The Leveraged Philanthropic Investment

February 21, 2012 • Blog, Philanthropy & Giving • by
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Don’t give to programming, give to the development team. That’s what Dan Pallotta wrote in a Harvard Business Review’s blog post last week entitled Multiplication Philanthropy. In the post he outlined the idea that if a donor wants to truly have an impact he should direct his resources to be used for fundraising, multiplying the outcome of his donation. He says if you are going to give $100k to an organization you could either give a $100k towards programming or $1m by channeling that money through development.

He and I are of the same heart and mind in that we both agree that overhead is a poor judge of a good nonprofit. He uses that idea as part of the evidence for this new approach to philanthropy. And I have to say that part of me really likes this idea. I think its an interesting one, maybe the next iteration of the matching grant. Obviously, if taken to its absurd conclusion we wouldn’t do anything because we were only raising money, but I think its an interesting point that is made.

I might take it even a step farther though. Instead of directing your money towards fundraising, just write the check. Gifts that have to be used by one department are another are horribly cumbersome to the organization. Unrestricted gifts is the most efficient thing you can do, if you trust the organization to use it wisely. Then they will be putting the resources towards the most efficient trade-off between overhead and programming.

What are your thoughts? What do you think about Dan Pallotta’s idea about giving to help organizations fundraise?

The Good Social Business

February 16, 2012 • Blog, Business, nonprofit, Philanthropy & Giving • by
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Earlier this week I wrote the post, Why I Don’t Like Your Social Business. It turned into one of my most shared and read posts of the last year, in part because I think it struck a nerve with many social entrepreneurs. Many know and can sense that the field has been inundated with bad social businesses, which I rant against in the post.

Today though I’d like to talk about the good social business and the parts necessary for creating one.

1) The best social business is a business!

This might seem odd but I think many social entrepreneurs are people who would have generally joined or started nonprofits but they see this trend and the potential for a continuous and sustainable revenue source, so they start a business. This, in my opinion, is backwards. I think the best social businesses are actually started by people who start businesses but they stumble upon a business model with positive social benefits.

2) The best social business doesn’t rely on charity.

You would think that would be covered by actually being a business, but a surprising number of businesses ask people for investment without giving them upside, return, or equity. This makes the investment a charitable gift without a tax deduction. This creates an environment where bad businesses last too long. In the normal market if you aren’t making money and have no hope of making money, you shut down. The charitable action in the social business world just prolongs the inevitable.

3) The best social business aligns social and financial returns.

This is the crux of the matter. Businesses that are built around giving a portion of their profit or each sale away are really just glorified corporate giving strategies. I think a social business is one that has found a way to align the social and financial returns. If your investors aren’t crying for you to increase social returns so they see an increase in financial ones then I don’t think you have created a social business. If you feel a tension between the financial bottom line and the social bottom line then you have not truly aligned the two.

If you are able to accomplish these three goals I think you’ve probably created a pretty awesome social enterprise. It will be sustainable, impactful, and lasting. If you are meeting a consumer need while addressing a social ill you have truly created something revolutionary. I am sure that many people will disagree with my definition here but I think that if you have not accomplished these three things you are probably just a nonprofit in disguise and you should embrace it already and give your donors the benefit of a tax deduction. You can still sell things as a nonprofit and operate in much the same way as a business.

I think social businesses can be powerful agents of social change but they cannot address every problem and it has become too large of a fad and people are being taken advantage of and good is not truly being accomplished. As I always say, bring a skeptical eye to the social business world and ask yourself are they really a business and are they really accomplishing anything good?

Unfair Trade: Does it exist?

February 8, 2012 • Blog, Economics • by
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Child labor. Environmental degradation. Abusive labor practices. These are all things that we as Westerners we try and avoid in our supply chain. But does this end up hurting the very people we seek to help?

Throughout history, as countries have developed, they have often gone through a period where each of these practices were present. During the period that moved America from poor agricultural society to massive economy, the industrial revolution, our factories employed children, polluted communities, and abused their workforce.

