Financial Innovation for Good: Part 1
First Things First
There is good news underway for all of us who admire the important work done by NGOs. Many of them are now actively pursuing financial innovation to achieve their goals.
The NGOs are generally seeking additional and lower-cost funding through initiatives like debt swaps, blended capital, impact funds, tech accelerators, insurance deals, carbon market collaborations, and so on. And it’s not limited to conservation organizations — it’s starting to happen in all sectors.
Further, these NGOs — wisely, in our view — are reaching out for help, recognizing that for most of them, financial engineering is outside their traditional expertise.
I’ve had several constructive conversations with NGOs along these lines recently. This has inspired us to launch a new series here: Financial Innovation for Good. We’ll share practical lessons about these opportunities in the hopes of smoothing the path forward.
So without further ado, here’s the first:
Lesson One: Horse Before Cart
Or put another way, financial innovation is never the answer in and of itself.
Financial engineering is just a tool toward an end. Fully developing that end goal — identifying the priority objectives for a project, explaining why they are important, and showing how they will be achieved — should always be the first step.
This “lesson” might seem very obvious to you. Believe it or not, well-intentioned non-profit organizations actually get this wrong quite often. For example, a Finance Minister from a middle-income country recently complained to me that his office was being “bombarded” with poorly designed debt-for-nature swap proposals.
“Why are so many smart NGOs pitching us such bad ideas?” he asked.
Good question.
Our advice to NGOs: Don’t make this mistake.
It’s pretty easy to get this right. Just do what you do when you are pitching conventionally financed initiatives. In such cases, you probably do the following for prospective donors:
lay out ambitious/inspiring goals for the project
outline a clear timeframe
set specific annual milestones that will allow progress to be measured
put together a well-developed budget (including details on how much capital you will need and how you plan to invest it)
demonstrate why your organization is well-positioned to lead the project
note your relationship with governmental agencies and explain why you believe they will view your project as a priority (if their support and engagement is important)
identify the partners (if any) that you need to succeed, and
strategize how you will manage all risks and get the overall project accomplished.
These are the same elements to think through when you are seeking alternative sources of capital.
This is especially true when you are pitching to capital providers who are not traditional philanthropists (foundations or donors), but rather ones who normally provide debt financing, credit enhancements or insurance, and/or take equity positions in a project. Financial institutions like these expect great detail on all of these matters.
Always begin with the basics: why is your project important and likely to succeed?
Once they agree that your initiative is worthwhile and that your organization is in a strong position to execute it (and has a track record of successful comparable projects), you can shift to the second topic: how best to source the capital you will need.
We’ll have more to say in future issues about the range of capital sources that are available to NGOs other than traditional philanthropy. But in the meantime, remember: first things first.
Onward.
