Maybe by now you’re convinced that Lean Impact is exactly what you need to radically increase your impact and scale, and thereby fulfill your social mission. Then the reality starts to sink in. How is this even possible? Everyone on your team is running flat out either trying to raise more money or deliver on the commitments that were made to secure the funds you already have. You’re not alone.
The structure and availability of funding is by far the greatest barrier to social innovation. Donors, governments, and investors all have their own ideas, strategies, and agendas. Whether they are right or wrong, they hold the purse strings, and thus power and influence over what gets done. Their desire for tangible results can be at odds with what is required for long‐term growth and impact. And, the divergent interests of trustees or constituents can drive funding priorities that are siloed, splintered, or otherwise misdirected.
Beyond the question of what gets funded is how initiatives get funded. In the private sector, investors perform due diligence on a company then place a bet in the form of debt or equity with few strings attached. If results are not delivered, any further funding may be withheld. But companies are otherwise given wide latitude to take risks, modify their products and services, and pivot based on what they learn. In contrast to investments, grants are often micromanaged – detailing activities, deliverables, “overhead” rates, reporting requirements, and spending down to the dollar. As I’m sure we can all agree, keeping teams on a tight leash rarely yields the most innovative outcomes.
Organizational mindsets, skills, and processes naturally reflect the system in which they work. As Kristin Lord, CEO of global development nonprofit IREX, reflects, “International NGOs are like Darwin’s finches, whose beaks have evolved to exquisitely match the idiosyncratic contours of the USAID flower. When they try to drink nectar [funding] from a different type of flower [source of funds], their beaks don’t easily fit.” Even when more flexible funding is available, leaders are not always prepared to capitalize on it. Britt Lake, chief program officer at the crowdfunding platform GlobalGiving, has been surprised that in situations where it has offered unrestricted grants, “Nonprofits can struggle to identify new ideas that have the greatest potential for impact. As they are accustomed to responding to donor requirements, it can be difficult for them to think outside the box and consider options that are not 100% guaranteed to work.”
Creating the space for innovation is not easy, but it can be done. If we are serious about social impact, mission‐driven organizations need to find ways to take risks, experiment, learn, and iterate. Draw inspiration from those who are already doing so – some of which you’ve read about in this book. In this chapter, we’ll take a deeper look at the barriers to funding innovation along with creative strategies to overcome them.
While entrepreneurial organizations have found many ways to navigate the existing system, true change will need to come from the funders themselves. To realize the full potential for social innovation, funding practices must be transformed to allow for more flexibility, to incentivize meaningful results, and to adopt an appetite for risk – the topic of Chapter Twelve.
The relationship between funders and those receiving funds can be fraught in the absence of aligned interests, shared goals, and most importantly, trust. A commonly held perception among grant recipients is that sharing risks, unknowns, or failures with their donors will put funding in jeopardy. As the CEO of one social enterprise told me, “There’s a disincentive, to be honest.” For funders, the lack of trust can give rise to micromanagement, rigidity, and bureaucracy. No one is a winner in this scenario, least of all the people we all hope to serve.
At one time, I believed this problem could be solved if donors would simply buckle down and change their ways. Alas, from my time at one of the largest, USAID, I became all too aware of my folly. In the case of USAID, we ostensibly wrote the checks, but were still beholden to a bewildering array of earmarks, directives, and reporting requirements stemming from Congress, US government regulations, and agreements with partner governments in the countries where we worked. While most were put in place to ensure taxpayer money was being spent responsibly, the cumulative effect of these myriad restrictions was to stymie creativity. This was further exaggerated by an overarching aversion to risk, as any single failure had the potential to cause a public relations and auditing nightmare. With government budgets tightening and coming under greater scrutiny, the pressure to avoid any semblance of failure will only increase, stifling the innovation that could ultimately make better use of government funds.
Foundations can be similarly beholden to their trustees or living donors, and impact funds have a responsibility to their investors. Each player in the system is doing what seems right and appropriate, yet the result is counterproductive.
Before we start to explore better options, let’s first look at seven of the common ways existing funding structures can impede innovation.
