Case studies in funding innovation: Diffusing innovation has been added to your bookmarks.
Rather than funding individual “social impact bonds” (a new approach for financing social service delivery), the Rockefeller Foundation chose to help build a coordinated ecosystem that could diffuse the innovation across the United States.
Innovation has long been an essential part of philanthropy. But the process of searching for and supporting new approaches can be messy. The reality is that the path from idea to impact is often long, winding, and unpredictable, and there is no simple, step-by-step methodology for finding and funding new ideas.
That doesn’t mean, however, that philanthropic funders can’t be intentional about the approaches they use to seed and scale social innovation. In our 2014 Stanford Social Innovation Review (SSIR) article “The re-emerging art of funding innovation,”(1) we highlight the ways that the processes, strategies, and structures required to deliberately seek out and support early-stage, breakthrough ideas can be quite different from those used in more traditional grantmaking.
To further illustrate what it really takes to fund innovation in practice, we have developed five case studies that aim to capture the realities of the innovation funding process. Each looks at the process of supporting innovation from a different angle:
None of these cases alone tells the whole story of what funding innovation looks like; they explore a range of approaches that emphasize very different aspects of the process. But we believe that the collective set of case studies begin to paint a well-rounded picture of many of the processes and approaches that innovation funders can use to nurture and scale new ideas with transformative potential.
It’s important to recognize that these stories are not about the innovations themselves. They don’t explore whether Kiva should actually be considered a truly game-changing financial innovation, or whether the Gates Foundation’s Grand Challenges program should have hit a “home run” already after 10 years of operation. Those are questions for another time and place.
But each of the examples described in the cases is showing important signs of promise, and because creative funders were willing to embrace a different way of working, the innovations have been able to grow from the seeds of ideas to full-fledged experiments. It’s still too early to answer whether they will ultimately prove to be transformative—but it’s clear that if the funders involved had been wedded to more traditional grantmaking approaches, we might not even be able to ask the question.
The innovation processes described in the cases here are inherently complex, full of stops and starts, iterations, and failures. And one of the clearest takeaways looking across the stories is that there is simply no straightforward recipe for funding breakthrough ideas. But the cases do help to illustrate an emerging set of “innovation funding principles” that can allow funders to better identify and support early-stage, high-risk, high-reward projects:
Perhaps unsurprisingly, these principles mirror many of the key elements that were discussed in our 2014 SSIR article related to the sourcing, selecting, supporting, measuring, and scaling of innovation. As we explained in that piece, innovation funding shouldn’t be seen as an alternative to, or replacement for, strategic philanthropy; funding innovation is actually an integral part of good, strategic philanthropy. And we believe that embracing these innovation funding principles can help with virtually all aspects of a funder’s grantmaking.
For many funders though, taking risks on high-potential projects won’t be necessary or appropriate for all of their work. Instead, the principles are better applied to just a subset of their giving activities. And much as financial investors try to build a diversified portfolio—placing the majority of their assets in investments with safe and steady returns, but using a smaller percentage for higher-risk opportunities with the potential to produce outsized rewards—funders, too, should consider using a portion of their resources to support innovation alongside their investments in more consistent and proven approaches.
Eric Schmidt, the former CEO of Google, used to describe what he referred to as his 70/20/10 rule: 70 percent of management’s effort should be dedicated to core business tasks, 20 percent should be focused on projects related to or adjacent to that core, and 10 percent should be dedicated to unrelated but high-potential new businesses.(5) Using this type of portfolio approach allowed Google to focus the majority of its resources on proven strategies that formed the heart of its business while ensuring that it wasn’t missing out on important new opportunities and impact.
For funders, 70/20/10 may not be the right ratio. Each foundation and donor will need to think about its own unique risk-reward profile. But imagine the potential impact if all funders dedicated 10 percent of their giving to experiments that may have a high likelihood of failure but that, if they succeed, could transform a critical system. With so many more ideas being supported, if 1 in 10, or even 1 in 100, of the innovations could succeed, it could change the world.
