In the early 1990s the advent of national donor advised funds showed that a huge market existed for unbundled products—donors would eagerly purchase the financial product by itself. Several billions of dollars in charitable assets were soon being managed through Fidelity, Schwab, Vanguard and others who provide best-in-class financial accountability, responsiveness, and transaction processing, with no promises of strategic advice, support or other types of information products. The market worked—we’ve had two decades of new innovations, new customers, and new financial products for donors.

Nowadays, some of the same technological advances that led to scalable efficiencies in transaction processing are beginning to shape the landscape for information products and service providers. First, the broad and deep adoption of broadband access and a decade plus of online banking, travel booking, emailing and searching have changed our collective expectations about where information lives, how to get it, and whom to trust. Second, the massive storage and searching capacities that underlie systems like GuideStar now make it a commonplace assumption that basic information on nonprofit organizations should be only a “click away.”

From these “expectational starting points” new behaviors begin to sprout, leading to the possibility of new products. If financial information is a click away, why not more nuanced information? This leads to systems like DonorEdge or Blackbaud’s Nonprofit Central. If there is “professional vetted information available,” why not the insights of customers or volunteers, leading to innovations such as GreatNonprofits or Keystone’s constituent response work. And if I can get information on one nonprofit, why can’t I find lots of options for action in one place (SocialActions.org) or compare the work of multiple efforts (New Philanthropy Capital’s reports or Acumen’s Pulse system)?

These are exciting developments. And they are built around data—data that can be found, compared, searched, mashed up, re-purposed, questioned, and applied. The data are the currency of change.

And rest assured, today’s data systems and information products are just the beginning. How we use these products, build off these services, interact with them as individual donors or change makers, or iterate entire new organizational forms on top of them is what the future holds. The information products for better giving are not as good as they will be, we have not yet seen all of the forms they will take, nor are they widely deployed or integrated into other financial management tools. Yet.

But we’re getting there. In which case the landscape for philanthropic giving—the structures and tools that donors use to organize, aggregate, learn, give, and bank (literally) their philanthropic financial resources will change yet again. This might explain why we’ve seen a notable rise in independent philanthropic advisory firms (SeaChange Capital Partners, Rockefeller Philanthropy Advisors) in the last five years, why online giving markets (such as GlobalGiving and Kiva) have taken off, or why the never-ending stream of new social media tools are all quickly unleashed for giving-related purposes (Facebook Causes, Twitter fundraising, and blog/badge challenges). And it might be inciting new forms from familiar ones—new roles for community foundations or new services from donor advised fund vendors.

We should also plan on this changing landscape of information being full of the seeds of new forms. If you imagine that any donor, anywhere, has quick, easy access to meaningful, comparable, useful data on organizations they could support and issues they care about, what kind of philanthropic entity, service provider, financial tool, public/private partnership, broker, deal platform or relationship builder would you build? That is the question we all need to ask, no matter where we work in philanthropy now, because that is the well-seeded field on which all existing philanthropic enterprises are now playing. And that is the question that some innovator, somewhere, is working on, right now, in the proverbial garage.

Lucy Bernholz is the Founder and President of Blueprint Research & Design, Inc, a strategy consulting firm that helps philanthropic individuals and institutions achieve their missions. She is the publisher of Philanthropy2173, an award winning blog about the business of giving and serves as Executive Producer of The Giving Channel on Fora.tv.

Membership—being part of a group of professional investors who agree on a real, if still evolving set of definitions—is important. It’s one of the things that gives an emerging market coherence. That in itself is one of the key branding elements of the GIIN, that it is a group that has agreed on some things and lives within certain definitional boundaries. It’s kind of like a club in that aspect: a voluntary association society. There is a standard, I agree with it, and that is part of what locates me on the inside.

But GIIN wants to have a positive impact on poverty, economic justice and a sustainable environment. That means it needs to counter the exclusive nature of its innate and valuable club and be sure to include the voices and the perspectives of the people in the developing world; to make sure that female venture capitalists from Africa, for example, are included at the table at the highest levels.

Point one: it has to be inclusive.

Point two: it has to make sure its metrics for success are also inclusive.

As it develops, GIIN will be one of the key drivers of evolving metrics efforts. Since it will be turning metrics into a basis for financial and social return to investors, it has to make sure that the metrics for success include what the disenfranchised in the developing world consider developments. I would point to the useful tools created by Sabina Alkire at the Ophi.org.uk project. Central to the Bhutanese Gross Happiness Index, her multidimensional indicators are a key way to make sure the benefits of Impact Investing are distributed transparently, and, potentially, more equitably.

The history of colonization and empire mandate GIIN be aware of funder and fundee power imbalances every step of the way. GIIN cannot look like another version of condescending western philanthropy. This kind of thing proceeds from first principles. The first thing GIIN needs to do as it starts thinking about branding and communications is look around the room.

There are plenty of marketing professionals who can build a great brand strategy. That part will be easy. GIIN is a great thing to brand.

