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.

Alberto has had a storied career as former publisher of the award-winning Miami Herald and El Nuevo Herald. He is a graduate of the University of Pennsylvania Law School and Wesleyan University. Prior to that, he served five years in the Peace Corps in Venezuela and Colombia. I caught Alberto as he was preparing to fly out for last week’s Forum on Communications and Society at the Aspen Institute, which set the stage for our conversation about his role as an advocate for democracy, and an educated and engaged citizenry.

Aaron Hurst: There has been a lot of recent discussion in the nonprofit sector about the emerging trend of social enterprises that have a dual purpose of generating financial as well as social rewards. Do you see journalism as double bottom-line industry?

Alberto Ibarguen: I was publisher of a Knight newspaper and sat in [Co-founder of Knight-Ridder newspapers and the Knight Foundation] Jack Knight’s actual office for eight years. There was a unity of business and mission under Jack Knight’s ownership, and informing community was at the core of his business model: If he didn’t inform the community, he didn’t make money. That’s a big issue in media today. The institutional shareholders of some publicly held media companies are not committed to news or information; they are committed to a certain return on their institutional investments. Jack Knight was committed to both.

It’s a great opportunity to apply Jack’s business tradition at the Knight Foundation. Running a nonprofit should be little different from a for-profit—the major difference is just a question of what you do with the return, if there is any. When I look at the nonprofit or online news organizations that we fund, I’m interested in their ability to continue doing that job indefinitely because the community’s need for information is indefinite, so part of the model needs to be about sustaining the organization by providing value to the market. It’s a way of thinking about philanthropy that is about social investing rather than charity. As a social investor, I want some return in the form of sustainability and the evolution of the project so that it continues to do the good that we intended in the first place.

AH: You recently joined the board of directors of AOL. What parallels do you see between what they are doing and John S. Knight’s vision for the role of media?

AI: AOL has made a very big bet on local news as a way forward and is moving to create a series of “Patches,” or local news operations that include locally produced journalism and blogs and community information. They reflect the community and are technologically very easy to use. The grand vision is you end up with the United States covered by these Patches, with The Huffington Post overlaying a regional and national perspective. That creates a future news organization that is sustainable by the engagement of readers and advertisers at the very local level.

To the extent that you can figure out how to create a for-profit business, you may also be able to figure out how to create sustainable new operations that may or may not be for-profit. Separately, at Knight Foundation, we are also interested in looking at possible changes in the tax laws that might be needed to encourage local nonprofit and community-owned news operations in the United States. There are all kinds of models and hybrids that are being talked about in lots of different places, including in Congress. They may look and run like businesses, but in fact are for public benefit. They could be community institutions or even universities.

AH: You were a leader in the publishing industry for a long time before moving to the philanthropic sector. What has been the most challenging part of making the transition?

AI: It’s hard to remember that you’re not doing the project. I come from a world where I was very much an activist. At a foundation, it is important to remember that you are supporting an individual, a set of leaders, or an idea. The biggest trap is that others will pervert their own idea so radically that it becomes some version of your own idea in order to get the foundation’s money. In my experience, that leads to failure because there wasn’t a commitment by the person doing the project or idea. It is important to maintain open communications and remind ourselves that it is not our project. We look for great ideas that can inform and engage communities, and allow them to come together to decide their own interests.

AH: So then, in your role as a foundation president, how do you measure success?

AI: People in philanthropy seem to want an equivalent for cash as a metric of success. Cash is an easy metric to have in business: You sell the product and make the money, and at the end of the day, you add it all up. You can put a number on it, and it is concrete. We’re in a different business. We should not be afraid to look for metrics, but we should also not be afraid to say you can’t assess social change in the same way you can count cash. We shouldn’t confuse the two. It’s as Jack Knight said: You want to be fair, open-minded, and opinionated. You take in all the facts, you try to be as fair as humanly possible, and then you develop an opinion. We’re in the judgment business, and we ought to be more comfortable—and transparent about—expressing that judgment.

AH: Both in journalism and philanthropy, you are constantly being pitched ideas. How to you filter and respond to these multiple requests?

