(Illustration by Neil Webb) 

In 2004 we co-authored an article in the Stanford Social Innovation Review that asserted that the social capital market (money that funds the social sector) was woefully inefficient. The vast majority of donors and grantmakers were motivated more by their hearts than by their heads, making giving decisions without good information or meaningful evaluation about the organizations they funded. Consequently, the best nonprofits often were not rewarded commensurately for their good work, whereas less effective nonprofits continued to raise money. Putting aside the issue of fairness, this situation was detrimental to the overall health of the social sector because most nonprofits had little material incentive to improve their performance.1

The solution to this problem, we wrote, was fourfold: cost-efficient processes with low transaction costs; robust information flows providing good data on value and risk; value-driven allocation of money, with investors rewarding better performers; and flexibility, where assets could be bought and sold easily and quickly. The good news is that over the last seven years a great deal of progress has been made toward realizing these goals.

The gains are largely attributable to the creation of a growing and diverse collection of intermediaries in the social capital market. Broadly speaking, these new intermediaries can be classified into two categories, information intermediaries and funding intermediaries. (See “Social Capital Market Intermediaries” below.)

Information intermediaries—which include philanthropic prizes, social networks, and new measurement and evaluation entities—have significantly enhanced efficiency in the social capital market. There has also been progress, though significantly less than the progress achieved by information intermediaries, in creating strong funding intermediaries. New funding intermediaries, such as Acumen Fund and Sea Change Capital Partners, coupled with long-standing funding intermediaries such as the Nonprofit Finance Fund (NFF), have had a notable impact on the changing contours of the emerging social capital market.

This article explores the advances these information and funding intermediaries have brought to the social sector, and the challenges—in concept and implementation—that remain for achieving true efficiency in the work of social change.


Economists have long held that the emergence of intermediaries can be a sign of a more efficient and effective market. This is particularly true when it comes to the flow of information. Economists believe information is valuable because it enables people to make better decisions, resulting in greater utility and higher payoffs. Despite the potential value of information, it is often imperfect (a buyer usually does not fully know what she is buying), asymmetric (a seller usually has better information than the buyer), or difficult to acquire. Consequently, people can be discouraged from making transactions that would be beneficial to the overall market. Intermediaries often arise to overcome the challenges arising from imperfect or asymmetric information, facilitating a more robust flow of information about things like value, impact, and risk.

Intermediaries also play an important role in lowering transaction costs, thereby making processes more cost-efficient. Transaction costs are the costs of participating in a market, adding to the ultimate price of a good or service. For example, if a person decides to buy a new stereo, the transaction costs would likely include the time and effort required to decide which stereo to buy and the best place to buy it, the energy to haggle about the price, and the hassle incurred in making sure the seller will take it back if it breaks soon after the purchase. Intermediaries often arise to perform these operations more efficiently, and in doing so lower overall transaction costs for all parties involved.

From the earliest days of the US economy, intermediaries have emerged to take on important roles. As James R. Beniger points out in his book, The Control Revolution: Technological and Economic Origins of the Information Society, intermediaries in the early American agricultural trade were prevalent for cotton, wool, sugar, spice, coffee, and tea because the quality of the product varied and buyers needed assistance in obtaining accurate information. By contrast, brokers did not appear in the wheat trade, which required little information processing because most grain was substitutable. Cotton brokers, like most other agricultural intermediaries, helped to classify and grade the agricultural output. By helping to provide accurate, up-to-date information about the value of the cotton for sale, the brokers minimized risk for both the buyer and the seller. Even though there was a commission, the cotton brokers also lowered transaction costs by minimizing time and costs associated with bargaining between buyer and seller.

Most markets, whether it is the early American agricultural trade or our contemporary equity exchanges, are not efficient in their infancy. Today the stock market is among the most efficient examples of a for-profit market, but this hasn’t always been the case. The capital markets did not have good information at the beginning, and developed robust information flow only over time. The social capital market is still relatively new, and it is not surprising that it is taking time for it to mature and become more efficient. The advent of information and funding intermediaries is an important advance in the maturation process.