The key design issue is this one: Are all the right people, the right groups of people, all the important voices, represented around the table? Are all the people powerful and rich? Are there men who wore their first names stitched onto their blue collar work shirts? How many people who took the high school equivalency GED, but never made it to college, are in the group? Those are not people who are often listened to by the great and the good. They are called in to fix the air conditioners and heaters at the hotels where the meetings are held, but they are rarely consulted. How many maintenance men are being called in to fix the market, people one rung above the bottom of the institutional hierarchy? How many people are called in from the rung below that—the janitors—who not even the maintenance men listen to? The perception of hierarchy and power imbalance is sharply delineated at the very bottom levels, while those sitting at the tables can balance higher education and other professional credentials against power and wealth to hold their own as new models of philanthropy and the capital market are being devised.

I’m sure the answer will be yes about that sort of inclusion, at least eventually. Nothing is perfect right away in that sort of effort. But the issue of who is at the table in a branding and communications plan is the key question for GIIN, I think. The brand will be built on trust, trust of the impact and intent of the capital being deployed. And that means everybody gets dealt into the game this time.

Kevin Jones is a cofounding principal of Good Capital, an investment firm that accelerates the flow of capital to enterprises that use market forces to create large-scale social change. Jones is a successful serial entrepreneur, angel investor, and cofounder of Social Capital Markets, the groundbreaking conference on social venture investing.

Based on the trends I’m seeing, I’m declaring the question settled. Yes, social venture capital is both a valid emerging asset class and in the forefront in its ability to deliver scalable social impact at low cost and provide an actual financial return that helps support the mission and the enterprise.

So the only question remaining is how are you going to manage exits? Nobody wants to end up like Ben and Jerry’s, where soon after a multinational acquired it, key facets of its social mission were cut from the company. What kind of social mission was lost? The ethical rule that Chunky Monkey would never have bovine growth hormone was kept under the Unilever regime; it was a value that consumers bought every time they bought a pint and was on the label.

What was gone? Hidden charitable subsidization of a social mission through non-profit partner ice cream shops. At those shops, 40 percent of the workforce was composed of at-risk youth who learned from social workers and job supervisors how to have a bank account and to complete a high school equivalency exam.

Exit is what matters now. The question is no longer can you build the second generation of socially responsible business, enterprises that bake their social mission into their business operations. The question is not even can those businesses make enough money to pay off investors. The question is, can the social mission survive the exit of the founders and the sale to new owners? Can it do so while still rewarding the people and the investors who took the risk to build a big business that delivers scalable social impact along with profit?

Judy Wick of White Dog Café has recently sold her iconic Pittsburgh restaurant but retained the rights to the brand and the ability to swoop back in to take over if she feels the mission is being compromised.

While there’s a lot to like in that approach, we at Good Capital have come up with something with our portfolio company Better World Books (BWB) that has a lot to commend it. We have created a new social impact model which carves out a 5 percent ownership stake for the company’s key literacy partners and grants stock options based upon the non profits’ ability to hit their stated literacy targets and increase the volume and quality of books collected in book drives that provide BWB with its inventory. Here’s a slide presentation on the details
What does this mean? Literacy groups like Room to Read, Books for Africa, and the National Council on Family Literacy, whose mission is to teach people to read, are earning stock options in a venture-backed startup. Those options will, if we do well together, be worth more money when, in a few years, BWB is at, say, $100 million in annual revenues.  (BWB will be at $30 million this June if things stay on their current track, up from $18 million when we invested last April.)

All the stockholders have to be satisfied if BWB sells. That means Books for Africa’s interests will have to represented at the table when the company negotiates with a buyer, if that should happen, say, five years from now. Unlike Ben and Jerry’s, where the private philanthropy of the owners was stripped away after the sale to the multinational, we will have set a price on a non profit’s meeting its literacy goals. That price will be equated with shares in BWB that have a financial value.

The mission can’t really go away in this company after a sale. If BWB ever does sell to a larger company, the mission has been baked in, and the social return will be directly convertible to a financial investment. We have aligned the interests of the social mission and the financial mission in a way that has rarely been done before, perhaps never in the context of a private, for-profit company.

How this will exactly play out will be determined by a mix of market conditions, BWB’s ability to execute as a fast growing business, and the ecosystem of goodwill, partners, and advisors it continues to accumulate around itself. But in this deal at least, selling should not result in selling out. The non-profits and the social mission are going to be counted in a way they’ve never been counted before.

Kevin Jones is a cofounding principal of Good Capital, an investment firm that accelerates the flow of capital to enterprises that use market forces to create large-scale social change. Jones is a successful serial entrepreneur, angel investor, and cofounder of Social Capital Markets, the groundbreaking conference on social venture investing.

And here’s another no-cost giving scheme whose underpinnings are collapsing along with interest rates: the system by which the interest in lawyers’ trust accounts goes to underwrite legal services for the poor. As interest rates decline, these contributions are shrinking, just at the time more poor people need legal assistance (to try to keep their homes out of foreclosure, for instance).

As the Nonprofiteer’s intolerably smug University of Chicago economics professors used to say, “There ain’t no such thing as a free lunch.” Eventually someone has to pay.  Here’s hoping our new President is inspiring enough to carry people past the shock of discovering that if they really want to give to charity, merely going shopping or passing along the interest on someone else’s money isn’t going to be enough.

