Funders Participate in the Challenge Of Building a Growth Capital Marketplace for Scale – and are Right on Schedule!

Cynthia Massarsky, Social Impact Exchange at Growth Philanthropy Network
Posted: May 6, 2014

Developing a growth capital marketplace for nonprofit scaling initiatives requires time and a lot of hard work. With the help of numerous grantmakers who collectively sit on the Exchange’s Working Groups, together we are building a new system and infrastructure to facilitate a social investment process that easily and efficiently taps into and aggregates the collective resources available to fully finance top-performing nonprofits that are scaling.

Since launching the Social Impact Exchange just a few years ago, we’ve learned a lot about what it takes to engage funders, test key elements of the process, and make adjustments as needed to institutionalize an efficient, transparent, and widely accepted mechanism for co-investment. To be sure, the creation of such a system is challenging and a task that is both supportive and disruptive to the usual ways of conducting business – whether for a foundation, a corporate benefit program, a wealth management advisory service, or other social investors. It involves new rules for the way the philanthropy operates.

Reflecting on our collective successes and challenges, we’ve put forth five distinct elements that lay the groundwork for an effective growth capital marketplace – and to-date the Exchange’s Working Groups have taken exciting and significant steps in implementing them:

1. Common Investment Standards and Processes – over the last 3 years, members of the Exchange’s Working Groups worked collaboratively to establish common standards for evaluation, due diligence, and materials requests. The Working Groups also set up a common investment approval process for growth funding, based on business plans and threshold investment levels.

2. Community and Field-Building Activities – an annual National Conference, three funding platforms, a Business Plan Competition, webinars, and relationships with more than 25 funder networks are educating funders, sharing knowledge and enabling dialogue, communicating the value of how scaling impact fits with grantmaker strategies, and providing tangible organizations with opportunities for funders to engage.

3. High Quality Deal Flow – through the Working Groups, nearly 50 evidence-based initiatives were nominated that meet initial scale readiness criteria. Eight investments were selected to the Scaling Marketplace and are currently being shared for co-funding, with 10-15 additional investments in progress. In addition, the Exchange’s S&I 100 investment platform has identified 100+ scale-worthy, scale-ready organizations that have been nominated from across the field.

4. Lead Funder Collaboratives – through Working Groups in education and health, lead funders representing dozens of foundations set their own governance and investment processes, conducted due diligence, and attend regular meetings to nominate and co-fund opportunities. To-date, they have collectively amassed $28 million since nominating 8 organizations for scale up (25%-33% of each scaling investment).

5. Large Scale Distribution – building the fields’ capacity to distribute scaling investments to a critical mass of interested funders – analogous to the for-profit sector’s well established system of vetting and financing promising companies – the Exchange built 3 electronic platforms, including the Scaling Marketplace, S&I 100, and SIF Registry, and established relationships with numerous affinity groups that are poised to distribute grantmaking opportunities to their constituents.

 

What’s in it for foundations and other funders?

The Scaling Marketplace provides funders with opportunities to scale up their own top initiatives more easily. By participating in a collaborative system, foundations can leverage capital from each other and from wider networks of funders. They also benefit from shared due diligence, exposure to new, innovative programs they might not be aware of, and joint learning. A large, vibrant marketplace also gives funders the benefit of ongoing, sustainable funding for their grantees, which allows them to exit after contributing early stage capital. In addition, locally-based funders have more efficient access to high impact programs for their communities, and will benefit from the learning that comes from the co-funding process. Foundations with small staffs and family donors, in particular, have the benefit of leveraging the due diligence and experience of larger grantmakers. They will more easily be able to identify programs that are now ready for dissemination to their communities with lead support from a premier group of foundations.

As for lessons learned thus far from participating funders, the co-creation and opt-in nature of the system appear most appealing. Co-creation means that funders drive the process themselves – by nominating, selecting, funding, and referring opportunities to one another – with the Exchange handling all the administrative tasks. And rather than committing to a pooled fund that affords little grantmaker discretion, opt-in means that each funder decides about co-financing on a case-by-case, organization-by-organization basis. In addition, this co-funding system means that grantmakers are not pitched. They make a choice to join a community where they see the value of the overall strategy and invite proposals that fit their funding areas and geographic focus.

And the very exciting news is that, so far, all this appears to be working quite well! See related article, From the Experts, in this issue of the Scaling Report to learn what Kenneth H. Zimmerman, Director of U.S. Programs at the Open Society Foundations, has to say about what philanthropy can do to help more people in need, the key elements for successful collaboration, and the value of networks as a resource to help finance scale.