Let’s trade in these old stories

Roll the tape from my childhood TV screen: image of a 4 year old Ethiopian girl, ribs visible, distended belly, flies on her face, and a voice over, “For just 50 cents a day, you can feed this child.”

This story is  emotional, concrete, personal…and effective.  It accomplished its goal (getting people to donate).  But the aid did not get to the root of Ethiopia’s problems.   And the image of the poor, suffering, African child who needs to be saved is tremendously destructive.

This story, and its many cousins (the emotional appeal, focused on pity) were in vogue in the 1980s, and they got people to dig into their pockets to donate to international charities.  They also did a lot of harm.  They dehumanized people, creating an us/them mentality.  They fed on and into a  power imbalance.  They created distance rather than connection.   All of this in the service of getting someone to do something good.

The good news is that this storyline is mostly dead.  But there’s a newer version of this story that’s still pervasive, and it’s more subtle.  It’s the “here is what you’re buying with your money” story.  “For $10 you can buy a bednet that will save a life.”  “For $120 you can buy a goat that will feed a family.”  “For $5,000 you can dig a well that will provide safe drinking water.”

Here’s what worries me.  It is true that you can buy and deliver one bednet, one goat, or dig one well for $10, $120, or $5,000.  And as a donor you absolutely want to know that your money is being used well, and a concrete connection reinforces that feeling.

But just because the one story is true doesn’t mean it remains true when you play the same reel 1,000 times.  When you want to dig thousands of wells or provide livestock to millions of families, don’t things get a whole lot more complicated?  And, by the way, who came up with the technology to create that mosquito net?  Who is funding innovation to create the next, better solution?

We need better stories, ones that recognize that we are all interconnected.  Ones that put dignity and creativity and innovation at the center.  And ones that give space to create complex solutions to complex problems – while still giving people a sense that they are part of the solution.

I think part of the answer comes in replacing the somewhat misleading concreteness with membership and inclusion.  Your $15 is helping solve this problem.  And better yet, here are a bunch of other people who are also interested in being part of this same solution.

Let’s share our stories, why we care, what we hope to see accomplished, and what else we are doing to make the world a better place.

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What do philanthropists care about?

Continuing a conversation from last week, I again have to acknowledge Seth Godin for understanding as well as anyone how REAL buying decisions (philanthropic, b2b software sales, you name it) are made.  You should read the full post, “The rational marketer (and the irrational customer).”  Here’s the punchline (Seth is talking about when you, the marketer, know your product is worth buying but your customer doesn’t):

You know that your car is more aerodynamic. You know that your insulation is more effective. You know that your insurance has a higher ROI.

…The problem is that your prospect doesn’t care about any of those things. He cares about his boss or the story you’re telling or the risk or the hassle of making a change. He cares about who you know and what other people will think when he tells them what he’s done after he buys from you.

The opportunity, then, is not to insist that your customers get more rational, but instead to embrace just how irrational they are. Give them what they need. Help them satisfy their needs at the same time they get the measurable, rational results your product can give them in the long run.

Let’s say that last bit again: “Help them satisfy their needs at the same time they get the measurable, rational results your product can give them in the long run.”

So if I occasionally get frustrated with the dialogue around creating more efficient philanthropic marketplaces, it’s because I don’t always see real, honest incorporation of how philanthropists’ really make decisions.    So, yes, we need to move the dialogue forward (in terms of making giving more efficient, helping the most effective nonprofits rise to the top, etc.), but doing this while overlooking / downplaying the donors’ reality is inevitably going to come up short.

This is why I loved Renata Rafferty’s description of “dinosaur philanthropy” on the Tactical Philanthropy blog.  We need to start where the bulk of the giving is – and the bulk of the givers are – if the conversations about measurement are going to have a signficant impact on the flow of philanthropic capital.

Are we dropping the bag in the lost and found?

Sean Stannard-Stockton, author of the wonderful Tactical Philanthropy blog, made a characteristically insightful comment on my “Create your own reality” post.   It is in a similar vein as Nathaniel Whittemore’s comment here, so I feel like I haven’t been nearly clear enough in some recent posts.  So here goes.

