SOCAP10 - Can the Social Innovation Fund tap into the impact investment market?

Last week the SOCAP10 producers announced the winner of the SOCAP10 Impact Challenge, a competition launched in July. The competition, designed by SOCAP, Triple Pundit and Myoo Create, challenged competitors to address the “Money for Good” report (PDF) by Hope Consulting and “explore what’s next in social enterprise” in 500 words. Kyle Westaway’s post was selected by the SOCAP10 producers as the winner for which he was awarded a complementary pass to the conference.

Kyle’s post suggested that there is an opportunity tap into the $120 billion impact investment market by directing individual investments into social enterprises. Specifically, he proposed leveraging Low Profit Limited Liability companies (LC3s) that would offer two avenues for capital: one targeting philanthropic institutions and the other targeting the individual investors at the heart of the Money for Good report.  For the philanthropic avenue, he recommended scaling up the Social Innovation Fund (SIF) through additional government funding and philanthropic donations.  That scaling up would provide the SIF with an additional $200 million from the federal budget and another $250 million from private donors who have taken the Billionaire Pledge.

In total, the SIF would then have $500 million to allocate in a given year. Instead of distributing the funds through grantmaking intermediaries as grants, which would in turn fund local nonprofits through subgrants, the SIF would morph into a program that would focus on making social impact investments with an expectation of a financial return.

It’s a fascinating idea, but I question whether the SIF is the appropriate home. The SIF has generated $123 million in a combination of public and private funds. By its nature as a federal government program, though, the SIF is not a conducive means for taking risk. Much of the criticism directed at it by me and others has focused on its inability to take high risks with its funding resources. But in some sense, it’s in the business of minimizing risk exposure with public funds. For example, the results from its first round of funding awarded grants to organizations that have demonstrated effectiveness instead of high-risk entities with innovative and potentially disruptive ideas that do not have significant track records of success.

Nor is the SIF agile and flexible enough to take advantage quickly of emerging opportunities in order to fund them. Instead, it has to publicize drafts of guidelines for future funding opportunities, solicit public feedback and comments, revise, and then publish the final guidelines before it can even get to the point of reviewing possible ideas to fund. That’s not a process designed to move quickly.

The first SIF round of funding started in December 2009 when the draft guidelines were published for feedback; the intermediary grantees were announced in July and some are still in the process of soliciting subgrant applications.  In other words – it takes a long time to get federal funds out into the community.

Last, until the SIF could recoup its investments through the Presumed Abundance model of funding it forward outlined by Kyle, it would need to generate additional investor support on a yearly basis in order to maintain its investment position. Otherwise, it might simply revert back to a $50 – 250 million federal budget. Ideally, individual investors would be willing to participate in multiple years of investments, although I suspect that might be a challenge.

Kyle’s post presented a really creative idea worthy of winning the SOCAP10 Impact Challenge. The funding it forward idea resonated strongly with the readers that commented on his post. Leveraging the LC3 structure also received strong support. At this point, I’d love to see the idea pushed further along, but with either a private or nonprofit replacement for the SIF. Expanding on a comment by Stacy Caldwell, president of Dallas Social Venture Partners, this would be a great discussion during the open space day at SOCAP10.

Disclaimer: This post is part of a series of posts on the SOCAP10 conference. As part of the blogging coverage for the conference, I was able to register to attend at a discounted rate. A version of this post appears on the SOCAP10 blog.

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