ImpactAlpha, Oct. 16 – We’re on the brink of a significant shift in the global flow of capital. We have the opportunity to redirect trillions of dollars as new wealth seeks to align investments with values – a massively different scale than philanthropy today. Unfortunately, very few in philanthropy are taking advantage of this potential.
In order for philanthropy to mobilize these trillions, we must shift our mindsets from organizational capital management to global capital systems leadership.
Groups like Tideline have put out great pieces on the value of catalytic capital, and a few have embraced this strategy, but it’s sparse. As ImpactAlpha and Convergence noted recently, the State of Blended Finance is still rather “sober.” With Opportunity Zones and other programs redirecting capital for public benefit, philanthropy has been mostly silent aside from a few large exceptions like Kresge, Rockefeller, and Sorenson.
While we’re excited to see more foundations exploring intentional investing, we also see many misinterpreting their role in the space and missing their biggest power play.
Philanthropy’s goal should not be to invest alongside SoftBank or TPG. Foundations should instead be working to entice the SoftBanks of the world to invest where it will have the most impact. This is not a co-investment strategy. It is a leverage strategy, looking for opportunities to take lead, early, junior, and gap-filling positions that draw in more capital to solutions that matter.
Here are three ways philanthropy can embrace its catalytic power:
1) Redefine success to focus on financial outcomes.
The push for impact and outcomes measurement is leaving out a vital metric.
As a result of your investment, has the organization reached a more sustainable financial position? Do they now have access to enough capital to achieve their grand vision?
We posit philanthropy only has to measure one thing: how much capital followed your investment?
This doesn’t mean giving up on evaluating impact. This metric shifts the reason for evaluation to finding good solutions to scale and attract more capital from private and public sources. It also means funding the full costs of investment readiness, including development, administration, and infrastructure.
2) Rethink the idea of concessionary capital.
Philanthropy prioritizes their own organizational balance sheet performance instead of how much capital is flowing globally to solve important challenges. As such, they end up seeking senior positions and to outperform traditional benchmarks while labeling everything else as “concessionary.” In fact, these concessionary investments do outperform when you zoom out to a global view or expanded time horizon, and often enable deeper impact by the investee.
Suppose you make a $1 million investment that yields merely 0%, instead of the 8% your advisors still tell you you’ll earn. Most investment committees say that 0% is unacceptable and puts the mission at risk.
But now consider that $1 million investment unlocks $10 million more from other capital sources specifically for your grantees. If you stuck to your normal method of distributing your inflation-adjusted 5% earnings on that $1 million every year, it would take you over 100 years to get that $10 million to your grantees yourself.
Assuming capital in pursuit of mission is your goal, which investment is better: 1,000% for your grantees or 8% for you?
3) Reconstitute investment committees.
Most of the time anything that sounds like an “investment” ends up in the hands of investment committees, even if it started with program officers. Unfortunately, these committees are usually composed of outside professionals disconnected from the day-to-day mission and following a charter solely comprised of fiduciary duties.
That disconnection makes it difficult for investment committees to take a mission-first approach to the investment strategy. As it stands, their job is to maintain the organization’s balance sheet, while another part of the organization makes all distributions in pursuit of mission – the embodiment of two bucket thinking.
In order to move to a mission-first stance and not just preservation of spending power, force the conversation around changing investment committee charters, policies, and composition. Some leaders like Heron have implemented integrated capital approaches, looking for solutions first and figuring out financial mechanics second. Should your grant and investment committee meetings be combined? Can your investment policy statement include a capital-leverage target or allocation?
It’s time for trillions.
We need both sides of the philanthropic house to seize their power to mobilize money in pursuit of mission, and look beyond their own balance sheet to focus on the global flow of capital for good.
Your dollars best serve your mission by creating the structures and incentives that attract more resources to that mission. Add external financial outcomes to all of your analyses – grants or investments – and create the space to get rid of legacy two-bucket structures.
With a massive capital redirection we can effect massive change. We need philanthropy to lead the way.
David Lynn is the Co-Founder & CEO of Mission Driven Finance