Changing the way we think about charity

It occurred to me recently that charities might have a greater yield with which to fund their causes if they invested a proportion of their donations into a long term asset management plan. A radical notion that prompts the question, would donors support risk-based financial investment rather than direct contributions to the needy and would profiteer through financial investment be legally permissible for non-profit organisations under the Charity Commission etc.

Changing the way we think

I’ve since come to understand that there is a similar practice called philanthrocapitalism – a technique that takes the concept of venture capital finance and applies it to philanthropic aims, used with great success by the Bill & Melinda Gates Foundation.

The idea of charities adopting a more corporate practice of investment returned to me while reading an article in TIME magazine entitled ‘Philanthropists of the World: You’re Doing It Wrong!’ The article examined a new book by self-styled philanthropist Eric Friedman, and his three-point plan for the reinvention of charitable giving, namely:

  • More critical thinking: where donors are encouraged to give to causes that have a successful record tackling the world’s toughest problems, opposed to those which the donor has an emotional attachment.
  • Better vetting systems: a reluctance to focus on a charity’s evaluating factors such as overheads and percentage of expenditure that go directly to the cause.
  • Greater donor research: an argument similar to the first based on donors making better decisions about contributing to charities with a successful track record, opposed to those that the donor has a personal interest in.

These arguments didn’t convince me. Largely because the first and last points seem to lecture the donor regarding what causes they would like to support which could potentially result in an exodus of donors’ altogether. The second point, however, did compel me to question whether we had gotten charity all wrong and roused my curiosity for further investigation. That’s when I stumbled across Dan Pallotta’s TED talk ‘The Way We Think about Charity is Dead Wrong’.

During this talk, Dan speaks about social innovation and social entrepreneurship, about how the things we’ve been taught to think about charity are undermining our desire to change the things we care about the most. More importantly, he talks about how current models followed by the vast majority of charities are simply not working.

Pallotta explains that the reason charities are failing is that they’re too small to cope with the overwhelming scale of the causes they are tackling. That the way we discriminate against the non-profit sector in comparison to private businesses due to an outdated mentality ensures that charities will remain ill equipped in having any meaningful impact towards curing the ills of society. He identifies five key areas where a change of thought is required.

1. Compensation: we let the for-profit sector pay people a competitive wage based on the value of what they produce.

Pallotta points out: “We don’t like non-profits to use money to incentivise people to produce more social services”. A sceptic would argue that financial incentive does not guarantee more motivation but what it does attract is more people with a higher skill set towards the non-profit sector. If the CEO of a business earns eight times as much as the CEO of a non-profit organisation, most people would take the higher salary believing that charity starts at home. You certainly cannot blame people for wanting to take care of themselves and their family first and foremost.

But what if the salaries were comparable or at least competitive, who wouldn’t choose to head up a humanitarian cause over a fast food franchise? With non-profits starved of a competitive wage, the brightest minds and the greatest talent – individuals who could pioneer real impact to social problems – are reluctant to make such hard-hitting financial sacrifices.

2. Advertising and Marketing: donors expect every conceivable penny to be funnelled towards the cause, which is perfectly understandable, but without fundraisers and awareness how can a non-profit ever expect to grow? Some of the biggest world charity events such as Band Aid only gained as much traction as they did because of successful marketing campaigns and marketing costs money.

The impact of a successful marketing campaign can be seen in last year’s short film Kony2012 by the charity Invisible Children. Their cause had been in arrested development for years but following the release of the film, it had gone viral within months and amassed 97 million views on YouTube. Despite the fierce scrutiny that followed, there is no doubting that from a purely marketing perspective, Kony2012 was a resounding success.

3. Taking Risk on New Ideas: due to the focus on all contributions going directly to the cause, any capital invested in new ideas for attracting new donors is treated with suspicion. This attitude of ostracising charities for showing initiative leaves them reluctant to try new ideas. Pallotta remarked: “When you prohibit failure, you kill innovation. If you kill innovation you can’t raise more revenue. If you can’t raise more revenue you can’t grow. If you can’t grow you can’t solve major social issues.”

Risk taking is a fundamental part of the Bill & Melinda Gates Foundation, whose website says: “Some of the projects we fund will fail. We not only accept that, we expect it—because we think an essential role of philanthropy is to make bets on promising solutions that governments and businesses can’t afford to make. As we learn which bets pay off, we have to adjust our strategies and share the results so everyone can benefit.”

The Bill & Melinda Gates Foundation is unique in this approach because it is primarily funded by its three main trustees Bill Gates, Melinda Gates and Warren Buffett, and not by the public who can call the organisation’s character into question when a new idea loses money.

4. Time: in its first six years of trade, Amazon failed to make any profits. This didn’t worry the shareholders because they knew that there was a long-term strategy for market dominance and that patience would eventually pay dividends. No non-profit charity has this sort of luxury, in fact, any that showed anything resembling the same ambition would be crucified for exactly the sort of long-term initiatives that have built some of today’s most iconic, successful and lucrative brands. Imagine if there was a charity with the same revenue stream as Amazon and the sort of impact it could make with those resources at its fingertips.

5. Profit: business can offer profits to attract investment capital but there’s no such vehicle for a non-profit organisations and they are left starved for growth capital.

When you add these five points up, it makes you wonder how on earth charities have ever been able to survive at all. Non-profit organisations cannot use money to lure the best talent, market themselves for growth, take risks in pursuit of fresh ideas, or have the same amount of time as private businesses to see their growth blossom. Pallotta says that since records tracking charity began in the 1970s, only 144 charities have managed to exceed the $50 million barrier of revenue compared with 46,136 in the for-profit sector.

It is an ideology policed by the shackling question “What percentage of my donation goes to the cause versus overhead?” There is an idea that overhead is an enemy of the cause which forces charities to forego the overheads they need to grow.

To illustrate this point Pallotta uses the example from a Breast Cancer 3-Day Walk event where a risk capital investment after expenses of $350,000 was multiplied by 554 times between 1998 and 2002 to $194 million. The obvious logic being that rather than giving the $350,000 to a breast cancer researcher to find a cure, it should be given to the fundraising department to make $194 million out of which can then give the researcher a greater resource with which to accomplish their mission.

Pallotta ends his TED talk by saying “Our generation does not want its epitaph to read ‘we kept charity overhead low’ we want it to read ‘we changed the world’. So the next time you’re looking at a charity don’t ask about the rate of their overhead, ask about the scale of their dream.”

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