Stanford Social Innovation Review : Informing and inspiring leaders of social change

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Impact Investing

Measurement for Small and Growing Businesses

A look at impact investor and capacity development provider measurement practices, and some innovative new approaches to metrics.

We recently proposed a vision for how we think measurement needs to develop in the entrepreneurial support sector. We believe that organizations that support small and growing businesses (SGBs) should start thinking of measurement as a potential source of value creation, rather than simply a mechanism for accountability. To implement this vision, which we call Metrics 3.0, organizations should focus on two things: integrating social metrics with financial and operational ones, and aligning with collective learning agendas—either by leveraging the existing evidence base, or by making sure that multiple stakeholders can act on and use their evaluations.

But what’s new about this idea? Certainly, at ANDE, we’ve been talking about these themes and data-driven decision-making with our members for a long time. Up until this point, there has been more talk than action. Rethinking the role of measurement and evaluation has been difficult for many organizations, as they struggle to think about questions such as, “How much is enough?”, "Does everyone need to run a randomized control trial to evaluate impact?", and "How much should we be spending on measurement?"

ANDE recently released a study on the measurement practices that SGB investors and capacity development providers use. Using a combination of survey data and qualitative interviews, we reviewed the motivations, practices, and use of measurement in more than 30 organizations (20 impact investors and 14 capacity development providers). While this is a relatively small sample and not necessarily representative of the whole sector, we were encouraged to find that measurement is a priority for most of these organizations.

However, we found some interesting trends concerning the motivation for impact investors, why they measure, and how they ultimately use their findings. Most investors pursued measurement so that they were accountable to funders, accountable to themselves, and attractive to potential funders—mainly retrospective in nature. Very few investors spoke about integrating their social metrics with financial and operational measures to actually manage performance and drive decision-making.

Encouragingly, we did find a couple of interesting exceptions to this trend: Vox Capital, and Insitor Management are both experimenting with a “social performance-based success fee" model to incentivize social performance in their impact investing portfolios. In traditional private equity, fund managers earn success fees (also called carried interest) by hitting a certain level of return (the hurdle rate). Vox Capital, an early-stage impact investing fund in Brazil, gets the full success fee only when it also reaches a certain level of social impact, measured using B Lab's Global Impact Investing Rating System (GIIRS). If the portfolio does not achieve its minimum social targets, the fund receives only half the success fee; it does not receive any success fee if it does not reach its financial targets.

While Vox Capital assesses targets at a portfolio level, Insitor Capital, a fund manager that invests in early-stage social businesses in India and Southeast Asia, implements a similar model at the company level. The fund works closely with each investee to develop social performance targets that are aligned with its mission, and receives a success fee only if the company meets these goals. Thus, both investors strive to align social and financial incentives at all levels, and integrate these factors to manage performance effectively.

The capacity development providers in our sample ranged from large international nonprofits, employing thousands of people, to small organizations that provided services to specific segments (for example, women entrepreneurs or social enterprises). These organizations offered a wide range of services, such as cohort-based mentoring, management training, and basic business development. Many capacity development providers also spoke about using measurement from an accountability perspective, though interestingly, they focused internally compared to impact investors. As one respondent stated, "We have achieved a high understanding of...who is in the program, who is doing well, and who needs more support. ...It helps us improve."

One organization that takes a particularly structured approach to integrating social performance metrics into decision-making is NESsT, a social business incubator working in Central and Eastern Europe, and Latin America. NESsT's portfolio is clustered around three social objectives: labor inclusion, sustainable income, and affordable technology, around which they develop specific social metrics for their companies. They also place equal weight on financial goals, and support companies in achieving both targets, using a personalized Performance Management Tool. The organization regularly assesses enterprises on a set of integrated criteria, and may graduate them to the scaling phase, keep them in the incubation phase, or drop them from their portfolio based on overall performance.

These examples illustrate our vision of Metrics 3.0 in action. We think there is tremendous potential in a pragmatic approach to "right-sized" measurement, where an organization can develop effective and useful approaches based on its internal capacity, objectives, and leadership position in the sector.

We discussed many of these, and many other approaches at the ANDE Metrics from the Ground Up conference last month. Some of these approaches included collecting social and impact and operational data using mobile phones, assessing the performance of social business accelerators using an innovative data collection approach, identifying alternative approaches to creating counterfactuals, and developing a learning laboratory for the sector.  These conversations will continue over the coming year, as more organizations innovate to create increasing value from measurement.  In the meantime, read more about the current state of measurement in our report.

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COMMENTS

  • Ben McAlpine's avatar

    BY Ben McAlpine

    ON July 10, 2014 03:33 PM

    I find the concept of a “social performance-based success fee” quite interesting.

    However, one argument I have heard against these types of arrangements is that they can incentivize organisations to only work with individuals or groups that have a high chance of success, thus excluding those with more complex (and arguably greater) needs.

    Do you see this as a valid concern? If so, how might funders and organisations use measurement and evaluation to counter this?

  • Genevieve Edens's avatar

    BY Genevieve Edens

    ON July 12, 2014 09:24 AM

    That’s a good point, Ben. 

    Among the organizations that we interviewed, many of them conduct in-depth due diligence on potential investments to ensure that the business has the potential to meet financial goals, and also social ones.  That lengthy DD process ensures an alignment between the goals and risk-return profile of both the investor and investee.  (We describe what investors look for and how they use M&E in the due diligence phase on p7 of the report)

    But you’re right that means that investors often exclude higher risk, early stage businesses—and that’s where philanthropic capital might come in to fill the gap http://www.ssireview.org/articles/entry/closing_the_pioneer_gap

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