Recently, I wrote about a pair of questions that social entrepreneurs should be addressing when “Constructing the Case for Impact Investment.” Here is a third question that social entrepreneurs should also be thinking about and, while this questions relates to an issue that we have seen arise constantly, it should be noted that it does not apply to all social enterprises.

Question #3: How committed is the business to the impact—is it truly impact first? Note here that I am referring to the “business” rather than the management team because there may be other stakeholders (e.g., earlier investors) who have a say in charting the course of a social enterprise. It might seem that this question is fairly obvious, but I am thinking about a specific instance in which this question comes up in the BoP context— where there are multiple revenue streams and/or business lines.

When I talk to entrepreneurs outside the impact and social enterprise space, I love to talk about monetization strategies. My standard advice is that investors love to see multiple bites at the apple when it comes to revenue because it means the following: a) the entrepreneurs are actually thinking about revenue (though that’s not always the case, unfortunately), and b) for my analysis, I only need to find one revenue source to believe in, even if several or many others will not pan out. Put another way, you can show me a dozen revenue streams and I just need to buy into one as viable. Then, as an investor, we will work together to make sure resources are allocated where they belong (that is to say, the best combination of likelihood of success and potential magnitude). That’s part of what a good investor brings to the table. Yet, at first glance, it is nice to have a variety of potential revenue streams in the mix.

Again, the picture looks very different when making an impact investment, especially for the BoP market. We often find social enterprises with a primary focus on a product or service that has an “impact,” but that can subsequently be altered and adapted for mass markets outside the developing world. At first blush, this strategy sounds solid. Furthermore, our approach might contrast with other investors who do not see this issue as a potential problem. However, at the iiSummit in Chicago over the summer, there was a great investor panel where the conversation included concerns of impact being “shut down” post-exit by acquiring companies. Echoing these sentiments, I can confidently say that there is real anxiety in the impact space surrounding this issue on the investor side.

Given our focus on the BoP consumer, we are even more concerned than others about distractions from impact. Moreover, these concerns extend to pre-exit scenarios where securing an exit strategy could also result in shutting down impact. Our philosophy requires that investments need to be more than simply socially responsible, but also committed to the BoP consumer’s welfare. This philosophy is a long-term goal that will outlive any financial returns. That’s why we challenge any business we look at to answer the question of: it is truly “impact first”?

Here’s why we worry: imagine that the potential of the “impact” business line stalls or fades out, but the mass market opportunity remains. We call this problem the “REI-problem” because the first time our fund discussed this topic, it was in the context of a business that was creating a product to be used in rural India, but had plans for a second product (an adapted model) that could be sold to outdoor recreational enthusiasts in the developed world. Since we could see that product doing well on the shelves at the REI, it begged the question: are we comfortable funding a product that will be sold to this audience for their camping and hiking adventures and, if the BoP line failed, only to this audience? The answer for us is a resounding no.

This is not to say, we will not invest in a business with non-impact revenue streams or business lines. Yet, it has implications for secondary revenue opportunities. These opportunities must be truly secondary, and we have to be convinced that the business is impact-first and foremost. It should also be noted that the REI-problem rears its head in situations that are less obvious and require much more consideration than described in the example above.

It should be said that we can address our uncertainty around this issue in a variety of ways, including (among others): the management team’s commitment to the target (geographic) market (see Question #1), and the target audience; the height of the impact upside; and the strength of the business strategy and business model related to the impact business line(s).

In conclusion, this question, along with the two questions discussed previously, represents the start of a conversation between an impact investor and a social entrepreneur on topics of deep importance to the nature of the impact and the company’s ability to see it through execution. Impact investing is about long-term investing and investing beyond exit. Hopefully, thinking about these questions will help keep social investors and entrepreneurs on the same page.

Read the first post in this series, “Constructing the Case for Impact Investment.”

It is nothing new to say that the Internet is a tremendous resource for gathering information. However, when it comes to starting a business, entrepreneurs in particular have the benefit of digging up a wealth of articles and blog postings from a vital audience: investors. Interestingly, investors seem to be a fairly vocal class of Internet participants whether it comes to formal articles, blog posts, or even tweeting on Twitter. Seems investors love giving unsolicited advice.

