One month later…the NY Times on Kiva

In case you missed it, the New York Times has picked up the Kiva story.  What I’m struck by is:

  1. The story was broken by David Roodman in his original blog post.
  2. How quickly the conversation spread online, including response by Kiva to the blog posts and changes to their website.
  3. The analysis is definitely deeper online than in the Times story, which almost feels like a story about the story.
  4. It took more than a MONTH from the time David wrote his post until the Times picked it up.
  5. For all the blogging/Tweeting buzz about the story, there’s been no real impact on giving to Kiva, which makes me think that the online conversation was really “inside baseball” and that the Times story will be what reaches 99% of Kiva’s donors.

Blogging and tweeting all have a role to play, and for some things it’s clearly where the deeper conversations happen.  But we also can fool ourselves into thinking that just because everything we read is talking about something, then everyone knows about it.

It’s true only as long as you know who you mean by “everyone.”

Connection, not Deception

Continuing on the Kiva thread, I wanted to pick up on my previous post where I argue that what Kiva is doing is nothing new, and put a sharper point on my argument.

(But first I have to applaud Kiva for already making prominent changes to its website in explaining how they operate: old vs. new; and old vs. new.)

Saundra Schimmelpfennig of Good Intentions Are Not Enough describes my take on this as “Sasha Ditcher argues in his blog that to get people to donate aid agencies have to use half-truths.”

This isn’t what I think at all.  Lots of nonprofits get lots of people to donate in lots of ways, and it’s simply empirically incorrect to say that they “have to use half-truths.”  Most don’t; some do.  I firmly believe that transparency and accountability will win; that, especially now, any organization that makes claims that it cannot support will lose (faith, trust, brand, credibility, donors) in the end.

What I’m saying is that “give to help this person” pitch is both true enough and compelling enough that it’s not going anywhere, no matter what we wish for.

Why is it so compelling?

A parable: imagine you’re walking in the woods on a crisp fall day, the leaves have just begun to turn, and you can see your breath as you crunch down the still trail.  You come upon a clearing and see mist rising above a flat, wide lake, and across the lake and close to the opposite shore you see a single rowboat.  As you approach, you notice the boat is rocking and you catch a glimpse of the boater’s face, agitated.  She whips her head around to see you, and starts waving frantically.  “O my gosh!!!” she gasps.  “Thank goodness!!  Please help me!!  My boat has a leak and I don’t know how to swim!  I’m going to drown!  Please help me!”

You will swim into the water and help.  Nearly everyone will.

Now change the story.  The lake is in a park, and fifty people are around.  What are the odds you’re going to help?  Low.  And in fact the odds that nobody helps are better than you’d think.

Need proof?  According to newspaper accounts, in 1964, Kitty Genovese was stabbed to death by a serial rapist and murderer.  The killing took place over the course of nearly half an hour, and 38 people witnessed the attack and did nothing – they didn’t even call the police.  This wasn’t an isolated incident.  It is easily replicated by social psychologists, enough that it’s been coined the “bystander effect.”

As Saundra points out, there are lots of reasons to bystand when faced with people in need half a world away: maybe someone else will give; maybe the money I give won’t get there; maybe it will be mismanaged.  The reasons not to give are so compelling that it reminds us that each time someone does give it is an act of generosity, of faith, and of trust.

How do you counteract the natural tendency to do nothing?  Kiva gives us at least one very compelling answer. Create an experience for a potential donor that’s as similar to walking by a lake alone with one person in danger.  How does Kiva do it?  They present this potential donor with:

  • A specific borrower
  • With a real story with strong emotional content
  • Needing a specific amount of money
  • With a deadline
  • And the ability to see what happened to that person
  • And they present this all to a web-savvy, 21st century consumer who has lots of experience clicking on things online and having real things happen (e.g. when they use Amazon)

The ask is concrete, tangible, direct, has emotional content, a feedback loop, and it’s presented to someone who is used to using online tools.  It’s brilliant, and it’s well-executed.

And let’s remember: these are real people who are getting real loans from real microfinance organizations and really paying them back.  And Heifer International really is buying livestock that goes to real people in the developing world.

It does seem like Kiva is already making some adjustments, and my guess is that they will lead the pack given their commitment to transparency.  But just last month I received an email from another international NGO titled “Help millions of women like me” with a personal letter from one woman whose story was alternately heart-wrenching and triumphant.  It’s a true story, it’s compelling, and it’s not going anywhere.

