This post first appeared on the Foundation Center’s GrantCraft blog. GrantCraft, a service of the Foundation Center, taps the practical wisdom of funders to develop free resources for the philanthropy sector.
Gradian Health Systems is a social enterprise that manufactures and distributes the Universal Anaesthesia Machine (UAM), a general anesthesia machine that is unique in that it neither requires electricity nor compressed oxygen to function. This makes it particularly suitable for infrastructure-weak health systems (largely in low-income countries) where hospitals suffer from frequent electricity and oxygen shortages.
But it’s not our product that I want to discuss in this post. Our business model, while less often explained, is just as interesting. Gradian operates as a single member limited liability company (SMLLC) that is wholly owned by the Nick Simons Foundation, a private family foundation. Also called a disregarded entity, we are both a program-related investment of the foundation and a commercial subsidiary of it. We have taken to calling this structure Foundation-owned Social Enterprise (or FOSE).
While we have found this model to be truly innovative for those of us who work in the global health or social enterprise space, the decision in 2010 to incorporate Gradian as such was rather banal. When faced with a great product (the UAM) that the foundation leadership felt needed to make its way to markets characterized by lower purchasing power, they had a few options for how to do that.
As a foundation without any full time staff, it was not an option to bring the manufacturing, marketing, and distribution in-house. Instead they looked at other ways that the foundation could 1) remain closely involved in the process and 2) maintain the nonprofit focus of the venture, while bringing on an experienced staff that could develop the strategy for commercializing such a distinct medical device. Ultimately the decision was really between a stand-alone nonprofit 501c3 organization and the FOSE model described above.
The foundation’s leadership, along with their counsel, ultimately opted for the latter. This was largely because the financial statements and reporting for an SMLLC roll up to the parent organization’s 990 forms. For Gradian, this offers two great benefits: it greatly reduces the paperwork we must spend our time on and it effectively extends the foundation’s tax-exempt status to Gradian.
For us at Gradian, this structure has worked terrifically – as a start-up social enterprise we are able to pursue non-profitable objectives with a steady, reliable source of funding (who gets to say that?!). As a new entity, our structure reduces (or eliminates altogether) the need to spend time and resources on fundraising and financial reporting, which allows us to focus on operations. We have also been able to piggyback on the foundation’s existing hard infrastructure (such as office space and technology) and soft infrastructure (such as tacit knowledge and mentors).
For the foundation, owning a social enterprise (or creating a disregarded entity) has allowed them to use market mechanisms to sell the UAM, while using philanthropic resources to address market failures and advocate a cause (we sell the UAM at our cost of manufacturing and underwrite the costs of training and aftersales support). As a tax-free investment vehicle, it also fulfills their requirement to spend five percent of their endowment annually.
While this has been our experience for the past three years, there are a number of reasons that may lead a foundation to invest in social impact through channels other than FOSE. If a potential SMLLC has a high likelihood of profitability, a foundation may feel that its money is better invested in social programs or products without that potential. Similarly, risk-averse foundation leadership may fear the burden of proof demonstrating the social enterprise is truly mission-related and does not expose the foundation to any unrelated business income. Also, for those foundations with a more risk-averse bent, the fact that the FOSE model is not (yet) common may simply lead them (and their counsel) to pursue investments through the more conventional grant or PRI route.
For those open to innovative approaches to social impact, however, I believe FOSE offers a terrific option. At this point, it seems particularly well-suited to foundations interested in supporting enterprises or initiatives that that are market-based, but are not likely to earn large profits from those markets.
We at Gradian are eager to understand where else this model might be applicable and/or appealing, so we have just launched a program to study the FOSE model and its opportunities and limitations for foundations and other philanthropic organizations. Does your foundation or family office have any experience or interest operating an SMLLC or owning a social enterprise? If so, I’d love to hear about your experience!
Erica Frenkel is the Vice President of Business Strategy at Gradian Health Systems, a New York-based social enterprise working to bring safe anesthesia to hospitals all over the world.
The last two months have seen a spate of announcements of foundation support for the growing Ebola crisis. Among the most recent was the announcement on 16 October that Capital for Good had received a $250,000 grant from Pierre & Pam Omidyar for the Ebola Crisis Fund. Established in mid-August, the Ebola Crisis Fund has raised over $700,000 as an immediate response to help prevent the spread of the deadly Ebola virus and rebuild community infrastructure and trust weakened by the outbreak.
