Venture philanthropists (VPs) are naturally eager to measure how their investments contribute to social change, but these funds often track generic metrics such as how many lives their investments affect. This data provides little insight into a much more important question: How have people’s lives improved? By focusing on overly simplistic metrics, VPs are missing an opportunity to add enormous value for social businesses.
In recent years, leading VPs have begun to embrace a new paradigm in which data is used as an essential tool to deliver greater social impact. While data collection has typically been viewed as a burden done for the sake of reporting, many VPs are now taking a much more proactive role in catalyzing social change through impact management. As one investor put it, “We are in the business of driving social performance and changing lives, not reporting.”
Since 2012, BCG has been working with Nobel Peace Prize winner Professor Muhammad Yunus—one of the pioneers of the social-business concept—and his network of organizations, including Yunus Social Business (YSB). Through this collaboration, we have developed a methodology to help VPs maximize the social impact of their investments. This methodology pushes well beyond the standard bean-counting approach that focuses on reporting. Instead, VPs use powerful data to gain a holistic view of their investments, which allows them to create more resilient and sustainable social businesses and make a meaningful difference in more people’s lives. VPs use this approach to manage impact at two levels: first to understand and optimize the fund’s impact on the social business to build stronger and more resilient companies, and second, to gain a comprehensive understanding of how the social businesses can optimize services and products to deliver better outcomes for beneficiaries.
While most funds track standard business metrics, such as sales figures and financials, few monitor the development and maturation of their social businesses in a structured way—and even fewer report on it. For VPs to strengthen the social businesses they invest in, a new approach is needed.
A social business needs to deliver results in three core areas: social impact, financial sustainability, and organizational resilience. To mature in these areas, businesses need more than philanthropic capital. They need targeted nonfinancial support, such as strategy consulting, training, and access to networks. Nonfinancial contributions are crucial in helping social businesses build internal capabilities and deliver greater impact. VPs can maximize the value of nonfinancial support in the following ways:
By following this structured approach across their portfolio, VPs can ensure that their support is targeted properly and is as effective as possible. It helps secure the VP’s investment, and the resulting insights enable social businesses to become stronger, more resilient, and fully capable of driving social change on a broad scale.
In addition, it’s critical for VPs to keep the lines of communication open with social businesses. Satisfaction surveys provide insight into how much the social businesses value the nonfinancial support they received, particularly in areas closely linked to the core objectives of social impact, financial sustainability, and organizational resilience. By soliciting this type of input, VPs can better understand the business’s needs and take action accordingly.
Much has been written about the importance of monitoring how well social businesses are delivering on their mission, but many VPs and social businesses have yet to advance beyond tracking output metrics such as “number of people served” or “number of jobs created.” This type of data offers little insight into how social businesses are changing people’s lives.
Instead of setting up complex monitoring frameworks, VPs should invest time and resources in helping social businesses understand what drives and inhibits their effectiveness. This requires an intimate understanding of beneficiaries’ needs, living conditions, and challenges:
Venture philanthropists have a unique opportunity to shape the future of social businesses. As early investors, they are uniquely positioned to drive change that creates value for social businesses and people in need. With a bilateral approach to impact management—understanding how the fund can best support the social business as well as how the social business can best support beneficiaries—VPs can provide the kind of targeted support that leads to long-term success.