As an early-stage investor, I enjoy reading what other investors have to say on topics from valuation to deal terms to the state of a particular sector. Some of the angel investors who keep blogs have a knack for writing such excellent, insightful pieces on early stage investing that the posts could just as easily be required reading in any business school course on entrepreneurship. However, in the impact space, there isn’t much information applying general startup topics to the unique challenges and idiosyncrasies of investing in the developing world and, especially, for the benefit of bottom of the pyramid consumers (the three billion people who live on less than $2.50 per day).

With that in mind, here is a pair of questions that all social entrepreneurs need to be thinking about when approaching impact investors and making the pitch for investment capital. I have singled out these questions because of the frequency at which they arise in our discussions as we screen potential BoP-focused investment opportunities. Bear in mind, these are not the only questions social entrepreneurs need to think about, but simply important ones that have special complexities in relation to the BoP marketplace.

Question #1: What is the management team’s commitment to the target (geographic) market? As with any investment, impact or otherwise, the analysis starts and ends with the management team. Outside of social enterprises, an investor wants to see an entrepreneur go all in. Usually, that comes in the form of a financial commitment and time commitment. “Quit your job, mortgage your house”—that’s the level of commitment some (perhaps, many) traditional investors want to see.

Social entrepreneurs focusing on the developing world need to show this level of commitment—and more. We tend to see a lot of US-based companies that operate (or will operate) in developing nations. That is certainly all right, but there are a number of questions that arise out of situations like this one. If the entire management team is located in the US, who is on the ground overseeing operations? Furthermore, if the going gets tough, how do we know they will stay? What partners do they have in the region? What ties do they have to the geography, and how strong and/or permanent are those ties? Social entrepreneurs have to answer these questions. However, I can count on one hand the number of business plans and presentations that offer a thoughtful discussion to address these issues. Instead, the focus is on items of traditional significance, such as management’s pedigree. Bottom line is that when it comes to evaluating a management team in the impact space, I say this: pedigree is actually far less compelling than relevance. The question of commitment to the target (geographic) market gets to the core of a management team’s relevance.

Question #2: Will consumers accept the product or service being offered? Obvious, right? After all, customer acceptance is part of any good business model. Actually, when the focus is on the BoP consumer, this question rises in importance and therefore requires far more consideration than the standard business strategy might require.

There is plenty of literature out there about design theory for products and services aimed at BoP consumers. If you are a social entrepreneur focusing on the BoP audience, get familiar with this issue and, importantly, how it applies to your social enterprise. Again, the bottom line is this: BoP consumers in the developing world will not simply buy a better mousetrap just because it’s better. In most cases, the majority of your target audience is not using the current mousetrap, and conventional notions of value propositions and payback periods won’t sway those who are. Explaining why BoP consumers will accept your product or service in the unique context you are providing it is crucial.

Linking Questions #1 and #2. When it comes to customer acceptance, nothing beats field trials and seeing the product in action. Successful or not, meeting the market, learning what it has to say, and using that information to refine everything from the product’s core features to the overall business model is part of building a viable enterprise. This is true in any sense, but given the nature of the customer acceptance issue with BoP consumers, it is of the utmost importance. We will always want to know about your beta customers, what they have to say, and whether any of them were so pleased with your product that they became evangelists for you and helped sell others during the field trial or initial launch period.

Naturally, the commitment of the management team is key to this process. In order to feel the full effect of meeting the market, the management team has to be there, on the ground, learning and gathering feedback first-hand. Not only do we have suspicions about the veracity of field trial results not conducted by the management team, but we have doubts about whether the feedback from it will be incorporated as it should be. As you can tell, social entrepreneurs who successfully answer question #2 will be able to support and back up their answer to question #1. When you have done your homework on the customer and show how your design will resonate with the target audience, you can construct a compelling narrative that not only articulates your commitment to the audience, but resonates with impact investors as well.

Read part two of this series, “Investing Beyond Exit.”

One of the principal reasons impact investing is growing in popularity is the parallel rise in the number of social businesses that are being started. As entrepreneurs create more for-profit businesses that have strong social missions—such as Numi Organic Tea, Method Products, and New Leaf Paper (all certified B Corporations)—the opportunity for socially minded investors to invest in those businesses grows right along with it.

