a baseball game (prototyping), it was proven that the business wasn’t ready to open a big facility yet. Prototyping on small scale avoids possible costly mistakes when large scale public sector projects are implemented without experimentation.

·           Measuring value: the most successful social endeavors are explicit about their goals [2]. Government needs to bring together expertise from not-for-profits, private sectors, policy makers and academia to device adequate tools to capture and measure impact. Since different programs demand different measurement criteria, independent unbiased research that is constantly tested on the field and consequently updated and improved is imperative. Availability of these high quality, data driven tools would help private players gauge social value and further appropriate in making sound investment decisions. Not-for-profits on the other end can utilize these tools in effectively communicating the exact scope of social impact to potential investors.   

  Systemic change is not an isolated concept. The idea of government harnessing the synergies between the key stakeholders in social change, the not-for-profits, private parties, social enterprises, is powerful and can result in exponential advancement in the field of social innovation and change.   

Ideas borrowed from

[1]http://www.huffingtonpost.com/alvaro-rodriguez-arregui/the-role-of-governments-i_b_3185062.html

[2]https://hbr.org/2014/11/look-to-governmentyes-governmentfor-new-social-innovations

[3] http://ssir.org/articles/entry/co_creation_in_government