For years, money given to nonprofits has been thought of as charity, says Jed Emerson, the School's Bloomberg Senior Research Fellow in Philanthropy. But a new perspective is emerging: These dollars, while charitable, are still capital investments of precious resources. The HBS Initiative on Social Enterprise recently embarked on an endeavor to understand the fast-changing and fertile arena of social capital markets. "The question has become, can we extract bedrock lessons from the for-profit world and apply them to philanthropy?" says Allen Grossman, the Bloomberg Senior Lecturer in Philanthropy, who will spearhead the effort along with Emerson.

Changes are sweeping the social capital markets, in part because a new breed of donor is altering the terrain: Internet moguls, entrepreneurs, and other business leaders who have created wealth early in their lifetime. "They look at how they created value in the for-profit marketplace and want to take a similar approach with philanthropy," Emerson asserts.

Joining this group of philanthropists are baby boomers, who are "entering their retirement years very engaged," Emerson notes. "They are not going to be happy just writing a check and going to the annual dinner." In addition, says Grossman, there's growing pressure from the government and other funders for "outcome-based" funding -- an approach based on nonprofits achieving certain goals. "It comes down to people questioning the system in which we've invested hundreds of billions of dollars and asking, 'Is it working in an optimum fashion?' "

Grossman, the former CEO of Outward Bound USA, wrote (with Christine W. Letts (MBA '76) and William P. Ryan) the pathbreaking 1997 Harvard Business Review article "Virtuous Capital: What Foundations Can Learn from Venture Capitalists." The article helped catalyze the thinking of many in the nonprofit field and illuminated and encouraged the evolving concept of "venture philanthropy."

Drawing on the expertise of HBS faculty in finance, negotiation, and entrepreneurship, Grossman plans to examine the impact of the terms and conditions of the distribution of capital on nonprofit management and organizational performance. He will also investigate how the availability of capital at various stages of an organization's evolution affects its growth.

Jed Emerson has been engaged in the development of social capital markets for the last ten years as executive director of the Roberts Enterprise Development Fund (REDF) in San Francisco. A pioneer in developing VC-like ways of measuring "social return on investment" (SROI), REDF invests substantially in a small portfolio of local, market-based nonprofits (such as Juma Ventures, which recruits at-risk youth to work in Ben & Jerry's shops). It monitors employee progress and tries to quantify the costs each represents to society. It then tracks how that cost structure changes due to the nonprofit's intervention. "If employees go off welfare and start earning wages and paying taxes, there's an inverse relationship; they end up contributing to society," Emerson says. "We are trying to find out what investments are needed to achieve social value."

At HBS, Emerson will explore how investors in the social capital markets understand valuation without clear-cut metrics by which they can assess their ROI. He will also research how others across the country are trying to develop and advance such metrics. "For decades, people have said there is just no way to measure nonprofit value creation. How can you value a forest, or a clean ocean, or living in a nonracist society? But," concludes Emerson, "there are ways we can begin to talk about value in terms that tell us whether or not we are moving in the right direction."

This article originally appeared in the Winter 2000 issue of Social Enterprise, a newsletter published by the HBS Initiative on Social Enterprise.

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