Not all impact investments are in for-profit companies, however. Many nonprofits also need access to investment capital, sometimes as standard loans, and other times in the form of creative financial products. The Nonprofit Finance Fund, for one, has played an important role in helping US nonprofits access this type of investment capital. Under its new CEO, former Rockefeller Foundation executive Antony Bugg-Levine, NFF is likely to push into new areas of impact investing. Bugg-Levine has been a prominent advocate of impact investing and is the co-author (along with Jed Emerson) of the new book Impact Investing: Transforming How We Make Money While Making a Difference. To read a provocative review of his book, see “Shifting the Market.”

Impact investing is not just a US trend. It is growing in popularity around the world as well. For an interesting look at the first Brazilian social capital fund, read “Journey into Brazil’s Social Sector.” Leonardo Letelier, the founder and CEO of Sitawi, recounts his experiences creating and operating the fund. Sitawi has provided more than $1 million in loans to a range of Brazilian social enterprises, including a community bank, a handicraft collective, and a poverty alleviation agency.

For an extensive look at impact investing, read “Roundtable on Impact Investing.” In this discussion, impact investing leaders from around the world discuss their experiences and the trends that they think are important. The participants include Jacqueline Novogratz, founder and CEO of Acumen Fund; Álvaro Rodríguez Arregui, chairman of the Mexican microfinance bank Compartamos Banco and managing partner at the impact investing firm Ignia Partners; Asad Mahmood, managing director of Global Social Investment Funds at Deutsche Bank; and Iftekhar Enayetullah, co-founder and director of the Bangladesh social business Waste Concern.

And finally, for an account by a pioneer impact investor about his two decades of experience, be sure to read Roger Frank’s “Impact Investing: What Exactly Is New?” Frank provides an honest and often humorous look at the difficulties he has had getting investors to consider impact investing.

“If baseball scouts’ intuitions lead to outcomes, use them, and if statistics produce greater success, as Moneyball portrays, then use them, and if together they provide better results, mix them,” he astutely observed.

Of course, while a baseball game can involve complex strategies, it is a more contained system than the nonprofit arena. It is governed by rules, which often fall short when tackling such pervasive problems as poverty. As Bill Veek once said, “Baseball is almost the only orderly thing in a very disorderly world—if you get three strikes, even the best lawyer can’t get you off.” It is easier to quantify a pitcher’s accomplishments than the spirituality stimulated by a religious organization, or the joy and healing by an arts group.

Nevertheless, sabermetrics offers constructive, as well as cautionary, lessons for foundations.

Proponents have found hidden value by better forecasting player performance. Historically, scouts “knew” that the best first basemen were tall left-handers, yet through rigorous quantitative analysis, the A’s discovered that body type didn’t matter, so they acquired some fine—and affordable—ones who were stout and right-handed. Moreover, on-base percentage, a statistic that was ignored, proved to be more predictive than traditional indicators such as batting average or stolen bases. Many donors, likewise, have determined that for calculating nonprofit effectiveness, programmatic outcomes are superior to administrative cost ratios and program outputs. Through enhanced perfomance assessment, they have realized that some legacy nonprofits are over-valued, while other innovative and evidence-based programs are underrated. 

Still, most foundations, especially smaller ones, underutilize strategy and performance measurement, diminishing their potential. Relying on untested “conventional wisdom,” they risk underestimating certain organizations by neglecting significant metrics such as program-related results per cost and the extent of their shared leadership, network connectedness, and reflective learning. The Hill-Snowdon Foundation, once a “charity-check-writing-around-a-family-kitchen-table” operation, has increased impact by strategically focusing its few million dollars of annual funding and using more data to inform decisions.

Yet relying too much on metrics brings its own risks, as baseball amply illustrates. Franchises that have discounted team chemistry, clubhouse leadership, and player conditioning have paid a price. While Moneyball techniques helped the Boston Red Sox win championships in 2004 and 2007, they collapsed this season—and devastated my four-generation Red Sox fan family—as a result of disjointed teamwork, collective stress, and other unpredictable circumstances.

In philanthropy, an approach that is overly rational, or too oriented around “command and control,” numbers and accountability can similarly backfire when inclusivity, responsiveness, and improvisation are overlooked. While particular nonprofits can benefit from control group studies, for example, most gain more from an iterative R&D approach to evaluation entailing real-time learning about cause-and-effect patterns and rapid program adaptation.