We hope you enjoy the story of innovation funding that follows, and we hope that it illuminates some of the ways that your organization might embrace supporting breakthrough ideas as part of your funding portfolio in the future.
(1.) Gabriel Kasper and Justin Marcoux, “The re-emerging art of funding innovation,” Stanford Social Innovation Review, spring 2014, http://www.ssireview.org/articles/entry/the_re_emerging_art_of_funding_innovation.
(2.) For more information on this topic, see Gabriel Kasper and Justin Marcoux, “How to find breakthrough ideas,” forthcoming as a blog post in Stanford Social Innovation Review.
(3.) Kasper and Marcoux, “The re-emerging art of funding innovation.”
(5.) CNN Money, “The 70 percent solution,” December 1, 2005, http://money.cnn.com/magazines/business2/business2_archive/2005/12/01/8364616.
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Just five years ago, social impact bonds (SIBs) were no more than a blip on the social change radar. The first SIB was launched in 2010 to fight criminal recidivism in Peterborough, England, a city of under 200,000 people, about 50 miles north of London.1 The approach was promising but still untested: allowing private investors to pay the upfront cost of providing needed social services, with the government repaying their investment only if measurable impact was achieved.
Few could imagine how quickly the excitement from this first SIB would spread. By 2014, there were a total of 25 SIBs worldwide, along with more than 100 additional proposals under formal consideration.2 In the United States, the SIB market has grown to nearly $50 million, the largest in the world, with four active SIBs spread from Massachusetts to Utah, and the approach is now being embraced by governments at the state, federal, and local levels.3 Seventeen states have taken steps to explore SIBs, and the US Congress is considering the bipartisan Social Impact Bond Act, which would allocate an additional $300 million to SIBs.4
But how has this innovation in social finance spread so quickly?
While many people and organizations have contributed to the advancement of SIBs over the last few years, a critical ingredient in their growth has been the coordinated investments of the Rockefeller Foundation and its dedicated social innovation team. The foundation helped the spread of SIBs by strengthening key parts of the “enabling ecosystem”—creating the infrastructure and supports required to facilitate adoption of the new approach and building critical capacity in partners across geographies and sectors.
And although it is still far too early to know whether SIBs will ultimately prove transformative to our systems for financing social service delivery, the story of the Rockefeller Foundation’s approach to funding SIBs can nevertheless provide many valuable lessons for anyone who wants to better understand what it takes to help social innovation diffuse and spread.
In 2007, the British government was looking for new, more effective ways to fund social programs. Around the same time, Arthur Wood, then the global head of social finance services at Ashoka, was experimenting with the structure for a “contingent revenue bond” as a way to build capital-intensive projects in the developing world that would allow philanthropic funders to repay private developers if their projects delivered measureable social benefit. Social Finance UK—a British nonprofit organization that seeks out new approaches to solving entrenched social problems—and others began to adapt and build on Wood’s ideas about raising early capital from investors that could later be repaid by other sources. And in 2008, a short paper by the Young Foundation on the subject coined the term “social impact bond.”5
According to Social Finance (the American sister organization to Social Finance UK), “A Social Impact Bond is an innovative financing mechanism designed to raise private-sector capital to expand effective social service programs. SIBs are a way to finance pay-for-success contracts, which allow government to pay only for results. If a program funded by SIBs achieves successful outcomes, which are defined and agreed upon in advance by all parties to the contract, government repays investors their principal plus a rate of return based on the program’s success. If outcomes are not achieved, on the other hand, government is not obligated to repay investors.”6 A core element of an SIB is the government’s ability to “pay for success,” a blanket phrase used to describe SIBs as well as other governmental performance-based contracts.
Criminal justice was a promising first test for the new financing structure—investors could fund recidivism-prevention strategies and measure outcomes, and the government saved money if fewer released prisoners returned to jail. Social Finance UK secured investors that supplied £5 million to fund the interventions of several social service providers to support prisoners (and their families) at Her Majesty’s Prison Peterborough. The UK Ministry of Justice and the Big Lottery Fund, a quasi-governmental organization that grants revenue from UK lottery programs back to the community, agreed to pay principal and interest back to investors if recidivism rates fell. All told, investors could make an annualized return of about 13 percent if the SIB was successful, or they could lose their money if it wasn’t.7
As an early supporter of Social Finance UK, the Rockefeller Foundation was one of the only American foundations to make a program-related investment in the Peterborough SIB pilot. And as the concept gained traction, it became increasingly clear to the innovation team at the foundation that the SIB mechanism would likely be transported back to the United States—it wasn’t a question of “if,” but rather of “when” and “how.”