Sean writes:

Sasha, it seems to me that you had a ton of tools at your disposal to find the mysterious Australian. What if instead your best bet was to just drop the bag off at a lost and found. That wouldn’t have made you feel as good because it was not just the act of trying to help that made you feel good, it was your success in helping.

That desire for success is what is driving “increasing donor demands for objective data.” Philanthropy isn’t just about trying to help, it is about actually helping.

15 years ago, you didn’t have all the technology tools you mentioned in the post available to help track the person down. That’s where we are today in philanthropy. We want to help, but we often don’t know how to do it effectively.

The passion behind philanthropy is not at odds with the technical, data driven discussions. The passion is driving those discussions.

Yes, yes and yes.  I totally agree.  So what am I getting at?

1. Yes, the passion is behind the discussions about data and creating measurement tools for the sector.  This is totally, completely necessary, which is why I’m hugely enthusiastic about the work that Acumen Fund is doing with the PULSE tool as well as other similar efforts in the sector.

2. My question is more about how people really make decisions when they allocate philanthropic dollars.  I’m skeptical not because of anything I think about philanthropy or the nonprofit sector (though measuring the changes we are trying to make is harder than in most sectors, I would argue).  I’m skeptical because I see other sectors that have much much better data, and I don’t see that data playing nearly as big a role as one would hope in driving decisions and dollars.   My front-and-center example? The mutual fund industry, in which individual investors make very irrational decisions, in which data on fees is available but somehow doesn’t seem to impact much at all, and in which intermediaries (salespeople) have a very big incentive to meet their own sales goals and divert people from making optimal decisions.

So yes, absolutely, let’s get better data and let’s start using it.  Let’s develop a common vocabulary and let’s put it front and center on all of our materials, so that the most effective organizations (no matter how small or obscure) rise to the top and attract more philanthropic capital.

But let’s also be realistic about the fact that there are many other incentives and actors, that brands matter, that personalities matter, that fundraisers will sell their own stories and that these stories may be much more powerful than the data.

My goal is to insert this into the conversation early, so that we don’t get surprised.  Our sector has a lot of catching up to do, but the data will only get us so far in terms of creating an “efficient philanthropic marketplace.”

Should foundation program officers be more like venture capitalists? (Part 2 of 2)

(This post first appeared on the Tactical Philanthropy blog, as part of a conversation Sean Stannard-Stockton kicked off on creating a ‘capital market’ for philanthropy.  It is the continuation of my earlier post on whether foundation program officers should be more like venture capitalists.)

One of the big problems we need to solve as a sector is how to find ways to scale highly effective nonprofit organizations.  Kudos to Sean for raising this question and also for highlighting the power dynamic that can often exist between funders and grant recipients.  (I particularly like George’s reference to the need to be a “chameleon”, which captures the issue very nicely).

At Acumen Fund, about two years ago we realized that we were in a position for a major scale-up of our work, and we also recognized that the best way to do it would be to raise a large pool of unrestricted philanthropic capital that would take us to the next level.  We set out to raise $100M over two years in unrestricted capital in May of 2007, and by the end of 2008 we raised $85 million against this goal.

One of my reflections having led up this effort is that individual philanthropists are typically much more prepared than institutions (foundations and corporations) to make large, long term, multi-year, unrestricted gifts.  (That said, there are some institutions that are exceptions to this rule, and I do believe that when programmatic goals of a nonprofit align closely with those of a foundation, large gifts with some restrictions can provided needed growth capital that allows for the kind of organizational investment that growing nonprofits need to make.)

Where things get really tricky is when a nonprofit that might be ready for tens of millions of dollars of growth capital (the $10-$30M that George Overholser suggests is a good reference point) finds itself mostly able to raise programmatic grants (often narrowly restricted) in $50,000-$100,000 increments from foundations.  Programmatic grants like this can create the two-headed hydra of not having sufficient funding for “overhead” (a.k.a. non-program staff), combined with the communications, relationship and reporting challenge that can come with having 100 individual $50,000-$100,000 grants (an absurd number, but this would get you to $5-$10 million) – the “chameleon” problem.