Given the complex nature of social challenges, designing the perfect program in advance is highly unlikely. People and external factors simply behave in unexpected ways. As nineteenth‐century Prussian army chief of staff Helmuth von Moltke famously observed, “No battle plan ever survives first contact.” Yet, grants from foundations, governments, or corporations can employ an enforced waterfall model (described in Chapter One), in which activities, budgets, and deliverables are defined in advance and difficult to change. Thus, when our best‐laid plans do go awry, we can be left to execute on a suboptimal intervention unless we undertake a slow and painful renegotiation. Even if we by some miracle get most things right, improvements can always yield greater bang for buck. Inflexible funding prevents both pivoting from failures and stretching towards opportunities.
In her first job out of college at a poor public school in Mississippi, Michelle Brown was shocked to discover how hard it was to access quality reading materials for her students. She spent nights and weekends scrambling to find resources to develop her own curriculum. Years later, at a high‐performing charter school in Boston, she was handed a quality curriculum her first day on the job. For once, she could think about instruction at a much higher level. This experience led her to start CommonLit, so all teachers and students would have access to free, quality digital instructional materials.
After stringing together small grants for a few years, CommonLit was fortunate to receive an almost $4 million award from the US Department of Education as part of an initiative to support innovative approaches to literacy. This was a huge boon, but it also came with many strings attached. As Michelle describes it, “Grants are not written with agile development in mind. They want to know exactly what you’re going to build, the third‐party services you will use, and line items down to the penny.” However, the design of a good product necessarily evolves based on user feedback. Having to seek approval for any deviation reduces agility and discourages innovation. At worst, it can even mean programs that aren’t working continue anyway, as making changes requires too much renegotiation, reputational risk, or fiscal upheaval.
As international health nonprofit PSI has begun to institutionalize design thinking and prototyping techniques across the organization, it has encountered similar challenges. While some donors have started to embrace the value of an iterative design process, many others still require a fully defined plan at the proposal stage that specifies exactly what will be done, with how many people, and by when, along with indicators to measure progress. This severely hinders PSI’s ability to develop transformative solutions, since specifics need to be locked down before fully understanding the context of the problem and the target audience.
Innovation doesn’t end with the initial design, even a good one. We should relentlessly seek impact through continuous feedback loops, experimentation, and iteration. Yet one CEO of a social enterprise has found that funders can have a “good enough mentality.” She has been surprised by “how surprised funders are when told we want to iterate on something that is already on the market.” A first version may work, but that doesn’t mean it can’t be better, perhaps dramatically so. In extreme cases, evidence‐based interventions can even become rigidly codified into legislation and impede contextual adaptations as well as further innovation.
Both individual donors and grant makers have long focused on the overhead costs of nonprofits as a primary measure of effectiveness. The overhead rate is an easy proxy to latch onto, as it is a single number that can be calculated from standard tax filings and compared among charities. Certainly, we want to guard against waste and the inefficient use of precious resources, but restricting so‐called overhead is more often counterproductive.
Nonprofit consulting firm the Bridgespan Group found that among the 300 nonprofits that account for a third of the combined spending of the top 15 US foundations, 53% suffer from frequent or chronic budget deficits, and 40% have fewer than three months of reserves in the bank. This highlights the long‐term damage of restricted project grants that don’t support the true underlying costs of building strong institutions.1 When organizations are in constant financial distress they are unable to make the investments that can enhance productivity, such as employee training, technology infrastructure, and R&D. Sometimes raising your overhead is the best way to increase your impact. In fact, shareholders generally reward corporations for increasing R&D spending, as it is a leading indicator of better products to come.
Fortunately, there has been a growing recognition that low overhead is a poor indicator of organizational health. Though it has historically featured overhead rates prominently in its ratings, Charity Navigator, the top US nonprofit rating site, has more recently begun to deemphasize it. In fact, in 2013 Charity Navigator joined GuideStar and BBB Wise Giving Alliance to launch the Overhead Myth campaign to shift the conversation away from financial ratios and towards outcomes and impact.
Both traditional donors and impact investors can place restrictions based on factors such as geography, sector, demographic, use of technology, and stage or size of company. Given that most organizations need to raise funds from multiple sources, the result can resemble an extreme form of social gerrymandering, where interventions are contorted to achieve an awkward mix of requirements. Needless to say, this can lead to a host of inefficiencies.