Established by Capital for Good and managed by Geneva Global, the Ebola Crisis Fund has been supported by a variety of donors, including the William and Flora Hewlett Foundation, New Field Foundation, and the Legatum Foundation, which provided the initial seed funding.
On 14 October Mark Zuckerberg pledged $25 million to help combat Ebola. The money will go to the Centers for Disease Control Foundation, the Facebook founder and philanthropist said on his Facebook page.
In its PND newsletter of 30 September, the Foundation Center had no fewer than three separate items detailing philanthropic responses to Ebola: from the IKEA Foundation and Bridgestone; from the Hewlett Foundation and HCA; and from the Wellcome Trust.
The Wellcome grant of $5.2 million will support a partnership comprising the International Severe Acute Respiratory and Emerging Infections Consortium, theUniversity of Oxford, Médecins Sans Frontières/Doctors Without Borders, the World Health Organization, the Institut Pasteur, the Institut Pasteur de Dakar, Fondation Mérieux, and the Global Health Network to rapidly assess candidate treatments in patients so those proved to be safe and effective can be adopted for use as soon as possible. Wellcome has also supported initiatives with the UK’s Department for International Development and the Dangote Foundation.
On 11 September, the Bill & Melinda Gates Foundation announced a $50-million contribution to fight the spread of Ebola in West Africa and speed development of diagnostic tools and treatments. Much of the money will go immediately to the World Health Organization and other groups to expand emergency operations on the front lines of the outbreak.
Finally, the United States Agency for International Development has announced a $5 million Fighting Ebola: A Grand Challenge for Development call for ideas focused on improving the tools used by frontline healthcare workers in the fight against Ebola in West Africa. In partnership with White House Office of Science and Technology Policy, the Centers for Disease Control and Prevention, and the U.S. Department of Defense, USAID will establish an open innovation platform to crowdsource and incubate ideas to improve care delivery and stem the spread of disease.
The 2014 Grantmakers East Forum proved itself a valiant attempt to illuminate some of the many ways in which European grantmakers might engage in the incredibly wide range of issues surrounding the topics of migration and mobility.
No small task.
Thanks to pervasive media negativity, for example, many people associate darkness and horror with the very term ‘migration’ while reserving ‘mobility’ for the movement-impaired. Yet when asked during the opening plenary who in the room was a migrant, the overwhelming majority of hands went up.
Over the following day and a half, the grantmakers behind those hands heard from, and debated with, a range of specialists, their peers and migrants themselves about the range of issues and solutions being worked on across the continent. The insights from public administration officials and civil society alike were welcomed and offered each a way to engage.
Clearly migration, like climate change, youth unemployment, and the rise of right-wing political extremism, is a pan-European matter. For demographic reasons alone, whether or not your foundation works on migration, it will sooner or later be an issue that affects you and/or your beneficiaries; and thus one worth thinking about.
Each of the session descriptions and a short report will be available here over the coming days and I recommend you scroll through. If you do work in the field and see a good case study, reach out and create some connections. One clear take away was that there are many positive interventions occurring which could be considered for testing and, potentially, responsible replication in other locales.
If you don’t work directly in the field, perhaps consider some of the ways in which you might at the very least ensure your foundation isn’t inadvertently supporting some of migration’s negative impact: check that your grantees have inclusive hiring and programmatic delivery policies. Look into the basics like checking the employment practices of the company cleaning your office.
And if you support public policy work, think about the ramifications of laws written today on a European future which will be much more diverse than today. Though we may all be a bit limited in our ability to leverage systemic impact in the space, we can at least each contribute through thoughtful, inclusive decision-making in line with our sector’s work to support (hopefully more) ‘civil’ society.
Christopher Worman is director of program development at TechSoup Global.
During the recent launch of a news outlet in India, former chairman of Microsoft India, author and impact investor Ravi Venkatesan opined that enterprises catering to low-income markets were no longer part of ‘Act 2’. ‘It has grown into a legitimate class of entrepreneurship, not something you do after you make your first billion,’ he said.
Such for-profit enterprises catering to low-income markets are increasingly gaining traction in India. However, despite the significant opportunity, scaling both operations and impact within these markets can be complex and risky.
The initial 2014 Union Budget tabled by Finance Minister Arun Jaitley has focused on start-ups and entrepreneurs. However, it remains to be seen whether the overall requirements of entrepreneurs working in low-income markets have been considered and whether the budget truly creates an enabling ecosystem for all start-ups.