Within the Rockefeller Foundation, there is a small, specialized innovation team that focuses specifically on how the foundation can be true to its centennial anniversary slogan of supporting “innovation for the next 100 years.” In addition to researching and sharing social innovation methodologies, building the innovation skills of social sector leaders, linking innovators across sectors, the innovation unit is also tasked with “replicating demonstrations of successful innovation systems.”8
SIBs represented an ideal opportunity for playing this demonstration role, while also complementing the foundation’s ongoing support for the development of the impact-investing industry, since SIB investors supply initial capital to produce both financial and social returns if an intervention proves successful.
For the Rockefeller team, the risks of not getting involved in the expansion of SIBs into the United States were unmistakable. According to early strategy documents from the foundation, “Poorly conceived and executed pilot projects threaten the long-term potential of this innovation. In the worst case, early failures could stunt or altogether kill it off.” The costs of implementing individual SIB pilots badly were simply too high.
The Rockefeller innovation team also worried that SIBs could fall short of their potential if they got pigeonholed into solving only certain types of problems. While SIBs are not a panacea, they can span a variety of topics, ranging from human services to pollution abatement to health care, to name just a few. As the foundation thought about helping SIBs spread, it realized that creating one or two discrete SIB deals wouldn’t be enough. The American pilots needed to be designed with scale in mind: They had to be tested across geographies and issue areas, and to resonate with a variety of political, philanthropic, and financial leaders.
But the Rockefeller Foundation had less than $10 million to spend on the effort over a period of three years—maybe enough for a single SIB deal. Rather than doing one experiment and hoping the idea would naturally scale, the foundation instead chose to build an ecosystem of innovation that could help a wide range of SIB experiments to spread more broadly. To borrow an analogy from botany: Instead of growing an individual “plant,” the foundation decided to invest in building a “greenhouse” that can help many plants thrive.
To help build the nascent SIB ecosystem, Rockefeller made investments in strengthening four key parts of the system where it felt its funding could have the most impact:
Because governments are the ultimate payers for successful SIBs, getting early support from state, local, and federal government officials was a crucial first step. But the SIB concept was so new and required such drastically different procurement and contracting that government officials were hesitant to get involved. Interest was brewing, but potential early adopters needed additional support to take the plunge.
In early 2011, Jeffrey Liebman, the Malcolm Wiener Professor of Public Policy at the Harvard Kennedy School, began working with the Commonwealth of Massachusetts to help craft what would later become the largest SIB in the United States, at $18 million, focused on reducing prison recidivism and improving economic opportunity for former prisoners.9
Impressed by the way Liebman was able to help the state government adopt the new concept, and eager to bring an academic level of rigor to the cost-benefit analyses and evaluation methodologies used in the first US transactions, Kippy Joseph, associate director of innovation at the Rockefeller Foundation, began to support his work. With seed funding from the foundation, Liebman founded the Kennedy School’s Social Impact Bond Technical Assistance Lab (SIB Lab) to provide additional assistance to governments interested in SIBs on issues such as choosing social interventions, budgeting, contracting, and measuring results.
After the SIB Lab demonstrated initial successes working with governments, Joseph came back to Liebman with an even larger opportunity, proposing funding for four more technical assistance projects, but with a catch: The SIB Lab would need to run a national competition to find the best proposals. It was a risk. If very few governments applied, the SIB movement would look like a bust. If a large number applied, the SIB Lab would be forced to turn down eager participants. Eventually Liebman agreed, and the initial competition garnered 28 applications from cities and states across the country, demonstrating the strong demand in SIBs. And the Laura and John Arnold Foundation, strong supporters of SIBs and early investors in the Massachusetts deal, along with the Dunham Fund, an Illinois-based foundation, stepped up to provide additional funding so that the SIB Lab could serve a total of 10 of the 28 applicants.