To summarize:

  • Do I think that giving to individual people in need is ever going to get to the root of the problems of poverty in the world?  No.
  • Do I think that there’s some blurring of the lines of what exactly is happening versus the appearance of what is happening when a nonprofit says “help someone like me”? Probably.
  • Do I think that fundraising in this way ultimately serves to undermine the hugely important role the nonprofit itself plays, inevitably leading to the spurious conclusion that all “overhead” should be minimized so nearly all of the dollar given goes to the person in need?  Yes.
  • Do I think that we desperately need both nonprofits and donors to lead with a different story that has strong emotional content and connection AND that helps us build real, large-scale solutions that work to solve these problems in a fundamental way?  Absolutely.
  • And do I think that the “help this one person” ask is going away, ever?  No chance.

The good news is, conversations like the one that just flared up around Kiva will keep the system in balance, and there are more tools than ever to create this kind of accountability.

But the real challenge is for all nonprofits to look at the Kiva playbook and really understand why their ask is so effective.  We need better stories to donors that explain all the nuance, challenge, importance and complexity of this work, but these stories will only serve their purpose if they have all the concrete, tangible, direct, and emotional content that Kiva creates for hundreds of thousands of people every day.

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Kiva Community Conference Call

The Kiva conversation continues vigorously online, including nice summaries by Sean (Donors Choose v. Kiva and Philanthropy Daily Digest) and Nathanial which are definitely worth reading.  For those interested in a live conversation, dial in to Kiva’s next community conference call on October 20th at 3pm U.S. Pacific time.

Dial in US: 866-740-1260 Access Code: 6415483

Dial in (Outside US): +1 303-248-0285 Access Code: 6415483

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Kiva Customers Don’t Receive the Loans you Give

If I wanted to get your attention, that’s the headline I’d write.  Strictly speaking, it’s true.  And when you only have a minute to grab someone’s attention, isn’t it your job to grab their attention?

That in essence is what’s at the core of the conversation that’s swelled up over the last two weeks about Kiva.  David Roodman’s “Kiva Is Not Quite What It Seems” post kicked things off; Tim Ogden took things further in his post on the Philanthropy Action blog, and Sean Stannard-Stockton provided the definitive summary of the conversation, with his take on it, on the Tactical Philanthropy blog in a post titled “Is Kiva Misleading the Publc?

Here’s the low-down: you can log on to Kiva, find a microfinance client in the developing world who needs a loan, and fund that person.  The catch is that that person has already received their loan.   In fact all the clients on the Kiva website have already received their loans.  The microfinance organizations that gets money from Kiva does receive those funds, but the funds don’t go to that individual client.   The GiveWell blog provides the picture that’s worth a thousand words by showing what the Kiva donor is told (graphically) and what the microfinance organization is told.

The thing is, what Kiva’s doing is nothing new.  Heifer International raises tens of millions of dollars a year by sending out millions of catalogs that are every bit as sophisticated as the LL Bean or J Crew catalogs, only instead of buying rugby shirts you buy a chicken or a cow for a family in the developing world.  But you’re not really buying that chicken or that cow.  On the bottom of every page for every cow or chicken or trio of rabbits you “give” to someone, there’s a small-print disclaimer:

Gifts made through this catalog represent a gift to the entire mission. To help the most number of families move toward self-reliance, Heifer does not use its limited resources to track gift animals from donation to distribution. We use your gifts where they can do the most good by pooling them with the gifts of others to help transform entire communities. And, because you are helping Heifer fight hunger and poverty, your gift is tax deductible.

So the gift of a cow isn’t buying a cow, just like the Kiva loan isn’t going to that actual Kiva borrower.

Before we get on our philanthropic high horse, let’s be clear about what is and isn’t true here.  To keep it as simple as possible, imagine you run a nonprofit that provides food aid to people struck by natural disaster.  The simplest story goes:

  1. People are suffering as a result of this natural disaster
  2. One can buy food for one person who is hungry for one week for $10
  3. We’re in the business of buying this food
  4. So give us $10 and we’ll buy the food.

And when you’re writing a catchy headline to get a high open rate for your emails, you’ll lead with “A $10 gift will buy someone food for a week.”  This is, strictly speaking, true.

So the question here isn’t really about truth, it’s about how big a sin of omission each nonprofit can and should commit as they play this game.  Is it the responsibility of the nonprofit sector and donors alike to break down the myth that each gift does or doesn’t buy a specific thing?  And will those who take the high road ever win out in the marketplace of ideas?  It’s an empirical fact that people give more to help one person than to help many (check out this excerpt from Made to Stick for the startling experimental data), and this is wired deep into our brains, it’s not something that was created by the nonprofit sector.

Which is why I think Nathanial Whitttemore has it right when he says that this “problem” is here to stay, namely that nonprofits will, by and large, tell almost-truths to their donors – focusing on a specific connection between their dollars and a given outcome – and that a major shift for the majority of the giving population won’t happen any time soon (if ever), even though as professionals our aspiration might be to change the narrative to investing in nonprofit organizations, as Sean suggests.  It’s a good aspiration, and we should keep at it, but it will never be the bread and butter for most nonprofits or for most donors.

