Big Finance Offers Some Thoughts

The key insight of “A New Approach to Funding Social Enterprises” by Buggs-Levine, Kogut, and Kulatilaka is not that harnessing financial engineering will usher in a golden age of fully sustainable and financed socially innovative ventures. Per this week’s discussion on “Capitalization and Impact Assessment for Social Innovation,” it makes sense to want look for answers, for the answer, regarding long-term funding that works. For most of the article, this was my expectation—that it was headed towards a claim about the answer for financing solutions to the world’s woes. However, in the end (literally, in the final paragraph), the authors give a key insight that is important to how we approach this topic this week. They admit that, while tapping the power of finance for social innovation would be amazing, they don’t know exactly how to do it.

Back when I was managing a small, struggling nonprofit (with a small, struggling revenue stream), if someone had approached me and said that I should explore quasi-equity or securitized debt as a funding solution, I wouldn’t have had (and still don’t have) the wherewithal to give such options much consideration, and this is likely true of the majority of nonprofit and humanitarian types. By admitting that their proposal of “creating fully functioning capital markets and legal frameworks to serve social enterprise” is still a work in progress and meeting us less-savvy good-doers on our level, the authors add a bit of credibility to their suggestions. For such a potentially boring subject and one that they realize many people don’t want to talk about, they do make high finance a little more accessible and do offer some potentially creative and impactful ways to change the world.

The main question that they leave open-ended, and which social ventures need to ask and are increasingly asking, is how to then unlock and utilize financial engineering as a better alternative to the traditional donor- and grant-funding model. Pertinent to this week’s topic, financial engineering gives a ready way to better assess impact, if through nothing else than there being lots of numbers. Instead of fudging numbers about capacity building or target group multipliers, project reports can show an actual return, an actual impact. It’s as simple and pragmatic as “We did this, it worked this much, and here’s the money to prove it.” Will financial engineering and utilizing debts and equities make the world a vastly better place? Probably not, but probably more-so than other current funding methods and in the very least it would make report writing a little less of a drag.