Simultaneously America and its people began to prosper. Incomes rose as people began to specialize and leave agricultural livelihoods. It was certainly a difficult time but the real question is, was it a necessary time? Is it a necessary growth pain to go through a time similar to what Western countries experienced during the industrial revolution?

I ask because I wonder if the efforts of Western consumers to help those in developing country through fair-trade and such is actually hurting them. There has been an outrage of Foxconn and I do not deny that its practices could border on the abusive, yet they have a line out the door of people willing to work there, fully aware of the abuse that takes place.

Is it right for us as Western consumers to force producers to bend to our moral framework? Should we allow them to develop in ways that make us uncomfortable and yet are ultimately beneficial? Is it better to have a larger portion of a country out of work if those that do have a job are paid what we consider a decent wage?

These are questions that I think deserve to be wrestled with* and I’m not sure what the answer should be. I support and purchase fair-trade products but then I ask myself, is there any such thing as unfair trade?



*It should be noted that in large part this is a thought exercise and not necessarily the beliefs or values I hold.

Giving by the (Right) Numbers

January 17, 2012 • Blog, Development • by
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Organization A’s overhead is 5% and organization B’s overhead is 15%. Who should you give to? Many donors would not hesitate to give to organization A because their lower overhead must mean they are more efficient since more of the money goes to the on-the-ground need.

Last week Fast Company had one of those articles that I wish I had written. Entitled, Its Time to Start Judging Nonprofits Like For Profits, the article discussed the problem of judging an organization by overhead alone. They correctly stated that many donors are advised to use sites like Guidestar or CharityNavigator when making their giving decisions. These sites are great for looking up an organization’s financials but they tell you very little about the impact those organizations are having.

The authors write:

“No one would judge a for-profit company for spending on advertising, sourcing the best hires, or using the best equipment. Indeed, these are points that a wise investor looking for long-term stability should seek out in a for-profit. This constant pressure that nonprofits feel from both their mission-driven world and the donor landscape toward minimizing anything that could be counted as “overhead” is destructive and efficiency-killing. Low overhead means burning staff out at an alarming rate, and having trouble sourcing or retaining skilled workers. It pushes organizations toward duplication over cooperation to attract and maintain funding. Worst of all, it forces a short-term view on what should be a long-term mission. This hurts not only the organizations, but the missions they serve.”

I think the authors are right on. Low overhead is not always better. Nonprofits need hard-working, brilliant teams and that takes money. Our most talented people should be addressing our most pressing problems. To attract them they need decent salaries, benefits, and technology. Of course there are horrendous examples of outrageous spending (see Jon Krakauer’s Three Cups of Deceit for one particularly upsetting example) but just because some people abuse donors’ money does not mean that everyone else should live in forced poverty.

As you make your giving decisions of course consult Guidestar and CharityNavigator, but don’t let that be the end of your investigation. Dig into how the organization is impacting people’s lives and addressing problems. Unfortunately, these numbers are currently very difficult to find (if they even exist) but these are the numbers to give by.

Distorting Nonprofits

December 20, 2011 • Blog, nonprofit, Thoughts • by
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The nonprofit world has a fundamental distortion; the people who pay for services hardly ever receive them. The person who pays for the homeless shelter, never uses it. The person who pays for a child to receive a meal in Africa will most likely never meet that child. There is one portion of the nonprofit world for which this fundamental distortion is not generally true, the arts world.

Those who pay to keep art museums open, symphonies playing, and theaters performing are generally those who visit them regularly. This gives these organization a fundamental advantage when it comes to funding (and why some think these organizations should not really be considered nonprofits).

The Stanford Social Innovation Review, a go-to resource for all in the sector, had an interesting article last week entitled Arts Funding Promotes Neighborhood Vibrancy. What I found most interesting though, was the idea of selling the general community benefits of arts organizations. The SSIR had originally reported that arts funding spurs economic development but the organization ArtsWave responded by saying, while that’s true we like to say that it increases neighborhood vibrancy.