To fund the operations and expansion of its savings platform for low‐income Americans, EARN receives grants from a number of philanthropic sources. It has found that traditional grant makers often require that funding be deployed for narrowly targeted demographics – corporations care about investing in the communities in which they operate, foundations may want to focus on particular constituencies such as women or Spanish‐speaking populations, and still others are interested only in savings that will go towards a predefined goal or purpose, such as buying a first home. Delivering and reporting on all of these requires detailed tracking, targeting, and marketing, and can conflict with the natural path for growth based on the greatest needs and mission alignment.
Such restrictions lock out many options entirely. In her research at the Center for the Advancement of Social Entrepreneurship (CASE) at Duke University’s Fuqua School of Business, Faculty Director Cathy Clark found that for most impact entrepreneurs, only a handful of donors or investors were likely to hit the sweet spot based on stage of growth, amount of funding, type of funding, sector, and expected returns they need at a particular point in time. Approaching the wrong funders is a waste of everyone’s time. On the other hand, approaching the right funder with a bad pitch is a waste of a scarce opportunity. As a result, CASE developed a suite of online tools, Smart Impact Capital (www.casesmartimpact.com), to help entrepreneurs navigate the funding landscape to raise the capital they need.
These silos can also make it difficult to raise money for crucial needs that go beyond a single domain. For example, it is easier to fund solar lanterns, clean cookstoves, or maternity kits than the distribution networks to enable them to reach customers. It’s easier to fund targeted mobile apps than the shared technology platforms and infrastructure behind them. And it’s easier to fund drugs and education for tuberculosis, HIV, and malaria than strengthening the underlying health systems that provide primary care. Thus, rather than building shared resources that can be leveraged for multiple purposes, we often see duplicative efforts and bespoke solutions.
Pressure from donors and investors to deliver immediate, measurable results can also stymie an organization’s ability to innovate. In Chapter Six, we learned about the importance of starting small to facilitate fast experimentation, allow for pivots, and avoid wasting resources on solutions that won’t work. Yet many funders measure success based on reach rather than lessons learned, sustainable growth, and cost effectiveness. One nonprofit I spoke with described being pushed to scale by a donor before it could streamline its operations, only to be crushed under the weight of manual processes as they grew. Another mission‐oriented startup found that impact investors prioritized hitting sales numbers over validating unit economics due to their nervousness over an unproven and unfamiliar market. They bled money with each additional sale and eventually had to retrench.
Grants in particular tend to be project rather than solution based. That is, for one to five years the grantee is expected to deliver the agreed activities, then the money runs out. Over the lifetime of the grant a nonprofit is usually fully occupied meeting its commitments, with little time to test and build a sustainable path forward. After the grant is completed, too often programs are shut down entirely or restarted at a new location in which new funding has been secured. In global development, this extremely inefficient cycle of spinning up teams and programs only to wind them down a few years later is the norm.
Rocío Pérez Ochoa, cofounder of Bidhaa Sasa, a lean social enterprise that distributes and finances goods for rural households in Kenya, was shocked that donors kept framing funding discussions in terms of a project rather than her business. They wanted to know what tangible results she could produce during the life of a grant, sometimes within as short a time as 12 months. That model might make sense for a bulk order of a mature product, but it was not what she needed to test and improve her service, build organizational capacity, and validate her business model.
As a nonprofit that provides open‐source software for last‐mile community health systems, Medic Mobile was hit by this dynamic on two fronts. It initially worked directly with other nonprofits but struggled to sustain its impact when their grants ended and projects wound down. This led it to work with local and national governments, which had a permanent stake in strengthening health systems. As for funding, Medic Mobile knew it could never build a cohesive, reusable platform by relying on project funding and made the tough call to turn away restricted grants unless they were well aligned with its strategic plan. Luckily, it identified a set of committed donors who could offer the unrestricted funding that allowed it to make the investments necessary to build a robust platform.
When we focus on short‐term deliverables to the exclusion of long‐term scale and transformation, we can become stuck in an endless cycle, placing Band‐Aids on the same problem over and over again.