It is true that philanthropists who makes major giving decisions and give considerable time and energy to these decisions have the opportunity to break this cycle; and the supporting infrastructure of philanthropic advising has an opportunity to push this conversation forward, aided by nonprofits who are willing and able to tell a different story.  But let’s not pretend that we will someday divide the world into two, with the masses being duped into emotional decisions that get them to dig into their wallets while major donors dig in deep analytically and primarily make educated, highly rational, institutional-building investments.  If it doesn’t happen in the stock market, why will it happen here?

All givers are essentially the same, essentially human, making rational and emotional decision based on the information they have and the amount of time they have to give to their giving decisions.  The emotional connection is the starting (and often ending) point for everyone, and what matters is the ability of every individual donor (whether they give $20 or $20 million) to insert themselves into the narrative of a particular nonprofit organization, the problem they’re addressing, and the role that the philanthropist and their gift have in addressing that problem.

The “your money buys this” message isn’t going anywhere soon. If anything, what Kiva and Charity:Water and DonorsChoose have shown is that there’s a way to take this approach and adapt it to 21st century tools – so that you can see an online photo of the microloan recipient or the well that was dug or the classroom that was helped — if not directly by your money, at least by that same amount of money as the amount you gave.  It’s interesting that making this association more visible and tangible is calling into question the veracity of these claims (no one’s writing about Heifer, right?), when in fact all Kiva et al are doing is strengthening a tried-and-true narrative.  The mechanics of gift -> organization -> recipient haven’t changed one bit.

If you think about it, it’s nearly impossible to change these mechanics and run an efficient, global nonprofit.  So why are we all acting so surprised?

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Kiva and Acumen overhead ratios redux

Sean Stannard-Stockton picked up my post Why overhead ratios are meaningless for Kiva and Acumen Fund in his Tactical Philanthropy Blog, and in reading his summary of my post I realized that I wasn’t as clear as I could have been in the original post.

I was trying to make two separate points, and I think I mixed them together:

  1. For any nonprofit whose main activity is NOT grantmaking, “operational efficiency” ratios (“how much do you spend on overhead?”) don’t mean much.

Here’s the math:  “Nonprofit Grantmaker” has a $10 annual budget.  It spends $1 on “administration,” $1 on raising money, $2 on paying its “program staff”, and $6 on grants.  According to nonprofit math, this organization spends 20% on overhead and 80% on programs.

But what if “Nonprofit That Invests Instead” spends the same amount on administration, raising money and program staff, but instead of $6 in grants it makes $6 in loans?  Nonprofit That Invests is spending 50% of its budget on “overhead” (Its annual budget is now $4, not $10.  The $6 stays on its balance sheet as an asset and is not part of the operational budget).

So even without getting into any discussions about whether loans are more or less effective ways of deploying philanthropic capital, we can agree that there’s no substantive difference between the “efficiency” of these two nonprofits, despite what the ratios say.

The solution?  The onus is on the Kivas and Acumens of the world to reframe this.  And unfortunately this probably requires some heavy lifting because until 990 tax forms explain this clearly, it will continue to feel like fancy footwork explaining “why we’re different.”

2. The second point is not limited to Kiva or Acumen Fund, though I do think our business models shine a brighter light on this question: what is the “core” work of an organization like Kiva or Acumen Fund, and what is “overhead?”

The question Matt Flannery posed on the Kiva blog was whether it makes sense that the engineer who writes the code for Kiva’s website – which in turn connects people to the issue of poverty in the developing world and motivates them to put their capital to work for microfinance customers – is “overhead” (read: bad, inefficient, should be minimized) vs. the person who interacts directly with the microfinance organizations that Kiva works with?  I for one think it makes no sense at all.

And my broader point is that you cannot successfully answer this question without grappling with your own theory of change.

This is why I gave the Grameen vs. BRAC example, and argued that large-scale, paradigm-shifting change happens as the result of lots of influencing activities which, according to traditional nonprofit math, are “overhead” and, therefore, inefficient and to be avoided.  The whole thing seems pretty a**-backwards to me.

Why overhead ratios are meaningless for Kiva and Acumen Fund

Matt Flannery, the CEO of Kiva, wrote an excellent post on nonprofit overhead over on the Social Edge blog.  Kiva has been a game-changer in the poverty alleviation space: they use to connect donors to microfinance loan recipients in the developing world.  What’s important is the loan part — rather than getting a grant the borrower has to pay back the microfinance organization, which in turn pays back the funder.  Conceptually, this is similar to Acumen Fund, where I work – we raise philanthropic donations and then make debt and equity investments in enterprises that serve the poor in the developing world.  When we’re paid back, we recycle that capital into new investments.

