Chapter Twelve
A Message to Funders

Much of this book has served as a guide for social entrepreneurs, whether at nonprofits, social enterprises, hybrid companies, or corporations. Yet its lessons are equally, if not more, important for the foundations, philanthropists, government agencies, impact investors, corporate social responsibility (CSR) departments, and individual donors who fund them. As described in the first part of Chapter Eleven, perverse funding incentives and restrictions represent the single greatest barrier to the adoption of lean approaches to innovation. Our means are impeding our ends.

We need nothing short of a revolution in how social good is funded. Nicola Galombik, an executive director at investment group Yellowwoods, describes a puzzling disassociation in which the same people are “chasing elephants in the private sector and chasing mice in the social sector.” Rather than adopting an investor’s mindset to take calculated risks in pursuit of growth and impact, philanthropic investments tend to be risk averse and prefer to deploy well‐known interventions over and over again. Alas, most are subscale and do not fully address root causes.

Funders can help achieve radically greater social good by empowering entrepreneurs, nurturing ambition, and approaching their work with a dose of humility. Empowerment requires shifting the frame from implementing a predefined plan to betting on a team and outcome. Ambition engenders a restless will to seek better solutions that can reach further and do more. And, humility entails a recognition that we don’t have all the answers and need to experiment and learn to achieve better results.

This message doesn’t only apply to grant‐making institutions. Philanthropists, and even modest individual donors, also contribute to the dysfunctional incentives. Are you asking a social venture about its overhead rates rather than its trajectory for learning and improvement? Are you restricting donations based on your interests rather than trusting a team to make the best choices to achieve its mission? Are you measuring success in terms of activities and compelling stories rather than sustainable outcomes? Are you basing decisions on personal relationships rather than cost‐effective impact? If any of these might be true, this chapter is also for you.

A NEW RELATIONSHIP

We need to start by fundamentally reimagining the relationship between funders and recipients, from one of suspicion and micromanagement to one of trust and reward. This will require change on all sides. Donors will need to establish clear goals, then let go of some control and select teams and organizations to empower as true partners. Nonprofits and social enterprises will need to accept more risk, become responsible for results, and develop the skills and judgment needed to accelerate learning rather than execute a plan.

As a successful businessman, private equity investor, and social entrepreneur, Chuck Slaughter has lived this dynamic from multiple standpoints. He observes that, “Foundations tend to base funding decisions 90% on strategy and 10% on people, whereas venture capitalists consider these more as an even 50–50 split.” I would go further to suggest that in many cases the “strategies” foundations fund could be more accurately described as tactical interventions that reflect the foundation’s own theory of change.

When the spotlight is so heavily focused on a predefined plan, agreements naturally focus on execution and tend to slavishly specify the expected activities, budget, staffing, and overhead. In contrast, when teams are empowered to pursue a shared goal, the conversation shifts to providing guidance, building capacity, and learning together. We’ve all seen this story before in commonly accepted leadership principles – micromanagement doesn’t work. The most effective and creative teams are the ones that feel empowered.

In Rockefeller Philanthropy Advisors’ 2017 report, Scaling Solutions Toward Shifting Systems, the first of five recommendations is to empower grantees by consciously shifting the power dynamics through trust, respect, and openness. This creates an environment in which organizations can make mistakes, pivot, learn, and focus on the work of scaling and long‐term systems change.¹

Such a relationship should ideally involve not only greater flexibility in the structure of grants, but also a more collaborative approach to direction and design. At USAID, we expanded the use of the bureaucratic‐sounding Broad Agency Announcement (BAA) as an alternative procurement mechanism that allows for co‐creation among a diverse array of public and private partners when the ideal solution is unclear. With a BAA, interested parties submit a relatively lightweight statement of interest. Those selected to participate collaborate to develop one or more concept notes that are then evaluated by a review panel. Rather than USAID dictating the design in a grant solicitation and organizations responding with formal proposals, this more open format allows for an exchange of ideas and the opportunity to build strategic partnerships.