Access to capital
Despite a broad mix of capital from grant makers, philanthropists and impact investors flowing into low-income markets, enterprises in the pilot and prototype phase continue to struggle to access much-needed capital.
In order to tackle this, the government announced the setting up of an INR 10000 crore (approximately USD16 billion) fund to boost capital flow towards small and medium-size enterprises. An additional INR 100 crores (approximately USD16 million) has been offered for the Startup Village Entrepreneurship Program, thus localizing employment opportunities.
This kind of financial engineering will help channel investment towards a greater number of enterprises working in low-income markets. However, there is a risk that the increase in capital flow will reduce the focus on investing in enterprises that create a positive impact socially and environmentally.
Fostering early-stage investments
The recognition and promotion of early-stage investments and early-stage impact investors such as angel investors and impact funds through the development of appropriate policy measures and fiscal incentives has also been overdue.
Budget 2014 proposed that the time period for tax on short-term capital gains be increased from one year to three years. This was primarily done to discourage angel investors from making early exits to avoid attracting higher tax. It will also give entrepreneurs sufficient time to build their venture without the threat of an early exit from the investor.
Debt funding is critical to meeting the working capital requirements of enterprises that have achieved some scale in low-income markets. Traditional debt providers like banks, however, do not lend without collateral and at least a three-year operating track record. In an effort to support banks in creating capacity and capability in lending to such ventures, the government will provide institutional funding to farmers. This will happen through schemes such as the Bhoomi Heen Kisan, NABARD, the Long Term Rural Credit Fund, and the Rural Infrastructure Development Fund.
The government can further act to promote social ventures by encouraging banks to percolate lending down to the branch level with whom entrepreneurs interact the most.
Encouraging partnerships in low-income markets
Low-income markets are characterized by several challenges such as last-mile distribution, inadequate infrastructure and low disposable incomes. In such markets, enterprises need to constantly innovate in their own operations, and to look at establishing creative partnerships with NGOs, government bodies, corporations and community groups.
The proposed nationwide district-level Incubation and Accelerator Programme for incubation of new ideas will help entrepreneurs better establish such partnerships.
INR 100 crores (approximately USD16 million) has also been set aside for the ‘Agri-tech Infrastructure Fund’, which will be used to make farming more competitive and profitable. Given that most of India’s agriculture industry continues to be within rural low-income markets, this measure by the government is poised to have a significant positive impact in these communities.
History has shown us that enterprises that have achieved scale in both operations and impact in India have done so with access to early-stage equity capital and regular debt funding to meet their working capital requirements. Capacity-building support from the ecosystem is also instrumental in the success of such enterprises.
The 2014 Union Budget has introduced some interesting initiatives. Unlike governments in the recent past, the newly elected government in India has a clear majority in the lower house. Unfettered by the pressures of coalition politics, it is widely expected that these innovative and constructive measures aimed at kickstarting the Indian economy will have far-reaching, long-term benefits.
Digbijoy Shukla is Director, Communities and Karthik Iyer is Associate – Communications at Ennovent India.
Ennovent’s Startup Services enable clients to effectively launch innovations in low-income markets.
With the resources of both governments and traditional philanthropy barely growing or in decline, while the problems of poverty, ill-health and environmental degradation balloon daily, it is increasingly clear that new models for financing and promoting social and environmental objectives are urgently needed.
Two new books from Lester Salamon, director of the Johns Hopkins University Center for Civil Society Studies, examine a significant revolution under way in social- and environmental-purpose financing, at the heart of which lies a massive explosion in the instruments and institutions being deployed to mobilize private resources. Where earlier such support was limited to charitable gifts, a bewildering array of new instruments and institutions has surfaced – loans, loan guarantees, private equity, barter arrangements, social stock exchanges, bonds, secondary markets, investment funds, and many more – all of them designed to leverage not just philanthropic grants but a much larger pool of private investment capital.
While these changes are inspiring, they remain largely uncharted in any systematic fashion. Released by Oxford University Press, New Frontiers of Philanthropy: A guide to the new tools and new actors that are reshaping global philanthropy and social investing, and Leverage for Good, which carries the introductory chapter of the larger New Frontiers volume, are designed to provide the first comprehensible and accessible roadmap to the full range of these important new developments on the frontiers of philanthropy and social investment.
