RETURN ON INVESTMENT

In India, the government provides limited financial assistance for maternity care for low-income families (i.e., $2 to $5 in daily household income). This hardly seems like a lucrative market; nevertheless, LifeSpring—a partnership between Acumen, a US based nonprofit global investor, and a corporate entity created by the Ministry of Health in India—set out to turn a profit in this sector. LifeSpring now has six 20-bed hospitals that operate “as high volume, low-cost businesses [targeting] high occupancy, utilization and turnover rates in order to ensure profitability.” Remarkably, it reached the break-even point after only 18 months (O’Donohoe, Leijonhufvud and Saltuk Reference O’Donohoe, Leijonhufvud and Saltuk2010, 53).

LifeSpring represents the ethos of impact investing: doing well by doing good. It combines financial rewards with societal benefit, achieving a “double bottom line.” In the case of LifeSpring, profit offers the opportunity to expand maternity care and provide additional services. In other cases, social benefits are combined with monetary returns to private investors. Social-impact investing can be described concisely as “the use of multiple instruments in addition to grants in order to leverage available resources to maximize social or environmental impact” (Salamon and Burckart Reference Salamon, Burckart and Salamon2014, 169). The focus of much of this investment is “bottom-of-the-pyramid” populations—those at the lowest income level who need health and welfare services (Saltuk Reference Saltuk2011, 10). Investors, including individuals, for-profit institutions, and foundations and other nonprofits, can access these projects through middlemen—that is, dedicated financial institutions specializing in this sector—as well as investment banks offering impact investing funds.

This all may seem far afield from foundation practices. Yet, foundations are drawn into impact investing by the seductive appeal of investing as an alternative to traditional grants. Some foundations (e.g., F. B. Heron) now operate as foundation banks, making investments rather than grants through loans, loan guarantees, fixed-income instruments, and equity (Salamon and Burckart Reference Salamon, Burckart and Salamon2014, 165). A fundamental attraction of impact investing to foundations is that it fits well with their orientation toward initiating something new; they want to take credit for facilitating or catalyzing innovation without assuming long-term financial responsibilities. Impact investing by foundations is similar to venture capital support of for-profit startups. The Omidyar Network works “across the social and business sectors, operating both a Limited Liability Company (LLC) and a 501(c)(3) foundation.” Its mission is to “invest in entrepreneurs and their visionary ideas that create opportunities for people to improve their lives.” ^{Footnote 3} Omidyar’s investees include Change.org and NationBuilder, nonprofits that provide software for social action and community organizing, as well as HealthKart and Quikr, electronic marketplaces for consumers in India. The massive Chan Zuckerberg Initiative appears to embrace a LLC impact-investment structure as well. Foundations, of course, have long helped to start new nonprofits, but this recent impetus is aimed at developing dedicated arms devoted to funding startups with investment support rather than outright grants.

It is not clear how much foundation money is being spent this way as opposed to traditional grants, but what is clear is that impact investing is receiving significant attention in the foundation world. There is no shortage of “evangelism” pushing foundations and other potential investors toward a double-bottom-line strategy. Bishop and Green (Reference Bishop and Green2008, 3) preach the divinity of “philanthrocapitalism,” arguing that impact investing is much more than an alternative means of doing good. Rather, “philanthrocapitalists see a world full of big problems that they, and perhaps only they, can and must put right.” Evangelism for impact investing and the pursuit of ROI also comes from business firms and nonprofits that act as middlemen. Capital aggregators assemble investors who pool funds into investment levels appropriate for a variety of projects and organizations. Enterprise brokers comprise another set of middlemen; they directly link investors with interests in promoting social and environmental goals to specific projects offering market-level returns (Salamon Reference Salamon2014, passim).

Individual consultants have built specializations in various niches in this complex array of financial instruments. In one interview, I asked a nonprofit director if she ever focused on ROI in her grant applications. Because most of her agency’s clientele are abjectly poor, she said she “didn’t know how to think about ROI.” However, she then added that a consultant who she used to help her agency raise money from foundations was always asking, “What about return on investment?” When I asked why the consultant was focused on ROI, the director responded, “Because she’s very creative and she’s looking for fame and glory. She’s trying to carve out a niche.”

