Have We Found a New Way to Finance the Best in Social Innovation?

By all appearances it looks like we’ve taken the next big step in developing Social Impact Bonds (SIBs) in the U.S. News broke Wednesday about two deals in Massachusetts and yesterday about one in New York City. In fact, regarding the latter announcement, I heard it at about 8:30 a.m. on my car radio. I think it’s pretty exciting that this innovative mechanism for financing effective social services has made it into mainstream news radio and was reported during a brief 10-minute segment on WCBS 880.

The Social Impact Exchange (the signature initiative of the Growth Philanthropy Network on whose board of directors I sit) has been tracking SIBs since people in the nonprofit sector first began talking about them several years ago. Our Market Development Working Group is devoted to supporting their development as one of several innovative strategies for enlisting private sector involvement to solve some of our most intractable social problems.

There were also separate sessions at each of our last two conferences about SIBs. The idea is that the private sector makes an investment and is entitled to a return if the program is successful, but this is really about an ‘impact investment’ where people are looking to make a social investment as well as a possible return. I talked about this in my interview with Nonprofit Quarterly last November.

At the Exchange we are also quite devoted to building a marketplace to drive capital to high-performing nonprofits, and consequently to ‘deals’ that bring the government, private and nonprofit sectors together. The SIB activity in Boston and New York City represents a marketplace-based solution that incorporates, rather creatively I think, collaborative funding. New York’s use of a loan guarantee is not a new concept, especially for foundation grant makers, but it is in this context of a SIB where the private sector is involved. And incorporating nonprofits as intermediaries – Third Sector in Boston and MDRC in New York City – is a smart way to leverage the knowledge, experience and credibility of nonprofit entities that are well regarded by all the parties involved.

While it’s way too early to measure the overall success of the Peterborough program in the U.K. — structured by Social Finance, and the first and only SIB financing completed to date — it’s clear that it produced sufficient excitement to spark transactions in Boston and New York City. Eyes are on them to demonstrate, in this era of great need but very scarce resources, that we can take some risks and come together in an innovative way to simultaneously reduce government cost and make critically needed social progress.

Simon Jawitz is a board member of the Growth Philanthropy Network, and an adjunct faculty member at the Zarb Business School at Hofstra University.