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The End of Charity: How to Fix the Nonprofit Sector Through Effective Social Investing PDF Print E-mail
Written by David E. K. Hunter   
October 2009
Table of Contents
Page 3 of 6

Effective Social Investing

Like any investment activity, social investing involves putting resources to work in order to create something of value. Whereas investing in the commercial sector has financial objectives such as creating profits and shareholder value, social investing involves channeling resources — money, knowledge, support — toward nonprofits that measurably help to improve the lives and life prospects of the people who depend on their services and programs.
But social investing isn’t monolithic. There is a continuum along which one can sort out various social investment approaches. So, for example, high-risk social investing involves channeling resources toward nonprofits that show evidence that they are on the road toward being able to create such value for their intended beneficiaries reliably and sustainably, but need additional time and resources to build the capacities to do so. At the other end of the continuum, low-risk social investing means channeling resources exclusively to those nonprofits that already have a sustained track record of producing documented impacts. Clearly most social investors will operate somewhere in between.

I don’t advocate for doctrinaire purity in social investing. I most emphatically do not believe that all social investing should be low risk. But I do advocate for clear thinking about what one is doing, why one is doing it and what one really is accomplishing.

Like commercial investing, social investing requires hard work up front and throughout the investment period. (This is yet another obstacle: in contrast to social investing, doing “charity” requires little work and provides great and immediate emotional rewards.)

While approaches differ, it is fair to say that social investing requires the following:1

  • the use of rigorous selection criteria to choose nonprofit organizations to support,
  • structuring investments to strengthen organizations in which investments are made2 in order to enhance their ability to provide effective services reliably and sustainably at high levels of quality,
  • tracking performance and providing non-financial supports3 as indicated, thus helping these agencies become more effective and efficient in helping the people they serve to measurably improve their lives and life prospects,
  • diminishing transaction costs to help these organizations stay focused on achieving their respective missions, and
  • helping nonprofits to build reliable revenue streams that will support them sustainably at the appropriate level of scale4 — before terminating the investment.
  1. ^Much of what follows is taken or adapted from the Guide to Effective Social Investing, which I co-authored with Steve Butz (2008).
  2. ^ In practice this typically involves several things such as making long (multi-year), relatively unrestricted investments that the organization can use in whatever ways it needs to in order to succeed against a series of pre-negotiated milestones — including such things as the ability to create a robust operating reserve, establish or build up its endowment, make capital and infrastructure improvements, and build essential organizational capacities such as an effective board, strong financial and human resource management, effective and efficient program management (with the use of external evaluations when indicated), and organizational performance management. Continued investment should depend — at least to a significant degree — on the organization’s ability to achieve its milestones.
  3. ^ These are especially critical if it appears that the organization is experiencing unforeseen setbacks; this is not the time for an investor to cut and run (unless, for example, there was malfeasance or deception involved) – rather, it is the time to roll up one’s sleeves and figure out how best to help bring things back on course to protect one’s investment. This does not, however, imply uncritical acceptance of the organization’s behavior; it could, for example, lead to tough conversations with the board of directors that might result in the replacement of an executive director.
  4. ^ This will vary greatly from one social services organization to the next. Some are inextricably bound to the neighborhoods and communities in which they emerged and evolved, and their strategies may call for them to grow locally up to a certain point (which can be thought of in terms of “market penetration”). Others adopt strategies of aggressive regional and even national growth, through such means as replication, franchising, etc. There is no inherently right approach to scale. But it is fair to say that all approaches to scaling up pose enormous challenges to an organization’s ability to maintain its quality and ability to create social value — that is, good results for the people it serves. These matters should be looked at very carefully during the investor’s due diligence selection process, and watched carefully throughout the investment period.