Investment Strategy: Key Principles of Funding Impact at Scale
By: Case At Duke
Tags: Hybrid, Scaling Pathways, Social Enterprise, Impact Investment, Funding

Funders should implement key principles to guide how they fund scale, what to fund, and some special considerations related to hybrid organizations and results-based financing. By implementing these key principles, your funding will be more effective and will help accelerate the path to scaled impact.

How to Fund Scale

1. Fund organizational outcomes, not activities.

Organizations need room to pivot, adapt, and innovate around how they deliver impact. Therefore, funders should shift away from project-based modes of financing — where activities are often prescribed and it is difficult for the enterprise to adjust course — to funding the enterprise’s vision, whole business plan, or a set of target outcomes. See examples from WSUP and Living Goods.

“It’s important to have flexibility to do things that funders typically won’t fund. Most funders want to know about direct number of beneficiaries. But if you change a system to benefit everyone, you can’t directly say it is x number of heads.” — Yaver Abidi, Managing Director, WSUP Advisory

2. Fund for multiple years, engage for the long-haul.

Provide multi-year funding (with smooth outflows) where possible, to allow for long-term strategic planning and smoother expenditures. See WSUP example.

3. Make diversification possible.

Decrease the management burden attached to spending your capital, so that the venture maintains capacity to bring in (and manage) additional funders. Collaborate with other funders on diligence, negotiation of terms/outcomes, and reporting/measurement requirements where there is alignment.

4. Don’t expect 100% self-sufficiency on earned income.

Recognize that full operational self-sustainability is not always the right target for ventures seeking to change systems. Encourage ventures to identify and define a metric for sustainability or value of impact per dollar that allows them to drive toward best value impact instead. Help enterprises understand the information you need to trust their metric. See examples from VisionSpring, Root Capital, and One Acre Fund, and ways in which social enterprises are rethinking the value for money narrative.

5. Be the insulation from earned revenue fluctuations.

Even ventures with strong earned income streams are likely to suffer shocks to this revenue given the inherently riskier and less predictable environments in which they work — particularly when they test new markets or approaches to achieve more efficient impact. Provide insulation for these fluctuations by providing patient, risk-tolerant capital and encouraging learning and innovation around the “shocks.” See how this effort has been critical for One Acre Fund to weather shocks.

6. Remove time pressure on talent.

Appreciate the importance of the team that drives scale and that hiring, training, and managing talent is an investment that takes time. Understand that “time to competency” is a real thing. Even once a new hire is on board, the individual will not immediately begin adding the value ultimately expected. Also recognize the consequences of “hiring fast” — expensive mis-hires, lack of investment in identifying and developing local staff, and overlooking diversity and equity — and allow your investees the time to strategically build a team to drive scale.

7. Recognize and support the costs of collaboration.

Engaging and collaborating with partners, including government, is a key path to scaled impact for many organizations. Yet there is an underappreciated cost and time required for developing and managing those partnerships. Enterprises emphasized the need for time and resources to cultivate and maximize collaborative opportunities — which often take place over long periods of time (i.e., beyond the life of any one funded “project”). Consider how to help ensure that the enterprise has the resources to maintain those important relationships, even beyond the period of your funding.

What to Fund

1. Fund pilots and testing at all stages.

Successful scaling organizations continue to pilot-test efficiencies and new ways of achieving impact, but require funding to do so. Encourage and support their testing and risk-taking. See example from One Acre Fund.

2. Help address larger market constraints.

Invest in market-level changes (regulations, infrastructure) in support of key solutions. For example, a venture in USAID’s Scaling Off-Grid Energy Grand Challenge faced regulatory obstacles in processing mobile payments. To help address this issue, USAID engaged consultants to work with government to update the digital financial policy regulations to allow for broader use of mobile payments.

3. Invest in talent — including the hidden costs.

If human capital is the engine that drives performance (and, ultimately, scaled impact), then funders need to carefully consider how they can invest in building and maintaining this engine:

Invest in salaries, benefits, and incentives.

Invest in hiring ahead (proactively investing in staff whose skills will be able to get enterprises to, and sustain them at, the next phase of growth).

Fund talent development such as training, attendance at conferences, seconding staff to other organizations to learn, and more.

Invest in the tools — and the people and time to leverage those tools — needed to maintain connectedness of dispersed and/or growing teams.

Invest in culture, e.g., funds to hire “people and culture” positions, support team building activities, pay consultants to lead values redefinition exercises, and more.

Invest in proactive retention and resilience practices for key leaders to avoid burnout. The Z. Smith Reynolds Foundation in North Carolina provides sabbatical funding for nonprofit leaders to re-energize and refresh. The Skoll Foundation was a key partner in the Well-Being Project which sought to catalyze “a culture of inner wellbeing for all changemakers” through development of evidence-based programs and convenings.

4. Provide a dedicated source of funding for data platforms.

Without a dedicated infusion of capital for data and technology, many organizations reported that they would not have taken resources away from programs to invest in a data platform. When asked how much they would reasonably spend on a data system, if given a dedicated infusion of capital, 67 percent of survey respondents would spend USD$250,000 or less. Also, consider funding to incentivize collaboration with organizations across a sector to create systems that serve greater field needs.

Special Considerations for Hybrids and RBF

1. Support hybrid structuring processes.

Many organizations use hybrid forms to unlock new types of capital, but require additional resources for the accounting and legal advice necessary to do so. Funders can provide support for that behind-the-scenes process.

“Starting [a hybrid] will not save a struggling organization. Don’t strap an eagle to the back of a turkey in the hope that both will fly.” — Yaver Abidi, Managing Director of WSUP Advisory, on scaling impact and growing earned income through a hybrid structure.

2. Bring different capital to the table.

As ventures adopt hybrid forms, there may be opportunities to fund their work with new types of capital. Know where the tools and resources you are able to provide fit in the capital stack and seek additionality — filling in the gaps where your offering adds value. Existing funders can either bring new capital themselves or act as a connector with other funders, as we saw with WSUP and B Lab.

3. Fund Results-Based Financing design costs.

The design, administrative, contracting, convening, and legal costs of an RBF are often not fully accounted for in government tenders that are based on a dollar value per outcome. Provide grant funding to facilitate RBF planning and execution: this can include baseline studies, legal counsel, and new hiring costs for both service providers and intermediaries.

4. Support outcomes-focused pilots and upgrades to enterprise performance management systems.

Help ventures to understand if RBF is right for them and to put themselves in a strong position before entering an RBF contract by funding outcomes-focused pilots. Once the RBF is in place, help organizations upgrade their performance management systems to more efficiently and effectively troubleshoot and pivot as the RBF project progresses, as a funder did with Educate Girls example.