Progress in the social capital market is ultimately gated by the quality of the decisions that donors, grantmakers, and investors make, yet accurate and useful information is still not widely available, particularly for the mass of individual donors. “There is so little good information and analysis,” says Holden Karnofsky, founder of GiveWell. “It’s as though the sector is trying to mass-produce a cookie, figuring out the logistics and branding before perfecting the recipe.”

Although much remains to be done to improve the quality and availability of information about the social sector, substantial progress has been made in recent years because of the emergence of three types of information intermediaries: prizes, social networks, and evaluation.

Prizes | Philanthropic prizes have become a useful instrument to signal the strong performance of an organization to other donors. For instance, “exemplar prizes”—which identify excellence, focus attention, and influence perception of a particular field or issue 2—typically recognize past demonstrable accomplishment, in contrast to a traditional grant that is a bet on future potential. Prize selection committees are typically composed of some of the leading experts in the world, who select recipients after extensive and rigorous due diligence.

The Henry R. Kravis Prize in Leadership is a case in point. Established in 2006, the Kravis Prize selection committee conducts extensive and detailed research on potential candidates and rigorously evaluates the impact of each nonprofit organization. “In the nonprofit sector, evaluation methodologies are a work in progress and economists are striving to improve them, but it is imperative that donors focus more intently on impacts and results. The Kravis Prize seeks to identify organizations with extraordinary impacts and low costs per beneficiary that we believe would be ‘best-buys’ for other donors,” explains Marie-Josée Kravis, chair of the Kravis Prize selection committee. “When I was awarded the Kravis Prize in 2009, I knew that it would help financially,” says Sakena Yacoobi, founder and executive director of the Afghan Institute of Learning. “What I didn’t anticipate was how the reputation of the Kravis Prize would bring my organization increased credibility on the international stage.”

In addition to signaling the value of this selection to donors who may lack the time or experience to conduct their own research, prizes can also raise awareness among institutional funders or intermediaries who advise donors. Consider the Conrad N. Hilton Humanitarian Prize, which is awarded each year at the Global Philanthropy Forum, an annual gathering of more than 400 leading philanthropists and foundation executives. The 2011 Hilton Prize award ceremony and dinner celebrated award winner Handicap International. Most of the philanthropists, foundation executives, and philanthropy advisors in attendance were not familiar with Handicap International; the event provided an introduction to the organization and a chance to hear expert perspectives about the organization’s strengths and achievements.

“If a group has won a prize, it helps us find them,” says Karnofsky. “We of course still conduct our own due diligence, but the prize is a signal that the organization is more promising and helps us identify possible high-performing organizations.” Many other prizes are spawning across the sector, from the Schwab Foundation’s Social Entrepreneur of the Year Award to the Lipman Family Prize in Leadership and Innovation at the Wharton School of the University of Pennsylvania.

Social Networks | Since the rise of Facebook there has emerged a burgeoning group of web-based organizations trying to create a social network around some aspect of people’s desire to “give back” or “do good,” and leverage that desire directly or indirectly for social impact. Some of these organizations, which we call social networks for social good, unsurprisingly, have Facebook roots. CAUSES, a Facebook Connect website, was founded by Joe Green, a friend of Facebook co-founder and CEO Mark Zuckerberg when they both were students at Harvard University. CAUSES enables users to identify and connect around their favorite causes, be it broad topics, specific organizations, or a user’s own cause. A person can use CAUSES to plan events, share ideas, or donate. CAUSES claims 140 million users and $40 million in donations for 25,000 nonprofits.

Chris Hughes, a Facebook co-founder and also a friend of Zuckerberg’s from college, first applied his Facebook skills to creating President Obama’s hugely successful online campaign during the 2008 presidential election. Late last year he launched the nonprofit Jumo, which is trying to build a social and dynamic directory for the sector. With Jumo it will be possible for a Midwestern mom to find out what’s going on in agriculture in Kenya, as well as what is going on in her own neighborhood. As Hughes explains: “The basic problem in the space is that while the social sector is immense and a significant percentage of the global economy, there is nothing on the Web as a home base for people to participate in it. There is no organizing network and no protocol on the Web for organizations, funders, researchers, and everyday people. There have been significant advances in the movies, restaurants, etc., and Jumo is trying to achieve this for the social sector.” Jumo has signed up nearly 15,000 organizations. “Jumo ultimately aspires to facilitate accountability and transparency,” says Hughes. “We provide an opportunity for everyday people to weigh in on the quality of a program. When it comes to impact assessment, more people watching and weighing in is a healthy thing for the social capital market.” Jumo recently announced it was merging with GOOD, a more conventional (and successful) content platform with a magazine and a supporting website.

