The Social Impact Exchange exists to build a growth capital marketplace that supports scaling high-impact nonprofits in the U.S. Funders with shared interests convene in working groups (currently active in health and education) to identify and vet highly effective nonprofit initiatives primed for scale using a thorough due diligence process. Nonprofits that clear the due diligence process receive 25-30% of their total capital raise from working group members; additional funding is then raised by “syndicating” these investments to a much broader market of regional and local foundations, family offices, individual donors, and others.
When the Exchange was getting started in 2010, there was none of the marketplace infrastructure needed to facilitate connections between scaling nonprofits and interested funders. This included a due diligence framework that would allow working group members and other funders to fairly and consistently assess each nomination. One of the Exchange’s most important contributions to the field, we believe, is creating such a framework to vet the scaling initiatives our philanthropic partners nominate (you can see a beta version of the framework here).
While we don’t claim to have perfected due diligence, our framework does provide a comprehensive set of questions to consider. There are two areas of particular importance, which we have come to call scale-worthiness and scale-readiness.
Scale-worthiness is how we describe whether the initiative has adequate evidence of positive impact. We start the due diligence here because we believe that before a decision is made to invest in significant growth or expansion, there needs to be some demonstration of effectiveness. Every initiative nominated to the Exchange must submit a quantitative outcome evaluation conducted by a third party that is reviewed by a team of independent evaluators to assess the quality and integrity of the study’s design and findings. The consultants assess discuss the pros and cons of each study, and in most cases the nomination can proceed to the next step of the due diligence process.
Once a nomination has been deemed “scale-worthy” for the purposes of our process, we then request and evaluate a comprehensive set of materials demonstrating whether the initiative is scale-ready. That is, does it have sufficient capacity and experience to increase its chances of scaling sustainably? The most important of these documents is a business plan that includes explicit growth goals, a thorough description of the work being scaled, a market analysis, operational plan, a marketing plan, and last but not least, financial projections outlining the anticipated expenses and revenues and the assumptions underlying them.
The funders who’ve collaborated with us on due diligence speak highly of the process and its value. It provides a neutral assessment of the strengths and weaknesses of the various nonprofits. It helps identify areas where lead funding could make a catalytic difference in the success of a scaling plan. Finally, it helps the nonprofits think through their scale strategy on a granular level.
The due diligence framework also has value for funders outside of our network who are interested in helping their current or prospective grantees scale. It can be used as an evaluation tool or as a conversation guide for grant development. The underlying principles are applicable if you seek to support the scale of a program across the country or across a county. How else could the framework support your grantmaking? Are there other resources you’ve found helpful in evaluating scaling projects? We encourage you to share your thoughts in the comments.