How government can adopt a venture capital mindset to drive social change
By giving big ideas a chance to prove themselves on the open market, venture capital (VC) has fundamentally changed startup financing in the private sector. But the innovative mindset that VC creates has not yet been employed in the social sector.
A new proposal in Congress, the Social Impact Partnership Act (SIPA), could introduce VC-style financing into public programs by infusing $300 million of federal capital into pay for success (PFS) projects across the United States.
This legislation, introduced last year in both the House and Senate, mirrors the $300 million President Obama requested for PFS in the FY 2017 budget. SIPA has the potential to transform the framework for evidence in PFS projects by scaling proven programs while expanding the field to include untested ideas with the potential for extraordinary change.
At the Urban Institute's Pay for Success Initiative, we believe that scaling evidence-based interventions is fundamental to the viability of PFS. We also believe PFS funds can facilitate new innovations with the potential to dramatically improve the public good.
Thus far in PFS, the preference has been for safer, more scalable interventions developed around strong existing evidence bases. These projects are helping thousands of people across the country and producing evidence about what works.
But we also need to tap into new ideas with explosive potential to generate evidence about how government can more effectively and efficiently serve the public good. Here, VC provides a fascinating model.
How VC works
In the private sector, VC is a high-risk financing strategy for companies with groundbreaking ideas. The browser you are reading this on right now—be it Chrome, Firefox, Safari, or Internet Explorer—was created by a company that received VC funding. VC-backed companies have a market capitalization of $21.3 trillion, a majority of the total market for public companies created since this financing strategy began in 1979.
While the numbers are impressive, the benefits of a VC mindset in a social impact context may be best explained through example.
Social programs, particularly preventive programs addressing problems like recidivism and homelessness, achieve success by influencing the behavior of the population they serve. VC elevates companies that achieve this type of behavioral change.
For example, Uber, which matches a passenger with a driver in their own vehicle instead of a cab, has completed more than one billion rides in less than five years. Airbnb, which allows people to rent their homes directly to visitors for short stays as a hotel alternative, created 17 million stays last summer alone. The behavioral change these companies caused was an increase in sharing on a massive scale, as millions of private car and homeowners opened their doors to millions of strangers.
Small initial VC investments gave these companies the ability to start in local markets, in both cases San Francisco. Once Uber and Airbnb proved their impact, investors helped scale to other markets and dramatically expand the number of people that use their services.
Applying the VC mindset to the social service marketplace
Though a majority of SIPA capital would invest in proven programs, the remaining funds could bring untested but promising programs with brilliantly innovative theories of change to the social service marketplace in the same way that investment companies use venture capital funds to stand up private corporations.
Right now, the financial institutions that invest in PFS have venture capital arms designed to enter into high-risk projects, but none of them apply their VC resources to PFS. Private VC is designed for one home-run investment to make extraordinary profits, but the success of a home-run social program is measured in people reached, not dollars made.
SIPA could fill this void because government investment, unlike private capital, values social impact over financial profit. With this $300 million infusion of capital into the field, governments across the country could take risks on new programs that might give them the tools to solve previously unsolvable problems.
SIPA would maintain high standards of evaluation for each project funded through the bill, mandating experimental evaluation when possible and the most rigorous available quasi-experimental evaluation if an experimental design cannot be employed. Coupling the $45 million in rigorous evaluations mandated by SIPA with the ability to fund new programs could make it a game changer for human services.
VC in the private sector has allowed new ideas to change the behavior of millions of people. SIPA could give PFS the potential to bring that same kind of innovation-driven change to the social sector.
Pinterest market researcher Paul Pattishall works at his desk at the office in San Francisco, Wednesday, April 1, 2015. The San Francisco-based venture capital darling celebrated its fifth birthday in March 2015. Photo by Jeff Chiu/AP