Disaster preparedness and risk reduction programmes have long been shown to save both lives and money. The United Nations Development Programme estimates that for every $1 spent on preparedness and risk reduction, $7 is saved in disaster relief and recovery costs. The experiences of vulnerable communities investing in preparedness have been shown to saves lives, such as in Odisha province, India, which after 10 years of implementing disaster preparedness programmes was able to lower the death toll from similar storms from 10,000 to 21. It is no wonder that international organizations such as the UN, Asian Development Bank and ASEAN have repeatedly called for the private sector to invest in this important area, whether in for-profit schemes, through public-private partnerships or through philanthropy.
But, for many philanthropic donors, it is unclear where to begin to tackle such large problems, and how to integrate disaster preparedness or risk reduction effectively into their grantmaking and giving strategies. As a result, individuals, corporations and private foundations continue to scramble to fund emergency relief projects each time a disaster strikes. Not only could investment in preparedness and risk reduction lessen the need for relief funding, it could provide much-needed stability to the budgeting and strategy process for many international grantmakers.
Give2Asia and the International Institute of Rural Reconstruction aim to demonstrate how preparedness and risk reduction initiatives can be easily integrated into donor strategies in a way that benefits both the beneficiaries and the donor.
Step 1: Assess disaster-vulnerable assets and investments
Donors should take a close look at their assets and philanthropic investments in regions vulnerable to disasters and climate change to better understand how they are affected when hazard events such as storms, earthquakes and floods strike. Give2Asia’s recent white paper Disaster Vulnerability and Donor Opportunitycan be a useful resource in evaluating investments in South and South East Asia.
Step 2: Identify priorities for preparedness
The next step is to prioritize. For a corporation, communities near factories and other infrastructure, or with large populations of employees and customers, may be the highest priority. For foundations or individuals, the priority may be supporting preparedness and risk reduction efforts within other philanthropic investments such as education or healthcare. Each donor must weigh vulnerability with potential impact on their partners, assets and investments.
Step 3: Research interventions that meet your needs
With priorities in place, donors can begin to consider the most effective interventions to address disaster and climate change-related threats. To ensure that local context is considered and that target communities are included, it may be wise to contract with local experts to advise on a philanthropic strategy and effective interventions.
This is where community-based approaches are most effective. Large international bodies have called for investments in insurance schemes, infrastructure projects and national government initiatives. While this may be the way to build disaster resilience for an entire nation, donors with a limited geographic or programmatic focus will find much more effective solutions at the grassroots level. Local NGOs and community-based organizations (CBOs) have long been working within the context of their own community to build disaster resilience. The challenge for them has been a lack of funding and limited capacity. Philanthropy can address those issues, bringing effective solutions to larger populations with far less investment and far greater geographic and programmatic flexibility than could be found in top-down approaches.
Step 4: Identify local partners to implement interventions
Donors will need to identify local NGOs and CBOs capable of implementing the plan. Organizations like Give2Asia provide due diligence evaluations on local groups to ensure they are transparent, reputable and capable, as well as advisory services that accurately map the current landscape of actors. Donors should not expect to simply hand down a plan to local implementing groups, but rather should work with groups to refine the proposed interventions. These local NGOs and CBOs will bring a valuable perspective and help ensure the target community is included and its needs are heard. Increasing community participation and ownership greatly increases the chances of making gains in preparedness and risk reduction.
Step 5: Assess disaster response process and goals
Finally, donors should assess their recent disaster response philanthropy to identify trends or ad hoc processes that have arisen, and ensure that their philanthropic goals are still being met. Parts of the strategy that can be implemented ahead of disasters can be identified during this analysis. If an organization routinely supports immediate relief in certain areas, partnering with relief organizations or with intermediaries such as Give2Asia ahead of time could help your contributions reach beneficiaries more quickly and ease the decision-making burden when a disaster does strike.
Similarly, corporations can make arrangements to automatically establish employee giving funds, including matching programmes, when a disaster strikes in an area of interest. Knowing what kind of support to expect can help local NGOs and CBOs focus resources on responding to the needs of affected communities, rather than on seeking funding at a crucial time.
This proactive approach to grantmaking for community-based disaster preparedness and risk reduction offers donors a real opportunity to save lives and money in communities that are important to them.
Matt Grager is director of the NGO Disaster Preparedness Program at Give2Asia.
The Charity Finance Group Investment Conference, held in London on 25 September, had a broad agenda across the investment space, starting with an overview of the economy and finishing with a plenary on ethical Investments. My participation was in a panel on alternative investments.