Here’s the ArtsWave insight: people are ready enough to agree with the notion that the arts are good for the economy. But if you probe deeper, and ask what top three things we should do to improve the economy, no one answers “subsidize the arts.” So apparently the argument that the arts are an economic engine (true or false) is unpersuasive, which is what really matters.

Let me just pause here quickly and say that I think they are slightly incorrect. Everyone would probably agree with the statement that having a healthy diet will improve an athletes performance but it probably wouldn’t show up in the top three ways to improve an athletes performance. Other things like exercise, good coaching, and practice might be the best ways to improve performance but they are not the only ways.

But the ArtsWave research also uncovered the fact that if you ask people what would improve their neighborhood the most, the arts come up time and time again. Why? Because artists’ residences are known to herald an improvement in real-estate values; because arts audiences mean feet on the street and therefore greater public safety; and because arts venues are known to spawn coffee shops, restaurants, and other places of urban liveliness.

Therefore, the argument for public funding needs to be focused not on the art but on the public benefits of art-making.

I think this is an important insight. When approaching donors, the focus needs to be on persuasiveness, not just what is true. Organizations need to think about how to sell their impact to donors. This is true for all organizations, not just arts organizations. Think about the effect you have on your community and how that benefits various stakeholders, then approach them and ask them to pay for that benefit. It is a subtle correction to the fundamental distortion found in the social sector.

Evidence Based Philanthropy

December 19, 2011 • Blog, Philanthropy & Giving • by
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The Philanthropy 2173 named “Evidence Based” one of their buzzwords of 2011. (Read the post here) I think this is a good choice. I believe that a level of academic rigor can and should be applied to the social sector, especially given the fundamental distortion found in the sector. It plays itself out in that those who receive the service and those who fund them are two people who will most likely never meet. You can read more of my thoughts on that here.

As nonprofit practitioners, we must work to ensure that our organizations are offering programming and services that are backed by research, measured for effectiveness, and creating the impacts we set out to create while minimizing unintended consequences. Of course, numbers and data isn’t everything. There are some things that will be impossible to apply the evidence based methodology to. It is important then, to work with people who know how to decipher what can and cannot be measured.

If your organization is interested in addressing these issues contact me and I’ll be happy to discuss what Means Well Does Good can do for you.

How To Spot A Bargain in Philanthropy

December 8, 2011 • Blog, Philanthropy & Giving • by
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What makes something a bargain in the philanthropic world? Last week, Dean Karlan wrote a post on the Freakonomics blog entitled, Bargain Hunting for Charities. He wrote,

Gosh that sounds so stingy. When we are charitable, we don’t want to be cheap. This is our moment of giving, of generosity, not bah-humbugness. Alas, that is exactly what we should be. If we go to a restaurant for chicken wings, what would you think of the following prices:

  • 4 chicken wings: $8
  • 6 chicken wings: $8
  • 8 chicken wings: $8

Which would you opt for (assuming more is always better)? Naturally, it shouldn’t require much thought. So why not apply this to charity?

Karlan then goes on to highlight GiveWell, a great organization that does some very innovative work in studying nonprofit institutions and makes recommendations about excellent charities. There are a couple of similar organizations, but GiveWell seems to be the most robust. Unfortunately, many of these resources are vastly under-utilized when it comes to an individual’s giving, with only 1 in 10 donors utilizing such resources at all.

I love Karlan’s premise but I’d like to take it one step further, because the issue isn’t really that we go to the same restaurant and are shown the same price for different quantity wings. It’s more like different restaurants offering a burger at different prices. In that case we don’t always go for the cheapest. I’m not going to eat a burger at McDonald’s when I can go to Kuma’s Corner.

As donors we shouldn’t be focused solely on quantity but quality as well. We trade off those things in our consumer purchases all the time, and the same thing can occur in our philanthropic choices as well. A focus solely on quantity leads to ever decreasing overhead which does not always lead to the best quality (think low overhead, large transaction chains like McDonald’s). Quality and quantity are not positively correlated, but they don’t have a negative correlation either. Just because something is more expensive does not make it better.

As we approach our philanthropic decisions let’s think about quantity and quality. Also, check out resources like GivingWell. They help you make good giving decisions.

