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Measuring Social Impact

The Present Value of Social Investment

How to calculate the value of a social investment made now versus at a future date.

In 2001, I left a lucrative executive post in technology to start the Taproot Foundation. I had always intended to return to the nonprofit sector, where I began my career, but it was hard to pull the trigger given the stability of my income and the exciting and innovative work I was doing at startups. In the end, I made the jump based on a simple realization: the present value of social investment.

At the time it was a fuzzier notion, but over the last 11 years it has become clear in the impact of our work on a daily basis. It is also something that I have come to express in a much more scientific way. It reminds me why I work in the nonprofit sector and why I try to never put off for tomorrow what I can get done today.

The present value of social investment (PVSI), or present discounted value, is the value given to a social investment made at a future date as opposed to today. The present value of social investment can be used to compare taking action today or delaying investment in addressing the nation’s social, environmental, or economic activities.

If offered a choice, a rational nonprofit executive (or administrator of a government program, citizen in need, etc.) will choose a donation of money, products, or services today over one made at a future time. They recognize that they can use it create greater value if it is at their disposal today and can use it to solve current challenges. PVSI helps a potential donor understand this relative value and helps nonprofits (and other recipients of social investment) articulate the rationale for up-front investment.

The best way to understand PVSI is to consider the concept of compounded social impact over a set period of time. Let’s say you are a Silicon Valley millionaire deciding if you should donate $1 million (SI) today or if you should wait until you retire in 20 years (t) to make the contribution. The group donation would enable a nonprofit to generate a social return on investment of 10 percent (sroi).

Like interest, social impact is compounding. For example, the later you invest in helping someone, the lower the odds of making an impact. An investment in a child younger than five years old can contribute to the development of a productive and healthy adulthood. If you were to make the same investment just ten years later, once they are in the criminal justice system for example, it would have a much smaller impact. This applies to how we invest in individuals, nonprofits, and government programs.

In the case of government, you can use this formula as a simple measure to weigh the cost of additional debt (interest rate) to increased current investment in both the economy and social programs (for example, teacher salaries). It goes beyond measuring tax income to look at the broader societal value of those investments.

As with the present value of money, the equation provides an input for decision-making, but it is not the only consideration. For example, it doesn’t factor in opportunity costs or risk. Also, because sroi is harder to calculate and predict than inflation or interest rates, this formula is best used for scenario analysis based on different sroi assumptions, as opposed to using it to arrive at a specific value.

Read more stories by Aaron Hurst.

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COMMENTS

  • BY Peter York

    ON August 4, 2012 01:55 AM

    Hey Aaron - I strongly agree with investing now and the concept of present value of a social investment. However, I think that compounding doesn’t neatly and consistently apply to social returns. Money and interest are value neutral mathematics. Sroi is not. Social returns are never permanent. They are culturally constructed and what is important/valued today - with the exception of Maslow’s bottom-level basic needs - will always wax and wane, but almost never compound in perpetuity. Compounding is achieved for a while, but social returns will plateau and then eventually diminish to the point of extinction. Example: If someone invests now to increase the acquisition of liberal arts degrees, the social returns are not increasing or compounding, but in fact are diminishing. If they waited long enough, the investor would learn that for economic outcomes it is way better to invest in science and engineering degrees, instead. All interventions rise and compound positive outcomes up until the system/group/population has adopted them widespread enough such that the evolutionary/competutive advantages shrink and disappear because every one is doing it and/or another intervention/strategy renders the previous strategic advantage moot. Read the New Yorker article from 12/10/10 by Jonah Lehrer, “The Truth Wears Off.” it makes the point and will blow your mind. Now if you are talking about compounding not tied to an intervention or specific strategy - in other words, always moving your social investment dollars to the winners/best outcome getters, then your formula and argument are right on. So, investing in your compounding model requires finding winning strategies on the rise, but moving on to the next successful idea when they plateau. It’s more analogous to portfolio investing or a 401K. But, if you are investing in a great strategy, exclusively, investing now may not compound if the intervention is close to reaching its apex of benefit to the target population.

    As always, you are thought provoking!

  • BY Aaron Hurst, author

    ON August 5, 2012 06:37 AM

    That is compelling, Pete.  It really speaks to the nature of different social returns. Investing in the environment, a individual child’s education or healthier lifestyles has the most direct compounding impact. Investing in changing all kids access to college has compounding impact but then hits a tipping point and then the value diminishes.

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