The venue provided an example of an alternative relevant to the charity sector in itself. Inmarsat, whose conference centre it was at, was set up in 1979 by the International Maritime Organisation to enable commercial ships to stay in touch wherever they were, for operational and safety reasons. It helped take satellite communication through to the next stage of development, transforming itself from an intergovernmental organization to become a private company and ultimately floated on the London Stock Exchange. This example of how a non-government organization providing a necessary service has entered the private arena made me reflect on the theme of impact investing which I was presenting on in the afternoon.
‘Alternatives’ covered a wide spectrum. Peter Pereira Gray, one of the two managing directors of the Investment Divisionof the Wellcome Trust,looked at the role of alternative investments (private equity, venture capital, hedge funds, property) in a charity portfolio. While at the other end of the spectrum from the fledgling impact investing space I occupy, there were parallels: entering each space requires a commitment of resources, both human and financial, to properly engage with it. The lock up of resources and the time it can take to see returns require the capacity to continue to meet spending commitments (grants or direct spending on beneficiaries), riding out the inevitable downturns in performance until either the financial or the social goals are achieved.
Hearing Peter’s reflections on the importance of good manager selection made me reflect on our impact investing sector – will we see performance only in a small percentage of our managers, or will our social returns be more widely achieved, investing in social and charitable organizations?
Richard Lichfield of Eastside Primetimers talked about their review of mergers in the charity sector. It is a thoughtful and subtle exploration of the nuances of mergers in the charity sector and how they differ from the commercial world. Looking at the 189 organizations that merged through 90 deals with income of £959 million,I’d recommend a report that provides some reflective insights into activity in our sector.
Reflecting on our session afterwards, how can we take the excellence of organizations like Wellcome into our own organizations? We cannot simply replicate a structure and approach and expect it to work. However, we can adopt underlying principles around good investment, learn from the best, and then develop our own cultures and approaches in this alternative investment world.
Danyal Sattar is development director at Big Society Capital.
The UK should make more of a fuss about its philanthropists. Private donors give away billions of pounds every year, from the armies of people with monthly direct debits for chosen causes to the mega-rich with a portfolio of large charity investments. Quite simply, none of us have to give away our cash, and it’s a cause for celebration that we do in such generous quantities.
That celebration should also be forward-looking, because social problems are as pressing as ever. Giving levels have remained relatively static in recent years, even as economist Thomas Piketty warns us that wealth inequality is at its highest point for a century. It is imperative that we find ways to increase levels of philanthropic giving and to make that money stretch further than ever before.
This question of how to attract more money and spend it better is central to NPC’s new paper, 10 innovations in global philanthropy. Cutting-edge thinking is being applied to all areas of our lives, and giving is no exception. We are continuously changing the way we shop, catch up on the news, book a holiday, listen to music, find a new partner – all of these new methods supposedly improving our lives in some ways. The new report applies the same logic to how we give away our money: what is happening at the cutting edge of effective global philanthropy, and how can it be be adapted and rolled out elsewhere?
The report looks at ten separate innovations from across the world, from new uses of data to growing trends in impact investment. This is not the place to list all of them, but there is space to pick out two from the crowd.
The first is close to home. The UK’s Edge Fund has led the way over recent years in involving grantees and beneficiaries in its grantmaking. Top-down decision-making might still be the norm among many foundations and grantmakers, but the charities in whom they invest may well know far more about where money is most needed and which approaches are most likely to succeed. Edge Fund is a membership body, with members brought together to share expertise and discuss grant proposals; but even a less formal arrangement could see philanthropists welcoming grantee observations much more warmly as part of future planning.
Secondly, philanthropists would do well to embrace greater transparency. As Fran Perrin, Director of the Indigo Trust, told us, ‘the richer the available data, the better the investment decision’. This is easier said than done: philanthropists from a private sector background, for example, may be nervous of opening up their books to the public. But if big givers are serious about addressing some of the most complex and entrenched social issues of the day, repeating past mistakes isn’t an option, especially if evidence of those mistakes can be uncovered and learned from.
NPC’s innovations paper presents examples from around the globe, from new methods of collaboration between Indian philanthropists to an Australian study of layered funding. Some can be replicated and adopted in other countries easily, others less so. But these ideas and more needs serious attention.
Plum Lomax is deputy head of the Funders Team at NPC.
What did we learn from our experience developing The Foundry – a new human rights and social justice centre which has just opened in London?