Kelly Kleiman, who blogs as The Nonprofiteer, is a lawyer and freelance journalist whose reportage and essays about the arts, philanthropy and women’s issues have appeared in The Wall Street Journal, Washington Post, Christian Science Monitor and other dailies; in magazines including In These Times and Chicago Philanthropy; and on websites including Aislesay.com and Artscope.net.

The most vital element in the social capital markets is the capital that shows up on two legs, rather than on a balance sheet as a new investment. That influx of new people is what’s starting to tip the balance as this movement heads toward the mainstream. The flow has not let up since the Wall Street meltdown. The people who were committed to social enterprise, to financially sustainable, mission-focused business as the way to make a difference in the world, are no less committed. In fact, the problems they are tackling, from alternatives to predatory payday checking businesses that pray on cash-strapped poor people, to solutions like roof-top gardens that green the inner city, are growing.

The number of new people wanting to join them, eager to get involved, is growing as well; the downturn has created an important inflection point where people are willing to examine and even start walking away from existing beliefs that kept them enmeshed in the old-style, greed-is-good market system.

As I encounter this new influx of people when I speak at an event, or when they come to the events we put on, I’ve started to use a generational filter to put them into context. That’s because how they enter, what they expect, and what they have to learn or how they have to compromise seems to differ according to whether they are a millennial (roughly 30 and under), a Gen X’er (30s and early 40s), or a boomer (mid-40s to late 50s).

The millennials are, in large part, not buying into the system. They seem to be naturally entrepreneurial, wanting to create their own initiatives, while they live five to an apartment.

The Gen X’ers who have heard the call are often stuck; they’ve got kids, mortgages, or at least nice apartments and have gotten used to regular paychecks. But when they can manage to make the switch, they have a decade of practical and professional experience on the millennials. Their professional skills are sometimes the exact right fit for the problem of a particular social enterprise at a particular point in its growth.

If you find the right ones for the right companies, they can often manage to deliver the perfect injection of professional skill for a short consulting gig that doesn’t make them leave behind the day job that’s paying the rent. And, since most social enterprises, at whatever stage of funding, are often cash-strapped or working within tight budgets, the Gen X’ers are a core group that is providing the movement cum asset class an essential nudge forward.

Working with them often requires a long engagement by the funder or advisor or board member who’s trying to round up the right ecosystem of talent to push a particular social enterprise toward its full social and economic potential. They often need some level of career counseling as they learn to put together the new, meaningful part of their professional life with the other part that’s paying the bills.

My own group, baby boomers, is often the most difficult to work with. The problem is, boomers have often been successful and kind of suddenly wake up and realize that the meaningful part of their life has been segregated from the professional part. They have a legacy problem: “Oh no, this can’t be all that I’ve done. How did I get to this place? I need some more meaning in my professional life right now.” There’s a real opportunity for someone to develop some kind of career change curriculum or practice for both Gen Xers and boomers.

It often takes boomers a couple of years to realize their skills are not directly transferable, that the nonprofit-infused social capital market is a different culture with different rules and norms, and that their habits of command and fast action run into barriers they don’t see coming. That’s about how long it took me; it may not take others as long.

I tell boomers it’s like being transferred to Japan; there are customs that you don’t recognize, that you can’t change, and that you have to pay attention to; walls you will run into that you didn’t see coming. When I encounter recent cash-outs or early retirees, I try to send them off on a quest. Start going to the events in the space, become a mentor to a raw student startup in a social venture competition or a particular nonprofit and learn the different kinds of funding and execution challenges facing businesses with an embedded social mission.

The overlaps of the three generations are pretty interesting as well; boomers and millennials are natural allies; they are both impatient and unwilling to do it the old way. They can work together on projects well, but longer-term engagements can be more difficult. Boomers are used to long-term commitments while millennials reassess the link between their engagement and meaning more often; but I’m seeing a lot of potential as they learn to figure out the roles of experience and enthusiasm.

The desire to take the next step into social capital markets may be just as strong for all three generations. For the short term, however, it seems to me the Gen Xers, the ones who are in some ways stuck, are able to provide a social enterprise the most bang for their scarce bucks. They don’t have the habits of power to unlearn that the boomers do. And unlike the millennials, who continually question their engagement, Gen Xers are used to taking on a particular task and working until it gets done. They have 10 years of honing their professional skills, and are thrilled when their particular talents can be the answer to a mission-focused business at an inflection point.

This is just a tentative hypothesis, based on gathering a lot of observations. I don’t consider them rules or a methodology. And that is the real problem; I wish somebody would make their own version of this concept into a methodology and maybe a career counseling and curriculum business. The biggest gap I see is a way to scale the intake, evaluation, and assessment and matchmaking processes as these three generations work their way through the intersection of money and meaning and try to find a way to make a difference helping or starting a social enterprise.