Interesting Idea in Tax Reform

October 4, 2011 • Blog, bloggers, Measurement & Evaluation, Public Policy • by
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I know, I know. Many of you find the idea of tax reform so intoxicating and constantly complain I don’t discuss it enough. Well today I came across such an interesting idea I thought I’d share it with you.

It’s from Robert Egger, founder of DC Central Kitchen, a social enterprise in DC in a post entitled, Boosting the Economy Through Charitable Tax Deduction Innovation over on the Tactical Philanthropy blog. His basic premise is that nonprofits and social enterprises create jobs too and in a time where we are looking to spur growth and investment we can spur social enterprises on by having the Charitable Tax Deduction code catch up to the times. He writes:

America is no longer a manufacturing economy, with jobs for all. Nor do we produce enough “extra” money to support an unlimited number of charities. Therefore, we must begin to let go of attitudes, ideas and tax policies that rely on the incomes and opportunities of a by-gone era.

His idea is to create a return on investment formula so that donors could experience an increasing tax deduction over time if the program they supported succeeded in addressing social problems. This makes complete sense academically. Many nonprofits save tax payers millions through the services they provide and yet though don’t reap any benefits from that.

What could happen is almost like a social stock market where one could invest in a nonprofit in the hopes that the tax deduction you would receive would increase over time. Logistically there are huge hurdles to the measurement and identification of the impact and then putting a number on it but I think it is definitely an interesting idea.

Some Smart Philanthropic Thinking

September 13, 2011 • Blog, Philanthropy & Giving • by
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If you’re grandfather was one of the richest men in the world and you took over one of the families’ philanthropic institutions, what would you do? That’s exactly the situation facing Howard Buffet, grandson of Warren. He took over the Howard G. Buffet Foundation recently and has set about bringing his grandfather’s business strategy to the social world.

The idea? Find the brightest people on a given issue (they are focusing on food security) and invest in them to solve the problem. ”My grandfather, in part, has been so successful because he has identified the best human capital for managing businesses,” the young Buffet explains.

This is exactly the kind of thinking we need in philanthropy. We need to encourage and support collaboration and outcomes. We can no longer support disconnected and inefficient organizations.

Check out the article here.

Conspicuous Philanthropy

July 21, 2011 • Blog, Business, Development, Philanthropy & Giving • by
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There is a theory in economics called Conspicuous Consumption. It’s essentially the “Keeping Up With The Jones’” theory. People buy things so that they can signal some sort of status or ideology. When you see your neighbor buy that nice car, you want one as well so you don’t appear less than your neighbor. I think we can all admit that we’ve at least seen this behavior (not in ourselves of course but in our neighbors).

This morning I came across an interesting Freakonomics podcast about Conspicuous Conservation. It profiled two budding economists, Steve and Alison Sexton (twins, and worse, the children of economists). They have an interesting draft of a paper entitled, “Conspicuous Conservation: The Prius Effect and WTP [Willingess to Pay] for environmental bona fides.”

They essentially are saying that because the Prius is known as a hybrid and hybrid only, as opposed to say the hybrid version of another car (the Honda Civic Hybrid for example), it is more easily identified as hybrid and provides a better signal to the world that the driver cares about the environment. This signal however, only matters in areas where others care about the environment, for example in San Francisco rather than Texas.

What they found is that in areas with higher rates of environmentalism not only do you see the sale of all hybrid vehicles increase, sales of Prius’ are a markedly higher proportion of the market. People want others to see them as environmentally friendly.

Now what does this have to do with philanthropy?

What if, philanthropy harnessed this conspicuousness in a new way. For decades people’s names have been added to buildings, benches, etc. But what if we found new ways to allow people to engage in conspicuous philanthropy?

I think we’re already beginning to see this movement take place and it has a lot to do with revenue streams.

People don’t but Toms because they are particularly good shoes, they buy Toms because they want to signal to the world that they care about poor people, that they have given a pair of shoes to someone in need.

What are ways that your organization can help donors engage in conspicuous philanthropy? How can you tap into consumerism to increase support for your organization?

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