Matthew Bishop and Michael Green

The Capital Curve
for a Better World

The world isn’t short of good ideas. The challenge that confronts every nation on
earth is how to weed out the good from the bad, and then exploit the full poten-
tial of the good ideas and turn them into social innovations that can change the
world for the better. For too long we have relied on the bluster of political debate
and the logic of the pork barrel to decide on the best way to run our schools, stop
killer diseases like malaria, or figure out how to avoid a climate change catastro-
phe. Given what is at stake, something has to change. Fortunately that is starting to
happen.

The world is in the middle of a fundamental rethinking of this process of social
innovation, with the goal of making it far more efficient and effective than ever
antes, through a movement that we call “philanthrocapitalism.” The best business
brains of our age are turning their attention to doing good, using not just their
business skills but, en algunos casos, their businesses. One of the most important tasks
they face is figuring out how to finance the growth of a good idea into a world-
changing social innovation.

The “capital curve” for commercial businesses as they move from start-up
finance to venture capital and, finally in some cases, the public debt and equity
markets, is now well understood. En general, the finance sector does a good job of
matching the right kind of capital to the best prospects for profitability. The social
sector needs an explosion of innovation and new thinking to follow suit, incluido
developing its own well-functioning capital curve. This process, in which the phil-
anthrocapitalists have a crucial role to play, will require a wide-ranging debate
about the respective roles of for-profit, gobierno, non-profit and philanthropic
capital, so that these sectors work together more effectively in ways that play to
their strengths and minimize their weaknesses.

Philanthrocapitalism is behind the growth of mission-related and impact
investing that could lever hundreds of billions of dollars of new financing for social
environmental projects. It is in the efforts of traditional non-profits, such as

Matthew Bishop and Michael Green are the authors of Philanthrocapitalism: Cómo
Giving Can Save the World. Bishop is American Business Editor of The Economist.
On Twitter he is @mattbish. Green is a writer and consultant.

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Matthew Bishop and Michael Green

microfinance lenders, to tap the for-profit capital markets. It is in the emergence of
inspiring conferences about social capital markets, such as SoCap. It is in the inno-
vative partnerships developing around strategies for sustainable profits between
for-profit businesses, such as Wal-Mart and Kohlberg, Kravis and Roberts, y
non-profits, such as the Environmental Defense Fund (and not just as public-rela-
tions window-dressing but as a part of their core money-making strategy). Tiene
even crept into government, with the Obama administration’s establishment of a
White House Office of Social Innovation to find successful ideas for social servic-
es from the non-profit sector and scale them up. And so on, and on.

The growing importance of social entrepreneurs, barely heard of a decade ago,
is one of the leading indicators of this emerging new approach. These are people
who specialize in the start-up phase of the execution of socially innovative ideas,
the counterparts of the entrepreneurs who form the early-stage for-profit busi-
nesses backed by angel investors and venture capitalists. The challenges they face
are arguably far harder than those confronting commercial entrepreneurs, not least
because the primary goal of a social entrepreneur is not to generate revenue and
profit, but to generate less financially tangible but socially more valuable returns
on capital. That increases both the difficulty and the importance of creating an
effectively functioning social capital curve.

The term “social entrepreneur” reflects a movement away from the traditional
bifurcated view that business and business methods are for the for-profit world,
whilst donations and government drive social innovation. It is about combining
the business person’s focus on efficiency with the social crusader’s desire for a bet-
ter world. It is the emergence of these social entrepreneurs that, according to Bill
Drayton, the founder of Ashoka, holds out the promise of a productivity miracle
in the social/citizen sector, which has long lagged behind the productivity of the
for-profit business sector (even allowing for the recent economic crisis).

Ashoka, a network dedicated to supporting social entrepreneurs, has played a
crucial role in improving society’s understanding of the four-stage social entrepre-
neurial life cycle: apprenticeship, launch, take-off (“an extended period in which
entrepreneurs consolidate their organizations and continue to refine and spread
their ideas until they become widely adopted”), and maturity (when “entrepre-
neurs have had demonstrable impact on their fields”).