Kevin Jones is a cofounding principal of Good Capital, an investment firm that accelerates the flow of capital to enterprises that use market forces to create large-scale social change. Jones is a successful serial entrepreneur, angel investor, and cofounder of Social Capital Markets, the groundbreaking conference on social venture investing.

Because of our investing partner and the management team assembled, Adina has a great chance of success, at least financially. That is, we and our investors are likely to make good money. But if that’s all we do, our investors will not be happy. They are investing with us for more than financial reasons; they also want to know that they are leveraging their positive impact in the world by putting their money in our hands.

We tie directly into their philanthropic motivations but through a new angle; one that also engages their rigorous, investor mindset and doesn’t ask it to turn itself off or play by a second, less rigorous set of rules. We want the investors in our funds to bring their “A” games to the table. We are playing the real game, trying to get the ball in the pocket, not some soft form of bumper pool.

For us, Fair Trade solves a couple of problems and helps us overcome some investor objections. If Good Capital is selling both the prospect of leveraged social impact and a financial return, then, people ask, how do you measure that; how do I as someone who has trusted you with my money, know you are doing good?

Well, with Fair Trade we can quickly answer that there is a third party certifier at every point along the supply chain, that the coffee, vanilla, sugar, and tea in Adina’s products come from certified Fair Trade and democratically elected coops in places like the Oromia region of Ethiopia, the Ixil Triangle of Guatemala, and Surinam, Paraguay, and India.

We also get around the imperialist-tinged element of people with money deciding what is good for poor people producing commodities with the way the Fair Trade premium is delivered. In addition to paying the farmer a price higher than the market rate for the commodity, Fair Trade rules require the buyer to deliver a further premium to the cooperative to be spent as the community sees fit. They have to report on what they do with the additional premium, and it often involves building or fixing a school or clinic, achieving Organic certification, digging a well, or repairing some kind of irrigation or water project.

For us as investors, the benefits are two-fold; we don’t have to build a measurement system to prove the social impact to our investors, and the democratic element finesses political and power considerations, helping left-leaning investors and activists concerned about empowerment issues feel good about the way they are deploying their money.

Many of the most socially minded and active people of wealth still have a problem thinking of social impact and investing as existing in the same realm; they have a hard time accepting that investing for good can be an asset class. The cultural framework they have inherited is that you do your good out of your philanthropic pocket, expecting the total loss of your capital.

Then even these socially minded activists and philanthropists invest with a mindset in which you are not being who you should be unless you think only about financial return when you invest; it’s the bastard child of Milton Friedman and heir of Andrew Carnegie’s Gospel of Wealth from the devil’s side of the family.

The good news is that Good Capital is raising money, even in this climate, through this premise; more money is teeing up to come our way.

But the prospect of success, as slowly as it is creeping our way, creates risk for us and investors like us. If people are willing to invest with us, buying our premise that we can deliver financial and social value in greater measure than if they had just given their money away, we have to prove that we really are doing good.

We can point to the premium and what it has done in each coop, but have we really changed the lives of the people in that community in a positive way by our intervention? Some studies say that the real good is achieved through making a cooperative a viable decision-making structure; we get the people in the community to cooperate in hope of a realistic gain and the benefits derive from that. So Fair Trade’s role in helping people lift themselves out of poverty might be a secondary benefit.

So if we and our peers successfully funnel more money to Fair Trade, we have a risk factor that we need to address. What is the real impact of our money? What do the people affected say that it does for them, aside from what they did with the Fair Trade premium and other than what our metrics allow us to report back to our investors and the consumers who buy Fair Trade products?

To look into that issue, I’ve started substantive conversations with my friend Sabina Alkire of the Oxford Poverty and Human Development Institute at Oxford University. Her metrics, which are based on Amartya Sen’s capacity approach to development, incorporate and quantify the voices of the poor. They are being incorporated into how several countries (which can’t be announced yet) measure poverty, and are starting to be used by several development agencies. They are working because they really do empower the poor to say what’s working for them and what’s not; so you can more accurately know what impact any effort to alleviate poverty is having on the ground.

We’re going to see if her approach could be applied to the data that is already being gathered by Fair Trade coops in an effective way at a reasonable cost. If we can do that, then we will reduce the risk of funneling money to Fair Trade companies that promise that they are doing good, only to discover that we are not making the difference we and our investors had hoped we were.

Finding the right Fair Trade partner for this research is something to be managed carefully, of course, but that’s a step down the road. The first step, according to Sabina, would be to deploy a researcher funded by her institute to look at the data from a Fair Trade coop and company and see if it’s the kind of information her method could use to answer the key questions we want to answer on a regular and consistent basis.  We would also find out whether the effort would provide sufficient value at a reasonable cost.

We hope to have this project teed up during December and be able to talk more about it in January.

A potential positive upside if we succeed is that commercial companies and private sector companies would be measuring the same things that the development agencies and nations are starting to measure.

That could lead to significant partnership opportunities between venture-backed companies and development agencies. The chief barrier so far has been that the development agencies speak their own agency-centric, theory-of-change language, and social venture funds and venture philanthropy funds use vocabulary adapted from the market, like risk, return and social impact.