AI: Coming into the philanthropic side, I underestimated how much pressure feeling good can create. It feels wonderful to say, “That’s a great idea. Here’s a million dollars!” It is much harder to say, ‘”‘m sorry, that’s a wonderful project you’re doing, but that’s not what we fund. We fund informed projects that lead to informed and engaged communities.” Sticking to the strategy and funding focus is really very hard because it is so easy to fund feel-good projects.

AI: How do you maintain that discipline?

AI: The pressure has to be self-imposed. In my past positions, there were readers who could simply walk away if the newspaper wasn’t providing services, or my legal clients could find another lawyer. At a foundation, there is no market pressure to achieve goals—it is all internal. Part of my job as CEO is to provide some of the urgency that is natural in business and necessary for foundations to stay focused on the changes in society. At Knight Foundation, we fund projects that will lead to transformational change by supporting informed and engaged communities. This comes directly from Jack Knight’s philosophy on the purpose of a great news organization: to inform and illuminate the minds of its readers so that the people may determine their own issues and interests and best decide how to move forward. I think that is a wonderful model and the kind of thinking that should inform an organization like ours, creating the pressure that will substitute, to some extent, what the market does for a business.

Read more from this interview at Taproot.

Aaron Hurst is the founder and president of the Taproot Foundation, a nonprofit organization building a national pro bono marketplace and leading the global service movement through its award-winning Service Grant program. Widely known for his thought-leadership in civic engagement, nonprofit management and corporate social responsibility, Aaron is an Ashoka and Draper Richards Kaplan Foundation fellow and has been formally recognized as a social innovator by the Aspen Institute, Social Venture Network, Fast Company, Commonwealth Club, the Manhattan Institute, the State of California, and the Alliance for Nonprofit Management. Aaron currently sits on the International Advisory Board of Directors of CiYuan, a three-year initiative to increase social investment in China, and serves on the boards of Reimagining Service and BoardSource. He co-authored the children’s book Mommy and Daddy Do It Pro Bono and is a featured blogger for The Huffington Post.

However, I am concerned that, in our collective excitement about the exceptional, we are losing our vital expectations of quality and access for all. Our concept of exceptionalism creates benefits for all, but only when it is linked to our commitment to a level playing field and a social contract that assumes a baseline of quality and opportunity. I believe our focus on exceptionalism alone (without the distribution and scale of baseline expectations for all) may contribute to increased disparity in our society.

To put this in simple terms: I want my kids to have exceptional teachers, but I don’t want my children’s exceptional teachers to be the exception. As a citizen of a democracy, I need every child to have a quality education. I want every child to have a really good teacher. I worry if my child’s excellent teacher is the exception.

Just turn on the news, and you will see candidates and pundits on the right bolstering “American exceptionalism” as a litmus test and an argument for unilateralism, bootstraps expectations, and cuts to safety-net programs. Switch from FOX to Huffington Post, and you will see progressives rewarding exceptionalism, in the form of brilliant model programs from the Harlem Children’s Zone to Green for All, as an argument for social innovation and enabling environment based-solutions. Combined, we are reinforcing a frame that only exceptional leadership, exceptional circumstances, and go-it-alone bravado can create improved lives and communities. And while exceptional talent, ideas, and leadership are all critical, we have allowed ourselves as a society to accept sub-standard education, health access, food security, and economic opportunity for the many as the norm, with exceptions of high quality services, outcome measures, and quality of life for the exceptional few or for those served by exceptional organizations.

Have we moved the baseline too low? In our celebration and appropriate reward of the exceptional, have we accepted an unjust and intolerable norm? In our idealism of the exceptional, are we further letting go of and giving up on the scale and sustainability of social contract-based expectations? I see two key challenges that emerge from unbridled exceptionalism; these challenges call for the need to leverage the exceptional with increased advocacy for equity, scale, and sustainability.

The Acceptability of Individual Benefit Choices

We all constantly balance the choices we make as individuals between our benefits factors (what’s in it for me?) and our values factors (what aligns with my beliefs?). Just look at any recent successful school or library bond measure, and you will see the careful listing of specific new branches, sports fields, etc., to show voters what they get very locally compared to the overall seismic upgrades, replacements of boilers, and improvements in neighborhoods that have the greatest need but may not have the voting impact. This is human nature, and every social marketer recognizes it.