The management challenges presented by each stage have been increasingly
well-understood in recent years, not least by Ashoka. Drayton thinks that “the
moment of “greatest magic and maximum vulnerability”, is at the take-off point,
cuando, without the right help, so many good ideas either wither and die or get stuck
as isolated “islands of excellence”. Más recientemente, the management challenges of
more mature social organizations, such as leadership succession and remaining
innovative, have also been better understood. Specialized consulting firms such as
Bridgespan and non-profit arms of mainstream consultancies such as McKinsey
and Monitor have emerged in recent years to tackle these new problems of success-
lleno, but not successful enough, organizaciones.

innovaciones / invierno 2010

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The Capital Curve for a Better World

Yet improving management and nonprofit governance is only part of the rev-
olution that is needed. The next frontier in raising the efficiency of social innova-
tion has to be the capital markets for good.

WHERE THE MONEY IS

Over the past few decades, our understanding of how to finance the growth of a
good business idea into a world-beating company—say, Google—has improved
massively. The efficiency of the capital curve that goes from angel funding via ven-
ture and mezzanine to publicly traded corporate debt and equity, though still not
perfect, has improved considerably. By contrast, our understanding of how to
finance the growth of a good idea into a world-changing social innovation, aunque
better than it was 25 years ago, lags far behind. There is no easy fix. The for-profit
capital markets are based on thousands of innovations that have helped bring the
right investors together with the right investees. A concerted effort is now needed
to design an effective and efficient capital curve for social innovation.

For a regular entrepreneur, the financing question is essentially about extract-
ing money from for-profit investors and from customers who will pay for the
products and services that the start-up produces—after the initial seed help from
what Amar Bhidé, author of The Venturesome Economy, calls the “three Fs”
(amigos, familia, and fools), and perhaps some extra pennies from government
enterprise grants. The social entrepreneur with a good idea, por el contrario, is often
likely to focus on raising money from philanthropic investors who do not expect a
profit. The social entrepreneur may also look ultimately to government to be her
biggest paying customer.

Yet in recent years, the social sector has seen a growing and increasingly impor-
tant role for for-profit investors and paying customers for social entrepreneurial
businesses that also needs to be incorporated into the social innovation capital
curve.

The challenge in driving more efficient social innovation is to figure out which
forms of money—grants, debt, equity, government funds, for-profit funds, paying
customer—are most effective at which stage along the journey from good idea to
having massive social impact. The systems then need to be put in place to ensure
that the resources that exist are available to the most promising ventures at differ-
ent critical junctures. (In commercial technology entrepreneurship, a lot of atten-
tion has focused on the early “funding gap” between invention and market-ready
innovation. Alas, we suspect, there are currently funding gaps all along the social
capital curve.)

The new social innovation capital curve requires an up to date understanding
of the strengths and weaknesses of each of the different sectors with money and
resources—for-profit, gobierno, non-profit, and philanthropic. This will then
allow us to focus on how to get these sectors to work together more effectively in
ways that play to their strengths and minimize their weaknesses.

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Matthew Bishop and Michael Green

Específicamente, private for-profit capital has proved extremely effective at taking
some kinds of innovative ideas to scale; in allocating capital to promising ideas,
testing them quickly, sorting out the good from the bad; and in shifting capital
from where it is underused to where it can be better used. Sin embargo, as the recent
global economic crisis has demonstrated, too often for-profit capital has been uti-
lized in ways that focus on short-term gains at the expense of long-term goals. Y
it has frequently pursued private gains at the expense of, rather than for the
increase of, the benefits to society as a whole.

Government—from the local council level to multilateral agencies—has huge
advantages in driving large-scale change, through some combination of legal
authority, democratic legitimacy, and the ability to raise taxes and borrow cheap-
ly. Even in developing countries, where the quality of political leadership and
administrative competence is (sometimes much) más bajo, despite a great deal of
socially entrepreneurial innovation in these activities, only governments have the
potential to provide universal access to a more limited list of basic services, como
primary education.

Sin embargo, government often struggles to be innovative and take risks.
(Politicians have to be re-elected every few years, which makes them wary of any-
thing that costs money but could fail, or only pays out when it benefits their suc-
cessors.) Government can also be extremely ineffective, especially when compared
with the for-profit capital markets, in shifting funds from existing uses to new uses
with a higher value. (Political processes tend to give a stronger voice to those who
benefit from how government funds are currently spent than to those who might
benefit one day from a risky new idea.) When it works with outside organizations,
government often prefers shorter-term funding rather than long-term capitaliza-
tion of new initiatives.

