This post was originally produced for Forbes.
Catarina Schwab, 43, and Lindsay Beck have set out to completely revolutionize philanthropy. Their firm, NPX, Inc., has introduced a new security to Wall Street called the “Impact security,” which they hope will end the practice of funding nonprofits without impact.
Problems in philanthropy
Ted Williams, Managing Partner at Springbok Partners and an advisor to NPX, explained the problems in philanthropy today. “The nonprofit sector is woefully lacking creative destruction. Mediocre and weak organizations are still attracting funding and the best organizations are not accessing the funding they need to achieve real impact. The only way to get to a more efficient and robust nonprofit market is to reward good organizations and penalize bad ones. This will only occur when there are economic consequences tied to impact.”
For her part, Schwab says, “The nonprofit capital market is opaque and inefficient. It is a trillion-dollar industry and the money is being wasted. And it’s being wasted at the expense of human lives and the environment.”
Watch the interview with Schwab in the video player above.
The impact security is intended to address this problem by inserting investors into the philanthropic capital market to better align the money with desired outcomes.
Nonprofits will issue impact securities in much the same way that corporations issue notes or bonds. The money will go to the nonprofit to fund a specific program with a measurable outcome or impact. The investors don’t get their return from the nonprofit but from a philanthropic guarantor instead. The guarantors are happy to take on this role because they want to give their money away but want it to go where it will have measurable impact.
Impact securities put the donors in a no-lose situation. If the program works and impact is verifiably measured according to the contract, the donors are happy to pay. They have funded something that actually did some good—no guessing, only measuring. On the other hand, if the project fails to achieve the intended results, the donors don’t pay and they keep their money to do good with it another day.
The nonprofit is happy with the arrangement. It gets the money for the program up front. This puts some new pressure to perform on nonprofits, but it is the sort of pressure that is already increasing in the philanthropic marketplace as donors increasingly look for measurable impact.
The investors are taking risk, but not as much as you might worry. The donors acting as guarantors will often put their money in a donor advised fund when the securities are issued so that the funds are already available to meet the guarantee if the outcomes are achieved.
Under longstanding Federal rules, nonprofit securities are not subject to SEC regulations, potentially making them less expensive to issue and allowing ordinary retail investors to participate, not such wealthy or “accredited” investors. This even opens the possibility of crowdfunding.
Measuring impact will be a challenge. Schwab says, “We can structure and execute an impact security for any nonprofit with measurable impact.” Still, it is often easier to measure intermediate outcomes than it is measure long-term impact.
Schwab says her model will increase the availability of measurement data and will thereby make measurement easier.
First Transaction: The Last Mile
The first transaction that NPX hopes to complete is an issuance for a nonprofit called The Last Mile that trains prisoners to code while in prison and even employs them to do it. The prisoners can earn $17 per hour, which compares favorably to the $0.94 per hour they earn from other work in prison. This allows them to leave prison with a nest egg, even though much of the money they earn goes to restitution and reimbursing the state for its costs. Some prisoners have even found six-figure jobs after being released from prison.
After working on the project for months, Schwab observed that people often say that prisoners deserve a second chance when they get out. She’s concluded that for many of them that isn’t fair. “This is their first chance; it’s not their second chance.” Some have simply never had an opportunity to get the education and training they need to survive as a contributing member of society. The Last Mile gives them this opportunity.
The impact security the nonprofit hopes to issue will fund a program at San Quentin. The impact that will be measured is straightforward: hours worked in the development shop. This output measure can be tracked easily and objectively. It does, however, ignore the question of whether the program achieves its stated, longer term objectives of helping with a successful reentry and reducing recidivism. Schwab notes that some of the prisoners will never leave but having a real job while in prison is still life-changing.
Prison statistics in the U.S. are staggering. While only 5% of the world’s population lives in the U.S., 25% of the world’s prisoners do. It costs five times as much to incarcerate someone as to educate them.
NPX hopes to help The Last Mile break the cycle and return productive people to society.
Schwab’s explains the premise of her work, “One simple change of linking money with impact changes everything.” Now she’s out to prove it.
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