Will The Social Innovation Fund Really Change the Nonprofit Market?

On Wednesday, the Corporation for National and Community Service announced the new head of the federal Social Innovation Fund would be Paul Carttar. Although Carttar's appointment warrants much excitement, his stated goal to develop the nonprofit capital marketplace may be undermined by the constraints of the Social Innovation Fund as it is currently imagined.

Carttar is a smart pick for this position. He's got great experience in scaling nonprofits from his work at New Profit, the first venture philanthropy fund, and at Bridgespan and Monitor groups, the biggest and most sophisticated consulting firms for large nonprofits. He has the potential to really take the Social Innovation Fund and run with it and I'm excited to see what he does. But at the same time, we need to be cautious about our expectations for what this fund will do.

While having a $50 million public/private partnership of new money to scale innovative nonprofits is a great addition to a very limited nonprofit capital market, I'm not sure that it can actually, as Carttar said yesterday, "Develop the capital market around funding results as opposed to funding stories, funding founders, [funding] connections, funding a CEO's ability to weave a yarn."

It seems that the underlying assumptions of the Fund are that a) results, if they are there, are easily gathered and b) mezzanine funding is the most important capital lacking in the nonprofit sector. I would say, however, that capacity funding is the bigger, and more pressing, hole in the nonprofit capital market.

The fact of the matter is, the vast majority of nonprofit organizations in this country (more than 80%) have budgets under $1 million. That means that they often lack basic infrastructure and capacity for large scale growth, and by that I mean they don't have the "evidence," or research, to prove that their solution is really working, let alone basic funding to drive operations, create a strategy for growth, etc. Indeed, most nonprofits don't even have an articulated theory of change, which would be the beginning step in driving research to find those "results" the Social Innovation Fund wants to grow.

I am a huge supporter of organizations like New Profit, Bridgespan and Monitor.  I think they have done incredible work to make the top echelon of the nonprofit community more focused on scale. They have really raised the bar. They count Teach for America, Citizen Schools, Build and others among the nonprofits that they have grown towards systemic change. But those nonprofits are the exception, rather than the rule in the sector. I'm concerned that a focus on a model like theirs of selecting and growing nonprofits that already have systems, capacity, infrastructure, proven results in place, is simply guilding the lily, rather than truly transforming the marketplace.

That's not to say that mezzanine funding is not needed. But it's not enough. We need to see more public/private funding partnerships around capacity investments for innovative nonprofits, like funding the articulation of a theory of change, or a strategy for growth, or program evaluation so that nonprofits have results to point to in the first place.

The Social Innovation Fund is a much needed entrant into a very immature nonprofit capital market. But let's not forget that a truly robust capital market provides funding for innovative ideas and organizations at every stage of the game.  We're not there yet.

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