UNRESTRICTED FUNDING

Making grants less restrictive and less prescriptive is an important first step towards building trust. With unrestricted funding, also known as general operating support, an organization’s leaders are able to balance between the tactical needs of their operations today and the strategic investments required to achieve their mission tomorrow. R&D can lead to transformative breakthroughs, IT infrastructure can increase productivity and accelerate feedback loops, and training staff can build new skills and capacity.

Of course, relaxing restrictions requires funders to trust and be willing to cede control to their grantees. But, more and more foundations are recognizing that healthy, empowered institutions will be more likely to deliver greater social impact in the long run. The Edna McConnell Clark Foundation (EMCF) has been a leader in this regard in its mission to help economically disadvantaged youth. Around the turn of the millennium, its strategy shifted from seeking nonprofits that would execute on EMCF’s vision and theories for systems change to supporting the best organizations in building the capacity to execute on their own visions for greater impact. Rather than requiring predefined programming, EMCF provides flexible capital that allows for innovation and pivots. And by making an upfront commitment, its investment frees grantees to focus on execution of their own business plans rather than being constantly distracted by fundraising and donor demands.

More recently, in 2015 the Ford Foundation made a deliberate shift in its funding strategy after feedback from grantees led President Darren Walker to believe Ford was “project‐supporting nonprofits to death.”² He recognized that general operating support was crucial for organizations to invest and plan for the long term. To do so, Ford doubled its overhead rate on project grants and made a big splash by announcing a $1 billion commitment for the Building Institutions and Networks (BUILD) initiative. BUILD will invest in the capacity and sustainability of social justice organizations through five‐year unrestricted operating grants, plus additional support for institutional strengthening. In an article in the Stanford Social Innovation Review, EVP for Programs Hilary Pennington asked the all‐important question: “How do we break our own addiction – let alone that of our grantees – to funding activities, rather than impact?”³

The good news is there is a growing recognition of the importance of unrestricted funding. According to the Foundation Center’s 2014 edition of Key Facts on U.S. Foundations, general operating support now represents 23% of foundation grants.⁴ While it is still far from the norm, the proportion has inched up from only 19% of foundation grants in 2006.⁵ Newer foundations and philanthropists, particularly those focused on innovation and entrepreneurship, have continued to expand on this trend.

While I believe that funding should be unrestricted in almost all cases to empower teams and allow for the agility that fuels innovation, this does not equate to a lack of accountability. But, organizations should be held to results, rather than how they get there. This can be done through constructive incentives such as milestones, tiered funding, and outcomes‐based payments.

TIERED FUNDING

One of the tried‐and‐true mechanisms to encourage innovation in the private sector is the use of tiered funding, perhaps best exemplified by VCs in Silicon Valley. Tech startups typically receive multiple tranches of financing, starting with a seed round from friends and family or an accelerator, followed by an angel round from high‐net‐worth individuals, and finally progressing to multiple rounds from VCs known as Series A, Series B, etc. The earlier the round, the higher the risk and the smaller the size of the investment. As a startup proves technical feasibility and market demand, the risk comes down and the dollar amounts go up. And if it doesn’t? The startup simply can’t raise more money and goes bust.

No one micromanages these startups along the way. They are set off to succeed or fail on their own, albeit with various support systems. Nevertheless, the companies are motivated because their survival is at stake. They know what questions need answers and what traction must be demonstrated to make a compelling case for the next round. This system has arguably led to a pace of innovation that is the envy of the world, giving rise to some of the most transformational and successful companies of the modern era.

While there are many differences between the private and the social sector, elements of this model have been successfully adapted for purpose rather than profit. At USAID, our DIV program was inspired by this VC style of funding. It incorporated three stages, at levels of around $100,000, $1 million, and $5 million, each based on successively higher levels of maturity and evidence of impact. Although government is notoriously risk adverse, by starting with relatively small awards at Stage 1 we were able to place more and far riskier bets than would have been possible with larger grants. Based on our successes, we later established GIF as an independent entity based on a similar tiered model, along with other donor partners and additional financing tools, such as debt and equity.