There are countless other social networks for social good. For example, Change.org is a compelling online advocacy platform that enables people to start and sign petitions as a means of social change. But as of now, no Web-based organization has broken through the threshold of true scale compared to conventional person-to-person social networks like the United Way, which still raises $4 billion annually, or the 700 or so community foundations that exist throughout the United States, the largest of which have assets of more than $1 billion. Even Kiva, the widely known online microlender, has facilitated less than $250 million in loans. Despite the slow progress, it’s hard not to imagine that some social network will transform the social capital market by bringing the same efficiencies that eBay, Amazon, and other for-profit online businesses have.

Evaluation | It is now generally accepted wisdom that few nonprofits have easily accessible evaluative information upon which donors and grantmakers can make well-informed decisions. The most astute decision makers have come to appreciate the insight said to have been written by Albert Einstein on his chalkboard in the Institute for Advanced Study at Princeton University: “Not everything that counts can be counted, and not everything that can be counted, counts.” That said, a quick perusal of GuideStar or Charity Navigator, or a nonprofit’s own website, will likely lead to the well-known conclusion: Few nonprofits provide the evaluative information that counts and can be counted. The first step in creating a more efficient social capital market won’t happen until such evaluations are widely available.

In recent years there has been an increasing emphasis on thirdparty evaluation to assist funders in identifying the most compelling interventions, programs, and projects. These third parties serve as information intermediaries, conducting rigorous analysis to evaluate the impact and effectiveness of a nonprofit’s programs. In addition to providing charitable investors with greater insight into the organization they are investing in, this information also allows the nonprofit’s board and staff to manage the organization’s programs better. Increasingly, nonprofits themselves are soliciting these evaluations.

The rise of consulting firms—such as the Bridgespan Group and the social sector consulting arms of McKinsey and Company, Monitor, and others—along with the creation of other intermediary institutions—such as the Center for Effective Philanthropy, this journal and its parent organization, the Stanford Center on Philanthropy and Civil Society, and similar organizations at Harvard University, Duke University, Indiana University, and New York University—all in some way support the creation of evaluative information for the sector.

There are many different types of social impact evaluation, but randomized controlled trials, such as those used in medicine, are emerging as the gold standard. Randomized controlled trials are considered most r igorous because they generate a statistically identical comparison group with which to compare outcomes of those who participated in a nonprofit program with those who did not participate. Because they produce the most accurate, unbiased results, randomized controlled trials are particularly useful to the social capital market. Although randomized controlled trials provide good data, they are expensive and sometimes difficult or impossible to apply to an organization’s activities.

Trailblazing progress in developing and promoting randomized controlled trials has been made by the Abdul Latif Jameel Poverty Action Lab (J-PAL) at the Massachusetts Institute of Technology, and its affiliate organizations such as Innovations for Poverty Action. J-PAL researchers have completed or are undertaking more than 267 evaluations, enabling them to develop clear perspectives on which programs really help the poor and which do not. Funders and nonprofits use J-PAL’s research to scale up the most costeffective programs.

On the other end of the evaluation spectrum are websites that offer a wide range of information, including sometimes misleadingly simple evaluations. The largest of these are GuideStar and Charity Navigator, each with more than 2.5 million users. GuideStar continues to provide the most information on the most nonprofits, but it does not yet provide comprehensive evaluative information that donors and grantmakers can rely on. Charity Navigator is trying hard to provide simplified ratings based on better information than the specious ratios it has relied on historically, but it still has a way to go.

