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Step One in Growing Impact Investing: Prove Social Enterprise Works

02/09/2015 04:38 pm ET | Updated Apr 11, 2015

Rigorous evidence of impact is not just about accountability in impact investing. It is an enabler of the field's growth in its own right.

That holds true across the board. Whether its investments in for-profit or non-profit organizations, with philanthropic or commercial impulses, proof of impact attracts attention and gives new investors confidence that the promise of concurrently delivering financial and social performance is for real.

However evidence plays an especially important role for non-profit social enterprises, at an earlier stage in their development.

This is where venture philanthropy provides a natural complement to impact investing, by readying social enterprises for the returns-seeking capital that is becoming more available, thanks to innovations like social impact bonds.

By venture philanthropy I mean an approach that focuses on providing unrestricted, entity-level grant funding, which is desperately needed in order for social enterprises to scale and become truly investable.

And the key ingredient in venture philanthropy is rigorous evidence of impact. By proving replicability, evidence refocuses the conversation with funders on operational capacity, rather than discrete programmatic expenses, essentially transforming grant capital into growth capital.

As the father of social finance in the UK, Sir Ronald Cohen argues, rigorous proof of impact will unlock the capital markets for social enterprises. Once we know the costs, savings to government, and societal value of a range of preventative interventions, Sir Ronald believes impact investing will come to comprise a few percent of most portfolios.

Enter an important new study with the potential to create tremendous momentum.

The study followed 284 workers at seven California-based social enterprises focused on hiring and assisting people who face barriers to work, including the formerly homeless or incarcerated, disconnected youth, and those with mental health disabilities. The common denominator was backing from REDF in the form of funding and business expertise. REDF also commissioned the evaluation, from Mathematica Policy Research.

The research shows that social enterprise employment helps with job retention; workers had a 19 percentage point higher employment rate one year later than people only receiving job readiness and search services, but not placements. And social enterprise employees also had greater economic self-sufficiency; the percentage of total income from government transfers decreased from 71 to 24 percent, and total monthly income increased by 268 percent on average.

Keep in mind these social enterprises cover a majority of their costs using business-related income and are working with extremely challenging populations -- 25 percent of participants had never had a job and 85 percent did not have stable housing in the year before starting work. It's a great deal for society! In fact for every dollar the social enterprises spent, Mathematica found the return to society was $2.23, including $1.31 to taxpayers from reductions in government benefits and increases in revenues.

The numbers tell a powerful story. What's more profound, however, is the study's categorical design, as opposed to being focused on a single organization like many other evaluations.

By including workers at seven social enterprises, the case can be made that the entire concept of transforming lives through social enterprise employment has been independently validated.

Smaller sample sizes mean the results are not as watertight as they could be. But the implications are unmistakable regardless. As Mathematica concludes: "our results suggest that it may be beneficial for funders to support the growth and maturation of [social enterprises]."

In effect, the REDF study should vastly expand the playing field for venture philanthropy to include the hundreds of employment-focused social enterprises that resemble those in the study. And while a lot more work is needed to understand how each social enterprise model differs, and the most appropriate uses of capital, this fresh evidence should ultimately lead to more deals and growth in impact investing.

Even stepping back, and setting aside categorical ramifications, seven more organizations have proven or in some cases reaffirmed their impact: Buckelew, Center for Employment Opportunities, Chrysalis, Community Housing Partnership, Community Resource Center, Taller San Jose, and Weingart Center for the Homeless.

It's up to impact investors to show that, when evidence arrives, capital markets really are ready to be unlocked.

Note: The author is a consultant to REDF, although his work is unrelated to the Mathematica study and the social enterprises Mathematica evaluated.