Traditionally, these two concepts have been separated by a Chinese Wall built with a combination of ethics, moral, and even legal barriers. In the nonprofit world, investments used to be purely a means of increasing the capacity to give over time and grant making was the only way to further a mission. Today those lines are greying, partly due to a rise in social entrepreneurship and the introduction of for-profit strategies in giving among individuals and foundations.

 

Today, giving is less of a handout and more of a hand up, while investing is increasing, taking adding social impact as a factor. Don't believe me? In two seperate U.S. Trust surveys, one showed the growing role of impact in investment decisions and the other showed the level of satisfaction among high net worth individuals (HNWI's) in their giving experience. The former revealed that the importance of social, political, and environmental impact was 49% among baby boomers, 70% among Gen X'ers, and 85% among millennials! The latter study showed that 60% of HNWI's were dissatisfied with their giving, citing impact/efficiency and engagement as primary factors. 

 

What does it mean? The market must react. Financial advisors and non-profits will either have to adapt to the shift of expectations or become obsolete. As crazy as it sounds, the government may be reacting faster than the private sector, with the extension of the IRA charitable rollover and the recently  expanded definitions of program-related investments, or those that favor social impact over pure financial returns for private foundations. 

 

As we (Benefunder) work in the Donor Advised Fund space, we working with financial advisors, donors, and research programs, dealing with both investing and grant-making. We realized that in order to satisfy all stakeholders, we need to push the envelope and balance the challenge with opportunity in shifting market conditions.

 

I was asked to host a roundtable at this year's Council on Foundations Annual Conference in Washington, D.C., which is the largest gathering of foundations, endowments, non-profits and related service providers in the U.S. As expected, a lot of networking, idea sharing, and informational sessions ensued. Perhaps less expected was a conclusion I came to about impact investing, which I hadn't previously realized: all investments and grants are impact investments, and the structure that defines them is simply a reflection of the risk/stage and expected outcome of an organization, company, or program. 

 

Zoom out and think of all capital classes as having the same lens. If you line them up on a continuum, you have pure gifts (giving capital with no expectation of a return other than to help further a cause) on one extreme. Leading to the opposite end of the spectrum are proof of concept/clinical trials, startups, merging growth companies, and impact bonds, where you'd have the least risky investment, say treasuries (still impact). Along the continuum, there's a seesaw effect: when the bar is perfectly level, we expect the stage and risk are on an even plane with a potential outcome (impact and return). From there, we would transition from a grant to a financial return structure when deploying capital, which can still happen within a university.

 

What does it mean? Basically, we need to reevaluate how we view giving and investing. Since traditional grant making and impact investments aren't competing, they may come from multiple sources (for-profit vs. non-profit), sometimes simultaneously. For Benefunder and our mission to match researchers with aligned sources of capital, this holds very true. In traditional investing (stocks, bonds, mutual funds, etc.), we have this notion of an efficient market, where price and demand are in parity. This is far from true in the non-profit world, particularly when it comes to research! There's plenty of evidence of this, but unfortunately not a lot of attention, which, for a capitalist, spells opportunity! The 'innovation deficit' is very real and has a profound effect on more traditional for-profit capital markets downstream. Since so many large companies can trace their origins to a research grant, this is simply a problem of aligning risk classes of capital with opportunities that match the intended outcome in an efficient way. This also means supporting the riskiest programs with the longest time horizons (basic research) through late stage research/new ventures, as well as established companies that are reflecting aligned values. 

 

This is what gets us excited!