By Katherine Murtha
“As impact investing comes into the mainstream, there are not enough investment-ready enterprises able to absorb the amount of capital that impact investing is poised to generate.” Dr. Judith Rodin, remarks at Aspen Ideas Festival, June 2014
“All levels of government are facing steeper costs on health care and pensions, where the relentless demographics are just grinding down on all other items in the budget.” – A former state government CFO quoted in Bridgespan’s report, January 2012
A dearth of impact investment-ready deals. Diminishing government funds for social sector organizations. These are big challenges. This week, Nonprofit Finance Fund’s CEO Antony Bugg-Levine and VP Bill Pinakiewicz shared solutions that might address both. They suggested three ways for funders to help social enterprises remain viable and create value for investors.
- Help social impact organizations understand the new paradigm. The possibility is very real that traditional public funding for nonprofits will not bounce back.
- Help social enterprises and nonprofits adapt to this new funding landscape. Enable them to focus on the measurable outputs that impact investors like to see and adjust their business models to take advantage of government incentives for achieving metrics.
- Strengthen social impact organizations. Invest in their adaptive capacity or organizational effectiveness – give organizations tools to understand their finances, improve their capital structure, and measure outputs.
- Help organizations understand the new paradigm.
For four years in a row, NFF’s State of the Nonprofit Sector survey has revealed that nonprofits are facing more and more demand but are not receiving as much government support as they need – and the government reimbursements they do receive tend to arrive late.
Although nonprofits already recognize that funding is decreasing, they may not realize that it is not a cyclical drop. Regardless of which political party controls the budget, America’s changing demographics mean that the proportion of government money budgeted for healthcare and care for the elderly is going to increase – and that means fewer funds left for nonprofits (and everything else).
The resulting budget consciousness in government and philanthropy drives funders to invest wisely. They want to garner the greatest social return on their investment, and they’re looking for metrics.
- Help social enterprises adapt to the new paradigm by focusing on metrics.
Tracking metrics is crucial because funders want to invest in organizations that can capitalize on cost savings or government incentives for achieving measurable outcomes. Government pays contracts based on results like number of people served. Philanthropic “pay for success” funding has smoothed cash flow challenges for service providers by paying the upfront costs of service and recovering the capital when government reimburses the service provider.
Meanwhile, the investing sector has become increasingly interested in identifying enterprises generating social impact as well as financial returns. The philanthropic sector, too, is looking for the social return on investment.
The new paradigm means that organizations would do well to structure their operations in a way that enables them to generate outputs that are easily measurable. Funders should help nonprofits and social enterprises understand the landscape and give them headspace to consider how to adapt their business models to be more metrics-driven.
One way a metrics-focused nonprofit can create economic efficiencies is working through new policies where metrics are the bottom line.
For example, nonprofits can partner with hospitals to help reduce return visits to the ER. Keeping readmission rates low is key because the Affordable Care Act (ACA) penalizes hospitals readmitting too many patients by cutting their Medicare reimbursement rates.
Here’s an example of how a nonprofit benefited from a metrics-driven business model. Lifespan, a nonprofit that provides Meals on Wheels, financial help, and other services to seniors, was getting most of its revenue from government grants in 2009. After the 2010 passage of ACA, Lifespan made agreements with several hospitals. Since readmissions are costly to the system, the Centers for Medicare and Medicaid Services paid Lifespan a fee for caring for the hospitals’ senior patients. Lifespan’s senior services kept the patients healthy and prevented costly ER readmissions.
Other potential business models might take advantage of pay for success in non-health areas such as recidivism and successful housing of homeless individuals. Social enterprises might also capitalize on the New Markets Tax Credit and state and federal energy-efficiency retrofits incentives.
- Build organizations’ capacity.
Many funders already invest in organizations’ capacity-building, but NFF’s State of the Nonprofit Sector survey shows that nonprofits aren’t comfortable talking with funders about planning financial sustainability.
The NFF survey suggests that if funders are going to require metrics from investees, they might consider covering the cost of assessing impact. In addition to helping organizations develop metrics, funders can pay for tools to measure outputs and improve organizational effectiveness.
Metrics Support: A funder can convene nonprofits that do similar work so they can set common benchmarks, such as number of children served, number of shelter beds provided, or pounds of food distributed.
Impact Measurement Tools: Funding the transition to a cloud-based Homeless Management Information System could allow real-time coordination among homeless services agencies.
Building Capacity: Many nonprofits could benefit from training and easier-to-understand financial software that could predict shortfalls in advance.
These three steps will support the social sector’s shift toward metrics-oriented models, increase the number of investment-ready organizations, and nurture thriving organizations that make a positive social impact.