SoCap Media is convening another Social Capital Markets event in Washington D.C. in the spring, bringing together social investors and venture philanthropy funds with development and other government agencies. If things work out, the effort with Sabina could lead to a prototype of a Rosetta Stone that we could unveil, in beta, and subject to massive transformation and evolution, at that event. 

Kevin Jones is a cofounding principal of Good Capital, an investment firm that accelerates the flow of capital to enterprises that use market forces to create large-scale social change. Jones is a successful serial entrepreneur, angel investor, and cofounder of Social Capital Markets, the groundbreaking conference on social venture investing.

I recently collaborated on a white paper with colleagues from the Calvert Social Investment Foundation, a pioneer in social investing, and McKinsey and Company, the large corporate consultancy that has an ambitious goal: to make sense of the Social Capital Landscape.

Our goal is to define a common language. We began by bringing in definitions from the traditional capital markets and mixing them with language and metrics from the non profit world in what we hope will become, as our thesis evolves, a coherent picture.

Our thesis is here, and we presented it as a work in progress to the more than 635 people who attended the recent Social Capital Markets conference at Ft. Mason in San Francisco. To get the people at Socap08 involved and to see if we were on the right track, we turned the target graphic (zeroing in from relief to recovery to development to systemic change in the “bullseye”) into a grid, then printed it out 30 feet wide on the wall. Every registered attendee had three small adhesive name tags, a red one for their primary interest and two black ones.

Nearly 400 people literally “put themselves on the map” during the course of the event, saying they were involved in health care and development, or housing and systemic change. The readiness of people to put themselves on the map, and the natural sector-focused groupings that arose from the exercise and other context building tools we provided at the conference makes us think we are indeed on the right track; people do want a landscape to the area of social investing and are eager to put themselves “on the map” and talk with their “neighbors” in contiguous industry/impact sectors and relevant asset classes.  All of that self-reported contextual information is being turned into an online database that should be available soon.

One thing that became clear, literally at first glance, however, is that almost no one put themselves on the map at the outer ring of relief. Partly, I think that is because we limited that category too much; we said it only included things like responses to “a natural disaster or human security crisis.” In the paper itself, we said that included things like soup kitchens and domestic abuse hotlines, but the example on the grid on the wall had fewer examples, and included things like tsunami relief. Even if we had been clearer, however, I think that at a conference like Socap focusing on ways to invest with a positive social impact, areas like relief will be under represented.

If that is going to be the case, I think it’s important to state clearly that there is no hierarchy of virtue. Even though systemic change creates lasting results and creates multipliers, it is not by nature superior to relief. If the relief aid isn’t provided in a timely and effective manner, then the community won’t be intact for recovery, development or systemic change efforts.  All of these types of social impact are necessary and important.

Asking that qualitative question of whether relief is less valuable than systemic changes brings up the issue of impact metrics; one of the noisiest and most contentious areas and one I have tried for the most part to stay out of. Two things have changed my perspective; new money has come into the social capital market; more than 400 of the 635 people who attended Socap08 registered after Lehman Brothers went under; they were interested in a new kind of capital market that includes the traditional investment criteria of risk and return but they also wanted to include the third dimension of social impact as they made their decisions. New investors, even the new money trickling in during the current financial crisis, demand a way to evaluate the return on their impact. So the metrics field will no longer be the domain of squabbling insiders jealous of their terms and yardsticks. It will have to get real, because capital flows in and out of the market will demand it.

I have some ideas for the kind of metrics required: metrics that do no harm, and that create more value than they cost.

In addition, it is not appropriate to apply a systemic change metric to an effort that is properly in the relief area. To ask people running a soup kitchen to document the root cause of homelessness is to apply a systemic metric to a relief question. The result is less money devoted to mission, and a distraction to the people who know their first priority is to feed the people who come in off the street. If more metrics equal less lasagna in the bellies of hungry people, then it’s a metric that does harm.

One of the virtues of San Francisco’s huge homeless population is that you can easily see where homelessness fits in at every point on the social impact target map. Soup kitchens and needle exchange/shower facilities and shelters are in the relief sector; they are just about meeting today’s needs.

Transitional and group housing moves to the recovery space.  The job training programs like the Chef’s program, which leads formerly homeless people into careers as cooks, could be classified as development, as could some of the low income housing initiatives. Systemic change efforts are harder and by their nature take longer and involve coordination across multiple stakeholder groups, but they exist as well.

The takeaway? Just because a new capital market is arising, where investors are learning to put their money into social enterprises that can deliver scalable social impact, create systemic level change, and return capital, does not mean that investing is the answer to all social problems.

Philanthropy and public sector support will have a continuing and increasingly coordinated role to play as the social capital market evolves. The problems in the relief sector are not going away and capital that asks for a financial return may not often be the answer in that sector.

Giving still matters and is not going away. Feeding people at a soup kitchen today is still a good thing to do. And that is likely to be true for the foreseeable future.

Metrics will matter as the social capital market forms. They need to be metrics that do no harm and that provide more value than they cost.