In the end, the contest served as an important forcing mechanism for states and cities that were interested in SIBs but not quite ready to jump in. As Liebman recalls, “There were civil servants around the country who were interested in SIBs but didn’t have a way to get their governments to move forward. This contest allowed them to ask their bosses, ‘Can we apply for Harvard’s help?’”10 The contest crystalized emerging momentum into real plans of action.
Intermediaries play a critical function in SIB partnerships by aligning the interests of all stakeholders. As Tracy Palandjian, CEO of the US-based Social Finance, describes, “Our role is to design and execute the framework for the partnership: to structure, negotiate, and raise capital for the contract; to design the program with the service provider; and to provide ongoing investor relations and performance management. Our job is to create and sustain the partnership over the project life to ensure that shared goals are met, and, most importantly, that outcomes are achieved for people most in need.”11
Indeed, intermediaries such as Social Finance and Third Sector Capital Partners are often the “glue” that holds investors, government officials, nonprofit service providers, and evaluators together in the midst of the complex transactions required to make an SIB happen. The Peterborough SIB, for example, had a total of six contracts among all the different parties.12 And since there isn’t yet a template for these types of multifaceted deals, intermediary organizations are required to play a central role in brokering, managing, and maintaining the agreements.
In addition to helping with individual deals, intermediaries can also be a driver for innovation in the field. While many early SIBs have focused on recidivism, Social Finance is actively working to explore SIBs for issue areas such as child and maternal health, early childhood education, workforce development, and chronic illness management, among others. In this capacity, intermediaries are helping stretch the model into new spaces.
Recognizing this value, the Rockefeller Foundation has made intermediaries a core part of its strategy. Along with several other institutions, it helped to seed the American branch of Social Finance and provided key operating support to other intermediaries such as Third Sector Capital Partners.
As the Rockefeller Foundation was developing its strategy, it gave considerable thought to the best sources of capital for SIB investments. One of the questions that the team struggled with was whether SIBs would increase the pool of capital available to address social issues or simply shift existing money around.
While foundation capital has been critical to validating the concept of SIBs, it is somewhat less attractive as a long-term source because of the opportunity cost of using grant- or program-related investment capital for SIBs instead of for other projects. “It can be like a shell game,” notes Joseph, referring to the street game where a ball is hidden under one of three shells that are quickly shuffled around.13 If foundations just shuffle capital away from other projects to fund SIBs, the new financing mechanism may not actually increase the net amount of funds available for addressing social issues.
Similarly, many banks are bound by the Community Reinvestment Act (CRA) to make investments that serve low-income community members. Since SIBs can qualify as CRA investments because they typically serve low-income residents, early deals have proven to be popular choices for banks looking to fulfill their obligations. But banks making CRA investments face the same concerns as foundations: Shifting assets away from other worthy investments in favor of SIBs may not actually result in a net increase in the capital available for projects serving vulnerable residents.
Concerns like these can be allayed if SIBs are used to deliberately broaden the pool of social investors, as the New York State SIB did in late 2013. The $13.5 million deal, which was organized by Social Finance with technical assistance from the SIB Lab, engages the Center for Employment Opportunities to help former prisoners find employment and thereby reduce recidivism.14
When Bank of America Merrill Lynch first heard about the proposed SIB from Social Finance, the firm was intrigued. “We’ve seen a growing interest in impact investing among our private wealth clients,” notes Dash Boyer-Olson, director and senior product specialist.15 Bank of America Merrill Lynch offered the SIB to certain prequalified, high-net-worth clients, allowing a number of individual impact investors and foundations to take part in the innovative new financing mechanism and increasing the pool of capital available to fund the initiative.
Part of what helped private clients invest was the deployment of a guarantee fund that the Rockefeller Foundation created with Social Finance. The $1.32 million guarantee (amounting to about 10 percent of the project) provided important downside protection to investors. Beyond this formal safeguard, the foundation’s brand also helped investors feel more at ease.16
In addition to its work with governments, intermediaries, and investors, the Rockefeller Foundation also paid special attention to enabling functions that can sometimes fall through the cracks, such as systems thinking, communications, policy research, and network weaving.
