Transparency, the theme of this journal’s issue, is at the core of sustainable finance. But why does the concept of transparency in philanthropy matter? Why should we care, for example, about articulating the assumptions that go into making grants, sharing publicly the processes that determine the beneficiaries and the amount they receive? Should we hold grant makers or grantees to account for how philanthropic funds are actually spent, or whether the work they supported made any kind of difference at all?
Consider, for example, the problem underlying the work of the Social Impact Exchange, whose mission is to create a philanthropic marketplace that efficiently delivers capital to the most effective nonprofits, so they can spread their impact. Given the billions of dollars made in charitable grants each year — even when you exclude donations to religious organizations and higher education — why aren’t we seeing “the needle move” when it comes to challenging social issues, such as achievement gaps in our schools, unemployment rates among young men of color, or childhood obesity?
Now, to be fair, the philanthropic sector didn’t create these problems, and it can’t be expected to solve them on its own. And while charitable giving in the U.S. is big money — 2% of US GDP, in 2013 — it is dwarfed by the funds spent by government on education, health, workforce development, etc.
At the Exchange, we believe that we will not see meaningful improvement in our society’s intractable social problems until we establish reliable systems that will allow “best-in-class” nonprofits to aggregate the capital required to scale effective solutions in sustainable ways. In other words, we are building growth capital markets to scale social impact, with the philanthropic sector as our main audience. Although this is a new model, initial results are quite promising. Since launching our Scaling Marketplace platform in late 2013, funders have invested new growth capital dollars in eight social innovations scaling their impact.
Transparency is a core value underlying our work. The Exchange believes that to have a well-functioning philanthropic marketplace, we must have shared standards of quality and impact, and key stakeholders must have access to reliable information. For the past several years, the Exchange has collaborated with many of the country’s leading foundations, intermediaries, evaluators, nonprofit leaders, and others, to create the infrastructure needed to build a philanthropic growth capital marketplace. We have begun to create a common language describing whether a potential nonprofit investment is “scale worthy” (i.e., is it effective?) and “scale ready” (i.e., does it have a sufficiently robust plan supporting its growth over the next several years?).
At the core of “Scaling Marketplace” are the philanthropic funders we’ve convened in Working Groups, with an initial focus on health and education. Comprising over 50 private and corporate foundations and government entities, these funders and sector leaders nominate the top grantees that they believe are both “scale ready” and “scale worthy.” The Working Groups then oversee a rigorous due diligence process of each nominated initiative, focusing particularly on demonstrated effectiveness, quality control systems, growth goals, organizational capacity to support growth, and the underlying business model.
The initiatives that survive this process are then presented to their Working Group. Members are asked to consider a core investment of 25-33% of their capital raise. Once this initial funding is secured, the opportunity is then “taken to market”, which is to say they are featured on an online platform that includes a comprehensive description of the initiative but also features much of the information that was used in the due diligence process, including the outcomes evaluation used to demonstrate impact, and the business plan documenting growth plans and organizational capacity. (For examples, please visit our Scaling Marketplace platform.)
At this point, the initiative is syndicated among a much broader network of funders — family foundations, community foundations, high net worth individuals, etc. — that we believe also want to maximize the impact of their giving and would welcome the opportunity to co-invest in vetted opportunities that have the potential to grow. The problems these nonprofits investments are addressing, and the solutions they’ve developed, far exceed the resources of any single foundation. Participation in a capital aggregation model such as the one the Exchange is building allows for funders to see their investments achieve their potential impact. Furthermore, the Exchange’s Working Groups offer members a unique opportunity to be part of a community of peers, all of whom are interested in learning about successful approaches to scale. We are unaware of other forums that are solely focused on the opportunities and challenges associated with scaling social impact.
In addition to a shared commitment to impact, the common theme at all stages of this process is transparency. We at the Exchange strive to be as transparent as possible in propagating standards and how we implement them. The funders are transparent in their rationale for why the nominated initiatives should be considered for major philanthropic investment. The nonprofits demonstrate a commitment to transparency in sharing information related to their effectiveness and sustainability. At all points along the way, we do our best to communicate this information as clearly and consistently as we can.
The Social Impact Exchange is excited about the potential that a growth capital marketplace has to transform the lives of millions of people. We are proud to partner with pro-social businesses and philanthropic and nonprofit leaders in creating this new market. And we are convinced that transparency, while perhaps not sufficient, is absolutely necessary.