Originally posted on Devex Impact

As NGOs look to explore how they can work in the emerging space where business meets social good, John Kohler, the director of impact capital at the Miller Center for Social Entrepreneurship, writes about the three critical features their experiments need to have to succeed. 

An increasing number of international nongovernmental organizations, faith-based social ministries, and aid organizations are beginning to incorporate impact investing into their operations.

By now, there’s enough evidence in impact investing to see the benefits of applying money and building markets to foster entrepreneurship and prosperity from within underserved communities around the world. Unfortunately, evidence also shows that the last 60 years of foreign aid has yielded scant long-term results, apart from things like disaster relief, where foreign aid is crucial.

Those involved in programmatic support recognize the broad failure of a top-down aid approach in addressing long-term, systemic issues such as poverty, health, education and environmental degradation. That’s why they’re interested in approaches that have more persistent results.

Social entrepreneurship, fueled by impact investing, is about the creation and growth of ongoing businesses that can become self-funded, or where the market pays for the goods and services that the businesses deliver.

Social enterprises exist at the intersection of the public, social and private sectors — along with emerging corporate engagement and mission-based business efforts to serve the poor.

International NGOs and faith-based organizations such as Heifer InternationalOxfam, Humanitarian Aid Commission, Christian AidCAREMercy CorpsCatholic Relief ServicesBRAC, and ACDI/VOCA are beginning to experiment with new ways to achieve sustainable impact through the support and funding of businesses arising from within local communities.

In other words, they’re experimenting with social enterprise solutions fueled by impact investment.

As NGOs look to explore how they can work in the emerging space where business meets social good, their experiments will need to have three critical features:

1. “Points of presence” — i.e., staff, facilities, projects, partners — local to the problem that deeply understand the context of the problem, both culturally and systematically.

One way NGOs can begin is by evaluating the programs and partners at existing points of presence and asking if any of them are fundable. This might mean observing that an NGO purchased a sewing machine for a poor woman making garments to earn income, then using some of the proceeds to buy more sewing machines for more women — eventually building a profitable garment shop. It might mean expanding relationships with local farmers into the creation of agricultural-based businesses, such as bakeries or wineries. Or it might be as ambitious as meeting some or all of a village’s electricity needs through community solar systems or solar products distributed by networks of community members.

Points of presence can also be offices, staff, church parishes and NGO program partners that are embedded into the communities being served. In these cases, the points of presence can provide valuable local context for fundable enterprises.

2. Capital along with the knowledge of what it takes to run a successful business — otherwise known as capacity development.

Once fundable points of presence are identified, the next step is identifying sources of capital. The traditional routes of grants and donations are giving way to some flavor of impact investing. That’s because applying for grants, soliciting donations, and managing how the funds are spent consumes enormous amounts of energy and staff resources. Because grants are highly focused and short-lived — a particular program might be funded for only two or three years — it’s almost impossible to sustain momentum toward any particular impact goal.

Plus, grants and donations are by definition one-way trips for capital: from the funder to the recipients.

What if instead of spending their time writing and managing grants, NGOs instead spent that time investing in social enterprises? They wouldn’t have to see market-rate returns or even profits to come out ahead financially. Making back the money invested with no profit — i.e., seeing their capital make a round-trip journey — would mean they could take that same capital and invest it over and over again.

Achieving round-trip returns on investment requires that the social enterprises be successful as businesses. It also requires a different form of investment vehicle that can “self-liquidate” over time. Such vehicles are beginning to appear and are attractive to some NGO investment funds being set up. In addition, social entrepreneurship accelerators and business-savvy mentors become important for this step, to help shift mindsets from aid and grant-funded processes to solid business fundamentals.

3. Innovation, which means new ways of breaking open a problem to solve it.

The final piece needed here is innovation. Are there new ways of breaking open the problem of how to achieve long-term social and environmental impact in a way that’s sustainable and rewarding for everyone involved, including investors? How can we address issues in ways that are different from the old ways that haven’t worked, despite a surplus of good intentions?

Helping the world’s poor to enjoy a more developed, self-sufficient, prosperous, and dignified living space is the goal here. Empowering NGOs through social entrepreneurship and impact investing can play an important role in achieving that goal.

John Kohler is the director of impact capital at Santa Clara University’s Miller Center for Social Entrepreneurship.