Kevin Jones is a cofounding principal of Good Capital, an investment firm that accelerates the flow of capital to enterprises that use market forces to create large-scale social change. Jones is a successful serial entrepreneur, angel investor, and cofounder of Social Capital Markets, the groundbreaking conference on social venture investing.

I just read the great book When Markets Collide. Published this year, the book comments on events that were occurring in the financial market as recently as the spring of this year. Author Mohamed El-Erian is the former head of the Harvard endowment and current co-CEO of PIMCO, one of the largest investment management companies in the world (he also spent 15 years at the International Monetary Fund). In the book, El-Erian says that when asked what career he would suggest a young women go into he replies “structured finance” without hesitation. His point is that while we are in a cyclical move away from structured finance due to excessive risk taking, the structured finance movement will continue to dominate financial markets over the long term.

All of this brings me to a great session I attended at the SoCap conference in which my friend George Overholser of NFF Capital Partners described how grantmakers can inject capital into a nonprofit debt financing deal to make it more attractive to for-profit lenders. The idea is that if a profit seeking lender will only lend to a nonprofit at a 10% interest rate, they may be willing to lend at a lower rate if a philanthropist puts up capital that will act as a “first loss” cushion. Let’s say that for example the loan is for $5 million. The philanthropist might put up $500,000 that the lender could lay claim to if the nonprofit was unable to fully repay the loan. This reduces the risk to the lender and therefore lowers the interest they are willing to accept to complete the loan. The philanthropist is willing to put up the money because the injection of a relatively small cash cushion can unleash much larger new cash flows into the nonprofit system. While the provider of the “first loss” cushion can achieve a maximum financial return of 0% (just getting all their money back if the nonprofit doesn’t default on the loan) and a maximum loss of 100%, this actually compares favorably to the guaranteed 100% “loss” that occurs when you make a grant. While a first loss capital cushion is not superior to making a grant, it is another tool to be considered by high-impact grantmakers.

This brings me to a recent announcement by Schwab Charitable (the national donor advised fund) of its pioneering program to allow their donor advised funds to put up capital to guarantee microfinance loans. The program is being run in collaboration with the Grameen Foundation. According to the press release:

“‘We are excited to be partnering with Schwab Charitable to expand the reach of microfinance loan programs around the world,’ said Alex Counts, President of Grameen Foundation. ‘Historically, guarantee programs have only been open to large foundations or to the very wealthy. This program opens up participation to a much broader range of donors, democratizing access and building a solid base of ongoing support.’
…Donors who agree to participate will recommend that up to 10 percent of their Charitable Gift Accounts be set aside for a period of 24-36 months to help guarantee microfinance loans. Any funds used to guarantee microloans will stay in their accounts, will continue to be invested for the entire period and will be applied to the guarantee only if the microfinance program has losses in excess of reserves. In addition, Schwab Charitable will report back to participating donors on the social and economic impact that these microfinance loans provide to their various recipients.”

Like all tools, structured finance can be used in inappropriate ways. As El-Erian points out in his book, the “securitization” of home loans (pooling them and reselling the loans to investors) was a positive development. However, misaligned incentives encouraged excessive risk taking that is now coming back to haunt the mortgage markets. Structured finance is a powerful tool and powerful tools can be dangerous, but I think the development of social capital markets towards more sophisticated forms of structured finance is inevitable. Let’s work on getting it right.

Sean Stannard-Stockton is a principal and director of Tactical Philanthropy at Ensemble Capital Management. Ensemble Capital provides families both traditional investment management and philanthropic planning. He is the author of the blog Tactical Philanthropy and writes the column On Philanthropy for the Financial Times.

Insight:  People are much more attracted to a fully paid-back donation than a high-risk, low return social investment.

For all those social entrepreneurs looking to disrupt the financial system with a blended value financial services company, I’d recommend looking at the most important decision that Kiva.org had to make before launching: whether to offer their lenders zero percent interest loans (no profit) or low interest rates loans (for-profit). They chose the former primarily because it would allow them to launch right away without a lot of investment and time into regulatory compliance, but it was consistent with a more important communication and branding decision: The Kiva experience is perceived by most as a fantastic donation, not as a fantastic investment! 

The point is that when we sit down and try to convince others that investing for return and impact is viable, some people get it on an intellectual level, but it’s still not an easy sell. We desperately need people to push this blended value investing field forward, but it’s still very far from coming together. We are much closer to a tipping point in getting people to allocate their philanthropic monies towards high social impact initiatives that have a high probability to repay in full. Kiva trail-blazed the way with a good model that does just that, and there are many more models out there just waiting to be offered to the public (disclosure: I’m working on one now for socially relevant blockbuster films!). Smart entrepreneurs—especially social entrepreneurs—are advised to start picking the low-hanging fruit.

Question: Is blended-value investing going to grow the pie or displace pure philanthropy?