Unfortunately, empowerment and advocacy fit poorly into an ROI framework. Problems of measurement are discussed more fully later in this article; however, at a conceptual level, it is hard to define what constitutes advocacy return. An executive with a health-related nonprofit explained that “it’s been difficult for me to make [my board] understand that empowerment is a deliverable.”

At the heart of this problem is a mismatch between the way foundations distribute their available funds and the very nature of advocacy. Affecting change in public policies is a long-term process. The president of a foundation noted the disjunction as follows: “[f]oundations fund grants in the range of one to three years. That doesn’t square with the realities of how long it takes to achieve social change.” Foundation officers need to show impact, whether it is an ROI or a more traditional conception of impact. The time horizon for achieving change in the political world means that those foundation officers must inform their management or board that the grants they have awarded for advocacy may not realize a payoff for many years. That is a tough sell and such grants may be unlikely to help anyone climb the ladder of success in the foundation world.

CAPACITY BUILDING

If foundations and other institutions are to maximize leverage with their dollars, they need to invest in those nonprofits that have the capacity to effectively implement programs, grow revenue, and achieve results that influence the broader field. Thus, capacity building is directly tied to ROI because high-capacity organizations, understandably, are perceived as more likely to deliver results.

“Capacity building” is an inherently ambiguous term. In his book on the subject, Light (Reference Light2004, 53) defined it “as any effort to increase, replenish, or improve an organization’s capacity.” This “nondefinition definition” perfectly captures the all-encompassing nature of capacity building—it is what anyone says it is. Nevertheless, practitioners—especially consulting firms—do identify the qualities they regard as most important. For example, Grantmakers for Effective Organizations lists eight areas as key to building capacity: leadership, vision and strategy, program delivery, fundraising, financial management, communications, technology, and strategic relationships. ^{Footnote 4}

The emphasis on capacity building derives in large part from the stereotypical image of small- and medium-sized nonprofits as being run on a shoestring and managed by a few overtaxed individuals whose training did not prepare them for all that is required to run an organization. Letts, Ryan, and Grossman (Reference Letts, Ryan and Grossman1997, 36) wrote in the Harvard Business Review that nonprofits “often lack the organizational resources to carry out the programs they have so carefully designed and tested.” They reprimanded foundations as well because “in the process of making a grant, foundations often overlook the organizational issues that could make or break the nonprofit” (ibid.).

These long-standing critiques have led to a greater weighting of capacity building in foundation grant making. As contradictory as it may seem, one reason that nonprofits may lack sufficient capacity to excel is that they are expected to be lean, no-frills, low-salary, low-overhead organizations (Pallotta Reference Pallotta2008). Once the concept of investing began to take hold in philanthropy, however, private-sector business practices became more relevant in foundation strategizing. A consultant specializing in capacity building said in an interview, “Who in the private sector asks, ‘Does it [pay] to train our people?’”

Because foundation grants continue for only a limited time and often are awarded to a nonprofit so that it can start up a new initiative, there is always the question of the “exit strategy.” Foundations want to know “How does the nonprofit keep the new initiative going after we’ve stopped funding it?” It is in this context that impact investing provides a solution. If money is leveraged through an investment rather than contributed as a traditional grant, the enhanced economic activity can lead to sustainability. This is the “Holy Grail” of foundation giving: a grant that does not need to be renewed but nevertheless will have a lasting impact. As one foundation officer stated, “This is a funder’s dream, because you won’t feel guilty after you stop funding” (Seedco Policy Center 2007).

