What’s the difference between an investment and a grant? The obvious difference is that one is to make money and the other is to make change. What happens in social impact investing where the goal is to do both? That question has been on my mind lately as I look at a couple potential social impact investments.
The current investment I’m looking at is a non-profit aiming to spin out a commercial enterprise to run a potentially self-sustaining (and even lucrative) social business. The trouble is that the project is so early stage at this point that it’s questionable whether it’s an investable enterprise or should be considered a research project – the kind that if they were coming from the for-profit world we’d all be trying to get grant funded. However coming from the non-profit world there seems to be a bit of a pinnochial urge to be a real boy and they’re determined to incorporate. As someone who could write a grant or could make an investment I’ve been pondering which I’d prefer they be at this stage. There’s a level at which I myself want to be a real investor and that makes it far more comfortable to write a grant because then I don’t have to measure my success based on the return. Research projects can be successful by proving their hypothesis unfeasible but that’s less palatable in early stage companies.
As a social impact investor I’ve gotten comfortable in the space referred to as “a concessionary return” – but for me that means lending at 2.5% to CDFIs. I’ve gotten some looks at anticipated negative returns – I know of a fund that lends at 0% and covers the cost of operations out of the fund so inevitably it consumes a low but steady % of the capital on an annual basis. I haven’t “invested” in that fund and my understanding is the original investors established it with a grant, wisely enough. That reinforces my distinction that for an investment there should be the expectation, at least the opportunity, of getting at least the original capital back. With this new opportunity it is at least technically possible for me to get the capital back – there are no structural or legal barriers, it’s just a question of risk. So I cannot categorize this as a grant situation by my one bright line rule.
From a tax perspective there aren’t many differences to my portfolio between making a grant and writing off an investment. If it’s a grant, I can control the year in which I take the write-off, with an investment I have less control. If it’s a grant then it’s part of my total granting for the year which is subject to a maximum % of my Adjusted Gross Income (although there are few years that I’m close to that), if it’s an investment loss I don’t think there’s an AGI limitation.
What is becoming clear to me as I think about this investment is that, when it’s an investment, I am more invested. I inquire more deeply about the capacity of the organization to fulfill the mission, and I will certainly be doing better followup – at a minimum I need to figure out when I get to write it off. In the ideal situation (which I think is actually rare) I’m monitoring performance and able to add help along the way. Perhaps this means I’ve been a second-rate grantmaker to-date, and this is why grantmakers have begun using investment language: to distinguish what they do as including these sorts of practices standard in their grantmaking. If I were to make this investment as a donation it would be much easier for me to walk away shortly after writing the check. All I need is the receipt.