With a limited budget, the foundation was eager to find key leverage points in the system—areas where its support could have an outsized impact. So it relied on scenario planning (a technique for systematically exploring what the different futures of SIBs might look like and using those future scenarios to inform foundation strategy) and system mapping (a way of looking at all of the players and interactions in the SIB ecosystem and deciding where intervention would be the most impactful). The results of these analyses ended up helping the foundation realize that supporting early adopters—governments, intermediaries, and investors—would be a better option than charging ahead on its own. These investments in understanding the larger system were critical to guiding the efforts of both Rockefeller and its partners over time. “It felt like a luxury at the time to step back and think deeply about the entire ecosystem,” says Joseph, “but foundations are one of the few organizations that can afford to do it.”17
The Rockefeller Foundation also focused heavily on communications as part of its strategy. Recognizing from its scenario-planning and system-mapping efforts that support from government would be critical to SIB success, the foundation funded the Center for American Progress to create research and educational materials highlighting the promise of SIBs. “If SIBs became politicized, they may never have gotten off the ground,” noted Joseph. So the center deliberately developed materials and conducted outreach aimed at launching a bipartisan dialogue among policymakers and investors.
The Rockefeller Foundation also played a key role in connecting people and organizations across the ecosystem. In this network-weaving role, the foundation was able to link those working on SIBs across sectors and regions, coordinate strategies across organizations, and incorporate their voices into broader communications. The foundation worked with the Nonprofit Finance Fund to create a “learning hub” for SIBs so that the network could learn together and build a shared base of knowledge.
This coordinated ecosystem of support has provided fertile ground for SIBs to grow. While they remain unproven, SIBs now have solid traction and are being explored and tested by a wide range of governments, intermediaries, and investors. Going forward, key questions still remain, and critics raise a number of important concerns.18 For instance, critics question what a fair rate of return is for investors that profit from solving public problems, what role foundations should play in guaranteeing their investments, and what role government should play in delivering solutions to public problems. Questions like these remain heavy intellectual, if not moral, decisions over the future of SIBs.
SIBs are also facing more pragmatic challenges as they expand: They continue to be weighed down by complex deal terms and contracting that can take years to negotiate. While it may be possible to create a more standard template for SIBs, today’s deals are still too nascent to have an “off-the-shelf” solution. Additionally, a majority of the interest in SIBs to date has been focused on prison recidivism because it can be easy to measure, and costs to the government are relatively clear (for example, the cost of jailing someone). Whether SIBs can be fully implemented in areas where social outcomes take longer to accrue or are more difficult to measure remains to be seen.
These types of questions will be important for the next level of SIB development, but it is important to note that Rockefeller’s early work with SIBs has already affirmatively answered an important existential question: Is this concept worth exploring?
For funders interested in expanding new approaches like SIBs, Rockefeller’s approach to building an ecosystem of innovation around SIBs may serve as a useful guide. In particular, the foundation’s efforts help us understand the different assets that a foundation can provide to help scale a new innovation; how funders can make smart choices about which strategies to pursue; how innovations diffuse in a system; and the way networks can be used to help innovation spread.
Provide more than money. Funding was a critical element of the Rockefeller Foundation’s support for the growth of SIBs, but it was just one of the resources that the foundation brought to bear to help spread the innovation around the country and around the world.
The foundation played a critical role as a convener and network weaver within the ecosystem, reaching across sectors to build a broad coalition of support that included state and federal policymakers, local civil servants, investors, and intermediaries. It served as a public educator, conducting outreach and crafting communications that worked across multiple stakeholder groups, and helped shape public perceptions and drive interest in SIBs. And the foundation served as a system troubleshooter, identifying potential barriers to participation in the SIB process and acting to address them. When it became clear that governments needed help to participate in the bonds, the foundation partnered with the SIB Lab to build capacity. When investors needed additional assurance to be comfortable with the SIB deals, the foundation used its brand and provided a loan guarantee to encourage and “derisk” participation.
