Blueprint Research & Design

There is a wealth of information for individuals who want to learn how foundations have historically approached the issue of mission investing. For program-related investments, there are the Ford Foundation’s two reports, Grantcraft’s guide, the Packard Foundation’s case studies, and the transcripts available from the 2006 PRI Conference. For mission-related investing, there are Rockefeller Philanthropy Advisor’s two monographs, FSG Social Impact Advisors’ report and SSIR article, the Case Study on the F.B. Heron Foundation published by Southern New Hampshire University, and Blueprint Research & Design’s report on community foundations.

To put the various pieces of mission investing in context, the Philanthropic Capital Matrix below illustrates 6 funding opportunities that foundation’s have to support nonprofits and for-profits. [1]

The matrix illustrates a few key points. First, one of the fundamental characteristics that distinguish nonprofit and for-profit institutions is their ability to receive equity capital. While many in the nonprofit sector discuss the need for equity-like capital, [2] a for-profit equity investment is different in that it allows a funder to own a percentage of the assets of an organization, something that is legally impermissible in the nonprofit sector.

Second, in addition to debt and equity, foundations can provide guarantees to help capitalize both nonprofit and for-profit institutions. When a foundation provides a loan or an equity investment, it uses its capital to directly fund the activities of the recipient organization. A $10,000 loan or a $10,000 equity investment shows up on the recipient’s balance sheet. Guarantees on the other hand operate through an intermediary, providing insurance to a third-party lender for when loan recipients default. For example, when a bank makes a $10,000 loan to a business, it sometimes seeks a guarantee to limit its losses from a defaulted loan, paying a premium to an insurance firm like AIG. Nonprofits, community banks, and microfinance institutions that seek capital from a third-party may ask foundations to provide guarantees for the loans instead of making loans directly to help make the loans possible.

An additional point to consider is the difference between funding organizations and funding fields. A foundation that is looking to expand its support beyond just grants may not be concerned as much with the needs of the field writ large. It would focus its attention on the capital requirements of its existing portfolio of grantees, researching the financial statements and business plans of individual organizations. A foundation looking to make a difference in the field of microfinance, for example, would need to understand what the capital requirements are of the entire sector, examining total supply and demand as well as researching the needs of individual organizations.

Funders of social entrepreneurship, who generally support individuals and organizations rather than fields, often emphasize their process of identifying and supporting the best social entrepreneurs. Funders who practice what some call “catalytic philanthropy”[3] may be more likely to focus on the needs of a field rather than the needs of organizations, which is often the focus of traditional or venture philanthropy.

Thus, to help frame our analysis, we’ll borrow a page from the discipline of economics and discuss two different approaches to answering the question of what capital when, dividing our attention between microeconomic analysis (understanding which financial instruments to use to support an organization) and macroeconomic analysis (understanding which financial instruments to use to support a field). In our next post, we will look at the strategic difference between using grants and investments for nonprofits from the microeconomic perspective, drawing heavily from the Ford Foundation’s and Packard Foundation’s experiences in program-related investing.

[1] Since the distinction between grants, below-market rate investments, and market-rate investments is strategically more important than the distinction between grants, program-related investments, and mission-related investments, we categorize the term “recoverable grant” as a below-market rate investment since it offers some return between -100% and market-rate.

[2] Clara Miller, “The Equity Capital Gap,” Stanford Social Innovation Review (Summer 2008): 40-45, http://www.nonprofitfinancefund.org/docs/2008/ssir_summer_2008_equity_capital_gap.pdf.

[3] Mark Kramer, “Catalytic Philanthropy,” Stanford Social Innovation Review (Fall 2009): 30-35, http://www.ssireview.org/images/ads/2009FA_feature_Kramer.pdf

How Technology Is Influencing Philanthropy and Social Innovation
January 28, 5:00 pm – 6:30 pm, Stanford Humanities Center
The Stanford Center on Philanthropy and Civil Society, seeking to connect scholars with practitioners working to effect social change, continues its seminar series with a panel that include Sonal Shah, head of the Office of Social Innovation and Civic Participation; Rob Reich, faculty co-director of PACS and Associate Professor of Political Science; and Lucy Bernholz, founder and president of Blueprint Research and Design Inc.  Register.