The non-profit/philanthropic sector has a decent record of funding innovative
ideas in the early stages of putting them into practice. Sin embargo, non-profits have
tended to remain small and inefficient, especially by comparison with for-profit
companies. They often have little choice but to rely overwhelmingly on short-term
fondos, which tends to be extremely expensive to raise (especially when it is in
small amounts from the general public). Large-scale philanthropy has the poten-
tial to provide the long-term, high-risk capital that social innovation often needs,
but too often is risk-averse and uses short-term project financing rather than pro-
viding innovative start-ups with philanthropic equity. Online crowd-sourced
donations channelled through websites such as GlobalGiving also have an increas-
ing role to play.

Each of these sectors has great strengths to bring to the capital curve needed to
build a better world. Yet often there are significant barriers in the way of these sec-
tors collaborating effectively with each other to bring a good idea to fruition. Laws,
tax and fiscal policies, and organizational and societal cultures currently all too
often work together to emphasize the differences between non-profit, for-profit,
filantropía, and government. This tends to keep them in their silos rather than
to encourage the smooth and timely transition between different sorts of money

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The Capital Curve for a Better World

that is the essence of a well-functioning capital curve. These barriers urgently need
to be broken down.

Describing the capital curve for social innovation can help, not least by
addressing the widespread misunderstandings that the different sectors have of
entre sí. Government, Por ejemplo, often tends to view the philanthropic/non-
profit sector more as a source of cheap funds and other resources than a source of
socially entrepreneurial innovation. For-profit companies often look at partner-
ships with non-profits as a public relations activity rather than as an opportunity
to improve their long-term profits through win-win collaborations that combine
the financial clout and organizational reach of the corporation with the deep
insight into social change of the non-profit. Non-profits are too often happy to
take the money from either or both and chug along.

The result is so many missed opportunities for the sectors to work together
and add value to each other. Cultural norms and legal restrictions have often held
back institutional investors (including philanthropic endowments) from urging
the companies they invest in to focus more on long-term value creation and prof-
it maximization. Philanthropic endowments have only slowly started to see the
potential to achieve their missions by investing in securities that help the organi-
zations they back to achieve social goals while offering below market but above
zero financial returns. Governments have often denied the private sector, both for-
profit and philanthropic/non-profit, a meaningful seat at the table at high-level
discussions of how to solve the biggest problems facing the world (while often
allowing the for-profit sector to “buy” access to governmental processes through
lobbyists and campaign finance).

RISKS AND RETURNS

The for-profit world didn’t crack the capital curve question because it is innately
smarter; the for-profit capital curve is just easier because it involves a fairly
straightforward combination of financial risk and financial return. At one end of
the curve is the high-risk, high-return combination provided by angel investors
and venture capitalists; at the other is the low-risk, low-return mixture of the
investment-grade bond investor.

The social innovation capital curve is far more complex because of the diffi-
culty of measuring the social return on investment. Philanthropists and govern-
ments are both looking for social returns, with governments, it is widely under-
permaneció, having much less appetite for risk than philanthropists. Hasta ahora, so straight-
forward. That would suggest a capital curve in which philanthropists take on the
role of venture capitalists (hence the term “venture philanthropy”), funding ideas
with high risks but potentially high social returns, while governments focus on
scaling up social innovations that have been proven.

Sin embargo, the difficulty in measuring social returns means it is hard to say with
much confidence whether that is what either philanthropic foundations or govern-
ments actually do. En efecto, there are plenty of reasons to suspect that they do not,

innovaciones / invierno 2010

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Matthew Bishop and Michael Green

due to the personal risk-aversion of foundation trustees and elected politicians and
the fact that a lack of data makes it easy to settle for business as usual rather than
the hurly-burly of innovation.

There has been much work done over the years to try to measure more rigor-
ously social impact and social returns on investment, through triple bottom lines,
blended value etc, much of it pioneered by Jed Emerson (who has given valuable
intellectual input to this article). It may never be possible to design data for social
investment that are even as rigorous as profit is as a measure of success for the
business world (nor, en efecto, is profit the perfect measure of successful capitalism,
as the financial crisis demonstrated). Yet there are plenty of reasons to believe that
considerable improvement can be made on what passes today for measuring social
impact to turn it into a genuinely useful tool for allocating social capital.

The most important first step will be to get agreement, as far as is possible,
among those who are already committed to social innovation to start using some
common definitions. At the moment, relatively trivial differences in, decir, the meas-
urement of environmental impact are frustrating any meaningful comparative
análisis.

