All too often, great design solutions for the developing world fall victim to dependency on charitable giving to achieve their goals. Few social enterprises have a truly sustainable business plan, so it is no surprise that there is no flood of wealth coming from traditional investors to fund these enterprises. This post focuses on understanding the investor’s two bottom lines, which will yield a Part 2 post advising social enterprises on how to attract more funding.

A recent Harvard Business Review article on “Funding Social Enterprises” opened my eyes with a new perspective on how I manage my own little “investments” in social enterprise.

Charitable Giving as an Investment

If you were to think of your annual charitable giving as an investment fund, how would you rate the fund’s performance? Traditional investors look at Return on Investment (ROI) in a pure financial sense. They only put money in if they expect to get more money out in the end. On the other end of the spectrum, HBR looks at charitable donors as another kind of investor. Charitable “investors” seek ROI in terms of pure social impact. They put money in expecting to make a difference in the problem that the organization addresses. It’s nice to get free money, but charitable funding is hard to forecast and competition is steep to win donors’ dollars.

When seeking traditional investment funding, social enterprises face insurmountable challenges when trying to compete against other enterprises, since their ability to promise financial returns is hampered by selling to the poor or increasing costs in order to benefit the cause (environment, health, education). With financial restructuring, new approaches offer a mixture of financial and impact-based ROI to help social enterprises appeal to traditional investors. For a nice summary of those blended financial investment models, I point you to the HBR article, which delves into the financial offerings much more rigorously.

Demand Evidence of ROI

Charitable investors are willing to take a -100% ROI (completely ludicrous for a traditional investment) in order to see social ROI. However, social ROI varies wildly from donation to donation, and it is only by the grace of donors’ emotion-induced investment blindness that most charities continue to receive funding.

To make smarter charitable investments, donors should seek organizations that demonstrate visible accountability for the aid they receive. The more granularly the organization can demonstrate ROI, the better.
For example, many non-profits publish an annual report stating how their funds were used and what they delivered using the aggregate resources available to them. However, it is hard for individual donors to see directly how their donation contributed to the impact, or to know whether their donation has as much impact as they were expecting. With that knowledge, donors could adjust their investments to ensure they are making the impact they seek.

If a favorite organization does not report ROI today, you can exhort that organization to start publishing ROI or risk losing your support. To see two examples of organizations that publish excellent ROI reporting to their donors, subscribe to this blog to get an alert when Part 2 of this series is posted.

Quantifying Social ROI

Now, philanthropic investors can evaluate their investments’ performance according to a double bottom line: financial and social. Similar to the Generally Accepted Accounting Principles (GAAP) for financial accounting, the Global Impact Investing Network has set up a standardized set of metrics for quantifying ROI in terms of social impact. This set of metrics, published in the Impact Reporting and Investment Standards (IRIS), is used by the GIIN members Rockefeller Foundation and Acumen Fund to evaluate their investment performance.

As an individual, I won’t likely have access to the information needed to evaluate the IRIS accounting for the organizations I donate to, but hopefully institutional investors will encourage social enterprises to proactively report their social ROI so that it is more apparent to individual donors. Until then, I will simply have to manage my “charitable investment fund” according to the information that organizations provide today…which means in 2012, I will definitely be shifting my investment proportions more heavily toward those that demonstrate a clear evidence of ROI for the dollars I give.