It doesn’t get much attention, but the Obama administration has embraced a venture-capital approach for catalyzing innovative solutions to urgent social problems.
Spending for non-defense programs, from early childhood education and workforce re-training to revitalizating low-income communities, is lower in real terms than it was before the Great Recession and is on track to hit a record low as a share of the nation’s gross domestic product.
That puts the federal government under intense pressure to focus scarce resources on the most cost-effective strategies possible. One way to do that is through a form of social-impact investing, in which the federal government partners with the private sector and the social sector to finance and evaluate promising new strategies. The strategies that get the best results get more financing, while those that are ineffective are cut off.
Tyson and Greenblatt describe one of the administration’s first efforts of this sort, the Social Innovation Fund:
It operates much like a fund of funds…[that] makes grants to social sector intermediaries like foundations, nonprofits and social enterprises on a competitive basis. It requires up to a three-to-one match of private money with government dollars…. Funding over the life of a grant in large part depends on the ability of the intermediary to expand, evaluate and improve these programs. This conditional approach is similar to that used by venture capitalists who invest in early rounds of a start-up, maintaining funding in further rounds only if the start-up grows and demonstrates success.
Thus far, the fund has awarded more than $175 million in grants and catalyzed more than $420 million in private capital. More than 200 organizations have received money.
On a second front, the Small Business Administration operates the $1 billion Small Business Innovation Company Impact Fund. Created in 2010, this fund private up to a two-to-one match on private capital for ventures that have both financial and social objectives. Its focus is on education and clean-energy projects.
President Obama has also proposing a $300 million “Pay for Success Incentive Fund,” operated by the Treasury Department, that would provide matching federal money for innovative new state and local programs.
This is more nimble and more modest approach to federal leadership. The government becomes a catalyst rather than a builder. It fosters experimentation, reflecting a recognition that non one has a monopoly on good ideas and that innovation never stops. The government uses its scarce capital to spur investment from the private sector and philanthropic sources, and it creates a results-based setting in which the best new solutions rise to the top.