Moneyball should not convince funders to go overboard and let algorithms, logic models, and cost-benefit and ROI analysis dominate. Like baseball managers, they must begin by selecting players with the greatest potential. The craft of grantmaking is crucial: Funders should authentically cultivate nonprofit partnerships, collaborate on agendas and strategies, and allow for experimentation. They need to share control and work organically within fluid boundaries.

Just as baseball is both an art and a science, so can philanthropy benefit by deliberately tapping the dynamic tension between the humanistic and technocratic. A case in point is the Novo Foundation, which makes approximately $55 million in grants annually to empower girls and women. Foundation President Jennifer Buffett says that her father-in-law, Warren Buffett, advised her and her husband to focus their funding, take risks, be patient, and assess their impact. “In a field that works to build and support human capacities and change entire systems, it is not a good idea to fall into the trap of relying exclusively on metrics or a technocratic approach,” she comments. “We work in a very thoughtful way to equalize power relationships, build expertise on the ground, and listen and nurture…balancing and considering the head and the heart. That doesn’t mean we are not interested in sound structures, evaluation, and solid results. But, again, to us, solutions should always have a human being, a human voice, at the center.”

Neither philanthropy nor baseball can afford to disregard the varied ways to create value. Moneyball advocates would be well-served to view empirical data as the beginning, not the end, and heed intangibles. And baseball traditionalists should appreciate sabermetrics’ insights more.

Correspondingly, some technocratic philanthropies might benefit by not being as directive and rigid with grantees, “owning” the strategy less, drawing on values and intuition more, and looking hard for any blind spots causing over-confidence. And certain humanistic grantmakers could profit by providing further direction to grantees and holding them more accountable for outcomes. Phil Buchanan, president of the Center for Effective Philanthropy, wisely discerns that funders “need both assessment and morality” and “are morally obliged to seek to know how we are doing and what we can improve.”

Fixed formulas for permanent solutions are unrealistic because the real world is not static. The way forward is intentionally intertwining the objective and subjective while diligently measuring shifting variables, creatively exploring how they influence outcomes and making meaning, and continually adapting strategies, tapping the wisdom of diverse stakeholders at every step. This emergent journey matters far more than the metrics. Whether you are striving to win the World Series or scale social innovation, you need to cultivate a symbiotic and vibrant interplay of logic and instinct, internal expertise and outside perspective. You need to follow the linear path along with the serendipitous one.

As a leader of one of the largest capacity-building organizations in the country, I want to let you in on a little secret. You can ignore nearly all these findings and best practices.

Nonprofit consultants and the industry’s media are largely to blame for this proliferation of noise. It is not due to bad intentions. It is simply a natural outgrowth of specialization, survival and marketing.

Consultants become specialists (in social media, strategy, governance, and so on)—and they need clients to survive. Unfortunately, some turn to the tried and true marketing formula of: think up a potential “next big thing,” tell a few success stories, share a few supporting trends about adoption, and make the case that if you don’t keep up with the Jones’s and hire them, your nonprofit will get left behind. The media eats it up, the consultant gets speaking gigs at conferences, and pretty soon their practice or idea or approach is accepted as fact. But it isn’t.

Our sector wastes an insane amount of time implementing best practices that have painfully low—if not negative—return on investment (ROI).

Here are five examples:
1) Volunteers. Recruiting and managing volunteers generally isn’t worthwhile unless you use at least 50 per year, they do at least 50 hours of service each (or fewer volunteers and more hours each), and you invest in volunteer management systems. Short of that, it’s almost certainly a waste of time.

2) Websites. Most nonprofits (the small neighborhood ones) would likely be fine with just a Facebook page. A template site would do the trick for slightly larger group. Only 25 percent of nonprofits need customized web design.

3) Board. There is a tremendously high fixed cost to training your board to facilitate donations (in kind or cash). If your board can’t generate a large part of your budget (say, 20 percent), you are likely to find them getting in the way of fundraising success and eating up senior staff time (and increasing burn out). If that’s the case, your organization would likely see more success with a smaller board focused solely on audits and the legal requirements of governance.

4) Social Media. Does it drive your advocacy, fundraising, or program success? It does for likely less than 2 percent of nonprofits. Everyone else is wasting a ton of time and energy on it. Much like my local car wash that urges me to “like” it on Facebook.

