Impact Market Failure

It comes down to this: we're all operating in a dysfunctional market for impact.


This article was originally published by Stanford Social Innovation Review on April 7th, 2011 with the headline: Impact Market Failure

I was dragging my feet on the way to the Skoll Forum in Oxford. I'd been in Africa for a month, connecting with 20 organizations in 4 countries in 4 weeks, and I was pretty desperate to get home and sleep in a room I didn't have to check out of.

I'm really glad I went, though. Among other things, the organizers did a beautiful job of bringing serious funders together in a productive way. Those who came seemed like a different breed of donors, in a different kind of mood. There is a high ratio of doers to donors at Skoll, which may explain why the donors there seemed less afraid of hanging out with doers and more serious about funding them.

As for doers, the Skoll social entrepreneurs are the kind of people who make you feel optimistic about the fate of the world, and it's nice to see them celebrated. All the hoopla makes it that much weirder when you talk to them and find that almost all are in a continual scramble for money. Two of the organizations who've demonstrated big bang for the buck are in precarious financial straits and no one's financial future is assured, no matter how well they perform.

That's just wrong. For god's sake, these are the rock stars, the golden ones anointed by Jeff Skoll and blessed by Archbishop Tutu. They're not the only great ones out there, but they're all pretty remarkable. We've been making a big deal out of social entrepreneurship for a decade, but even the most celebrated are still reduced to passing a tin cup. What gives?

It comes down to this: We're all operating in a dysfunctional market for impact.

Think about it. In the for-profit world, if you make a big profit, everyone wants a piece of you. If you have a money-making idea, you need to protect it from me, or I'll steal it. With a few hiccups here and there, capital flows toward success.

That doesn't happen in the social sector. Real impact—our analog of profit—doesn't make it easier tofund-raise. Good ideas sit around unused (a friend of mine referred to the social sector as "a desolate landscape of abandoned pilots"), and zombie NGO's can operate for years without any evidence that real impact ensues. Capital does not flow efficiently toward those who know how to create change.

Ultimately, the fault lies with us, the donors. By and large, we don't fund on the basis of impact—we're like investors who don't look at profit-and-loss sheets. Because we don't demand ongoing measurement of impact, organizations don't do it. Because we prefer to fund shiny new stuff, organizations have little incentive to copy others' successes. Good ideas languish, and high-impact organizations struggle to raise the money they need to grow. Calls for collaboration go unheeded because organizations won't get credit for the increased impact, and it may even hurt fund-raising.

As far as I know, no foundation head—or even program officer—has ever been fired explicitly for lack of impact. Wouldn't it be great if a few of us who head up foundations got the chop for insufficient impact? How cool would it be if organizations without demonstrable impact went out of business, if high impact translated into higher compensation, if successful founders could move on with enough dough to start something new or sit on the beach for a while?

There are encouraging signs out there. More donors are asking for measurement of impact and a lot of smart people are working on ways to measure it. I worry that they're going to make it too complicated—at our little shop, we rely on a relatively simple eight-word-mission and single-best-indicator approach, and we prefer internalized systems where ongoing measurement feeds back into operations.

However we do it, though, it has to happen, and we have to fund on the basis of what emerges from the process. And in the end, I ought to get fired if I can't show that our investments have led to real, scalable impact.

There, I've said it. Hold me to it.