It may only be a baby step but there was an extremely encouraging develop-
ment in September 2009, when a group of prominent investors committed to
social innovation launched the Global Impact Investment Network (GIIN).
Among GIIN’s founding members were giant philanthropies such as the Bill and
Melinda Gates Foundation and the Rockefeller Foundation, mainstream financial
firms such as J. PAG. morgan, Citigroup and Deutsche Bank, Generation Investment
Management (a green-tinged fund management firm co-founded by Al Gore) y
innovative philanthrocapitalistic hybrids such as Acumen Fund, which invests
philanthropic dollars in for-profit firms in developing countries. The GIIN’s goals
include sharing information on what works and what does not, and agreeing on
common language and measures of performance. One way it will do this is
through the PULSE performance measurement system developed by Acumen,
Rockefeller and the philanthropic arm of Google.

If GIIN can build a consensus among some of the big hitters in the social
investment world about how to measure what works, we can hope that this will
help to dispel much of the muddle and confusion that holds back social impact
measurement today.

GETTING AHEAD OF THE CURVE

Better measurement of social impact should lead to a better fit of capital to social
innovation, as money naturally flows more easily to where the demonstrably best
ideas are. But there are several other ways in which the functioning of the capital
curve can be improved—ways that are already starting to be put to work.

The first is the rise of what we call “virtue’s intermediaries”, which play an
equivalent role in the world of social innovation to that of the financial interme-
diaries of the for-profit world. This idea has been attacked superficially in the after-

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The Capital Curve for a Better World

math of the financial meltdown of September 2008, characterized as arguing that
the social sector needs “Lehman Brothers to the rescue”. But although the main-
stream financial sector can certainly do better, it is hard to fault the efforts of their
counterparts in the social sector. These range from the likes of Echoing Green,
which provides seed capital to social entrepreneurs, and the Non-Profit Finance
Fund, which provides loans and growth capital, to Sea Change Capital, which rais-
es equity-like capital for non-profits, and New Philanthropy Capital, which does
research on which non-profits offer the greatest social bang for the buck. (It would
also be desirable to see the emergence of the equivalent of mergers and acquisi-
tions advisors to broker the sort of organizational combinations that rarely occur
in the non-profit world.)

The greatest weakness of these “good-brokers” is that they are underfunded,
not least because philanthropists and indeed governments too often regard invest-
ing in infrastructure as inferior to funding programs that have a direct impact on
the needy. Sin embargo, the infrastructure of virtue’s intermediaries may actually
ensure that those direct programs deliver a far higher social return on invest-
ment—in which case they would be a high impact social investment.

The second area is to accelerate the ability of some ideas to move from relying
on philanthropic capital and government grants into a for-profit activity that can
be taken to large scale by the for-profit capital markets. Aquí, microfinance
demonstrates the possibilities. Encima 30 years it has transitioned from pure charity
into an industry that now includes many for-profit financial institutions, cual
serve millions of people who were previously denied access to basic financial serv-
ices. True, this evolution has not appealed to some microfinance pioneers, mayoría
notably Nobel Peace Prize-winner Muhammad Yunus. Yet there is little doubt that
tapping the for-profit capital markets has enabled this good idea to reach a far
greater scale far more quickly than would have been possible by relying on chari-
table funds or foreign government aid.

A more efficient capital curve could potentially achieve similar results in other
bottom of the pyramid services for the poor, in areas such as basic education, clean
water supply, and health care, but far faster. Philanthropic funds could be used
deliberately to design and test business models that could be scaled up by for-prof-
it capital, instead of chancing upon such a model, as happened with microfinance.
Ignia, a new investment fund started by Alvaro Rodriguez Arregui and Michael
Chu, and backed by philanthropists such as Pierre Omidyar, is attempting to pio-
neer in several bottom of the pyramid sectors this accelerated movement along the
capital curve from philanthropy to for-profit.

The third area is to improve the transition along the curve from high-risk,
high-return philanthropic capital to large scale, less risk-tolerant government
fondos. One important initiative is the establishment of the White House Office
of Social Innovation and its associated Social Investment Fund. The goal is to
explicitly search out social innovations that currently work on a small scale and to
grow them rapidly with government funds to maximize their social impact. Este
will not be easy—New York City, under its philanthropist mayor, Miguel

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Matthew Bishop and Michael Green

Bloomberg, is probably the best example so far of putting this idea into practice—
and the eyes of the world will be on this promising American experiment to see if
it can be replicated elsewhere.