5) Strategic planning. You need a strategic plan, but for most organizations it can be a lot lighter than most MBAs want to admit. It doesn’t need to be perfect and frequently should be more of a living document.

My bottom line advice is that you should only invest in things you need to achieve your goals and be very careful of anything that you should do. If you are not positive which category an investment falls into, don’t ask a consultant. Ask your peers about their experience.

For decades, the main pressure facing networks was to be in more places and serve more people. Now, there is a different kind of pressure: to get better. Networks with multiple sites are increasingly expected to provide donors and supporters with a higher level of evidence that their work is effective and delivered consistently across the board. While an “outcomes” orientation isn’t new, its effect on the sector has been magnified, in part because of the difficult economy.

In our work, we have seen several networks take promising steps to deliver measurably better results in achieving their missions. Central offices are working collaboratively with affiliates to improve the way in which their network’s high-level strategy translates into action across the entire organization. They’re figuring out where their best work is being done, finding ways to become more effective, and learning how to ensure that all affiliates benefit from the experiences and know-how of their peers.

Here are five promising elements that networks are using to raise the bar:

Use the network’s unified strategy to drive decision-making. Although network members operate in distinct communities—serving populations or causes that may vary by geography—consensus around a common strategy keeps each site moving in the same direction. The Boys and Girls Clubs of America, for example, identifies key performance indicators (such as academic success measures and frequency of visits) that apply to all clubs, regardless of size, programming, and population characteristics. These measures help the organization assess individual clubs, identify the things that individual affiliates need to do to improve their results, and show where one club might benefit from the experiences of another.

Create a common language by defining the dimensions of effectiveness. When affiliates share an understanding of what high performance looks like, it becomes easier to identify reliable indicators of effectiveness. Networks should ask themselves: What information will allow us to set clear expectations and compare results? What will help us see how all affiliates are performing against their common strategic goal and understand why some affiliates may be achieving more than others? What support is needed to transform the effectiveness of the individual organizations and the network itself?

Create paths for affiliates to improve. No basketball coach would ever tell a player to “just play more like Michael Jordan.” Professional athletes hone their skills by progressing through a series of developmental milestones. The same is true with network affiliates trying to become more effective. Once the networks we studied have developed a clear sense of the dimensions that indicate high performance, they have then shifted their focus to defining clear, intermediate developmental stages on the way to reaching those goals.

Diagnose where the network is today and uncover pockets of strength. Having figured out the developmental stages that characterize an affiliate’s progress, these networks have moved to diagnose their current state, giving themselves a baseline against which to measure progress. They ask: Where do affiliates fall on the developmental continuum? Are there pockets of strength, or weakness? How might the entire network strengthen performance if affiliates could improve in one key area?

Consider the experience of the National Guard Youth Challenge Program (ChalleNGe), which offers a quasi-military environment for teens who have dropped out of secondary school, with the aim of helping them become productive citizens. In 2010, ChalleNGe identified key dimensions of program effectiveness and assessed affiliate performance against those dimensions. If all affiliates could match the performance of the top quartile, then 2,700 more young people would graduate from the residential program each year—a 35 percent increase in impact—without needing to add new locations.

Capture knowledge that matters: After completing the tough task of assessment, networks face the challenge of leveraging affiliate knowledge to improve results across the board. This means figuring out what to do first and how affiliates can best learn from their colleagues throughout the network. Especially important may be the use of a self-evaluation tool by which affiliates can track performance indicators, understand their strengths and weakness relative to other network members, and tailor performance improvement strategies to those strengths and weaknesses.

We have seen a growing number of networks embark on a journey to drive impact in their work. A new article, “Growing Network Impact: How Nonprofit Networks are Raising the Bar on Results” shows how the work of six networks illustrates these practices. Please share your thoughts, ideas, and stories.

Alan Tuck, a partner in the Boston office of the Bridgespan Group, leads Bridgespan’s work with networks and is the former head of the Boston and New York offices. In addition to his work at Bridgespan, he serves on the Executive committee of the Board of Directors of the YMCA of Greater Boston.

Mandy Taft-Pearman is a partner in Bridgespan’s Boston office and lead the work with environmental networks. Prior to joining Bridgespan, Mandy worked for the National Safe Kids Campaign, a national network focused on children’s public health.