One of the first things the founding organisations – Trust for London, the Ethical Property Company, the Barrow Cadbury Trust Joseph Rowntree Charitable Trustand LlankellyChase Foundationdid was to establish a ‘special purpose vehicle’ in 2011 to develop and run The Foundry. Then we raised more than £11m in finance; bought, refurbished and extended a building, secured tenants, and created a centre that will provide a focus for social justice and human rights activity.
The Foundry will provide work and meeting space to organisations working on human rights and social justice issues. Set up as a social investment initiative, it is funded through a combination of equity investment and loans from independent trusts, the Ethical Property Company, banks and financial institutions. We also intend it to be an asset to the local community and those from further afield, who will be able to use the cafe, visit exhibitions and events, and take part in a programme of learning activities.
So looking back over the development period, what made it all come together, and what lessons have we learned?
PARTNERSHIP AND SHARED VISION
Undoubtedly it helped that the founder organisations knew each other well, had worked closely together, and were experienced and trusted partners. This made it easier to create a shared vision, and has helped us through some tough moments.
This shared vision was established right from the start and has guided our thinking on all aspects of the project; from the building design, to the planning, and to the associated education activities that will take place in the centre, to the detail of our performance framework.
THE RIGHT PROPOSITION
And in a difficult economic climate, we were helped by having an investable proposition – a property-based development in the capital city, led by organisations with extensive experience in property investment, management and mission-related investment. These factors, combined with the clear social mission of The Foundry, enabled us to confidently approach other investors.
The lead partner in the management of the project, the Ethical Property Company, has over 15 years experience of developing and running shared office spaces with a social mission. Our advisors, particularly the architects, shared our enthusiasm for the project, and were chosen both for their architectural vision and for the added value that their experience of building and managing shared space brought to the project.
FUNDRAISING AND MISSION DELIVERY
Undoubtedly the fundraising element of the project was our biggest challenge. We started the project as the global financial crisis was unfolding – and had to decide early on whether or not to press ahead. But Trusts and Foundations have the benefit of the long view, and we were confident that in time the market would pick up and we would be able to provide a return on investment.
Initially we hoped to raise most of the investment through equity. However, in an uncertain climate most investors preferred the security of a loan rather than the higher risk equity investment. So we ended up with a more complex combination of loans and equity than we really wanted. Because raising the funds was more complex than we thought it would be, we had to renegotiate ‘heads of terms’ with our primary lenders at a late stage – a difficult process for all sides. One lender withdrew, but others stepped in to fill the gap and allow the building work to get under way. The complexity of the financial arrangements and the need to meet the differing due diligence requirements of different primary lenders was costly both in time and money; it would be good to see more convergence so that less precious social investment funding is spent on legal fees and more is available for delivery of the mission.
And we had to be bold. Finding a suitable building was challenging. Our initial preference was for an area in East London, but prices were rising rapidly and were a little out of our reach. We widened our search and found a building while we were still some way off our funding target. A decision had to be made whether to buy, and risk not being able to raise development funds, or continue fundraising and risk losing out in a price bubble. At the same time we had to assess the risks of not being able to find enough tenants to fill the building. Fortunately market research indicated that there would be sufficient demand for space, and, as it turned out, by the time we opened, almost all space had been filled.
So what could we pass on from our experience to anyone thinking of embarking on a similar project?
Debbie Pippard chaired The Foundry project and is Head of Programmes at Barrow Cadbury Trust.
When I first started out in social impact investing, it was hard to find anyone writing or talking about it (apart from my boss at Venturesome, John Kingston). But the tables have turned, and in the recent Alliance special feature, ‘Markets for good: removing the barriers’, we had not just one article but several from around the globe! It’s a joy to think that the field is now at a point that such an esteemed and diverse group of contributors can come together and debate the issues raised by Monitor Inclusive Markets’ report Beyond the Pioneer: Getting inclusive industries to scale. For me one big issue the report raises is the role of government vis-à-vis impact investing in addressing social problems.
Beyond the Pioneer is framed as an exploration of the barriers faced by social/impact enterprise (‘social ventures’ as we label them at Nesta) when attempting to scale up their operations. Many of the responses to the paper looked through the lens of social/impact investing and its role in overcoming those barriers.
In my opinion, the barriers to scale faced by social ventures as identified in the paper (at the level of the firm, value chain, public goods and government) are a helpful framework to consider what is needed to tackle any complex problem, ie it is a means of exploring a whole system of innovation around a need (as Vineet Rai points out in his contribution). It shouldn’t surprise us that solving persistent social problems effectively, at meaningful scale and with longevity, requires interventions beyond the level of a single firm. I agreed with Guillaume Taylor that the lessons from Monitor Inclusive Markets’ developing world experience have plenty of resonance with our experience making impact investments within the UK’s developed economy and government structures.
