The Problem
The nonprofit sector has experienced tremendous growth in recent years as well as tremendous innovation in how it pursues solving critical social problems. A new generation of social sector leaders has adopted more strategic thinking, disciplined management, and a focus on data-driven decision making.
However, the nonprofit sector faces significant challenges in adopting performance measurement practices. Unlike the private sector, the social sector lacks established performance indicators and benchmarks, so impact data are notoriously difficult and expensive to collect and measure. Nonprofits generally do not have the staff, time, or expertise to systematically collect, report, and use data to improve their performance.
Social impact investors face a similar dilemma: they want to maximize the impact of their investments, but they do not have the information they need to make educated decisions.
The Information Gap
Social impact investors want rigorous and reliable information about nonprofit performance to make sound investment choices. Unfortunately, they face two major information challenges:
Measurement Challenges
Quality information about nonprofit performance is scarce. The data available are often fragmentary and unsystematic and lack standardized outcome measures.
In the article “Investing in Society” in the Stanford Social Innovation Review, authors Meehan, Kilmer and O’Flanagan state, “In the social capital market…social returns are difficult to quantify and measure; there are no standard measures of performance success (the art and science of outcomes and performance measurement is just beginning to emerge).1 Investment decisions are often based on things like institutional loyalty or belief in a cause, rather than financial and organizational performance and potential social impact. The result is that investors give, whether or not the nonprofits produce social value.”
Even within a social problem “subsector,” or an approach to a social issue, few accepted standards of what to measure exist. As a result, organizations cannot be compared or evaluated by using the same parameters or applying the same standards.
Access Challenges
Social impact investors encounter tremendous difficulty accessing useful information about social issues and organizations working on those issues. Performance-based information is hard to find, understand, and use.
Government agencies have already studied many social issues. In addition, grant-making organizations have studied and evaluated social sector organizations for internal purposes as part of their application and reporting process. Yet while some of that information is publicly available, little of it is utilized. Often the information is dense, or does not lend itself to actionable decisions.
Private Sector Market Analogy
1970s Technology Industry: Money Looking to Get Smart
We’ve seen this before—the investment information gap in the social sector today mirrors a similar gap during the rise of the technology market in the late 1970s. At that time, significant capital was available to invest in start-up companies; however, investors lacked an understanding of industry trends, “hot” companies, and performance on a comparative level. One of the primary innovations that helped to provide transparency for technology investors was the development of an independent research industry. Reports, conferences, and advice were offered by companies such as Yankee Group, Forrester, and Gartner Research. These research reports provided investors with the necessary insight to take action and make informed investment decisions with confidence, and greatly increased the amount of capital invested in the technology marketplace to build strong companies, create millions of jobs, and generate great wealth.
Opportunity
Similar to the technology sector in the 1970s, the social sector is experiencing enormous growth in both the number of organizations and investments. Now is the time to provide social impact investors with the information and tools they need to make effective and rigorous social impact investment decisions. Writing in the Stanford Social Innovation Review, William Meehan III and Derek Kilmer highlight two factors that contribute to an efficient capital market:
- “analysts provide easy access to information about companies”
- “companies that do well are rewarded while those that do poorly are penalized”2
If a reliable and efficient social capital market that rewards performance is not developed, then billions of current dollars and trillions of dollars invested in nonprofit organizations over the next fifty years will not produce significant social impact. Instead, philanthropic investments will continue to go to traditional recipients, regardless of performance and impact.
Social Impact Research
Root Cause’s Social Impact Research (SIR) aims to bridge the information gap by:
- Collecting, analyzing, and distributing actionable information about social issues and the performance of nonprofit organizations working on those particular social issues;
- Writing Social Impact Research reports in a concise and accessible format, modeled on equity research reports, and focused on the needs of the social impact investor; and
- Developing cross-sector expertise, partnerships, and platforms to move philanthropy toward performance-based giving.
Philanthropic investment needs to be channeled to the nonprofits where it can create the most significant social impact. That means finding and funding organizations with the best performance, not the most activity or effort. Just like private sector equity research and analysis, SIR provides social impact investors—philanthropists who care primarily about results—with the actionable information they need to make smart nonprofit investment choices. We will aggregate, analyze, and disseminates useful and understandable information to help social impact investors find the most effective, efficient, and sustainable organizations.