Impact investing has never been more prominent. Nearly $1.6 trillion is now deployed with intent to generate social and environmental returns, according to the latest GIIN research.
Yet the field-building organizations that make impact investing work — by developing standards, training practitioners, convening and disseminating best practices, and advocating for enabling policy — are operating under funding constraints and uncertainty that jeopardize their impact and long-term viability.
Too many organizations are competing for roughly the same philanthropic dollars that existed 15 years ago, when the field was a fraction of its current size.
The result is a field that looks successful from the outside but is structurally underfunded at its foundation. Funders who care about the long-term health of impact investing have a rare, high-leverage opportunity to fix that, not by writing more checks to more organizations, but by funding the consolidation necessary to make the field-building ecosystem stronger.
A field built for growth is now under strain
We had the good fortune to work together at the Rockefeller Foundation nearly 20 years ago, when the term “impact investing” was coined to refer to investments made with the intent to generate positive social and environmental impact alongside financial return. It was a “big tent” concept that we hoped could bring together some of the sectors (microfinance, clean tech, etc.) that had long preceded it.
While at Rockefeller, we ran a time-bound grant-funding initiative to incubate a cohort of field-building organizations that would take impact investing from a niche concept few people had heard about to an approach that many prominent investors and the institutions that manage trillions of dollars of investment assets now understand and support.
The amount of impact investing capital deployed has grown steadily. But we never intended to measure success in assets deployed. Impact investing has always been about solving social and environmental challenges. So we are sobered and motivated by the fact that economic inequality has continued to widen and “business as usual” in the capital markets has delivered an increasing share of profits to a shrinking number of people.
Unfortunately, that may also mean we need fewer, stronger organizations.
Fragmentation and competition
Based on our back-of-the-envelope math, there are about three to four times as many field-building organizations as there were when we left the Rockefeller Foundation more than 15 years ago, but about the same amount of philanthropy to support them. Most of these organizations do important and courageous work, but most are also severely underfunded. Some have been able to develop meaningful earned revenue strategies to reduce their dependence on philanthropy. Most have not.
When too many organizations compete for too few philanthropic dollars, it places enormous financial strain on those organizations. Inevitably, short-term fundraising pressures distract from a focus on long-term mission — in this case, the critical work of reshaping our economy so it works better for more people and the planet. In addition, leadership is fragmented and organizations feel pressured to advocate for their individual work rather than the collective needs of the field.
In defense of consolidation
We do not fetishize for-profit approaches as inherently better. But we do know that in the for-profit sector, mergers and acquisitions are often seen as markers of success. And many companies are founded with an explicit intention to build something of value that they can sell to a larger incumbent who can create even more value after a strategic acquisition. That approach creates easier pathways for strategic mergers that leave everyone, and the industry, better off.
Unfortunately, in the nonprofit sector, mergers are often presumed to reflect organizational weakness. We frequently talk to nonprofit leaders who are afraid that raising the possibility of an organizational merger could undermine their prospects for funding and broader credibility. This stigma is wrong and needs to change. Mergers, acquisitions and other types of meaningful organizational integration may actually be key to ensuring the long-term health and sustainability of the impact investing field. Organizations that give it serious consideration should be lauded and supported.
We also know that funders often encourage nonprofits to merge, but do not make available the additional resources needed to make mergers work. Given the stigma associated with them, encouraging mergers without supporting them financially seldom leads to action.
That is why the Ford Foundation has partnered with the Sorenson Impact Institute and the MacArthur Foundation to launch a request for proposals for strategic collaboration in the fields of impact investing and inclusive capitalism.
M&A requires an upfront investment of resources, often at a time when they are hardest to come by. This RFP will consider proposals for critical but often hard-to-fund activities like feasibility studies, legal costs, coaching and severance. It builds on the insights from previous collaborative merger funds, such as the Catalyst Funds that Nonprofit Finance Fund helped to coordinate at another time of financial strain. Those lessons showed the power of flexible funding and the imperative to build trust among nonprofits and funders in recognition of how vexing these actions can be.
We are inviting additional funders to join us. If you believe the impact investing field should be structurally stronger a decade from now than it is today, this is one of the most direct ways to make that happen.
The path forward
Mergers are hard. They require investment at the moment when resources are most scarce. Funders who provide that capital and signal that consolidation is a sign of strength, not failure, can change both the economics and the culture of how this field organizes itself.
The costs of inaction are real, borne most heavily by the people sustaining underfunded organizations year after year and by the communities that depend on a healthy impact investing ecosystem to deliver capital that works for them.
We know there are no magic bullets. But mergers and acquisitions should be part of the menu of options for how we strengthen this field so that impact investing and inclusive capitalism realize their potential to deliver an economy that works for all of us.
Antony Bugg-Levine is co-founder of the Global Impact Investing Network and author of Investing in America. Margot Brandenburg is Senior Program Officer of Mission Investments at the Ford Foundation.
Guest posts on ImpactAlpha represent the opinions of their authors and do not necessarily reflect the views of ImpactAlpha.