This focus on capacity building in the nonprofit world is advanced not only by foundations but also by an extensive infrastructure of consulting firms that market their expertise in this area. The large roster of consultants includes national firms such as McKinsey, which—in addition to private-sector work—operates a robust nonprofit practice. There also are many firms that specialize in nonprofit consulting, some of which are nonprofits themselves. Bridgespan is one of the best known and its stated goal with clients is to strengthen “the ability of mission-driven organizations and philanthropists to achieve breakthrough results.” ^{Footnote 5} The private-sector TCC Group has a strong nonprofit practice with a particular focus on capacity building. One of its products, the Core Capacity Assessment Tool, priced at $350, is a 146-item online questionnaire that measures a nonprofit’s capacity along four dimensions. The firm also offers more direct consulting with an emphasis on leadership and what it calls “adaptive capacity.” ^{Footnote 6}

What is perhaps most surprising about capacity building is that despite its centrality to foundations, nonprofits, and consulting firms, there is much uncertainty about whether it achieves anything significant (Light Reference Light2004, 44). Melinda Tuan (Reference Tuan and Salamon2014, 233), a leading consultant on nonprofit capacity building, concluded that there is a “lack of meaningful, practical, and consistent methods of evaluating the effectiveness and impact of organizational capacity building.” However, the problem is far more than the absence of consistent measures. More essentially, it is difficult to operationally define what is to be measured. In all of the various schemes for building nonprofit capacity that I examined, improving organizational leadership was at the very core of strategies to improve performance. Is there anything more elusive than measuring the impact of leadership? Furthermore, what does improved leadership bring to a nonprofit? A study of “high-impact” nonprofits by Grant and Crutchfield (Reference Grant and Crutchfield2007) found that internal management capabilities were not related to these organizations’ success. The Center for Effective Philanthropy concluded that capacity building had little chance of working unless it was comprehensive: “Providing just two or three types of assistance to grantees appears to be ineffective” (Buteau et al. Reference Buteau, Buchanan, Bolanos, Brock, Chang and Ross2008, 5). More than a few forms of assistance, however, are expensive and beyond what most foundations are willing to support in their capacity-building grants.

A clearer case can be made about the relationship between capacity building and any emphasis on strengthening nonprofit advocacy. Building up the capacity of nonprofits to improve their efforts in community organizing, lobbying, and other forms of advocacy does not appear to fall into a foundation’s conception of what constitutes capacity building. In a survey, the Center for Effective Philanthropy asked foundation grantees about 14 different types of capacity building (Buteau et al. Reference Buteau, Buchanan, Bolanos, Brock, Chang and Ross2008, 8); not one of the capacities was related to advocacy. Moreover, in reading the literature on nonprofit capacity building, there is scant mention of the subject.

Interviewees confirmed that foundations do not perceive a link between building capacity and advocacy. As one consultant stated, “the resistance comes largely from foundation people’s level of comfort with advocacy.” An executive with a nonprofit infrastructure group noted that “Foundations don’t understand what they can do in terms of advocacy. A lot of them think that advocacy is what Saul Alinsky did....We need to educate foundations on this.” Yet, there is no reason to believe that foundations want to be educated about how advocacy is part of organizational capacity.

MEASURING OUTCOMES

In an era in which statistics and analytics are of paramount value, there is a strong imperative to quantify the true impact of impact investing. This pressure comes from foundations that make such investments; from donors and investors who want evidence that their money is doing what was promised; from consulting firms that want to win contracts to conduct the measurements; from the boards of directors of nonprofits who want the best tools at their disposal to oversee the work of their professional staffs; and from the staff of nonprofits themselves (Schambra Reference Schambra2013). Although the need for evidence creates additional work and internal challenges for nonprofit managers, these individuals want to show that their work is effective. The Chief Executive Officer (CEO) of a community-development nonprofit stated that although it gathered the numbers at the request of the foundations that fund the organization, “It’s important to have these numbers for ourselves. We have to ask ourselves if what we are doing is working.”

Although foundations frequently ask for evaluations and may appear to favor quantitative scoring of program impact, they actually seem to be of two minds concerning the value of rigorous analysis of their grants and investments. For those adopting an investment strategy, the obvious incentive is to validate their efforts by demonstrating the effectiveness of leveraging the dollars they distribute. Even for those foundations that operate through a traditional grant-making structure, there are reasons to pursue exacting measurement. Foundations may believe that they need to keep up with trends in their field when they believe that other foundations have adopted these oversight processes.

