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.