Both DIV and GIF take an open innovation approach, accepting applications across a wide range of sectors, geographies, and problem areas. Their goal is to identify and support the development of the most cost‐effective solutions for social impact. Other funders of open innovation can specialize in particular stages of development. For example, the Draper Richards Kaplan Foundation and Echoing Green support early‐stage social entrepreneurs, while the Skoll Foundation focuses on more mature social enterprises that have achieved some scale. Silicon Valley–style startup accelerators are also getting into the game, providing early‐stage social enterprises with seed funding along with mentorship, networking, and skill building. Among these, Fast Forward focuses exclusively on technology‐driven nonprofits, 1776 tackles government‐dominated markets, and the renowned tech accelerator Y Combinator now includes nonprofits in every cohort.

In contrast to open innovation, directed innovation seeks to draw talent, attention, and engagement to targeted problems where existing solutions are insufficient. One prominent cluster of such initiatives are the Global Grand Challenges, initially started as the Grand Challenges for Global Health by the Bill and Melinda Gates Foundation, and later expanded as an umbrella for a collection of challenges undertaken by Gates, USAID, Grand Challenges Canada, and a number of regional partners. Most employ some form of tiered funding, initially seeking a broad range of new ideas with small grants, then doubling down to scale those that prove to be most promising. At USAID our Grand Challenges spanned a wide range of areas, including literacy for children, humanitarian crises, maternal and child mortality, clean energy for farmers, scaling off‐grid solar systems, and the response to the Zika and Ebola crises.

During the early stages of development, follow‐on funding decisions should consider innovation and learning metrics, rather than vanity metrics such as reach. These measure progress towards the success criteria for value, growth, and impact. Experiments and pilots can improve on key drivers such as customer satisfaction, cost basis, and adoption rate. If the necessary thresholds are not reached, but the pace of learning is high and a new pivot looks promising, another round of funding at the same stage might be worth consideration.

Tiered funding is particularly valuable in the early stages. As risks can be high and expected financial returns can be low, organizations can have difficulty accessing traditional forms of private financing. With tiered grants, donors take on calculated risk, but only at levels commensurate with the stage of development. Grantees then have the runway to experiment, though they must demonstrate traction in order to access the next tranche of funds. As these are high‐risk bets, the expectation is that only a small fraction will succeed.

For many donors, the overhead associated with issuing numerous small grants can become a barrier. One way to reduce transaction costs is to encapsulate tiers as milestones in a single overarching grant. We did this in USAID’s Securing Water for Food Grand Challenge by defining rigorous criteria for subsequent disbursements, with the expectation that only a fraction of grantees would succeed and with only sufficient budget to cover those. Thus, we eliminated the need for a new costly and time‐consuming procurement cycle for each tranche, while maintaining selectivity and rewarding results. Other tiered funds, in the face of limited staff bandwidth, have contracted out the selection and disbursement process to a third party altogether.

If you want to manage risk while promoting innovation, tiering funding in some form is one of the best tools available to do so. Another is paying for outcomes.

PAY FOR OUTCOMES

As opposed to tiered funding, which is granted in advance of work being performed, outcomes funding is usually disbursed after the fact, on the basis of success. In both cases, the focus shifts from prescribing activities to rewarding actual results, either through follow‐on funding or outcomes‐based payments. In the outcomes scenario, the risk of failure is borne by either the grantee or the financier, rather than the donor.

On one end of the spectrum, a prize competition can inspire new inventions by providing an award for a singular accomplishment, such as the $10 million Ansari X Prize won by SpaceShipOne for being the first nongovernmental organization to launch a reusable manned spacecraft into space twice within two weeks. On the other end of the spectrum, various forms of pay‐for‐results contracts can provide ongoing compensation for each instance a specified outcome is achieved, analogous to a commission‐based compensation structure for sales.

I consider paying for outcomes to be the holy grail because the interests of grant makers, recipients, and beneficiaries become fully aligned. Grantees gain far the flexibility and motivation to experiment with more cost‐effective and scalable solutions. Funders deploy dollars far more efficiently, only paying when the desired outcomes are achieved. And, the incentives focus all parties on maximizing the positive impact for beneficiaries. In a sense, an open, competitive market is established for social good.