By viewing its role as more than just a grantmaker, the Rockefeller Foundation was able to adjust to emerging challenges and strengthen many parts of the SIB ecosystem, which in turn has allowed the bonds to rapidly move from an untested idea to broader implementation in just a few short years.
Look for the path of greatest leverage. With the benefit of hindsight, the story of the Rockefeller Foundation’s role in nurturing the SIB ecosystem seems neatly laid out and logical. But during the process, the foundation actually wrestled with a number of complex strategy choices.
For instance, it wondered whether it should use its funds to construct one strong SIB pilot, but it ruled out that choice because one pilot wouldn’t be enough to help the concept spread. The foundation also explored whether it should build momentum for SIBs by starting with issues areas—health, education, or criminal justice—so that it could more concretely target and recruit specific government agencies, investors, and foundations that had more focused agendas. However, it ultimately decided that it didn’t want to see SIBs become pigeonholed. And the foundation even considered trying to raise an SIB “general fund” from other foundations to participate in early deals and help cover the costs of structuring SIBs, but it abandoned the idea when it received feedback that funders only wanted to consider individual deals.
Part of creating a good strategy is figuring out what to say “no” to. And for funders looking across an entire ecosystem, it can be easy to overextend. But by mapping the system, understanding the key inflection points, and pivoting away from ideas that don’t gain traction, funders can make the best use of their limited resources.
Consider how innovations spread. Just because a better solution exists does not necessarily mean that it will be adopted. The US QWERTY keyboard, for example, was designed in the late 1800s to slow typists down and prevent jams on early typewriters when two nearby letters were struck in rapid succession and the metal pins would get entangled. In the 1930s, an objectively better arrangement was developed that put vowels and commonly used letters directly under a typist’s fingers. But the inefficient QWERTY keyboard still remains today, even on touchscreen phones and tablets with no physical keys.19
Innovators (and their funders) can easily get excited by a new idea and quickly imagine a vision of an “end game” where innovations are adopted and lives are improved. Indeed, there is already much hype about what the end game for SIBs could look like—a world where government spending is more efficient, and where private investors can generate social and financial returns by addressing pressing social problems. However, in rushing toward visions of an end game, it is important to consider all the required steps in between where you are and where you want to end up. As Bhaskar Chakravorti, author of The Slow Pace of Fast Change, notes, dividing up the “middle game” is a critical but often overlooked element of bringing innovations to scale.20
The middle game is often difficult to map and understand because it involves a system of actors that may or may not have incentives to change. The Rockefeller Foundation considered the SIB middle game as it supported efforts that would rally government officials and build their capacity; built up intermediaries who could handle the complex contracting, negotiations, and measurement currently required of SIBs; helped bring in new kinds of investors; and worked to better connect all the groups. For funders looking to diffuse innovation in a system, the key questions are, “Who needs to change?” “What do they need to change?” “Why would they change?” and “What can you do to help?”
Harness network effects when diffusing an innovation. When helping an innovation scale, funders should consider how networks can help or inhibit ideas from spreading. As a foundation, Rockefeller was in a unique position to look across the entirety of the system and help make connections. In this role, the foundation was able to bring together a group of independent actors—governments, intermediaries, and investors—as early adopters of SIBs. And by simultaneously supporting all of these early adopters and increasing their numbers, the foundation was able to capitalize on important network effects.
Network effects occur when the value of a product or network increases as more people join: A lone fax machine isn’t worth much unless there are others to connect to it, and the larger an online social network becomes, the greater its usefulness to each of its members. Within the SIB ecosystem, governments are more likely to consider SIBs if there is strong investor demand; investors will likely be more interested if governments are proposing a range of deals; and intermediaries are more likely to join if they can advise a larger number of clients. Thus, as the SIB ecosystem becomes more robust, it also becomes more valuable to each of the stakeholders. By working to grow each of these segments at the same time, the Rockefeller team was able to create powerful network effects that have generated a virtuous circle that will continue to build and strengthen the field over time.