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Aug 26, 2014

Investing in Social Enterprises Requires Rethinking Philanthropy

As I talk with foundations about investing their capital in social enterprises (often called impact investing), I see that the grant-making process and the investment of assets are often separately managed and have independent objectives.  Impact investing requires blending the two activities into one strategic and decision-making process, a change that often challenges the culture of the foundation.  A recent article in the Stanford Social Innovation Review articulated this very well.

“Impact investing presents something of an existential challenge for foundations.  Convention dictates that investors manage a corpus to maximize risk-adjusted financial returns, in the hopes it will underwrite philanthropic giving for social impact into perpetuity.  By seeking to deliver a blended financial and social return, impact investing forces two culturally distinct practices be simultaneously pursued:  money management and grantmaking….

“But the understanding of how a foundation may interrelate its pursuit of social change with financial return is still limited.  Despite communities of interest arising, such as Mission Investors Exchange and subgroups within the Global Impact Investing Network who site (sic) a handful of recent experiences, many skeptics still believe trade-offs between financial returns and social impact outweigh the opportunities to align them (my emphasis).”

This site offers 12 case studies of successful impact investment programs, of which 7 are headquartered in the US.  They all point to the importance of adapting the foundation’s culture if a social enterprise investment program is to succeed.  They call it “alignment of stakeholders”.  Buy-in by the foundation’s trustees and program staff is essential.  For the W.K. Kellogg Foundation, its program was initiated as a “learning initiative” to provide flexibility to support innovation.  Now it is embedded in the routine investment function.

Indeed, I am reminded of Markle Foundation chair Joel Fleishman’s statement years ago that a foundation should be “the principal pool of society’s social venture capital.”

It is difficult for me to imagine a foundation’s fulfilling that role without having an active impact investing program.

Foundation’s can engage in impact investing on their own; however, the review and due diligence required before making social enterprise investments is a very time-consuming task.  Some foundations have told me that they must review up to one hundred investment requests before finding one they believe is suitable as an impact investment.

One solution is for a foundation to invest in a pooled fund, so that its portfolio benefits from impact investment but it shares the due diligence burden with many other investors.  We believe we have a good model both for creating a larger pool of suitable investments and for bringing capital together to make the investment process easier while diversifying risk.  Go to to learn about our efforts.