We at the Schwab Foundation for Social Entrepreneurship collected data and narratives from several dozen social entrepreneurs around the world about their experiences with social investment. Social investment is a means to provide capital, in a business practical approach, to organizations that bring social change. While the general consensus is that social investment is an overwhelmingly positive force, a handful of social entrepreneurs have reported less glowing experiences.

I offer here two examples, not to point fingers or question intentions, but rather in the spirit of collaborative and continual improvement. With this discussion, we give voice to the dissenting, often unheard but equally valid perspective. My hope is that we can use our collective power to address the barriers that now may be small cracks in the wall but in the future could cause a backlash against what otherwise has vast potential to make a positive difference in the world.

One social entrepreneur described a year-long “dance” with social investors. Given the rigor of the due diligence process and the already stretched bandwidth of her staff, she had to put internal projects on hold in order to meet the demands of the investors. At the same time, since the conversations with the social investors seemed to indicate the investment was almost certain, she did not focus on courting other prospective investors or writing grant proposals. At the eleventh hour, the deal fell apart. The investors told the social entrepreneur: “Sometimes these things happen.” She was left not only without the anticipated capital infusion, but also scrambling to make up for lost time on other projects and fundraising.

Another social entrepreneur told us about social investors who chose to work with her because of her organization’s theory of change, strategy for reaching the target audience, and measurable social impact. Yet over the years of the investment, the investor demanded that her organization pay for supplement costs, such as in-kind services and regular travel expenses, and used their decision-making rights to steer the enterprise away from the core values guiding its community engagement and mission. Her organization was left in the red and forced to downsize. This affected her team’s morale and the community’s esteem for her social enterprise.

During the Summer Davos meeting of the World Economic Forum in September 2010, forty social entrepreneurs met to share their experiences with social investing. From this, social entrepreneur Andreas Heinecke launched a taskforce to create useful insight for social entrepreneurs considering social investment, beginning with collecting a baseline of quantitative and qualitative data from the social entrepreneurs in the Schwab Foundation community.

Much has been written in recent years about the potential impact of the estimated 1 trillion USD impact investing—or social investment—sector. Yet little has been written for social entrepreneurs about the process of forming productive relationships with social investors, and whether receiving an investment is the right growth approach for each social enterprise.

Over the past year, with the support of the Center for Entrepreneurial Finance at the Technical University of Munich, the Schwab Foundation for Social Entrepreneurship created a free guidebook for social entrepreneurs on social investment.

It was not until we posted this document and received more than 1,000 downloads in the first 48 hours that we understood the pent-up global demand for this knowledge. The guide provides a launching point for social entrepreneurs to begin conversations—both with prospective investors and among themselves—around the challenges and opportunities represented by the social investment space. 

Here are two tools from the guidebook for social entrepreneurs to explore which financing instrument and which investors best suit the needs of their organization. These tools can help the social entrepreneur begin discussions internally and then inform their work with prospective investors.

Are you a social entrepreneur or social investor who has had experiences with social investment?  If so, we want to hear from you about what needs to be done to make the process work better. What knowledge, processes, or platforms do we need to ensure the social investment sector can achieve its potential for positive impact?

I’m really glad I went, though. Among other things, the organizers did a beautiful job of bringing serious funders together in a productive way. Those who came seemed like a different breed of donors, in a different kind of mood. There is a high ratio of doers to donors at Skoll, which may explain why the donors there seemed less afraid of hanging out with doers and more serious about funding them.

As for doers, the Skoll social entrepreneurs are the kind of people who make you feel optimistic about the fate of the world, and it’s nice to see them celebrated. All the hoopla makes it that much weirder when you talk to them and find that almost all are in a continual scramble for money. Two of the organizations who’ve demonstrated big bang for the buck are in precarious financial straits and no one’s financial future is assured, no matter how well they perform.

That’s just wrong. For god’s sake, these are the rock stars, the golden ones anointed by Jeff Skoll and blessed by Archbishop Tutu. They’re not the only great ones out there, but they’re all pretty remarkable. We’ve been making a big deal out of social entrepreneurship for a decade, but even the most celebrated are still reduced to passing a tin cup. What gives?

It comes down to this: We’re all operating in a dysfunctional market for impact.

