In the first post of this 4-part article, I described what an impact-based social capital market could look like and why I believe it is philanthropy’s biggest opportunity. In this follow up post, I want to elaborate on why such a market has not materialized so far and what we can do to make it a reality in the next 2-5 years.
To understand why an impact-based social capital market does not currently exist, it is helpful to start with the graph I used to summarize the concept:
What is particularly important to realize about marketplaces is that they require a critical mass before producing any tangible benefits. In other words, a market that distributes $50 thousand a year is not very interesting; a market distributing $1 million per year is intriguing, and a market dispersing $10+ million per year is fascinating. Of course, the fact that marketplaces require a critical mass to start is not all bad: on the flip side, once started, marketplaces are a very reliable source of capital and tend to grow sizably due to inherent network effects.
Given that an impact-based social capital marketplace does not exist currently, it is no surprise that the vast majority of nonprofits not only ignores the Internet as a viable funding channel, but also does not invest resources in measuring and reporting their impact. After all, nonprofit leaders need to use optimally the limited resources at their disposal – and their very rational conclusion is that it does not pay off to focus on participating in a marketplace, which does not exist and therefore cannot provide much-needed capital.
So how can we jumpstart the process of nudging people to give for the right reasons (i.e. based on impact) on a scale that allows a market to form subsequently? I would like to propose a simple approach: to overcome the lack of critical mass, we need a catalyst that can get a sufficient number of donors to give based on impact. This will create incentives for nonprofits to participate in this marketplace in order to tap into a reliable and growing capital pool while also increase the effectiveness of the limited philanthropic dollars.
So what could this catalyst look like? There seems to be three important characteristics:
- The catalyst needs to provide information about nonprofit impact at a cost that is bearable.
- The catalyst needs to be scalable – i.e. meet donors in the causes and issues they care about today as opposed to dictate what donors should be concerned about in the first place.
- The catalyst needs to provide actionable information that can actually engage donors in a world characterized by limited attention spans and overwhelming content.
There have been many attempts to create such a catalyst, some of which Philanthropedia reviewed in a recent whitepaper. Our conclusion was that none of the existing solutions offered an attractive combination of features that could satisfy all three of the important characteristics outlined above. To fill that gap, Philanthropedia has spent the last 3 years developing a methodology that has all three key characteristics in order to realize the potential of the impact-based social capital market that we believe in so much.
Our methodology is focused on extracting information about nonprofit impact from the very people who spend their entire days focused on it: program officers at foundations, nonprofit senior staff, university faculty, policy makers, consultants, journalists, and so on. As any other methodology, Philanthropedia’s approach suffers from both pros and cons, however, it scores very well on the three most important dimensions for a catalyst:
- High quality at low cost: we ask experts for 40 minutes of their time per year and in return offer rich information about a handful of nonprofits that donors use to direct their donations effectively in causes they care about. It is worth noting that despite earlier discussions our latest research demonstrates that experts are a great source of information and we can successfully compile ever better information from them. Stay tuned for a blog post on that or see for yourself by comparing the impact comments from our 2009 national climate change research to our 2010 Bay Area climate change research (choose a random organization and click on the “expert assessment” tab).
- Scalability: our approach works in all social causes and all geographic regions because the types of experts I outlined above are present in virtually each social cause.
- Actionable information: while still a work in progress, our expert funds provide an easy to understand yet smart donation strategy for donors.
In conclusion, I hope this post gave an idea of the necessary features of a catalyst that can jumpstart an impact-based social capital market and demonstrated that such a catalyst can be built successfully. In tomorrow’s post, I will turn my attention to the remaining elements that need to come together to create an impact-based social capital market.