Foundations should invest at least a portion of their endowments in return seeking vehicles related to their programmatic goals (often called Mission Related Investments, MRI). They should also leverage their balance sheets to provide venture debt and credit enhancements (often structured as Program Related Investments, PRI) to help scale promising organizations—both nonprofit and for-profit. Here’s a half a dozen reason why foundations should more aggressively use venture investment strategies:
- The US won’t achieve goals without innovation. Current reform agendas will bring up the rear but are unlikely to dramatically boost learning productivity—that will require innovation.
- Innovation is best produced and scaled by the private sector that has inherent incentives for speed, quality and scale. We won’t be able to spend our way to national educational improvement; public-private innovation partnerships will be key to improvement as they are in health, energy, defense, and transportation.
- There is a new opportunity set for innovation; cheap access devices, ubiquitous broadband, and powerful application development platforms are making possible a new generation of learning tools. Innovation platforms have transformed every other sector and will transform education if we create openings for investment and innovation
- There is a unique opportunity to leverage the $10 billion of ARRA investment particularly in regards to school improvement. Nonprofits simply can’t invest and scale sufficiently to support work in 10,000 struggling schools.
- Nonprofits need scaling capital. In addition to unrestricted grants, high performing charter school operators and other nonprofits need access to low cost growth capital including low cost loans or credit enhancements.
- Best of all, foundations can improve impact with little additional risk by selectively making venture debt and equity investments related to program goals.
Josh Cohen, City Light Capital, and I are writing a paper on this subject. If you know of a good example of an MRI or PRI, we’d like to talk to you.