Of course, huge hurdles exist to achieving this ideal state. Certainly, many desirable benefits to society are not so discretely measurable and thus not conducive to performance‐based financing. Even when clear outcomes can be defined, the cost and burden of reliable monitoring can be high. Existing entities may not have the skills, experience, and processes to handle such a structural shift. And mechanisms to finance the required up‐front investment and absorb risk are not widely available, particularly for nonprofits.

Still, while recognizing that a complete shift to a pay‐for‐outcomes world may be in the distant future, there are enough compelling benefits to warrant a strong and continued push towards this ideal. Given the real challenges, we would be best served by not being purists. In many cases, a blend of traditional grants, tiered funding, and outcomes payments may be the most practical.

Let’s explore the most common tools used to pay for outcomes – prizes, advanced market commitments (AMCs), and impact bonds – along with other types of outcomes‐based incentives.

Prizes

Although incentive prizes have existed in some form for centuries, the X Prize Foundation has perhaps done the most in modern times to draw attention to them as a tool to push the technological boundaries of existing solutions. With a prize, the performance characteristics for a desired invention are specified in advance and the sponsor issues a cash award when a team is deemed to have met them. For social good, the desired outcome can be a breakthrough in capability or cost that will expand the realm of potential impact. The associated award and publicity can attract both fresh talent and increased investment to a needed advancement.

Of course, most prizes are of a far more modest scope and scale than an X Prize, though they retain many similar characteristics. The US government even got in the game with the America COMPETES Reauthorization Act of 2010, meant “to invest in innovation through research and development, and to improve the competitiveness of the United States.” Among other provisions, the act allows government agencies to sponsor prize contests with awards of up to $50 million, though most are far smaller. Today, the Challenge.gov website lists over 800 such government challenges, with a goal of tapping into the innovative ideas of citizens.

In the social sector, the distinction between challenges and prizes can become somewhat blurred. Challenges typically identify a problem and allow for a range of potential solutions, whereas a prize specifies quantifiable performance criteria that the winner must achieve. In theory, the former are structured as tiered‐funding tranches while the latter are paid only upon success. However, given that most mission‐driven organizations don’t have the resources to fully self‐finance the upfront costs to compete for a prize, oftentimes prize competitions include some amount of funding for R&D.

One prize we fielded at USAID was the Desal Prize – an award for innovations in desalinating brackish water for drinking and agricultural use in the many water‐stressed environments around the world. The goal was to produce a minimum of 85% recovery of freshwater, powered only by renewable energy – twice the industry standard for existing reverse osmosis systems. Out of 68 applicants from 29 countries, a panel of judges selected five semifinalists who each received seed money to test and develop their devices. They competed head‐to‐head at the US Bureau of Reclamation’s Brackish Groundwater National Desalination Research Facility in New Mexico. A photovoltaic‐powered electrodialysis reversal system by a joint team from MIT and Jain Irrigation won the $140,000 grand prize. In addition, the winners became eligible for $400,000 in grants to implement pilot projects with smallholder farmers.

Tom Kalil, former deputy director for technology and innovation at the White House Office of Science and Technology Policy, observes that the US government has made more than $4 trillion in financial commitments that are contingent on failure. For example, the United States guarantees loans and agrees to assume the debt obligation of borrowers if they default. Shouldn’t we balance those with more investments that are contingent on success, such as prizes? In other words, rather than taking a loss when something bad happens, let’s be willing to spend money when a breakthrough becomes possible.

Advanced Market Commitments

AMCs are a less common, but interesting, funding tool that combines the open competition of prizes with the ongoing delivery terms of pay for outcomes. Here, the funder issues a contractual guarantee to purchase a large quantity of a product once it is developed, thereby creating a viable, outcomes‐based market. AMCs are typically used by governments or large donors who want to encourage companies to invest in products that require a large upfront investment and have an unclear payoff.

The first and best‐known use of an AMC was in 2007, when five countries and the Bill and Melinda Gates Foundation pledged to purchase millions of doses of a safe and effective vaccine for pneumococcal disease, a major cause of pneumonia and meningitis that kills 1.6 million people every year. An independent assessment committee was set up to select eligible manufacturers based on meeting minimum product specifications, including efficacy, safety, and cost per dose. As of December 2016, 164 million doses had been procured from two suppliers, GlaxoSmithKline and Pfizer, with an additional 160 million doses expected in 2017.