Most people argue clearly that blended-value investing will grow the pie. Trillions of dollars are traded daily in the financial markets while only approximately $300 billion is donated annually in the US so tapping into the financial markets must be the answer to all our problems. In fact, as an MBA, I subscribe to this rationale myself; but this sort of thinking misses an important consequence. Leaving aside religious and education contributions, the strategic philanthropists who think the hardest about maximizing their impact per dollar invested are quickly realizing that their money goes a lot farther if they get it back in six months and can reinvest it again in the same good social program. If this is the case, very good organizations without any self-generating revenue stream are going to be increasingly hard-pressed to raise money from strategic investors (most foundations and intelligent philanthropists). They will be crowded-out by social enterprises that can pay back donations. The results will be that legacy organizations will slowly be forced to evolve themselves to have a revenue model or be displaced. In many important cases this could be very destructive and deleterious, but in most cases it will probably strengthen the social sector considerably.

Lloyd Nimetz founded the online giving market HelpArgentina.org. While pursuing his MBA at Stanford Graduate School of Business, Nimetz has focused on for-profit business models that address social challenges. This summer he will launch a payments platform for India’s bottom billion.

I often get questions from students and readers about where to start. There is so much out there, and although NextBillion has done a great job of posting reviews of works as they are published, this post is designed to give a high-level overview of the literature over time. Therefore, the following showcases some of the most pivotal pieces that have influenced and continue to expand the base of the pyramid idea.

Genesis of an Idea

In 1999, CK Prahalad, Professor at the University of Michigan Business School, and Stuart Hart, then Professor at the Kenan-Flagler Business School at the University of North Carolina, wrote the article that first introduced the world to the term BoP. It was titled “Strategies for the Bottom of the Pyramid: Creating Sustainable Development.” This article attempted to raise awareness of the world economic pyramid and the vastly untapped market of four billion people living on less than $1,500 PPP per capita income. Organizations that were already involved in serving BoP markets, Hindustan Lever Limited, for instance, were highlighted as examples of MNC BoP strategy.

Although the early BoP theory was presented primarily as a business strategy for MNCs, it also addressed the potential for poverty alleviation, since the paper stated, “Foreign aid and charitable giving have not alleviated the problems for the world’s poor.” The paper called on MNCs to “recognize that the bottom of the pyramid poses a fundamentally new question: How do we marry low cost, good quality, sustainability, and profitability at the same time?”

Despite the fact that this seminal piece broke ground for the BoP movement, the idea did not really gain speed until it was picked up in 2002 by the Harvard Business Review. Al Hammond of WRI coauthored the HBR article with Prahalad, and it was titled “Serving the World’s Poor, Profitably.”

A Shifting Tide

So why was there a three-year lull between the original piece and the HBR article? Well, between 1999 and 2002 there were several books, articles, and discussions that may have shifted the business community’s openness to the BoP strategy. In the development space, scholars such as Amartya Sen and Hernando de Soto published outright challenges of what was then accepted as the traditional models of aid and development, and reframed the question of what was holding impoverished individuals back from reaching their full potential. They called on business to be part of the solution.

In 2000, the Millennium Development Goals were first established, as world leaders realized the reality of continued suffering despite years of international development spending. Fed up with government, the public began to call for the corporation to take on more of a role in sustainable development through what was termed Corporate Social Responsibility. The United Nations Global Compact, a voluntary initiative to promote socially and environmentally responsible business, was launched by the United Nations in 2000 as world leaders started to engage companies in deeper dialogue regarding their business practices.

Despite all of this pressure, companies were struggling to find the business case for most of their CSR activities, which were then framed as PR or risk-management strategies rather than strategies for top-line growth. The BoP theory, therefore, debuted on the world stage in 2002 as a potential strategy for business to alleviate global problems and tap into additional areas of growth—outside of the slowing top-of-the-pyramid markets.

The HBR article received a lot of attention, and both Prahalad and Hart decided to publish books on their somewhat divergent views of BoP theory. The books that followed this article were Prahalad’s 2005 “Fortune at the Bottom of the Pyramid” and Hart’s 2005 “Capitalism at the Crossroads;” both are must-reads for anyone wanting to learn more about the foundation of BoP. The “Fortune at the Bottom of the Pyramid” introduces the reader to many stories of early BoP actors, such as CEMEX and E+Co, which are still referenced today as prototypical examples of successful BoP cases. In “Capitalism at the Crossroads,” Hart addresses both poverty alleviation and the environment, as he asserts that “environmental and social concerns can be alleviated while spreading prosperity to those at the bottom of the pyramid.” Like Prahalad, Hart also draws on the real-world cases of organizations such as Grameen Bank to highlight his theories of linking profit to sustainability.

BoP Criticism

In August of 2006, University of Michigan professor Aneel Karnani posted a critique to the BoP theory on NextBillion.net. In many peoples’ eyes, the fact that the BoP perspective attracted criticism was a good indicator that enough people were taking it seriously. In Karnani’s article, titled “Fortune at the Bottom of the Pyramid: A Mirage,” he claimed that Prahalad’s estimates of the BoP market size were wildly optimistic, and he suggested that what impoverished people really needed was employment, not additional products. The basis of this article was the traditional poverty alleviation strategy of raising the real income of the poor, and it deserves a close read, alongside both Al Hammond’s and CK Prahalad’s responses. This debate is ongoing, and Karnani’s point of view has been adopted by a few other critics of BoP theory.