The irony is that in other lines of work – venture capital; executive search; etc. – being able to find and invest in a world-class team of people is seen as THE differentiator between good and great firms.  Yet all too often, foundations seem unwilling to invest in people and organizations, instead seeing nonprofits as a means to a programmatic end.

The problem with a world in which the most proactive, risk-taking philanthropists are individuals (rather than foundations) is that it has the potential to limit severely the types of new nonprofits that will be successful at growing to scale – namely, the winners will be those organizations that are run by individuals who are capable of building strong and deep relationships with ultra high net-worth individuals. Nonprofit CEOs who can do this bring together a unique combination of skills, but if this is only real way for anyone looking to grow a new nonprofit, then we as a society have a problem. (though large scale retail fundraising using Web 2.0 tools is a potentially interesting solution).

The potential I see is to have foundations bring together both know-how about what it takes to solve major social problems AND a risk appetite to put capital behind organizations (and not just programs) that have a real chance at building those solutions.

For now, at least, it seems like we’re coming up short on the appetite for risk and for openness to the idea that investing in great teams and building great institutions will be what brings forth the next wave of groundbreaking nonprofits.

Should foundation program officers be more like venture capitalists? (Part 1 of 2)

One of the big unanswered questions in the nonprofit space is how new, innovative, effective nonprofits can raise enough capital to grow big and expand their impact.  At the core of the conversation is the fact that, unlike in for-profit markets, there’s no clear and established way for nonprofits to raise money around a great idea and a great team.

The ideal proxy, in my opinion, is the venture capital business.  Venture investors typically have a specific area of expertise (telecommunications, alternative energy, software platforms) and, within that area of expertise, they find high-caliber people who have assembled teams around a new and innovative idea, and they put up significant amounts of capital to support that team and the idea.  The capital is meant to be enough to get the team past a certain threshold, at which point the business will be positioned to raise capital from another source or have an IPO.

Here’s the interesting part: foundation program officers ALSO have, you guessed it…specific areas of expertise and large amounts of capital behind them.  At face value, they are positioned to act like venture investors, but they don’t typically act this way.

The analogy to VCs isn’t perfect, but I do think it’s worth considering that foundations as risk-takers and “venture partners” would be a welcome shift for the sector (and yes, there are foundation program officers who act exactly like this, but it’s not the norm).

That said, there are a number of features of the venture investing world that will be very unfamiliar to the nonprofit space, and we would have to figure out how to tackle these if we expect to make progress:

  1. Acceptance of failure. In a typical venture portfolio, 1-2 of 10 firms is a blockbuster success, 3-4 return capital, and the rest lose everything.  The venture world has acknowledged that failure is a necessary ingredient in creating innovation; in the nonprofit sector, “failure” is a four-letter word
  2. Betting on people and teams first. This is what VCs do.  But more often than not, foundations see nonprofits as implementers of a specific programmatic strategy.  Being a delivery vehicle is very different than being trusted to create something new, powerful, imaginative, and groundbreaking.
  3. Clear path to exit. When startup firms are successful, there’s a clear path to the next round of funding.  This is arguably absent in the nonprofit world.  (Though George Overholser at the Nonprofit Finance Fund has put forth the idea that certain nonprofits with a built-in income generation model can achieve financial self-sufficiency once they reach a certain size, if only they could raise growth capital.  I agree, but think the concept might be too restrictive since donations are the revenue model for most nonprofits.  So the model might be: Growth → Increased visibility/brand/recognition → Stronger board/donor community → Increased ability to raise funds).
  4. Aligned incentives between the venture investor and the entrepreneur. If the venture-backed entrepreneur is successful, the VC and the entrepreneur get rich.  But if a program officer invests in a nonprofit that, through its innovation and ability to listen to its customers, veers off in a radically different direction, in some ways this is necessarily disappointing to a program officer who has a specific (and often somewhat narrowly defined) set of programmatic objectives.
  5. We’re in this together. Venture investors typically play a very active (some entrepreneurs would say too active) role in bringing in resources (people, expertise, board members) to support the success of the enterprise.  It is extremely rare that foundations play this kind of active role in supporting the success of their grantees.

So there are lots of barriers, but most of them seem to be of outlook and mindset rather than being structural.

More on this soon…

Is Generosity a Luxury Good?