Using an AMC to address a market failure for the broader public good was possible in this scenario, as GlaxoSmithKline and Pfizer are large corporations with sufficient financial resources to make the investment in research, development, and manufacturing in advance of receiving any payment. Realistically, most cash‐constrained nonprofits and social enterprises would be challenged to do the same. In such situations, milestone payments for interim progress can help enable them to pursue such ambitious goals.

While the global health community has been at the forefront of performance‐based financing mechanisms for innovations with a high social return and an uncertain financial return, these techniques are well worth considering to open competition and fuel social progress in other sectors as well.

Impact Bonds

Social impact bonds (SIBs) are perhaps the mechanism most closely associated with outcomes funding and have been applied for a range of purposes, including reducing recidivism, the number of children in foster care, youth unemployment, and the need for special education. SIBs hold the promise of outcomes funding at its purest: the government only pays the provider for agreed‐upon social outcomes when they are delivered. Because the typically nonprofit providers aren’t able to finance activities or shoulder risk, private investors supply the upfront capital in the form of a bond. These investors are promised a rate of return but are only paid if the expected outcomes are achieved and thus assume the risk of failure. An independent evaluator measures outcomes and determines payments. Finally an intermediary or project sponsor often coordinates all these entities, processes, and relationships (see Figure 12.1).

The first SIB was deployed in the United Kingdom by Social Finance in 2010, with the aim of reducing the prison population in Peterborough by lowering the rate of reoffending for first‐time convicted criminals. Rather selecting a single rehabilitation program that might or might not work, the government agreed to pay the project sponsor, One Service, based on the actual reduction of recidivism and the savings accrued from fewer people in jail. One Service in turn coordinated among multiple service providers to support ex‐offender needs such as housing and employment. Private investors assumed the risk by purchasing SIBs on the promise of a healthy return if the expected outcomes were achieved. In the final accounting, recidivism was reduced by 9% and the investors were repaid in full.

Much attention and excitement has been generated by the potential of SIBs to harness private investment capital for social benefit. Alas, the reality hasn’t quite lived up to the hype. As of the start of 2018, only 108 SIBs had been contracted globally.⁶ And, private financing largely serves to buffer risk, with existing donors or government still paying for the interventions as well as much of the design and transaction costs. The complexity and multiple parties required to establish and run a SIB have made them expensive, slow, and thus not easily scalable.

While SIBs are no panacea, they have galvanized efforts to better measure outcomes, raise attention to cost effectiveness, and adopt a results‐oriented mindset in funding. These important building blocks can serve as the foundation for evolving simpler pay‐for‐results mechanisms. A number of more recent initiatives have already sought to simplify the process.

A close sibling to SIBs, development impact bonds (DIBs) largely differ from SIBs by virtue of their use in developing countries with a donor agency or foundation as the outcome payer, rather than government. One of the newest is the Village Enterprise DIB, which seeks to alleviate poverty in East Africa by helping communities start microenterprises. With a total budget of over $5 million, it’s one of the largest DIBs to date.

What’s particularly interesting are some structural adaptations to make the Village Enterprise DIB simpler, less expensive, and more flexible than its predecessors. In fact, you could argue that it isn’t actually an impact bond at all, as no bonds were issued to private investors as part of the deal. Instead, the implementing nonprofit, Village Enterprise, is on the hook to shoulder the risk and obtain its own financing. This removes the complexity of brokering a multiparty arrangement between payers, investors, and the provider simultaneously. In addition, an outcomes fund has been established to allow new donors and providers to join over time without having to renegotiate the entire structure. Project sponsor Instiglio sees the arrangement as a step towards an outcomes‐based challenge fund – a far more streamlined market for outcomes with lower transaction costs.

Outcomes‐based Incentives

While the purity of funding entirely based on outcomes is theoretically appealing, it can also be impractical. What if you don’t have the latitude to do something so experimental, but still want to move towards aligning incentives with outcomes? Taking an outcomes mindset doesn’t have to be an all‐or‐nothing choice. There are many degrees to which funding can be outcomes oriented, with prizes, AMCs, and SIBs at the far extreme.