There are also many smaller online evaluation organizations. In his November 2009 report, “The Current State of Online Philanthropy,”David Koken identified 55 websites that provide individuals with opportunities to learn about, or directly engage in, philanthropic giving over the Internet. As Jacob Harold, a program officer at the William and Flora Hewlett Foundation’s Philanthropy Program, the lead funder in the area, explains: “The result is that the available online giving capital is shared, leading to insufficient funding for many organizations. And no one gets the network effects.” There is also very little standardization of data, contributing to information fragmentation.

One of the most promising new evaluation websites is Philanthropedia. After identifying a group of experts in a particular field, such as homeless programs, Philanthropedia asks the experts to complete a survey and recommend those organizations that have the highest demonstrable impact. Philanthropedia’s staff then compiles a list of the most recommended nonprofits and reviews the list with the experts before offering the results online. Philanthropedia has grown rapidly. In June 2009, after operating for one year, Philanthropedia had 39 experts and had identified eight high-performing nonprofits in one cause. As of this writing, Philanthropedia has 1,734 experts and has identified 242 high-performing nonprofits across 19 causes. In March 2011, Philanthropedia was acquired by GuideStar, an important step toward creating a comprehensive evaluative information hub.

The irony of all of these efforts is that most of this evaluative information already exists within the walls and computer networks of foundations. The best foundations conduct robust evaluations of their grantees and have a rich trove of hard research-based data as well as softer judgment-based data. Unfortunately, they are generally reluctant to share what they know with other donors. Cracking open this treasure trove would be an important step forward.


Few people of our generation are more respected and famous for making complex and high-stakes financial decisions than Warren Buffett, the founder of Berkshire Hathaway. Yet how did Buffett decide to handle the lion’s share of his philanthropy? By essentially delegating the responsibility for giving away his money to an intermediary that he thought would be able to make better decisions than he could, the Bill & Melinda Gates Foundation. If an intermediary is good enough for Buffet, why don’t more people use funding intermediaries to make philanthropic decisions?

The principal reason funding intermediaries have not taken on a more important role and are not likely to do so in the near future is donations by small- and medium-sized donors, who compose the majority of the social capital market, are still more raised than given. People aren’t usually inspired to give on their own. Rather, they must be asked or cajoled by a nonprofit organization’s active fundraising effort, using a direct sales and marketing program that the sector calls development.

In spite of this obstacle, a large number of funding intermediaries have been formed in the last decade, many of which are based on the Internet, as a means for generating cost-efficient processes with low transaction costs. Network for Good (NFG) is one example of an online funding intermediary. NFG aspires to “make it as easy to donate and volunteer online as it is to shop online” and provides adequate underlying infrastructure to do so. The vision behind many of these ventures is that donors and investors will come to the Internet, leverage powerful tools to understand their philanthropic goals and how to best meet them, and then find organizations who are best able to achieve them.

That vision remains, at best, in its early days. The vast majority of people still make donations when they are asked by a friend or a development officer, receive a letter or e-mail, or attend an event. Yes, they might text “Haiti” into their smart phone to give $10, but even that fundraising campaign, with millions of dollars in free advertising and support, raised only $22 million for the American Red Cross following the Haiti earthquake. In contrast, a few good university development officers can raise that much money in one year. As long as money is mostly raised and not given, the philanthropic part of the social capital market will remain inefficient. The Internet has been a dramatic force for disintermediation in many other markets for goods and services, so it is possible but not a foregone conclusion that it will become such a force in the social capital market.

The notion that money is still raised and not given applies not only to nonprofits’ efforts to raise money from individual donors but also to nonprofits’ efforts to obtain grants from foundations. For example, a feasible funding intermediary has not yet emerged to provide one common grant application that could be submitted by nonprofits to multiple foundations, eliminating wasteful duplication. This concept is similar to the common application adopted by many undergraduate colleges and universities, allowing prospective students to apply to several institutions with only one application. Despite the merits in reducing transactions costs and fundraising work—and ultimately making the social capital market more efficient—foundations are still hesitant to back the idea, perhaps because it would reduce the need for program officers or change the way they work.