A “luxury” good is something you consume more of as you have more money (economists call them “superior” goods, a subset of “normal” goods).  For example, as people get wealthier, they spend proportionally more on Tiffany rings, Hermes scarves and nights at the Ritz Carlton, and less on Kay Jewelers, Wal-Mart, and Best Western.

I’ve been fascinated by the role that optimism and pessimism play in today’s financial markets, specifically because I’d prefer to think that, for the most part, the price of stocks and bonds and condos in Florida is determined by something objective (like cash flows of the underlying business).  Of course it’s really about supply and demand, and demand for assets is at historically low levels.

This means that financial markets are like the old joke: two guys hear a bear outside their tent in the woods.  The first guy starts lacing up his Nikes, and the second guy says, “What are you doing?  There’s no way you can outrun a bear.”  The first guy says, “I don’t have to run faster than the bear; I just have to run faster than you.”

That’s how financial markets work: when sentiments change, the rational thing to do (if you can) is to get out first.  This is how we got: Lehman Brothers’ bankruptcy → defaults in a money market fund ( “breaking the buck”) → the end of liquidity → global economic meltdown.

So what about generosity, and specifically about philanthropy?  Is it the first thing to fall off the list when people’s portfolios are hit?  Where does it fall in the hierarchy of luxury vs. “inferior” goods (things you buy MORE of when you have less money?).

Wouldn’t it be amazing if, in tough times, people were MORE  philanthropic (on a relative if not on an absolute basis?).  Wouldn’t that say something extremely powerful about our society?

My worry is that this is not the case.

What scares me is the idea that philanthropy might be a luxury good.  Without a doubt, giving will decrease in the next 12 months.  Foundation assets (whether the Harvard Endowment, the Gates Foundation, or family foundations) are down, and out of that smaller pool of assets, people will give less.  But if generosity is a luxury good, that means it could be near the top of the list of things that people cut.  So the $260 billion worth philanthropic giving in the U.S. (2005 data) is itself at risk.

From what I’ve seen so far, donors and foundations are taking their philanthropic commitments very seriously and doing what they can to step up and support the nonprofits they believe in.

And that’s a good thing. It’s tantamount to running TOWARDS the bear and scaring him away.

Alert the press!! Weingart Foundation breaks new ground

If I were writing for the NY Observer or some other similarly sensationalist newspaper, I’d write a headline that says:

“Nation Stunned: LA-based Weingart Foundation Places Trust in Nonprofit Grantees”

This is absolutely, positively not meant to be a dig on the Weingart Foundation.  To the contrary, they deserve praise.  As the LA Business Journal reports, the Weingart Foundation has announced that it will “offer unusual ‘core support’ to underwrite administrative costs for social service agencies that provide necessities such as food, shelter and health care to the region’s poor, unemployed and sick.”

This is contrary to normal practice, wherein “Most philanthropic foundations traditionally give large grants that pay the costs of specific programs but do not underwrite non-profits’ operating costs, such as staff salaries and rent. Many non-profits get their operating cash typically from their own fund raisers or from direct donations.”

My point is: the fact that this is newsworthy is a reflection of how far (too far) things have swung in terms of foundation grantmaking to nonprofits.  There’s a serious power imbalance here, one that has to change if we are going to increase the impact and efficiency of the nonprofit sector.

There’s a longer history here, one that I will be exploring over time on this blog, but as a starting point imagine the following in the for-profit sector:  Blackstone or some other private equity fund investing three million dollars in a portfolio company, but restricts the funding to the purchase of an Oracle database, with 10% for “overhead.”   Guess what?  That never happens, because it doesn’t make a lick of sense.

So why have we ended up at this perverse equilibrium in the nonprofit sector?  The list of reasons might include:

1. A desire for funding to go “to the beneficiaries”

2. Concern that nonprofits are not efficient enough, and that limiting grants in this way will lead to increased efficiencies

3. Because there’s a serious power imbalance between people who hold the money (the foundations) and the people who use the money (the nonprofits), so the people with the purse strings get to write the rules. (something I talk about more here)

4. Because the donors have their own philanthropic agenda, and fitting unrestricted funding into a specific agenda is difficult

5. The fear that on the part of the foundation program officer that one of their grantees will end up as front page news because of exorbitant salaries paid to their top executives or CEO

The result of all of this is that we end up with scores of nonprofits twisting themselves into knots to manage a series of too-small, too-specific “program” grants, with individual donors asked to pick up the difference between what’s funded and what’s needed to deliver on the non-profit’s mission (weren’t the foundation supposed to be the trailblazers in this equation?).