The key question to ask is what can create the incentive for improved outcomes. If it’s not realistic for a grant to be 100% outcomes based, can it be 10%? Or even 1%? Though 1% may sound paltry, if it comes in the form of an unrestricted bonus, it can be quite valuable to a nonprofit with limited general operating funds. And simply sending the clear signal that outcomes matter tends to focus minds. Many nonprofits are unable to shoulder the financial risk or working capital for a contract that is 100% outcomes based but can accept a smaller variable payment as part of a grant where direct expenses are covered.

Beyond the existing funding agreement, the potential for future funding can also be a strong incentive. Oftentimes, the association is implied, but vague. Publishing explicit performance criteria for subsequent awards can shift the risk‐reward calculation for investing in improvements. Again, there can be a spectrum as to whether meeting the bar means guaranteed funding, likely funding, or eligibility for funding. In a sense, you could consider this a variation of tiered funding.

Third Sector Capital Partners, a nonprofit advisory firm focused on outcomes‐oriented funding strategies, applied both of these techniques in its work with King County, Washington to improve timely access to outpatient mental health and substance abuse treatment. Working with 23 of its providers, the county set tailored performance benchmarks for timely intake and transition to routine care, then amended the existing contracts to offer a 2% bonus for meeting improvement targets. That’s the carrot. The stick comes by 2020, when a greater portion of payments will become linked to outcomes and providers that are not meeting performance goals may no longer be competitive. By taking this staged approach to incorporating outcomes payments, Third Sector was able to cut its time to launch in half relative to other comparable projects.

These and other innovations in pay for outcomes will hopefully continue to simplify structures and lead to far broader application. The more we can move towards funding outcomes rather than activities, the better we can incentivize innovation and impact.

BLENDED FINANCE

In blended finance, public or philanthropic dollars can leverage greater amounts of private investment through mechanisms such as loan guarantees, subordinate debt or equity, risk insurance, currency hedging, and technical assistance. Historically, the predominant use has been in public–private partnerships for infrastructure projects such as energy, water, and transportation. Yet the same tools are becoming increasingly applicable, and needed, to fund social innovation.

As the business models for social ventures become increasingly hybrid, so must sources of financing. The Omidyar Network’s Across the Returns Continuum report describes this graduated spectrum between fully commercial and purely philanthropic endeavors.⁷ Today, many mission‐oriented organizations are able to generate some amount of revenue. For them, relying solely on grants would dramatically limit how much they can raise, and thus grow. Yet to rely purely on service fees or private investment would push them towards less risky and more profitable markets, forgoing opportunities for deeper impact. There is a huge gap between the expected −100% return for grants and the expected risk‐adjusted market‐rate returns of +5% or more for most investments (see Figure 14.1). Financing mechanisms that can blend the two are the best option to support social enterprises that straddle both worlds.

When the perceived risk of an unproven model or market is too high to offset the anticipated returns, early‐stage concessionary funding is invaluable. This was the case with USAID DIV’s funding of Off Grid Electric that I described in Chapter Eight, in which grant funding helped validate a novel business model for selling to poor, rural households. Such innovations for seemingly less lucrative markets can be difficult to finance, even for impact investors seeking to preserve capital. However, once the market opportunity has been demonstrated, private investors will follow suit.

Grants can also encourage larger corporations to enter markets they would otherwise overlook. In 2002, the UK Department for International Development (DFID) offered a £1 million matching grant to the telecom company Vodafone to develop a system for repaying microfinance loans via SMS. The resulting service, M‐Pesa, has blossomed into Kenya’s most important financial service and is used by over three‐quarters of the adult population of Kenya, with transaction volumes now amounting to over 50% of GDP.

Even when a social venture can successfully raise private capital, incentives may be needed to ensure the most challenging markets – such as those that are poor and remote – are served. Unabated, market pressures will inevitably steer capital towards more lucrative opportunities. In Tanzania, DFID incentivized household solar distributors to invest in the underserved Lake Zone with performance payments for incremental sales that tapered off by 25% a year as the market became more developed. For Off Grid Electric and other vendors, the subsidy was the encouragement they needed to enter a market that had not previously been economically viable.