In 2012, Monitor Group’s groundbreaking report From Blueprint to Scale: The Case for Philanthropy in Impact Investing coined the term “pioneer gap” to describe the lack of early‐stage capital for inclusive businesses targeting the poor. The report correlates the gap with the first two of four phases of a firm’s development: blueprint and validate.2
Today, the proliferation of innovation funds, contests, prizes, hackathons, and impact‐oriented accelerators has gone a long way in addressing the blueprint stage, when new ideas are generated. Yet a yawning gap remains in the validate stage – what I consider the 99% perspiration required to develop a successful solution, the core of Lean Impact.
As Copia Global’s former CEO Crispin Murira says, “There’s lots of money for new ideas or for scaled solutions, but it’s hard to raise money for the work in between.” Funding early‐stage ideas is easier, as the sums of money are small and fresh ideas attract attention. The crucial work of validation is less sexy and requires patience. Many organizations struggle in this gulf. Donors tend to be reluctant to pick up initiatives they didn’t initiate. And there can even be an inverse correlation between success and funding, with donor attention drifting to the next shiny thing once a pilot has given them a good story to tell. In the meantime, the real work is just beginning.
Simply making a decision on a grant can be a long, slow process – possibly a year or even more – for foundations, corporations, and government agencies. Approvals can become bogged down in strategy shifts, internal politics, procurement mechanisms, and board approvals.
This is particularly challenging for early‐stage organizations seeking small grants. Imagine applying for an innovation grant to test your promising new idea and receiving a $20,000 award a year later. By then, you’ve probably either identified other funding or gone out of business. And even if you’ve managed to cling on, changes in technology or other circumstances may have rendered your proposal obsolete in its original form. This is a sad, all‐too‐common story.
I have to confess that, despite our best efforts, the Lab’s DIV fund at USAID was caught in this trap. Though grantees praised us for our flexibility in supporting innovation, turnaround time was another matter. Our rock‐star team worked valiantly to move quickly, but was stymied by budget cycles, internal bureaucracy, and procurement requirements. One of the many benefits of spinning out the Global Innovation Fund (GIF) as an independent nonprofit to do similar work – which had been established based on the successes of DIV – was the ability to move faster outside the confines of a government bureaucracy.
A final impediment to innovation is the administrative burden associated with many forms of funding. Accepting a government grant can necessitate hiring a new staff person simply to manage the compliance and reporting requirements. For example, a USAID grant has 84 pages of standard compliance provisions – everything from vetting suppliers for terrorist connections to meeting exacting branding standards. To add insult to injury, each funder typically has its own unique requirements for content, format, and frequency of reports. The prodigious time and attention needed to fulfill all these obligations takes away from the real work.
The hardship doesn’t end there. For federal government grants, the negotiated indirect cost rate agreement required to reimburse costs such as facilities and general administration imposes rigid accounting procedures that put a straightjacket on an organization’s ability to strategically price its products and services for different clients. Managing grants from both public and private funders can become a nightmare. The challenges are significant enough that FHI 360, a global development nonprofit that receives significant funding from the federal government, decided to spin out a subsidiary to allow for more flexibility in working with foundations, corporate partners, and state and local governments that each have their own policies and restrictions.
If the existing funding mechanisms make innovation so difficult, what can you do? Be willing to push back, and if necessary walk away. I know, this sounds crazy when a grant might be the difference between staying in business and considering layoffs. I’m not suggesting it’s an easy choice or that grants always have to be 100% aligned with your mission. But if the alternative is accepting restrictions that take you off mission and trap you in a grant starvation cycle, negotiating for more flexibility may be worth the risk. Sometimes the funder may even admire your chutzpah!
Because of their commitment to radical listening, Health In Harmony writes in its grant proposals that its first step will be to ask communities what they want. Then, it plans to do just that. Certainly not all donors will be so flexible, but Health In Harmony has been pleasantly surprised at how many do agree. Some donors are even relieved by this fresh approach. Over time, Health In Harmony has earned respect by taking a stand and refusing to implement programs that are not wanted by a community.
Many organizations have come to regret changing their plans to satisfy funders because they can see how it has impeded their ability to fulfill their mission. As they’ve gained more financial breathing room, they start to wean themselves from grants that aren’t either strongly aligned or altogether unrestricted. Some of the most impressive organizations I’ve profiled in this book have increasingly shifted to accepting funding only when it is flexible or fits with their strategy, including Health Leads, Medic Mobile, Living Goods, the One Acre Fund, CareMessage, d.light, and VisionSpring. I, for one, see a correlation. If enough organizations balk at inappropriate restrictions, maybe funders will get the hint and change their tune.