That said, as we have shifted the baseline expectations of what is publicly provided to what exceptional programs can deliver, the acceptability of individual benefit drivers in choice-making gains currency. If you want your child to have PE or music or a library at school, in many districts you need to have an exceptional parent-led school foundation and an exceptional principal who can massage full time equivalency teaching positions. The same is true for many programs, including library reading, parks and recreation youth services, workplace wellness, early literacy, farm-to-school, green jobs training, parenting support, and others that meet basic community needs. Just last Sunday, the New York Times reported on the increased trend of public charter schools in suburban districts and the tension between increased choice and the reduction of resources in schools that have enviable achievement results. The article illuminates one of many arenas where the balance between individual and public benefit are playing out.

The Tyranny of Innovation vs. Delivery and Sustainability in Funding

So much of our social-sector funding streams are focused on the development of new programs, new models, and innovative approaches. This investment is critical to solve vexing social problems and to address new and changing challenges. However, the increased focus and acceptance of exceptionalism further accentuates funding in this area while masking the need to fund and sustain core delivery and expansion of programs that work.

The private-sector economic model moves from venture funders investing in the exceptional to capital markets and consumer spending funding widespread distribution. In this era of public sector cuts and diminished expectations for public investment, we often do not have the funding mechanism to bridge from innovator to scale delivery in the social sector. This results in many NGOs with strong programs constantly scrambling to create new pilot programs or to re-package existing programs to meet the social market’s demand for exceptionalism. As grantmakers, donors, and public-sector funders, we need to fund exceptional ideas and leaders, and we must fund normative delivery, stability, and expansion of programs and services that work.

So what can we do about this?

My argument is not to dumb things down, or to take credit and reward away from exceptional social innovators. I believe we have a responsibility to advocate for a both/and understanding that is rapidly getting lost. We need to shift the narrative to include the link between exceptional solutions and the systems change and scale needed to deliver a just baseline. We need to advocate for the value of shared benefit and public responsibility to invest in quality services and equitable access to opportunity. We need to join with other funders and social entrepreneurs to encourage funding models that value and invest in scale and sustainability. Ultimately, we need to leverage exceptional ideas, leaders, and programs, and refuse to accept quality, access, and impact as exceptions.

In both cases, the government is making the implicit assumption that grantmakers or other professional intermediaries are better positioned to make specific funding decisions. It is a similar assumption that investors make when they put their money into a mutual fund rather than making each investment decision on their own.

This framework is supported by people across the political spectrum and has garnered significant support from large foundations. For instance, both Council on Foundations and Grantmakers for Effective Organizations have successfully organized large foundations to help support the Social Innovation Fund.
However, the first two rounds of the Social Innovation Fund application process have seen only one large private foundation step up to take on the critical role of intermediary (the Edna McConnell Clark Foundation).

To be sure, the SIF has seen applications from a number of savvy public grantmakers, such as New Profit, Social Venture Partners, Venture Philanthropy Partners, REDF, the Cleveland Foundation, and numerous United Way chapters. But large private foundations pride themselves on their highly developed program expertise, rigorous due diligence of grantees, and sophisticated impact tracking efforts. These skills are exactly what the Social Innovation Fund and Pay For Success program require to achieve the best results.

Why then have we seen such an absence of participation from the country’s leading practitioners of sophisticated philanthropy?

One often stated reason is that large private foundations don’t need government funding. But this argument completely misses the point.

The reason to participate as an intermediary in one of the new government programs has nothing to do with receiving funding. It has everything to do with playing a role in redirecting government resources to the most effective programs. Since government funding dwarfs even the Gates Foundation’s annual grantmaking, the opportunity to optimize this flow of resources should be of prime interest to large grantmakers.

Just to put in perspective the degree to which these government funds make private foundation resources look like chump change, if every penny of the Gates Foundation 2010 grant budget had gone to K-12 education, it could have paid for less than one full day of nationwide schooling. In other words, the US government spends more each day on education than the Gates Foundation spends across all their programs each year.

Now I get that private foundations are “private” and have every right to opt out of participating in these sorts of programs. I believe strongly that philanthropy has a very different role to play than government. However, the Pay For Success program and Social Innovation Fund are examples of the government turning to philanthropy for help selecting the most effective programs. I don’t think it cuts it for the large, sophisticated foundations to stick to the sidelines cheering along the process.

