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A New Era of Philanthropy: The Rise of the Pay For Success Model

As society at large has become more focused on data and metrics thanks to the proliferation of technology, a new type of investment model has emerged – one that allows for-profit investors to consider social ventures as part of their investment portfolios. This new corporate non-profit hybrid model, called Pay For Success, is an innovative approach to solving some of society’s biggest problems.

The UK-based company, Social Finance, which has offices across the US and the world, has set the standard for creating successful Pay For Success outcomes. Pay For Success is effectively a public-private partnership that funds metric-based social services through performance-based contracts. The investment takes on the form of a bond, not equity. Pay For Success projects enable federal, state, and local governments to partner with highly effective Service Providers (i.e. the social ventures) by connecting the Service Provider with Impact Investors (i.e. private investors) who are willing to put their money into a company focused on providing a social benefit to society. If the Service Provider is successful, the Government Agency will provide the financial payout to the Impact Investors based on the pre-defined success metrics that were met.

Pay For Success is generally managed by intermediaries, such as Social Finance, that work with a Government Payor to identify appropriate tiered success metrics. Upon project completion, an independent organization measures the level of impact accomplished by the Service Provider. Depending on the tier of success, the Government Payor pays a specific amount that is pre-determined by a corresponding success tier. If the Service Provider is very successful then the Impact Investors stand to make a great return on their investment. However, If the project did not have an appropriate social return, then the Government Payor pays nothing, and the Impact Investors can lose their entire investment. In other words, the Government Agency only pays for outcomes that have a measurable impact to society.

This new social business model opens up to investors a whole new tool to invest in social ventures. The Government Payor only pays out if the project is successful (as defined at the beginning of the project), and society at large reaps the benefits of social change. Certainly, with a more metric-focused population making the philanthropic decisions, companies must re-think their corporate strategies if they want to be competitive in this new and exciting philanthropic-corporate hybrid industry that we have entered. With the rise of Pay For Success investing models, one can only wonder at what innovative solutions we’ll soon see to some of the world’s oldest and most pressing problems. One thing is for sure, the philanthropic market has changed, and competitive forces are driving the corporate and non-profit industries into a new equilibrium.

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