So I want to respond to the special feature on five particular points that speak to my experience investing in UK social ventures operating at the boundaries of private, social and public sectors in education, social care and local communities.
Start with the impact
The first is a simple one that arises throughout the special feature: the absolute importance of being impact focused and developing strategy from that starting point. We mustn’t assume that starting or growing a venture is the best route to impact (as Uli Grabenwarter and Fabio Segura point out in different ways). Yet this point got lost where the debate looked at ‘the sector’ versus ‘the mainstream’. Our pragmatic approach at Nesta is to not worry too much about sector, legal status, intention to make profit or not, but to focus on how can you have the best effect on the problem for the greatest number of people.
Balancing the push and pull
The second point that resonated is the interplay between demand and supply of product/service, or as some described it ‘push and pull’ (again, I liked Guillaume Taylor’s observations about developed markets on this point). That ventures will find it easiest to scale when there is a balance between the two is obvious. For example, our portfolio company FutureGov has been developing digital tools to improve social services for over five years and pushing to get them adopted, but a change in its market (government funding cuts and a digital first policy) have brought demand closer to balance with its supply. But I think we must be careful here about using the cold language of ‘push’ or ‘creating demand’ when what we are describing could easily be seen as at best paternalism (‘we know what is good for you’) or at worst self-interest (payment protection insurance, for example). Democratic representation through government (or other means) has an important role in overseeing and representing people in this push-pull tension.
‘We take seriously our responsibility for our employees, customers and everyone who is part of our supply chain,’says the international fashion retailer C&A on its website. So says almost every other international company. But they don’t all do what C&A’s corporate foundation has just done: not only running a programme to improve pay and conditions for workers in its supplier factories, but also publishing full details of how that programme worked, what it achieved and didn’t achieve, and the lessons. The new report – Frankly Speaking: C&A Foundation’s Sustainable Supplier Programme – is useful reading for anybody involved with international commercial suppliers.
C&A had long been concerned about workers’ conditions in factories from which it sources. In 2011, C&A Foundation began a programme to improve both workers’ conditions and productivity, hoping that gains in one would produce gains in the other. C&A wanted to learn about such programmes from other retailers and brands that had had them for a while, but was frustrated at the lack of available information about how those programmes worked, and what they cost and achieved. It hopes that by sharing its experiences now, it will encourage other industry players to do the same.
C&A Foundation’s ‘Sustainable Supplier Programme’ (SSP) began in 18 factories in five countries (Bangladesh, China, Cambodia, India and Indonesia) and ran for 18-24 months. One of two consulting firms introduced into each factory ‘lean management’ techniques, internal communication channels, qualification measures and training programmes. Indicators for improved productivity included quality (rejection rate), processing time, shipping costs and lead time. Indicators for workers’ conditions included: wages, overtime hours (a major source of discontent), staff turnover, women’s participation, health and safety.
In summary, the programme worked. Performance on most indicators improved: for instance, sewing line efficiency improved by 44 per cent and take-home wages rose by 18 per cent. The virtuous circle started to function in some factories. Productivity rose particularly sharply in Bangladesh (29 per cent on average) and Indonesia (38 per cent), and India led on improved timeliness of delivery. Financial modelling suggests that each factory saved around €450,000.
But, as Frankly Speaking recounts, some elements were disappointing and others could have been better managed. At the outset, recruiting factories into the programme was tough: 34 were invited, but only 18 joined, two of which later dropped out. The likely reason was that factories had to pay to join, and though the costs were clear up front, the benefits weren’t: the programme wasn’t linked to C&A’s buying process or making sales. Furthermore, factories had to pay at the beginning – ie they had to take a risk – whereas the programme could have been designed to let them pay only when cost savings were realized.
Managing the programme was complicated by the factories being so geographically disbursed. Some countries needed a ‘programme office’ which could only service one or two factories, which amplified the costs and limited the scope for learning between factories. Big distances reduced the frequency of factory visits, which essentially made the programme less intensive. The programme ended up too expensive to be rolled out in its original form. The engagement of factory owners was essential.