Another useful development is the rapid increase in the number of “partner-
ship offices” to work with at all levels of government—from multilaterals such as
the United Nations, which established an Office of Partnerships in 1999, to the
national level, such as the office created by the President of Liberia to coordinate
NGO activities in the country, to local mayors such as Cory Booker in Newark,
New Jersey, who established a philanthropy office in City Hall. Maybe politicians
and bureaucrats are starting to see the potential in partnerships.

Another opportunity is the use of financial innovation to provide market
incentives for social innovation using government capital. Measuring social impact
better allows those who care about social impact to put their money where their-
mouth is, creating an incentive for innovators to deliver novel solutions by paying
them when they deliver. Traditionally, governments have been the main source of
this sort of funding for social outcomes, but often they have spent their money
inefficiently, delivering services themselves in ways that are closed to innovation—
a tendency that has only somewhat been reduced by the global privatization wave
of the past 30 años. For government, how much it spends on a problem has too
often taken precedence over what the money achieves.

Más recientemente, sin embargo, governments and multilaterals have started to offer
forms of financing that incentivize innovation. One example is the advance mar-
ket commitments made by governments to buy certain drugs for the poor in the
event that pharmaceutical companies develop them. This greatly reduces the risk
to drugs firms of doing research with a high potential social impact but, before the
advance market commitment, a potentially low or uncertain financial return.

Another interesting new idea is the social impact bond being developed by
Britain’s Social Finance, another new social investment bank. The idea is to attract
private capital into solving a deep-rooted problem that is soaking up public
dinero. Llevar, Por ejemplo, re-offending by released prisoners, which costs the
British government millions of pounds a year. A social-impact bond could raise
money to pay for the expansion of organizations with the expertise to reduce re-
offense rates. The more money the organizations save the government, the higher
the return the bond would pay investors. This goes beyond a standard public-pri-
vate partnership, which is expected to provide the same service as the state, pero
more cheaply. The social-impact bond would reward better social outcomes and
not merely cut costs.

Social Finance thinks that the social-impact bond could be tried out in sever-
al public services. Besides being used to tackle reoffending, it could reduce the need
for children to be put in residential care or improve community-based health care,
easing the strain on hospitals. The key is to measure performance clearly, de modo que
contracts can be enforced.

A fourth need is to improve the legal and fiscal context in which social inno-
vation takes place. This agenda ranges from the tax treatment of charitable giving

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The Capital Curve for a Better World

to the legal treatment of different types of activity. There is growing interest in
making it easier for activities to transition from non-profit to for-profit, and to
stay in hybrid organizations that can make some money but are not obligated to
profit maximize.

Other countries should follow the example of Britain, En cual 2000 created a
Social Investment Taskforce, made up of financiers, non-profits, and government
officials, to examine how to improve the social investment process. It came up with
some good ideas, not all of which have been implemented and some of which can
be improved on. Sin embargo, every country could benefit from its own social
investment taskforce to work across the old sectoral boundaries and find new solu-
ciones.

En efecto, it would be great if countries competed with each other to create the
best environment in which social innovation can happen. Many of the ideas in this
article were mulled over in November 2009 by members of the World Economic
Forum Global Agenda Council on Philanthropy and Social Investment. This group
proposed that the World Economic Forum (WEF) should publish an annual Social
Competitiveness Report. This would rank countries according to the effectiveness
of their legal, fiscal, and cultural environment with regard to social innovation.

This would resemble the Global Competitiveness Report that the WEF has
published for decades, which ranks countries according to how favorable a place
they are to do business. This report, it is widely agreed, has encouraged countries
to compete to raise their ranking by improving their tax, legal, and cultural frame-
works for business. Similarmente, a Social Competitiveness Report would drive the cre-
ation of a systematic body of knowledge about the current structure of legal, tax,
and other policies toward social innovation, and about what works best.

We live in a rapidly-changing global economy where innovation has lifted mil-
lions of people and whole countries out of poverty. Imagine if we could translate
that ability to take new ideas to scale in the markets for profit to the markets for
social value. Competition has to be the key. The World Economic Forum’s Social
Competitivevness Report could drive social innovation higher up the political
agenda as countries compete to be better place to do good.

innovaciones / invierno 2010

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