Large foundations don’t need to participate in these new programs. But they should. It is the right thing to do, and it represents one of the most attractive ways for savvy foundations to leverage their program expertise to influence more funds than they ever dreamed possible.

Rod Schwartz is founder and CEO of ClearlySo, a company that helps entrepreneurs with raising capital, team building, product sales, and financial management and control.

When I asked what inspires him, Rod said he was driven by tikkun olam, a Hebrew phrase that means, “Repair the world.” While attending Skoll six years earlier, he realized three things: 1) He knew a lot of people who had great ideas, 2) lots of those ideas presented realistic opportunities, and 3) he saw a role for himself in helping entrepreneurs realize their dreams. 

In Rod’s opinion, governments and charities can often be ineffectual at addressing society’s greatest needs. He maintains that all too often people look on money with suspicion as if it were the cause of problems in the world. But he thinks the most successful social entrepreneur understands that it is important to leverage what exists in the market economy to bring positive results.

Lars Jannick Johansen is the founder and CEO of Denmark’s first social venture fund, The Social Capital Fund, which among other things, works to strengthen the social coherence and sustainability of the Danish welfare society.

Lars spoke a lot about the relationship between social enterprise and government. He suggested that attempts were made to not politicize the social entrepreneurship field. As a result, it is the policy makers, and not the social enterprises, that control social issues. He argued that social entrepreneurship had the capacity to really solve the issues in a cost-effective way, but that the challenge is in making social enterprises strong enough to “change the rules.” Lars said that marginalized people were not currently engaged and empowered through the political system. He said that in Denmark the social entrepreneurship sector was not yet strong enough to take responsibility for all these social issues, but that it was certainly gaining strength in key areas.

Lars referred to one of Einstein’s maxims that people do the same things over and over again but expect different results. He said that in order to break this cycle, it was necessary that we consider ways that we can proactively improve social entrepreneurship.

Biju Mohandas, the East Africa director for the Acumen Fund, is an example of someone proactively assisting social entrepreneurs. He is responsible for all of the Acumen Funds’ investments, operations, and business development activities in Africa.

Biju suggested that the great challenge in the social entrepreneurship space is training and retaining social entrepreneurs. He stressed that accountability and value judgments are important features of effective assistance—ideas easily overlooked where they are not stressed within a culture. He also argued that organizations need to share best practices.

Another key to Acumen’s work is developing a very close relationship with the people it works with through a model of patient capitalism—investors making long-term financial commitments and expect relatively low rates of return.

An effective leader, according to Biju, is one that inspires a great deal of respect for his fairness and balance. He commented that it was necessary to have a balance between the head and the heart, between accountability and generosity, between leading and listening, and between audacity and humility.

Charitable giving seeks to buy nonprofit program execution that will accrue to beneficiaries. It is classic “buyer” behavior, as defined by George Overholser in Building Is Not Buying (PDF). The charitable giver is concerned primarily with the value of the programmatic execution relative to grant size and cares little about the nonprofit enterprise for its own sake.

Philanthropic investment seeks to provide resources to nonprofit enterprises that increase the nonprofit’s ability to deliver programmatic execution. It is classic “builder” behavior, as defined in Building is Not Buying. The philanthropic investor, like a for-profit investor, is primarily focused on the longer-term increase and improvement in programmatic execution relative to grant size.

Strategic philanthropy seeks to buy nonprofit goods and services in a way that aligns with a theory of change defined by the strategic philanthropist, or to invest in the growth of nonprofits needed for the theory’s success. Unlike philanthropic investors and charitable givers who provide resources to a nonprofit so that it may pursue a theory of change, strategic philanthropists are concerned primarily with their own theory of change.

The charitable giver and philanthropic investor both transact with the enterprise but do not seek to be the agent of change themselves.

Strategic philanthropists, like nonprofits, seek to be the agent of change. Nonprofits execute programs directly, while the strategic philanthropist outsources program execution. But just as a for-profit company that outsources their manufacturing still “owns” the product they offer, the strategic philanthropist “owns” their programs despite their outsourcing.