There also are reasons why foundation executives and program managers may want to avoid independent, statistical assessments. The reality of program evaluations is that they create considerable risk to all those who have supported the program being measured. If the numbers come back as negative, it may not only reflect badly on the nonprofit carrying out the mission but also on those foundation officers who approved the grant. The nonprofit Evidence Action dewormed 17 million children in India but, somewhat surprisingly, did not evaluate whether those treatments improved school attendance, school performance, and graduation rates (Hobbes Reference Hobbes2014). I conducted one interview with the head of program evaluation for a large foundation that claims forcefully that it makes “investments” with its funds. When I asked him whether the foundation was earning a discernible ROI in the nonprofits in which it invested, he confessed that it does not actually conduct research that could show that. Instead, he offered me anecdotal evidence about what works with its grantees.

For a foundation officer, a qualitative self-assessment conducted by a nonprofit grantee—which is more likely to downplay program shortcomings and accentuate the positive—is a safer alternative to a more rigorous evaluation. Foundations may not have professional staffers qualified to prepare statistical analyses; therefore, they would need to outsource such studies to a consulting firm. This reduces a foundation’s control over the way that a given program is judged. Fleishman (Reference Fleishman2007, 96) noted that “Foundations usually shy away from empirical measurements of the extent of their impact.”

For whatever reasons, the feedback loop on program performance seems to be tenuous. Based on its surveys, the Center for Effective Philanthropy found that foundation officers “know little about the actual results of the assistance they provide.” Of the minority of foundation officers that do follow up with their grant recipients, nearly 90 percent indicated that “they ‘do not look for changes in grantees’ work or organizations related to the assistance they provide” (Buteau et al. Reference Buteau, Buchanan, Bolanos, Brock, Chang and Ross2008, 5–6). I asked the CEO of a large health-related nonprofit whether foundations ever came back to determine if new programs initiated through their grants were, in fact, sustained by the nonprofit when those grants expired. She replied simply, “No, that’s never happened.”

Beyond these concerns are actual methodological issues involved in measuring social-impact investing. There is no one generally accepted method to measure social and environmental impact and, as a consequence, there is great diversity in both approaches and levels of rigor in evaluations. The National Committee for Responsive Philanthropy (NCRP) calculates that for every dollar that a foundation or other donor provides to a nonprofit, the community benefit (i.e., ROI) is $115 (Ranghelli Reference Ranghelli2012, 1). As might be suspected, this sensational 115-to-1 ROI is based on a rather expansive notion about what constitutes “return.” For example, increased funding for public schools is counted by the NCRP as a return, even though increases in such spending can be the product of multiple advocates and might not be related to the work of a grantee in that community (Ranghelli Reference Ranghelli2012, 3). Nonprofits are not rigorous in how they determine key indicators. An Urban Institute study found that of those nonprofits with at least $50,000 in annual revenue, 37% indicated on their 990 tax return that they spend absolutely nothing on fundraising (Light Reference Light2004, 49).

Because it is difficult to quantify real impact, measurement of advocacy effectiveness tends to focus on rather mundane program qualities. One community development director I spoke with told me that his reports to foundations about the impact of his nonprofit’s community organizing were composed of the following measurements:

• • the number of people who show up for an event

• • the number of people who take on leadership roles

• • the number of people who speak at a hearing or meeting

• • how many people that participate are “not the usual suspects,” such as non-English speakers

I asked other nonprofit directors the same question and received a similar answer: the metrics focused on participation, things that could be counted. The shortcomings of these advocacy metrics were amply illustrated by the head of a disease-related nonprofit. His statewide chapter was part of a federated structure and he was required to report advocacy metrics along with all of the other indicators of chapter performance to national headquarters. The national office had a point system, and he explained that “You get three points if you actually speak with a member of Congress. You get fewer points for a letter or email to a legislator.” Remarkably, what is not covered under this point system is actually influencing public policy.