There was an interesting problem around tracking wages, in that many factories don’t keep wage data. Clearly that infrastructure was essential to the success of the programme but it had to be built. Other useful data wasn’t collected as the programme went along, so the financial benefits couldn’t be measured but instead had to be modelled, which introduces assumptions and inaccuracies.
As the programme concluded and the results became visible, a striking feature is the variability. For example, changes in sewing efficiency ranged from -15 per cent to +72 per cent, while changes in worker turnover ranged from -71 per cent to +64 per cent.
It’s often hard to see why social programmes have produced the results that they have, but the way the SSP was managed makes it impossible. For example, do factories’ results differ because of differences in national economies? We can’t see because there are too few factories in each country to make comparisons. China and Cambodia only had two factories each in the programme, which is far too few to form a robust comparison group. Was it because the consulting firms had quite different approaches? Again, we can’t see because the group supported by each firm is too small to enable reliable comparisons.
Like many programmes, the SSP wasn’t set up as an experiment but has eventually ended up being analysed as such. Eighteen factories is of course excessive for a pilot but insufficient for an experiment.
Some issues persisted: in five factories, overtime did not fall; in three factories, turnover did not fall; and in five factories, absenteeism did not decline. C&A Foundation executive director Leslie Johnston thinks that solving those may be too big for any one brand and may require an industry-wide approach. For example, the electronics industry has a code of conduct agreed in the industry. C&A Foundation welcomes others in the industry interested in collaborating. Just like sharing the details and results of programmes, this is of course effectively ‘competition collaboration’, but necessary because, as Johnston says, ‘competition shouldn’t be at the cost of workers’ well-being’.
Caroline Fiennes is director of Giving Evidence, which partnered with the C&A Foundation to share the findings from its Sustainable Supplier Programme (SSP).
In pubs across the land, fundraisers are presumably trying to think up the next craze that could go viral. From No Make-Up Selfie in the spring to the recent Ice Bucket Challenge, charities have been overwhelmed by grassroot appeals taking off on social media. Two weeks ago, the public raised £1.8 million in barely 48 hours after the Manchester Dogs Home was torched in an arson attack. Ice Bucket Challenges are still going on.
So how should a charity respond to this unexpected generosity? It largely depends on the charity.
While the No Make-up Selfie campaign for Cancer Research UK was generously supported, the £8 million it raised doesn’t even add up to 2 per cent of that charity’s annual half billion pound income. Nonetheless, Cancer Research UK was able to respond quickly and with specifics: because of that £8 million, ten clinical trials would be funded that otherwise would not have taken place.
A quick response is generally easier when the extra money raised isn’t too substantial a part of the charity’s income. Beyond that, things get more complicated. At the Teenage Cancer Trust, the £5 million raised by Stephen Sutton’s inspiring story made up nearly 40 per cent of their income last year. It was some months after Stephen’s death that the Teenage Cancer Trust gave a detailed account of how the money will be spent. Over half will be spent on specialist cancer units; £1 million will go into research; and the rest will be split between information and conferences. The chief executive explained proudly that ‘Stephen has allowed us to be more ambitious’.
Under the circumstances, the charity was wise to wait a few months before deciding on the best way to spend this money, and smart to give such a detailed response.
Such detail about how new money will be spent is needed and – within reason – the sooner the better. There will be other funders who will be put off donating because they’ve seen how much money has been raised for the charity. Fundraisers who have spent months putting together a good ask for potential donors will find donors asking why, if this project is so important, isn’t it being funded out of the windfall? Trusts and foundations will often look at a charity’s level of reserves when assessing their application. If there is no explanation of why money has been put into reserves, it can hurt a charity’s chances of success. Fundraisers need to be able to explain quickly how the money will be spent even if, like with the Teenage Cancer Trust, it won’t be spent for a while.
But there is also an opportunity here. The largesse is not just in the funding. It is also in the connection that people have made with the charity. Fundraisers in these charities will be wondering how to take up that opportunity and build on it for a longer-lasting fundraising relationship. Letting people know the specifics of how their donation is being spent, as both Cancer Research UK and the Teenage Cancer Trust recognized, is crucial. In NPC’s Money for Good research into the motivations of donors, benefactors told us that they were most influenced by their peers. They were more likely to give more money if charities engage with them in a way that meets their needs. It will be interesting to see whether fundraisers are able to rise to that challenge, and get a whole new segment of people to give.
Either way, things end up in flux. The old fundraising strategy probably goes out the window for a while.
Angela Kail, Head of the Funders Team at the charity think tank NPC