All three approaches are completely valid. Without charitable givers, the primary provider of philanthropic revenue to nonprofits would be missing. Without philanthropic investors, nonprofits would have no access to the capital they need to grow their enterprises. The strategic philanthropist is needed to create multifaceted solutions to complex problems that are beyond the scope of a single nonprofit. Now, none of this is to say that each donor must select one and only one approach. A donor may engage in philanthropic investing in certain circumstances and charitable giving in others. However, it is important that donors are cognizant of the type of approach they are taking so that they can execute well. In addition, it is important for institutional funders to recognize that the skill set need for strategic philanthropy (deep issue area expertise) is quite different from the skill set needed for philanthropic investment (organizational analysis expertise), and that it is unlikely staff members will have expertise in both domains. The point is not to maintain purity of approach, but to establish a frame of reference. For instance, if you are a charitable giver, it makes no sense to concern yourself with how much the CEO of a nonprofit from which you are buying program execution gets paid—no more than buyers of Starbucks coffee consider the salary of Starbucks’ CEO. The charitable giver should simply consider the value of the program execution relative to grant size and not the organizational attributes of the enterprise.

Philanthropic investors, on the other hand, should care deeply about executive compensation practices and other organizational attributes of their grantees, because they are related to the health and growth potential of the enterprise they seek to support.

Differentiating between approaches to philanthropy is important because it allows us to avoid debates that essentially stem from a lack of awareness of the different styles. For instance, there has long been a debate about the value of general operating support grants versus restricted grants. But this debate falls away when we recognize the distinction between an investment approach to philanthropy and a problem-solving, strategic approach. At its core, the investment style seeks to support the nonprofit enterprise. General operating support grants are the default choice because they are most useful in supporting the enterprise. Meanwhile, strategic philanthropy seeks to create a solution to a problem on the philanthropist’s own terms. The general operating support grant is preferred only if it best advances the strategic philanthropist’s solution.

I’m sure my definitions are flawed. I’m sure I’ve missed elements of this puzzle or mixed them up. But my hope is that they can begin to delineate the roles and responsibilities of the various actors that make up the social sector. It is a messy world, and no model will perfectly depict it. But by having internally consistent frames of reference, we can have a much more robust conversation about how to best practice the philanthropic art, because the answer to that question is very, very different for each of the actors I’ve described.

Taken together, the 10 phrases I have chosen to show the long steady rise in market-based solutions for social problem solving, technology’s infiltration of all things fund raising, and a shift in attention from local to global.



Following are the 10 philanthropy buzzwords that define the decade gone by. This story originally appeared in The Chronicle of Philanthropy.


Number 10: Donate-now buttons



Remember writing checks, stamping envelopes, and mailing off your donations? Way back in the 1990s that’s how we gave money. Filling in credit card numbers on a direct-mail appeal reply card was high-tech, just a notch above throwing your coins into the swinging red kettle.


Donate-now buttons on Web sites got their start in 1999 and really took off in 2001 when AOL, Cisco, and Yahoo started Network for Good.


Number 9: Prize philanthropy



It used to be the biggest philanthropic honors were those you couldn’t apply for—like the Nobel Prize or the MacArthur “genius” award. That all changed in 2004 when SpaceShipOne, a privately built and piloted craft, completed its second orbit of the earth and won the $10-million X Prize. Since then foundations and corporations have fallen over themselves offering cash prizes for social change. There are challenges for wireless news tools, clean-water carriers, digital learning games, and much more. Philanthropists love prizes because they don’t pay out until you solve the problem.


Number 8: Celebvocates



Nonprofits have always loved celebrity backers. Nowadays, star status requires that every movie actor, utility infielder, and aspiring politician find a charitable cause to love. Ceaseless, blatant self—promotion in the name of hungry children, sad diseases, and cute animals is ceaseless, blatant self-promotion we can all stand behind.


In fact, here: Let me wear your T-shirt, carry your tote bag, and tweet a gift to your organization so you can take credit for my generosity.


Number 7: Microvolunteering



Mom used to bake cookies for the PTA and serve on committees for the church. Now she edits marketing copy for the local animal shelter, while waiting for the bus and helps NASA identify craters on the moon during boring department meetings. Microvolunteering, the art of donating time in 20-minute increments, comes to us via our smart phones—which we also rely on to organize protests and tweet our bikeathon fund-raising totals.

Number 6: Philanthrocapitalism



Nonprofits should be more like businesses. Giving should be more like investing. And capitalism should be more creative, just so long as it continues to let some people get crazy wealthy so they can give some of it back to others.