Remember, bigger is not always better. Too often, in the absence of profits as a benchmark we measure success in terms of more programs, more staff, and more money raised. A smaller, more effective, financially sustainable organization that brings a clearly differentiated value proposition can sometimes do more good.
When Eric Ries came to speak with my team at Mercy Corps about applying principles from The Lean Startup, he was asked how to make room for innovation in the context of preplanned grants. He suggested the idea of carving out an innovation window, as part of a standard grant proposal, to build in room to experiment with better solutions. This might only represent a small percentage of a larger grant. But if that, say 5%, leads to identifying an alternative that is even 10% more cost effective, impactful, or scalable, it will have more than paid for itself.
It turned out that Mercy Corps already had a program in Ethiopia called PRIME (Pastoralist Areas Resilience Improvement through Market Expansion), which included elements of this thinking. Within the five‐year, $62 million USAID‐funded program, most of the work was targeted towards direct interventions. However, a $5 million innovation and investment fund was set aside to make investments that could catalyze sustainable growth through new approaches or business ventures.
Of course, most grants are a tiny fraction of this size. However, if we stick to the Lean Impact principle of starting small, experimentation doesn’t need to be expensive. It only requires a commitment to be scrappy, stay curious, and relentlessly seek impact. When Summit Public Schools decided it needed to disrupt its entire classroom model, it had little money and no idea how to iterate. Rather than spending a lot of money on consultants, the team read The Lean Startup. They also tapped into pro bono coaching from Google staff, and eventually partnered with Facebook engineers to build a technology platform to capture the data needed to drive their feedback loop.
mPower Social Enterprises, founded out of Harvard and MIT, was able to successfully negotiate with USAID to incorporate a phased‐innovation window. The USAID Agricultural Extension Support Activity sought to improve farmers’ access to inputs, best practices, and finance using digital technology in 12 districts of Bangladesh. Given that mPower wasn’t sure what would work, it negotiated the freedom to fail. In the first year, it deployed and tested 14 prototypes through a series of rapid experiments, then selected 5 or 6 to take forward. While USAID is not normally a particularly flexible funder, mPower was fortunate to work with a supportive agreement officer who helped to convince other parts of the agency to take this more flexible approach.
When writing a grant proposal or negotiating a grant agreement, consider ways to introduce an innovation window, either as a small ongoing percentage of work or as an initial experimental period to determine the best path forward. Realistically, some donors will be delighted, while others will balk. But you’ll be more likely to come away with the flexibility you need to maximize your impact and scale.
Even with an innovation window and the best of circumstances, restricted grants are still, well, restricted. In an ideal world, social sector funding would be entirely unrestricted with accountability coming through performance targets or tiered follow‐on funding. This would free organizations to experiment, learn, and double down on the best solutions. But, we’re not there yet.
Flexible funding sources can complement more traditional grants by opening space to both generate new ideas and experiment in existing programs. Sometimes you can find progressive donors who directly support innovation, such as the Draper Richards Kaplan Foundation, Echoing Green, the Omidyar Network, the Emerson Collective, the Skoll Foundation, the Mulago Foundation, and GIF. Other times, philanthropists, individual giving, crowdfunding, or earned revenue can be used to create your own flexible pool.
A common strategy is to seek donations from high–net worth individuals who appreciate the importance of innovation for achieving long‐term impact. Given the wealth being generated in Silicon Valley, tech philanthropists have become a favored target. Living in San Francisco, some days I can feel like a tour guide, given the number of international nonprofits coming to town looking to tap into tech wealth and know‐how. My advice? Don’t pitch the same activity‐based programs you would to a traditional foundation or government. Tech philanthropists are typically more interested in disruptive innovation with the potential for massive scale and transformational impact. The Giving Code, a report published by Open Impact, includes valuable insights into the Silicon Valley donor mindset.3
In Chapter Eight, I described how Code for America funds the ongoing operations of its California food stamp enrollment service through various government sources. But government won’t pay for activities such as customer discovery, testing prototypes, and building the website. So for R&D it turns to philanthropists from its deep network in the tech community, exemplified by Reid Hoffman, cofounder and executive chairman of LinkedIn.
