7 Myths About Social-Impact Investing Keep Grant Makers From a Good Thing

The Mott foundation poured $9.7 million into revitalizing Flint, but it was the grant maker's doggedness and vision that made it work.

A program officer hesitates before approving an emergency grant to a local health clinic, thinking a loan might be a better way to cover delayed government payments.

A foundation board meeting is derailed when a board member wonders why the president is proposing a grant to a job-training program rather than exploring a social-impact bond.

Another trustee thinks the foundation should stop supporting a longstanding grantee because a new benefit corporation says it can expand faster without grants if it can secure investments from the endowment and other for-profit investors.

Welcome to the new world of foundation management. Working at a foundation used to be simpler: Leave the endowment in the hands of a competent fund manager and focus on doing the most good with the 5% of assets you donate to nonprofits each year. Now, with the rise of social-enterprise and impact investing, more foundation leaders are expected to understand a wider range of investment tools and to finance a far wider range of groups. Some have embraced this new role and are encouraging others along this path. However, most foundation leaders are unprepared to navigate the increasingly voluminous and vociferous opinions of both the impact-investing hypers and haters.

I spent four years helping to lead the Rockefeller Foundation’s impact-investing, grant-making, and program-related investment portfolio and co-wrote the first book on impact investing. I’ve spent the past three years leading a community-development financial institution that has been making impact investments for more than 30 years, and I chair the Global Impact Investing Network. I’ve seen a lot of impact-investment deals and have been part of the discussions from every angle.

I remain convinced that impact investing offers substantial promise for foundations to increase their impact and leverage existing resources to meet the challenges of our time. But foundations are going to need to cut through a lot of myths to realize this promise. Here are some of the biggest myths I’m seeing and ways foundations leaders can avoid the pitfalls they create:

Myth: Impact investing invariably means investing in early-stage, for-profit companies. There are inspiring companies with potential to do substantial good that lack investment capital. Impact investors can certainly make a difference by supporting them. But nonprofits deliver the vast majority of services that underpin our social system and will continue to do so for decades, at least. In the U.S., these nonprofits currently generate more than $1.5-trillion in annual revenue.

You can make a real difference to society and make a decent financial return providing a simple loan to a health clinic to expand its facilities or to a local homeless shelter to meet its payroll while waiting for delayed payments on a city contract. These loans are often the shortest line between a foundation’s mission and its ability to have a positive impact through investment.

Myth: It’s your willingness to accept lower returns that makes you special. Foundation impact investors are special, but not for the reason many think. Few projects that impact investors seek to support fail because they cannot raise enough low-cost investment. Of course, if you can offer lower rates, the organizations you invest in can potentially do more good with the money they save. But there are actually a lot of investors ready to provide relatively cheap capital, though only in low-risk deals. Projects wither on the vine because they cannot find investors willing to take on risk.

Foundation impact investors have an outsized impact when they are willing to take the risk no one else will. You can entice more risk-averse investors into deals by providing a loan guarantee, as the Bill & Melinda Gates Foundation did in collaborating with JPMorgan Chase to set up the $100-million Global Health Investment Fund. Or you can help a project get momentum by committing your investment capital first to get projects to the point where more conservative investors can step in. Taking such steps is exactly why foundations exist: They can do what the commercial world can’t or won’t.

Myth: It’s just about the money. Foundations can use community connections, insights, and staying power to attract impact-investment capital. In Flint, Mich., the Charles Stewart Mott Foundation had a clear vision for a major downtown revitalization project and spent years keeping the deal moving forward. This vision and doggedness, as much as the $9.7 million in grant funds the foundation made available to the Uptown Reinvestment Corporation, ultimately catalyzed $32.8 million in total financing that will bring an expanded presence for Michigan State University’s medical school and public-health program, a new farmers market, and mixed- income housing to Flint.

Myth: Impact investments are best when they don’t have anything to do with grant making. The unique tool that foundations have is the ability to make grants. Why toss out that differentiator when making impact investments?

When the Andrew W. Mellon Foundation sought to start an impact-investing program for arts organizations, staff members realized very few of the groups were ready to take on debt. Instead, the foundation established a zero interest revolving-loan fund and enlisted Nonprofit Finance Fund to train grantees on financial management and help offset risk.

The result: Grantees have better financial insights and management practices and access to loans that have helped many focus on their missions instead of worrying about keeping creditors at bay. Some of the most exciting impact investments provide this "complete capital" combination of investment capital and grants that offset risk and subsidize deal development.

Myth: You can predetermine exactly what investment a community needs. It’s a logical response by compassionate impact investors to a crisis or lingering social challenge: We want to set up investment funds to help the communities in need. But good intentions and even a well- researched sense of what communities should want seldom lead to effective impact-investing deals. Instead, they often lead to investment funds that raise a lot of money but fail to make investments because it turns out that potential beneficiaries don’t want what the fund is offering. And when multiple foundations get involved, things can get worse as restrictions and delays pile up. By the time the fund launches, the market has often moved on.

To avoid these pitfalls, start small, learn by doing, and gain confidence by finding fund managers you trust rather than imposing narrow restrictions on ones you don’t.

Myth: The work ends when the deal "closes." In the sometimes-inverted lexicon of finance, "closing" a deal is a good thing. It means all the investors are signed up and an organization is ready to begin its work. But too many foundation impact investors treat the close like an ending. They focus on announcing the deal rather than helping to ensure the investment capital is ultimately put to good use. A banker who helped forge a major impact- investing partnership with a foundation once told me, "In my 20-year career, I’ve never been paid a bonus for making an announcement. I get paid to make good investments. Now that we’ve announced the fund launch, I can’t get the foundation to return my calls."

Myth: You have to go it alone. Impact investing is an exciting area for many grant makers to explore. But you’re not the first one on these shores. Don’t make the mistake of trying to do this on your own. With very few exceptions, foundation impact-investing programs will be too small to build an adequately resourced in-house team of experts who can find, vet, structure, and manage a portfolio of high-quality investments.

Fortunately, there are many resources. The Mission Investors Exchange and Global Impact Investing Network both connect impact investors with one another, allowing members to share resources, network, and collaborate. Some impact investors collaborate with middlemen, like community-development financial institutions or loan funds, recognizing that community-based partners have expertise and infrastructure to deploy capital efficiently and effectively.

For example, the Maine Community Foundation embraces a highly collaborative investment strategy, first, by networking with other foundations developing similar impact-investing programs and, second, by collaborating with organizations with expertise, pipelines, and capacity to make direct investments as intermediaries.

Most of these myths apply to grant making as well as impact investing. Sterling Speirn, the W.K. Kellogg Foundation’s former president, notes that an additional value of impact investing is the "learning return," which often makes a foundation’s grant making better. And because innovative practices tend to be held to a higher level of scrutiny than business-as-usual, impact investing often pushes foundations to assess and measure the social value of their grant making with more rigor.

Impact investing can indeed be more complex than straight grant making, but the returns to society will be so much greater if we stop falling for myths and get money out to the leaders and organizations that can put it to work to address our world’s pressing problems.

Antony Bugg-Levine is the CEO of Nonprofit Finance Fund, which lends and provides advisory services to nonprofits and foundations. He is a member of the U.S. National Advisory Board to the G8 Social Impact Investing Task Force and co- author of "Impact Investing: Transforming How We Make Money While Making a Difference" (Jossey-Bass, 2011).