Philanthrocapitalism, a term coined by Mathew Bishop and Michael Green and used as the name of their 2008 book, celebrates the coming together of business skills and structures with a focus on solving the world’s shared social problems.



Number 5: B Corporation



For entrepreneurs trying to run businesses with a social purpose, corporate structure has been one of the persistent challenges.


Organize as a nonprofit and you’ll be forever capital constrained, organize as a commercial enterprise and you risk losing your mission to investors. Since 2006, a group called B Lab has enabled B corporations (the B stands for benefit) to gain traction around the country and lead a revolution in corporate operations. Corporate code may not be sexy, but these new efforts stand to attract billions of dollars in new investments in social businesses.



Number 4: Impact investing



Impact investing is the active form of socially responsible investing—seeking out commercial investments that return social good and profits. First named in 2008, this marketplace is estimated to grow to $1 trillion in opportunities by 2020. In the midst of global financial collapse the impact-investing realm did more than keep its head above water; it grew in both name recognition and assets.


Number 3: Embedded giving



A pejorative term for cause-related marketing, a term of art coined in 1983 to promote a campaign to repair the Statue of Liberty, embedded giving describes this decade’s approach to adding charitable donations to sales transactions. Choose one iPod over another to give to AIDS?



That’s embedded giving. During the holiday season that just wrapped up, there was no escaping the pressure to add a dollar to your checkout total or buy Aunt Martha the sweater that will help save the seals. Embedded giving is great for retailers, even if the jury’s still out on how well it serves good causes. And the seals? Well, they don’t care what sweater you wear as long as you stop eating all their fish.


Number 2: Microfinance



Thirty years ago, Muhammad Yunus, a Bangladeshi banker, started lending money to groups of women with no collateral. In 2006 he won the Nobel Peace Prize for his work, helping to make microfinance a household world.


Today’s field of microfinance is marked by hundreds of millions of dollars in investment, several IPOS by microfinance companies, and some scandal. Once the realm of nonprofits with large philanthropic supporters, microfinance is now a mix of commercial bankers and small donors. Sites like Kiva make it possible for anyone with a credit card to be a global lender.


Despite its enormous growth and cachet, we still don’t know how well microfinance helps the poor.


Number 1: Social entrepreneurs



In 2000, few people had ever heard of social entrepreneurs. Many would have defined a social entrepreneur as a very friendly business leader.


A decade later, Kiva’s founders are on Oprah, PBS, and NPR, universities offer degrees in social entrepreneurship, and U.S. presidents both present and past laud social entrepreneurs.


The universal reach of the term results from the legitimate accomplishments of leaders like Jacqueline Novogratz (founder of the Acumen Fund) and Muhammad Yunus and massive investments from philanthropists like Jeff Skoll and Pierre Omidyar. And it all builds from the work of Bill Drayton, founder of Ashoka, who introduced the term to the world back in 1980.



Forget the fact that no one can agree on a common definition, social entrepreneurs are still the hottest game in town and the buzzword of the decade.


What does the decade ahead hold? Look for the nonprofit world to become the “impact economy,” for the Securities and Exchange Commission to get involved in regulating investments in social enterprises, and for interactive data visualization to become the standout feature of effective nonprofit fund-raising pitches. More of my predictions for the decade ahead are here.

Fast-forward four years, and Diem is now making this resource possible for anyone in the hospital.  Since entering remission a little over 4 years ago, she has been working on a medical gift registry—aptly called MedGift.com — launched this week.

I met with Diem at Health 2.0 in San Francisco.  She is beautiful and confident, and radiates genuine enthusiasm and compassion.  From a Real World and Road Rules contestant to ovarian cancer patient to her new role as entrepreneur and executive, Diem faces adversity with grace and resilience.  Check out our interview below:

Halle Tecco is a San Francisco resident and social entrepreneur passionate about technology, service and healthy living. She is the Founder and Executive Director of Yoga Bear, a non-profit providing more opportunities of health and wellness to cancer patients through the practice of yoga. Halle has worked as a Product Manager at various consumer-internet startups, including Enternships.com and Kiva.org. She also serves as an advisor to GreatNonprofits.org. She is pursuing her MBA at Harvard Business School and will graduate in 2011.