Root Capital on the challenges of blending colors of money inside an organization:
Willy Foote, the founder of Root Capital, which invests in the growth of agricultural enterprises, realized early on that diversifying his organization’s capital base would make it easier for him to scale the business. This is because Root Capital has different and distinctive uses and business models within their organization. For example, the loan portfolio could be financed with low-interest loans and the training and field building could be subsidized with grants. As a result, he and the team created a “layer cake” of different kinds of funding that the organization could leverage for various purposes. Years later, though, he says he “was guilty of not being crisp enough about the different expectations you have to set with the kaleidoscopic stakeholders you have to bring together.” He set expectations for the entire organization around reaching complete self-sufficiency as he experimented with growth on the investing side. Today, he says, “Even though we expect to fully repay all of our loans, we will never set expectations again that we will be fully break even at the organizational level. So, everyone understands now that we are all about impact and additionality.”
Key takeaway: Diversify your funding, but set clear expectations with each funder.
Educate Girls on how a Development Impact Bond (DIB) has changed its organization’s overall performance systems:
Prior to the DIB, Educate Girls, an organization that leverages existing resources to ensure that all girls are in school and learning well, was focused on activities and outputs: how many life skills sessions were held, how many girls were attending school, etc. Funders had required Educate Girls to report these metrics, and were satisfied as such. However, according to Maharshi Vaishnav, Global Development Director, they shifted to an outcomes-focus using the DIB: “Our two outcomes in the DIB contract are enrollment of girls and learning outcomes of children. There are activities that drive each outcome. This has also shortened our self-correction time. We used to gather 25 district-level indicators on mobile phones, and it took two to three months to clean and analyze the data. By the time the management decided on a red flag and course correction, it was taking six months. With the DIB, we’ve institutionalized online and offline performance management systems (PMS). Now, we can course correct in two months. This has changed the performance focus of our entire organization.”
Key takeaway: Consider how results-based financing can drive process improvements and outcomes, as well as open new sources of capital.
Water & Sanitation for the Urban Poor (WSUP) on creating a for-profit subsidiary to access new types of capital:
WSUP, which is an organization that helps transform cities to benefit the millions who lack access to water and sanitation, was focused on doing work in six core countries. However, as it moved to scale, it was seeing opportunities in different geographic regions with different types of funders. Seeing an opportunity to extend its impact by bringing its expertise to more communities, as well as an opportunity to earn additional income, WSUP launched an internal team to provide consulting services. After 12 months, WSUP shifted from an internal team to launch a for-profit subsidiary—WSUP Advisory—that is 100 percent owned by the parent nonprofit. This for-profit structure allows WSUP to access different funders and revenue streams, mitigate risks and attract talent that might not otherwise come to the nonprofit sector.
Yaver Abidi, Managing Director of WSUP Advisory, provided some additional context and caution: “WSUP Advisory is doing some amazing projects, building upon the expertise of WSUP. If it works, it’s not just about revenue and profit, it’s about finding another way to achieve impact. Approach it in that order if you can, it’s not a money-spinner. Don’t do it from desperation. WSUP approached this as if it didn’t just see dollar signs. People somehow think it’s easy to make a lot of money on the for-profit side, but it really isn’t. Don’t approach it as a gravy train, because you will certainly fail.” He went on to say that it was critical for WSUP Advisory to be launched out of WSUP, which was in good financial health, because it provided the stability and platform to grow. “Starting something like this,” he said, “will not save a struggling organization. Don’t strap an eagle to the back of a turkey in the hope that both will fly.”
Key Takeaway: Consider hybrid legal structures to help leverage new sources of capital and extend impact, but realize it is not necessarily a panacea.
Read much more in Scaling Pathways Financing for Scaled Impact.
The Skoll Foundation, USAID, Mercy Corps Ventures, and the Center of the Advancement of Social Entrepreneurship (CASE) at Duke University’s Fuqua School of Business have worked in partnership to create the Scaling Pathways series, sharing best practices and hard won insights in addressing scaling challenges from some of the world’s most successful social enterprises.
