The Social Impact Bond (SIB) could be referred to as the Maybach of Social Impact, but in the fast lane of the new digital age, the market is craving something a little more sporty. Evidence suggests that the most efficient way to meet the immediate global need for social impact, is to micro-size the SIB. Three factors inhibit the SIB from maximizing its efficiency: creation time, bulk, and dimension. As a result, there lies impressive potential for a more lean social impact financing instrument that will fuel future social impact and innovation, the Micro-Social Impact Bond (Micro-SIB).
One of the major issues stifling the growth and potential of the SIB is the extended time it takes to actually create and implement one. The number of SIBs in the design phase far out-weigh the number of those actually being implemented. The amount of time it takes to create SIBs also eats away at critical time that could be spent discovering. Additionally, there are societal issues that simply cannot wait for elongated processes, such as violence, natural disasters, or virus outbreaks. Although these processes would naturally improve over time, a reduction in the time frame of the design phase would considerably increase the overall volume of SIBs. With a new agility and overall utility, less actually means more for Micro-SIBs.
Another factor hindering SIBs involves the large volume of capital investment, which can be a hard sell to risk-adverse investors in an unstable and tumultuous global market. Many SIBs have ranged from $238,000 USD in up-front capital to $30 million USD in outcome payments. With a smaller and more definitive initial investment threshold of $1-$5M USD for Micro-SIBs, the amount of up-front investment becomes more palatable for a larger pool of investors in today’s volatile markets. A school in West Africa we are currently consulting, has a capacity of 80 children operating annually on a $7,000 USD budget, making a multimillion dollar deal far from necessary. Lower capital requirements in the form of a Micro-SIB, also empowers many entrepreneurs and grassroots organizations all over the world by lowering the entry point for creating an SIB.
The last limitation of SIBs involves its 3-dimensional nature. The creation of an SIB traditionally involves up-front investment from the private and/or philanthropic sector, with intermediaries facilitating the process, and the government paying for positive outcomes. The service provider has been excluded from this 3D model for clarification purposes, due to the lack of economic power service providers bring to the final contractual agreement necessary to create an SIB. SIBs would benefit from a diversification of fund-raising tools, in particular the tool of crowd-funding in order to cover up-front programming costs, adding a 4th-dimension to the model. Such a strategy will allow smaller, less prominent organizations, more leverage and power at the bargaining table. They are then able to match donors with crowd-funded capital, lowering investor risk while further enhancing programmatic freedom, the number of potential outcomes, and overall innovation. Also, the Micro-SIB allows for the optional use of Bitcoin, creating a 5th-dimension by allowing for transaction fees to be minimized to less than .01%, meaning further cost-savings and a larger percentage of invested capital going towards funding the social impact it was intended to fund.
The majority of existing SIBs also rely on the government to pay for outcomes. The involvement of government and its often inefficient bureaucratic make-up tend to immensely slow down the creation time of SIBs. Philanthropists or the private sector may be better and more nimble parties to fill these roles, allowing the more risk-adverse Outcome Investor to pay for positive outcomes or successes on the back-end, with less risk-adverse Upfront Investors willing to put up all or part of the initial investment to pay for programming; but with the promise of attractive returns above the market average upon achieving successful outcomes. Philanthropists and the private sector would then be in a more capable position to petition government to split real cost-savings resulting from social impact. Furthermore, the government can repay philanthropists or the private sector with funds such as the Human Capital Performance Bond (HUCAP) in Minnesota (US), or with tax write-offs for investments made that benefit not only non-profits/501(c)(3)'s, but also social business infrastructures (L3C’s [US], B-corp’s [Int’l], SBC’s [US], Co-op’s [Int’l], and CIC’s [UK]). The result will be the creation of jobs, economic investment and/or growth, and an incentive for the global private sector to free up some of their $7 trillion dollars in cash reserves.
It was Muhummad Yunus who revolutionized the global financial industry by creating the micro-loan. It is in a similar vein, that we believe the Micro-SIB will bring social innovation and financial opportunity toward addressing not only social impact, but also economic impact, health impact, and environmental impact on a global scale. Pope Francis more recently stated, “That is the purpose of our mission: to identify the material and immaterial needs of the people and try to meet them as we can.” Through the creation the Micro-SIB, we too seek to accomplish an analogous mission, to create a more agile and capable impact financing instrument for the betterment of the universal human condition. We believe the Micro-SIB is a firm step towards achieving those ideals.
Learn more about how your organization can benefit from Micro-Social Impact Bonds by clicking here. We look forward to hearing your comments!
Ean Garrett, J.D., is the author of two books, "Rebirth of a Dream" and "The Immovable Race", as well as the Chief Innovation Officer of the consulting firm, Infinite 8 Institute, L3C, specializing in education and social innovation. Follow him on Twitter & IG: @eangarrett