Faith‐based nonprofits such as Catholic Relief Services (CRS) that have a large base of unrestricted funding through individual donors have a unique opportunity to leverage these resources to invest in innovation. Each year, CRS sets aside a $4 million internal innovation pool. As it believes that innovation will start closest to the problem, any staff member can submit a simple proposal for a programmatic, business, or operational idea. The fund supports them to test if the solution works, measure the results, and determine if it can go to scale.
Chasing all these sources of funding can be exhausting. Many CEOs and executive directors report spending more than half their time fundraising, rather than working towards their core mission. Is there another way?
Crisis Text Line runs a 24/7 texting service to connect people who are suffering to a trained crisis counselor, anywhere in the United States. While Crisis Text Line is a nonprofit, the team thinks of themselves as a tech company first. As such, they eschewed the high burden and restrictions of traditional funding sources. Director of Communications Liz Eddy explains, “They expect that in five years you are doing exactly the same thing you were five years ago. What we are doing now is different from six months ago, based on data for what works and doesn’t work.”
Constantly working the circuit to raise money would be a huge distraction from its mission. Instead, Crisis Text Line took a page out of the tech startup book and concentrated its fundraising in discrete rounds. Once the big push is over, team members have the breathing room to put their heads down for a year or more and just do the work. For its second round, Crisis Text Line put together a simple four‐page prospectus outlining the opportunity to do good through tech and data, projections for growth and costs, the amount of money needed, and the minimum donation level. It sought to be as transparent as possible by including a three‐year budget. Based on a $20‐million goal, it was oversubscribed and walked away with $23.8 million, all in unrestricted funds from a combination of individual donors and forward‐leaning foundations.
The notion of funding rounds isn’t limited to the tech world. After fundraising for both a for‐profit company and the nonprofit he founded, VisionSpring’s Jordan Kassalow was struck by the contrast between his experiences. With the for‐profit organization, funders cared about the founding team, market size, and the value proposition. They wouldn’t have thought of asking him to perform specifically defined activities. In contrast, on the nonprofit side, funders kept insisting on different geographies or demographics that would take VisionSpring off mission. After a few years he focused his energy on attracting unrestricted capital, with limited exceptions. Similarly to Crisis Text Line, he put together a prospectus of what was needed to build the team and systems that would bring the organization to the next level, raising $5 million.
Over its more than 30 years of identifying and nurturing emerging leaders, Echoing Green has had a bird’s‐eye view of the landscape of social change. Its flagship program, the Echoing Green Fellowship, provides unrestricted seed‐stage funding and leadership development to aspiring social entrepreneurs, now numbering nearly 800. Among them are the founders of Teach For America, City Year, and the One Acre Fund.
In its first two decades, almost all of Echoing Green’s fellows proposed nonprofit organizations to tackle social problems. But over time there has been a gradual shift in the diversity of models being used. While in 2006 only 15% of its applicants proposed social businesses with for‐profit elements, those numbers have risen steadily to nearly 50% as of 2018. Its experience reflects mine – a landscape in which more and more, the most interesting social ventures are some sort of hybrid and the lines between legal structures have become blurred. This poses both challenges and opportunities.
The phenomenon of for‐profit social enterprises using grant funding to validate and de‐risk a business model, then subsequently tap into private investment, is on the rise. We made a number of grants in this vein through USAID’s DIV program, including with Off Grid Electric and other pay‐as‐you‐go solar companies.
Some organizations have established multiple entities in order to straddle the available funding streams. This might involve pairing a nonprofit in the United States to receive philanthropic dollars with a for‐profit company in the operating country to build a sustainable business. Others have created both for‐profit and nonprofit sister organizations side‐by‐side, to raise investment capital to grow the core business while using charitable funding sources to address market and policy failures through advocacy, capacity building, and outreach to the most disadvantaged customers.
Clearly, there is no one‐size‐fits‐all solution for funding. The existing systems and mechanisms were established in a day and age when legal structures were more binary and innovation rarely intersected with social good. Leading social entrepreneurs and their funders are pioneering ways to navigate the grey spaces in between, but a more fundamental shift will be needed to fully unleash the potential for social innovation.