Although countless new funding intermediaries have emerged over the past decade, including 63 online platforms at last count, the proven, long-established financial intermediaries are still drawing insufficient attention and replication. NFF, for example, which provides debt-financing products to US nonprofits, has a proven model that helps build the capacity of nonprofit organizations and enhances how money is given and used in the social sector. During its 30 years of operation NFF has lent more than $235 million and leveraged $1.3 billion of capital investment on behalf of its clients. With the arrival of Antony Bugg-Levine, the former leader of impact investing at the Rockefeller Foundation, as NFF’s new CEO, look for the organization to expand beyond its longtime focus on debt financing.

Over the past 10 years several hundred students at the Stanford Graduate School of Business who have considered becoming social entrepreneurs upon graduation have sought the advice of faculty regarding the nonprofit or social enterprise that they envision. Tellingly, more than half of them have focused their attention on starting a new Internet-related funding intermediary, but only a few have considered replicating a proven, long-established model such as NFF.

Some of the leading re-grantors, such as the Acumen Fund, make very compelling cases and are on their way to validating their model as a mechanism for improving the efficiency and effectiveness of the social capital market. For example, the Acumen Fund consolidates the funds of a group of donors, enabling smaller donors to share costs, spread risks, and give in previously inaccessible areas and ways. Despite our enthusiasm for the aggregating and re-granting models, we cannot help but wonder about the intermediary costs hidden in the models, and whether donors will be attracted to use them.


The advances that the rise of information and funding intermediaries has brought to the social sector in recent years bode well for the future. And although significant challenges still remain, there are several trends that are likely to spur additional progress toward achieving the goal of true efficiency in the social capital market.

The Internet has been a driving force in stimulating the robust flow of information for decision making in the social capital market, and we expect this to intensify. One need only reflect for a moment on the fact that Facebook has more than 800 million users to appreciate the great potential of social media to become a force in the social capital market. Jumo is still nascent, but if Hughes is a fraction as successful as he was at Facebook, Jumo could be a driving force in the social capital market. The important question that remains unanswered is whether social networks for social good will grow to rival traditional social networks.

Probably the most important trend that has emerged since our 2004 article is how the social capital market has begun to tap into two sources of capital that dwarf philanthropy: government funding and private investment capital. The Obama administration has aggressively adopted the concept of social innovation, which has had the effect of marrying government funding with philanthropic and private capital to achieve social impact. Take, for example, the recently created Social Innovation Fund (SIF), a federal program that was established with an inaugural round of $50 million that was competitively allocated to public-private partnerships that address areas such as economic development, health, and education. Although SIF provides direct grants to awardees that hit income statements directly, it also allows the awardees to scale up by using the new money as collateral for additional financing. SIF has strengthened both the income statements and balance sheets of the organizations it supports.

At the same time, there are multiple efforts—called variously impact investing, social investing, or hybrid financing—to bring into the social sector private investment capital seeking both a financial and a social return. If these two trends take hold, the social capital markets could expand dramatically beyond the current scale of about $300 billion in philanthropic dollars to well over $2 trillion in philanthropic, government, and private investment capital.

Finally, there is the burgeoning pool of talent going into the social sector. Ashoka, Teach for America, and others have legitimized and proselytized social good as a worthy career for the young elite. Social entrepreneurship classes in business schools, nationwide social business competitions for students, and student-run social venture clubs show that the idea of business and social value creation are influencing those who will shape the culture and the social capital market in the future. And at the end of the day, it is talented and motivated people who will find ways to make the social capital market more efficient and effective.

Bill Meehan is a lecturer in strategic management and Raccoon Partners Lecturer in Management at Stanford Graduate School of Business, and director emeritus at McKinsey & Company. He is also a board member of GuideStar, the San Francisco Symphony, the Oregon Shakespeare Festival Endowment, and the Stanford Center on Philanthropy and Civil Society.

Kim Jonker is a consultant to nonprofits and foundations on topics related to strategy, board governance, evaluation, and organizational effectiveness. She is a visiting practitioner at the Stanford Center on Philanthropy and Civil Society, and director of the Henry R. Kravis Prize in Leadership.

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