Recap & Summary: Foundations can provide three functionally different types of capital (grants, below-market-rate capital, and market-rate capital). In order to manage assets strategically, a foundation should identify the optimal allocation of all three. This post describes a methodological framework used by Acumen Fund called the BACO methodology to help provide an analytical frame to assess different opportunities for allocating philanthropic capital.

If you were an arts funder and wanted to support the efforts of an arts organization looking to secure a building in which to operate from, would you give a $10,000 grant, an interest-free $100,000 loan, or a $100,000 loan at 10% interest? What if you were an international health funder who received two different proposals, one from a nonprofit and one from a commercial enterprise. How would you evaluate which organization you should fund? And finally, imagine you were an education funder building the field of digital media and learning with several million dollars to allocate. How would you allocate the funds across different strategies and different sectors?

All of these questions are variations on the theme of “What Capital When?” – whether it’s identifying the best form of capital for an individual organization, the best funding opportunities among multiple organizations, or the best allocation strategy for a field-building initiative. In order to answer these questions, funders must rely either on intuition or apply some sort of methodology to the decision of which type of capital to provide. Fortunately, several tools to compare philanthropic capital already exist. [A new database of such tools can be found at http://trasi.foundationcenter.org]

One common framework used in comparing grant capital to investment capital is Acumen Fund’s BACO (Best Alternative Charitable Option) Methodology and its investment in A to Z Textile Mills in Tanzania. To determine whether or not to make an investment in A to Z, the Fund calculates the net cost per unit of social impact per philanthropic dollar. For example, after calculating the true cost of a $325,000 investment at $32,500 and the expected social impact at 2,000,000 person years of malaria protection, Acumen Fund expects an investment in A to Z Tanzania will cost $.016 per person year of malaria protection. The best alternative charitable option, which Acumen Fund estimates by the best possible grant it could make to a nonprofit like UNICEF is $.839. Thus, in order to maximize its impact per dollar, Acumen Fund should choose the investment over the grant on the basis of its analysis.

As a framework, the Acumen Fund methodology is both powerful and flexible. It informs decisions about capital allocation by estimating the expected social impact and costs of each option. Comparing two different proposals from two different types of organizations? Ditto. Allocating millions of dollars across a portfolio? Check.

The devil, however, is in the details. Although calculating expected cost is fairly straightforward, calculating expected social return may feel like an unusual macroeconomics problem. In the A to Z example, there are several issues not explicitly addressed in the paper. In calculating the impact of an investment on the output of bed nets, does the analysis differentiate how many bed nets the company produces and the net change of bed net production in the region caused by the investment? It’s one thing to say that a company produced 400,000 bed nets, it’s quite another to be able to say that a company produced 400,000 additional bed nets without affecting total bed net production. And while the BACO analysis might explain why an investment into A to Z was more effective than a grant to UNICEF, it does little to explain why exactly Acumen Fund agreed to the particular terms of investment in A to Z that it did. What would the BACO analysis reveal if Acumen Fund considered making a grant to A to Z or insisted on a market-rate of return on its investment?*

The BACO method provides a theoretical framework that allows comparisons of grants to below-market-rate investments and market-rate investments. It leaves unanswered many questions for the program officer who seeks to apply the method to actual funding decisions. In the next several posts we will focus on retrospective case studies of particular foundation funding decisions to illustrate how others have answered the question of #wcwhen.

*For more information on how Acumen Fund approaches the issue of measuring impact, check out their article in  MIT’s Innovations journal. For a third-party analysis on whether Acumen Fund demonstrates impact with its investments, see this discussion on GiveWell among Holden Karnofsky of GiveWell, Brian Trelstad of Acumen Fund, and others.