Think about it. In the for-profit world, if you make a big profit, everyone wants a piece of you. If you have a money-making idea, you need to protect it from me, or I’ll steal it. With a few hiccups here and there, capital flows toward success.

That doesn’t happen in the social sector. Real impact—our analog of profit—doesn’t make it easier to fund-raise. Good ideas sit around unused (a friend of mine referred to the social sector as “a desolate landscape of abandoned pilots”), and zombie NGO’s can operate for years without any evidence that real impact ensues. Capital does not flow efficiently toward those who know how to create change.

Ultimately, the fault lies with us, the donors. By and large, we don’t fund on the basis of impact—we’re like investors who don’t look at profit-and-loss sheets. Because we don’t demand ongoing measurement of impact, organizations don’t do it. Because we prefer to fund shiny new stuff, organizations have little incentive to copy others’ successes. Good ideas languish, and high-impact organizations struggle to raise the money they need to grow. Calls for collaboration go unheeded because organizations won’t get credit for the increased impact, and it may even hurt fund-raising.

As far as I know, no foundation head—or even program officer—has ever been fired explicitly for lack of impact. Wouldn’t it be great if a few of us who head up foundations got the chop for insufficient impact? How cool would it be if organizations without demonstrable impact went out of business, if high impact translated into higher compensation, if successful founders could move on with enough dough to start something new or sit on the beach for a while? 

There are encouraging signs out there. More donors are asking for measurement of impact and a lot of smart people are working on ways to measure it. I worry that they’re going to make it too complicated—at our little shop, we rely on a relatively simple eight-word-mission and single-best-indicator approach, and we prefer internalized systems where ongoing measurement feeds back into operations.

However we do it, though, it has to happen, and we have to fund on the basis of what emerges from the process. And in the end, I ought to get fired if I can’t show that our investments have led to real, scalable impact.

There, I’ve said it. Hold me to it.

The notion of Low Profit Limited Liability Corporations (L3Cs, for short) is that they’re a vehicle for doing well by doing good and therefore an improvement over the typical nonprofit structure. L3Cs are permitted to earn profits, but proponents claim that their praiseworthy intentions—to end hunger or provide clean water or whatever—make those who lend to them eligible for the special tax benefits attached to program-related investments. In other words, this is a legal structure presented as a technique for gaining access to capital (always a struggle for nonprofits) by providing a tax benefit to lenders.

Of course, foundations already get a tax benefit for program-related investments in regular nonprofits, so what, exactly, is the appeal? In theory, foundations might be more interested in program-related investments that generate a reliable flow of capital (in the form of profit) than in program-related investments that generate nothing but additional nonprofit programs and services. Likewise in theory, regular venture capitalists outside of foundations will be more interested in making investments in profit-making entities than in pure nonprofits. This—the notion goes—will increase the amount of capital available to support general good-guy behavior.

However, a number of scholars and lawyers (Daniel Kleinberger of William Mitchell College of Law prominent among them) see the L3C as, at best, redundant and, at worst, an invitation to fraud. They point out that regular limited liability corporations can be organized for any purpose, including public-spirited and low-profit ones. They point out that the IRS has not yet issued (and does not seemed inclined to create) a rule awarding automatic program-related investment status to any investment in an L3C. So anyone who invests in an L3C on the basis that it provides a higher return than a regular nonprofit with the same tax benefits will find out to his/her sorrow that this is not the case.

What strikes me as peculiar, though, is that in the many discussions I’ve heard and read about L3Cs, only one mention (specifically, Professor Kleinberger’s Nonprofit Quarterly article) has ever surfaced of this opposition from the bar and Federal regulators. Not until my tax lawyer Stuart Levine asked about the (successful) efforts in Illinois to create L3Cs did I realize there was anything controversial about the phenomenon. After bringing me up to speed, Levine wisely said:

“L3Cs don’t work unless there is a change in federal tax law. In other words, L3Cs are a little like the wonder drug for which there is no known disease. L3Cs raise difficult issues of fiduciary duty and the inherent conflict between ‘charitable’ purposes and ‘business’ purposes. At the least, these conflicts cannot be dealt with via a quick-fix state statute.”

Doubtless I space out on frequent occasions and miss aspects of what’s said or done in the sector. But I suspect there’s also a significant disconnect between what nonprofit executives and L3C promoters expect and describe and what lawyers and regulators understand.