BoP Theory Subtopics: Driving Innovation, BoP as a Complementary Approach to International Development, Market Research

When one wants to move beyond these few seminal works that have mainly defined this space, it may be beneficial to take a deeper dive into one of the multiple BoP subtopics that have emerged over the years. As the field has expanded, so have the number of independent researchers that are carving their own niche areas.

One area that has been developed further by BoP originator Stu Hart, who is now at Cornell University and the William Davidson Institute, is the opportunity for business innovation through engaging with and building businesses with the poor. One of Hart’s early articles, titled “The Great Leap: Driving Innovation from the BoP,” was co-authored by Harvard innovation guru Clay Christensen. The piece discusses how emerging markets are ideal places to develop and incubate disruptive innovations. In the quest for furthering the BoP perspective on business innovation in the field, Stu Hart and his team have now produced the second version of the “BoP Protocol.” Drawn from best practices and field experience from the team, this document has laid the foundation for MNCs to engage in co-creating social businesses with BoP communities. It is an essential read for business managers who want to embark on a BoP project or people with a general interest in the startup phase of BoP businesses.

Ted London, who is at the University of Michigan, has carved his BoP niche in the role of the BoP strategy as a complementary approach to international development. London, who has on-the-ground experience with development projects, co-authored one of the early BoP papers with Stu Hart, entitled “Reinventing Strategies for Emerging Markets.”  He has now gone on to consider the BoP strategy first and foremost as a means for poverty alleviation. He believes that we need to measure the social, economic, and relational aspects of communities that engage in BoP projects in order to understand the full impact.

One of his most recent works, which addresses this niche area is the “Base-of-the-pyramid Perspective on Poverty Alleviation.” According to London, this paper is driven by “the development sector coming under increasing pressure to explore new approaches to reducing poverty … [and] a growing number of private sector and socially-oriented organizations viewing the poor’s unmet needs as untapped market opportunities.”

As London claims, it is true that many from within the international development community have also been calling for more accountability and more market-based approaches to development.  One of the most outspoken critics of aid-as-usual is William Easterly, and his 2006 book “The White Man’s Burden” may be of interest to those who see the BoP perspective as playing a role in this space. 

In terms of market research and quantification, WRI has created what is known as the most comprehensive document for defining and understanding the BoP market: “The Next 4 Billion Report,” published in 2007. This hard data-driven publication estimates both the size and composition of the BoP market. It should be read by anyone who is looking to better understand the particularities of the majority of the world’s consumers.

An Idea Turning to Practice: Finance at the BoP and Design for Social Impact

As the BoP idea has turned into practice in the field, noteworthy articles have begun to surface that address issues such as adequate financing, design at the base of the pyramid, and new models for distribution.

One of the most interesting and noteworthy trends in the base of the pyramid space is the growth of different kinds of “social investment” capital. MIT’s Innovations journal outlined this topic in Patient Capital, an article authored by Jacqueline Novogratz, founder and CEO of Acumen Fund, which is one of the pioneering organizations in this field. The article, titled “Meeting Urgent Needs with Patient Capital,” talks about the changing world of philanthropy (another driving force for more market-based approaches) and Acumen’s unique approach to investing in BoP businesses.  It also gives a good overview of some of Acumen’s main investments. Novagratz says that, “capital invested in businesses seeking to deliver basic goods and services to the marginalized majority will require long-term commitments, a lot of management assistance, and sustained relationship building.” This article is very useful for understanding the new approach to investment in SMEs that serve the BoP.

As adequate capital has begun to enter this field, there has been an increased push for innovative organizations and moreover innovative products and services that address the needs and aspirations of those living at the base of the pyramid. In 2007, the Cooper Hewitt Museum in New York City hosted an exhibition titled “Design for the Other 90%, which highlighted design-driven innovations in areas as varied and vital as water, healthcare, energy and housing. The book that summarizes the exhibition is definitely worth your time if you are interested in seeing how design can, for example, change the way men and women transport water and thus attain dramatic improvements in their quality of life.

“Design for the Other 90%” is the brainchild of Paul Polak, a prominent figure in the space of entrepreneurial approaches to the challenges of poverty who has revolutionized small scale agriculture through the design of affordable drip irrigation equipment at International Development Enterprises (IDE). His book Out of Poverty describes the path of building his organization and provides valuable insights from the field, emphasizing the importance of listening to and becoming aware of the specific context and conditions surrounding those at the base of the pyramid. 

Additional Resources

There are of course numerous other books, articles, and cases that highlight the growing adoption of the BoP approach. If you know of any additional pieces, feel free to comment on this post. Here are some in addition to those highlighted above.

Thanks to Francisco Noguera for his contribution to this post. Also, please note that this should not be understood as an exhaustive compilation of everything that has been written about the BoP. Please feel free to comment below if you want to add something to this list.

Grace Augustine is a research associate with the William Davidson Institute, an educational institute focused on researching and supporting organizations in emerging markets. She writes for the NextBillion blog and has an interest in economic development and clean technology for the world’s poorest citizens.