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In the third sector

The third sector, or grant economy, is the most common site of social innovation – in campaigns, social movements, non-governmental organisations and associations. By its nature this sector tends to be fragmented and small in scale. But its sense of mission often means that it is better than other sectors in acting holistically and better at linking action to advocacy.

Many new methods and tools have been developed to support and grow promising ideas. However, this sector is generally better at creating ideas than changing whole systems. The more recent waves of interest in social entrepreneurship and venture philanthropy have also been better at supporting individual projects than making them more than the sum of their parts, which usually involves collaboration across sectoral boundaries.

Despite this breadth of sources the main challenges for the sector are growth and the reliability of funding sources. Individual donors can be unpredictable. Institutional donors tend to avoid long term commitments, and prefer funding start ups. Grants are cost based, and do not allow for the generation of internal surpluses that can finance growth. Many grant programmes have a preference for projects and programmes and are reluctant to provide core funding. Grant aided organisations are often the first to suffer in state budget cuts and economic recessions. Grant programmes throughout the developed world complain of a lack of sustainable grant funding.

Commissions and contracts have tended to grow as a source of income (and account for 30-40% of income in most developed countries). A much smaller, but visible, trend has been the growth in venture philanthropy with much greater involvement of donors in projects and organisations. Another has been the spread of online platforms which enable individuals to support particular projects.

These developments are transforming the sector. To quicken the pace of change and encourage the generation and adoption of innovation within the third sector, there need to be new kinds of finance, platforms, packages of support, and regulatory, governance and accountability frameworks. There is a key role to be played by government and charitable foundations in re-shaping these structures. 

Improving the grant relationship

There are a range of intermediaries and online platforms which are attempting to improve the relationship between those giving and those receiving grants, often by linking the two together in more efficient and effective ways. In this field, the web offers new ways to cut costs and widen connections. Sites like Kiva, which connect donors with social entrepreneurs, have already been making these links. Experiments in ‘crowdfunding’ potentially enrich the gift relationship, and democratise the sector’s source of finance.

Grant giving

Philanthropic grants should be the ideal funding for social innovation. Donors can handle high levels of risk, and do not need the certainty of returns of the private sector. Yet there has been surprisingly little attention to how finance could best support innovation, and what mix of funding for individuals, teams and enterprises works best, or how to stage funding to maximum effect. We anticipate rapid evolution in this space as philanthropists develop more sophisticated hybrid tools that can combine grants, loans and equity.

Packages of Support

A network of support services for grant based organisations has grown up, some specialist private firms, some social enterprises, and some charities themselves. They provide legal and business advice, offer free mentoring services, and help to raise funds.

Mission related investment

Philanthropy has increasingly moved to softening the distinction between grant and investment, rather viewing funds as supporting projects that contribute to a specific mission, including transformations of whole sectors for social ends.

Training and formation

Some studies have highlighted the need for skills and formation within the third sector and identified a lack of training and experience as one of the main barriers to the sector’s success. Leaders of non-profits, charities, associations and foundations have to contend with the challenges of financial sustainability and stakeholder management while keeping the organisation aligned to its mission and values.

Legislation and regulation

Grant based organisations operate within a set of laws and regulations which affect their capacity to grow and be financially resilient. They may be given exemptions from some types of tax, for example, but only recently there have been moves to develop new types of company structure, and wider scope for charity operations.

Networks

Civil society has become increasingly effective in creating its own networks to share ideas and support innovation.