So if you’re considering investment in an L3C, be the aware buyer of whom you’ve heard.

Though money has poured into Haiti for disbursement by aid organizations such as the American Red Cross, Mercy Corps, and World Vision, security concerns and scant use of traditional banks made distributing cash difficult and slow. In cash-for-work programs and other cash-based interventions, there are security concerns for both staff and beneficiaries. The threat of riots when payments are delayed is an ever-present concern for payers, while beneficiaries face the risk of being robbed on their return home. For those arriving home safely, saving can be a difficult proposition; Haitians’ immediate needs are so great and so many of them lack stable employment in competitive, productive markets.

In this context, I’m co-leading Dalberg’s research on the potential for new mobile-based payment systems that offer a safer, more affordable, and faster alternative to distributing cash in a country where 85% of households have access to a mobile phone (according to Voila, a mobile network operator) but only 10% of the population is served by the financial sector (in a study by USAID). This potential was the impetus for the Haiti Mobile Money Initiative (HMMI), a joint program of the Gates Foundation and the U.S. Agency for International Development (USAID) that is using a $10 million incentive fund to spur the growth of the mobile money industry. The program is managed by Haiti Integrated Finance for Value Chains and Enterprises (HIFIVE), an innovative division of USAID working to improve access to financial services.

After interviewing people from across the mobile money ecosystem in September and October 2010 in Port au Prince, and learning about the myriad challenges to launching mobile money, it was great to see two partnerships of mobile network operators and banks successfully launch mobile-phone-based virtual wallets and begin competing for shares of the HMMI fund by expanding their clientele. The award of the HMMI’s first cash prize – $2.5 million to Digicel and Scotiabank – marks a major milestone in the evolution of Haiti’s mobile money industry: the first partnership to reach 10,000 transactions spread across 100 mobile money agents.

With this milestone, mobile money is beginning to realize its potential for making cash-for-work and other aid programs faster and more cost- effective. Questions remain, however, as non-governmental organizations (NGOs) such as World Vision and Mercy Corps begin to rely on mobile money for their disbursements: What will be the overall costs and benefits? What obstacles will be encountered in implementation?

When my colleague Lorenzo Bernasconi and I interviewed leaders of these NGOs, many felt that mobile money held enormous promise for reducing registration times and costs for aid recipients, increasing the speed of cash disbursement, improving safety and privacy for clients, and increasing financial access for the majority of Haitians. Jean Capili, senior manager of innovation and partnering at World Vision, put it this way: “We are excited about the potential mobile banking has for participants in our cash for work program and for future programs that can utilize such mobile technology. It is an alternate mode of payment that is more secure and will reduce the existing number of days in which participants get paid, which in turn means they can purchase necessities for their children faster.” Indeed, World Vision estimated that the cash disbursement time-lag could be lowered by as much 50%, as illustrated below.

In mid-2011 and early 2012, we’ll carry out two additional rounds of research on the costs and benefits of mobile money for NGOs and government payers in Haiti – as well as the efficacy of the prize mechanism and the effects on Haitians’ lives. While our initial analysis delved into these NGOs expectations and plans, this subsequent analysis will begin to show how mobile-based payments work in practice. We will seek to answer questions like:

• What time and cost savings have NGO‘s realized in Haiti using mobile payment solutions?
• What were the required investments to introduce mobile money platforms?
• What are some of the key risks and challenges in using mobile platforms?
• When is distribution through a mobile banking platform more cost effective than cash?
• What has the reaction been among beneficiaries?

I am particularly excited about this research because the potential impact for programs in access to finance, agriculture, and health is so significant. These solutions, if effective, could increase delivery times, reduce corruption, improve tracking, and reduce costs for the full range of NGO programs working with cash payments. Around the world, examples already include the use of mobile-based payment solutions for cash-for-work programs, conditional cash transfers, loan repayments, and voucher programs for agricultural inputs and health care. Where mobile money platforms already exist, as in Kenya, new aid programs can build on the existing infrastructure.

In the coming months, I will be continuing this research in Haiti and working with funders and nonprofits to apply these lessons to their own portfolios of programs. Check back here for an update on our research later in the year. In the meantime, the Gates Foundation and USAID will continue to award prizes as Haiti’s mobile money industry grows.