DONOR COLLABORATION

As with blended finance, when donors can combine their efforts towards shared goals, the results can be far greater than the sum of the parts. For recipients, coordinated funding can reduce the number of proposals, reports, divergent priorities, and ongoing touch points, freeing resources for more productive work. For funders, efficiencies can be gained through shared diligence, coordinated strategies, and greater leverage. A win‐win for social good, but one that requires letting go of some control.

For the campaign to achieve marriage equality in the United States, I was fortunate to participate in one of the most successful donor consortiums, the Civil Marriage Collaborative (CMC). The CMC was founded by a handful of foundations in 2004 to pool resources and strategically align grant making to advance marriage equality. Over 11 years, the CMC deployed $20 million in public education and advocacy grants at both the state and national level, magnified by an additional $133 million from many other aligned partners, ultimately supporting the work of thousands in achieving the freedom to marry in 2015.

If the donor partners had directed their grants independently, they would have likely made divergent decisions without the benefit of in‐depth analysis on the quality of organizations, strategic importance, and potential for results. In contrast, by pooling those dollars with others, they were invested based on CMC’s 10/10/10/20 strategy. The aim was to reach a tipping point nationally by funding effective organizations to achieve marriage equality in 10 states, civil unions in another 10 states, limited civil protections in yet another 10, and some degree of organizing in the remaining 20. Individual state selections were determined through a rigorous benchmarking process based on the baseline of public support, the capacity of state‐level organizations, and the legislative landscape.

Sometimes donors, like those in the CMC, come together on their own. Other times, a compelling grantee can force the issue. As it grew, Bangladesh‐based nonprofit BRAC became frustrated with the high transaction costs required to satisfy different, onerous requirements for reports, reviews, and meetings from each of its donors. After politely articulating its concerns in multiple forums, BRAC was able to bring together the funders for some of its largest programs into donor consortia – the first in 1989 for its Rural Development Programme. Each consortium committed to long‐term funding under a single budget and standardized reports, reviews, and evaluations, sacrificing a degree of independent control and ownership for the greater good.⁸ The resultant flexibility, agility, and long‐term planning have contributed significantly to BRAC’s success.

Happily, given their immense benefits, donor collaborations seem to be on the rise. In Chapter Eight, we learned about two of the most powerful ones: Gavi, to increase access to immunization, and Blue Meridian Partners, to scale solutions for American youth living in poverty. In addition, Co‐Impact was recently launched as a global collaborative to bring together philanthropists seeking to solve social issues at scale. Participants include the Rockefeller Foundation and a number of signatories of the Giving Pledge, including Bill and Melinda Gates, who are investing together in high‐potential system change efforts for underserved populations in low‐income countries.⁹ I hope we will continue to see donors increasing their efforts to collaborate in the future.

A CALL TO ACTION

In their 2018 annual letter, Bill and Melinda Gates describe using their philanthropy “to test out promising innovations, collect and analyze the data, and let businesses and governments scale up and sustain what works. We’re like an incubator in that way. We aim to improve the quality of the ideas that go into public policies and to steer funding toward those ideas that have the most impact.” They go on to say, “If we don’t try some ideas that fail, we’re not doing our jobs.”¹⁰

Even the largest foundation in the world recognizes that it is tiny relative to the spending of business and government. Foundations, philanthropists, and foreign aid will never be sufficient in themselves to address the world’s needs. But, they have an outsized role to play in fueling transformative innovations when returns may be too low for markets and risks may be too high for governments.

To do so will require a new mindset and new tools. First, we need to recognize that our current interventions are insufficient to reach our goals and aspire to devise far better solutions that will bend the curve of progress. Second, innovation can only thrive if funders empower teams with light‐touch incentives. This requires a radical rearchitecture of funding, in order to shift from supporting a linear model of plan–execute to a continuous cycle of test–iterate. Finally, foundations, philanthropy, and foreign aid can play an increasingly catalytic role by intentionally leveraging the larger pools of funding that are necessary to reach the size of the need.

As donors, you hold the keys to unleashing radical social change.