As Social Impact Bonds (SIBs) are best suited to “scaling what works,” nonprofits that are the ideal candidates for SIB funding are those with programs that have proven to be effective. Investors will only participate if they have confidence in the nonprofit’s ability to achieve the agreed outcomes. These outcomes, in turn, must translate into government savings that can be achieved within a relatively short timeframe and are large enough to cover the program’s cost and a reasonable return to investors. The program must serve a well-defined treatment population that can be tracked and whose outcomes can be measured against a counterfactual over the life of the SIB. Nonprofit candidates also need to have the capacity to effectively use growth capital to go to scale. Given these conditions, SIBs will work for only a small subset of nonprofits. Philanthropy will continue to play a major role in funding innovative organizations as they test, refine, and perfect their models, as well as those programs that do not produce near-term net savings to the public sector.
It is important to note that SIBs are intended to complement government funding, and must not be used to displace or replace it. SIBs support proven programs that the government is not currently funding at all or at scale, either due to budget constraints or an unwillingness to assume the financial risk if prevention fails.
Selection of the SIB intervention and nonprofit providers should involve careful consideration of the target population, and contingency plans should be made to protect vulnerable individuals if the SIB programs fail.
One SIB can fund a single nonprofit or several service providers working toward a common goal.