Worse, the nonprofits get tied into a cycle of yearly make-the-numbers funding, and they end up perpetuating the myth that you can neatly separate a non-profit into “program” and “everything-else-that-really-isn’t-that-worthwhile-but-we-have-to-do-some-of-it-even-though-we’d-rather-not.”

Lots more to talk about here, but here’s a starting point:  Do you think you’re going to get the best people to do a job that you (foundation program officer; non-profit grant-writer) have proclaimed is in the “not terribly worthwhile” bucket?

(Hat tip to Sean Stannard-Stockton at the Tactical Philanthropy blog for pointing out the LA Business Journal article.)

What a great time to raise money

I just returned from a week in Europe – talking to people about their philanthropy in the midst of the worst market free-fall in 70 years.  What’s going on is unprecedented, and being in London the day that the other shoe dropped –  RBS lost 39% and one of Iceland’s bank’s had to be nationalized – was surreal.

So how could the trip have been a success?  The thing is, philanthropy really is about relationships and about making long-term change in the world.  These problems have existed for decades, and the solutions will be decades in the making.  This is not about transactions, not about a single gift or a single project or investment.

So yes, people will take longer to decide to give, and most won’t be giving this year.  But now is the time to invest more, not less, in relationships for the long-term.

(Also, here’s a thought: what’s going to happen to the tens of thousands of people who were in finance and have lost their jobs or their bonuses?  Will we see an influx of highly-skilled people into the nonprofit sector?  And if so, what can we do to make the most of this opportunity?)

When will we start to see buyouts in the nonprofit sector?

There are a number of tools that exist in the for-profit sector that lead to greater efficiencies.  Some are about raising capital – for example, the more successful a for-profit business gets, the easier it gets to raise capital.  The opposite can be true in the nonprofit sector – where early donors can feel left behind as an organization starts to grow.

Another missing tool is buyouts.  When you buy a for-profit company, you buy their staff, assets, and revenue stream.  On the nonprofit side, when funders are dedicated to a particular organization or its leader, the revenue stream may disappear as a result of the acquisition.

I’m not sure this is the only reason we don’t see buyouts in the nonprofit sector, but it might be part of the reason.

If you could get your donation back, would you?

I always read the Kiva blog with interest.  In it, Matt Flannery, the founder and CEO, gives a candid, blow-by-blow account of Kiva’s growth.  Kiva is an innovative organization that allows donors to lend money directly to clients of microfinance organizations in the developing world.  This means that donors have the chance to connect to an low-income individual who needs a loan, lend that person money, and then get the money back.

There is a lot of interest in the idea of using invested capital (meaning funds that eventually will get returned to the investor) to fight poverty.  Which is why I found Matt’s recent post on the Kiva blog so fascinating.  In this latest iteration, Kiva “lenders” (the donors) get their money back as it’s paid back, rather than as one lump sum at the end of the loan cycle.  The effect, as Matt writes, was that people quickly turned around and lent money back to other borrowers:

We had a lot of activity, in the first 10 days since the event, our users have lent about $2.5M on the site.  Before that, we had been lending about $3M every month, so this is a significant jump.  However, instead of new funds being injected into the system, this surge of lending is compromised mostly of dollars that are already in the system.  Instead of sitting in our account, they been liquidated…headed next into the hands of entrepreneurs on the site with the help of our Field Partner MFIs.

This is an incredibly interesting observation, as it speaks to the mentality of the “philanthropic investor” who has the option of getting their money back.  My suspicion has always been that people who have this option would, in general, choose to reinvest the money that comes back to them — that the return of their donation is really more about accountability than about actually getting their money back.

As the social investing world expands, it will be interesting to see how this further develops.  It’s perhaps the first real data set that will help us all to understand how people really think about their giving.