One of the challenges that Acumen Fund and Kiva both face is that our models – focused on innovation, accountability, investment, and better leverage for each philanthropic dollar – are in direct opposition to the traditional metrics that rate nonprofit efficiency.  This is because invested capital (loans and equity), unlike grants, don’t factor into ratio of “overhead costs as a percentage of total cost.”  It just stays on the balance sheet but is not part of the annual budget.

The conventional nonprofit wisdom is that “best in class” nonprofits will spend no more than 20% on “overhead,” breaking down roughly to 10% on fundraising and 10% on administrative costs.

As Bridgespan, one of the leading consulting organizations to the non-profit sector, reports, “Many organizations and their funders are locked in a vicious cycle in which nonprofits are pressured to under-invest in overhead and to under-report their true overhead costs, even when those costs are still below what their senior managers feel is needed.”  Worse still, Bridgespan reports that “The majority of nonprofits [75-85% they studied] under-report overhead on tax forms and in fundraising materials.”

If we’re going to break the cycle, we have to uncover how flawed the underlying logic is.  Here’s where the logic falls apart:

An example: Both the Grameen Bank and BRAC in Bangladesh are world-class organizations that have changed the lives of tens of millions of poor people (mostly Bangladeshi women) through the provision of microfinance services.  Both organizations were founded by visionary leaders upon whose shoulders my generation stands in our work to bring an end to global poverty.

Yet, if forced to choose, I would argue that Grameen had the greater impact on the world because Mohammed Yunus, Grameen’s founder, won the Nobel Prize.  This was a major marker that “mainstreamed” microfinance and allowed the world, and not just the development community, to understand that lending money to poor people could change their lives in new and exciting ways. The result was a huge influx of commercial capital, and significantly more growth in the sector – ultimately leading to millions more served.

My question is: in the 30 years prior to Yunus receiving the Nobel Prize, does it sound right to you that every meeting Yunus had with a world leader, a powerful donor, or a leading journalist would have been counted in Grameen’s “overhead” cost, as separate from the “program” cost of delivering microfinance services to Bangladeshi women?  Should Grameen have “stuck to its knitting” in delivering microfinance services and not wasted money on all the “overhead” of external communications and building a community of friends, advocates, advisors, and supporters, which ultimately led to a global movement in support of microfinance?  (and yes, I know it wasn’t all Yunus, but without him, I don’t think we’d be where we are today).

My point is: it’s not just a little wrong to try to separate out “program” from “overhead,” it’s an outdated (or maybe it was never right) mode of thinking that is based on the premise that nonprofits are primarily delivery mechanisms for pre-determined services.  In reality, nonprofits play an active role in shaping our collective understanding of how to solve important social problems.

And getting back to Kiva and Acumen…: There’s a whole new segment of hybrid organization – encompassing the likes of  Kiva, Acumen Fund, Root Capital, E+Co, Agora Partnerships, sitawi, and others – that deploy mostly non-philanthropic capital for social ends.  Much as we’d like not to worry about the conversation, people do often ask about “overhead ratios” when making philanthropic decisions.

In closing, here are four (more or less related) thoughts:

  • Until “social investors” like Acumen et al. can develop a common vocabulary to  assess how efficient and effective we are (or are not), we will be at a disadvantage in the philanthropic marketplace
  • The nonprofit sector as a whole would be significantly stronger, and better positioned to weather economic downturns, if nonprofits didn’t rely on annual funding cycles.  But raising money over 18 months to pay for costs over 5 years requires an upfront investment – one that will look “inefficient” based on traditional ratios
  • If you care about fundraising efficiency, ask how much it costs an organization to raise a dollar, not how much they spend in total on raising money.
  • Even when asking this question, take the answer with a HUGE grain of salt – raising money, teaching, inspiring people, changing attitudes, motivating people to act….there’s huge overlap in these activities. If you don’t agree, please read my NonProfit CEO Manifesto and let me know how we can all do this better.

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.

What would Maimonides think of Kiva?

(First blog Milestone reached: a blog post inspired by a reader’s comment. The next milestone will be when the same thing happens and I don’t know the reader personally).

A blog reader of mine brought up Kiva in response to yesterday’s post, which I thought was interesting – both because I didn’t mention Kiva and because it was on my mind too. So what would Maimonides think of Kiva?

In Maimonides’ discussion of charity, he says that you should not put money into the tzedakah box unless you know that the person responsible for the box is faithful, wise and trustworthy. If not, you’re not sure if the donation will help improve a person’s life.

This sense of distrust has become more common in recent decades, especially in international charity. There’s a sense, fair or not, that little has been accomplished with the $2.3 trillion the West has spent on foreign aid in the last 5 decades, since much of the world is still very poor. William Easterly in his book The White Man’s Burden has been one of the most vocal critics in this camp, explaining the many failings of international charity and international aid. On the other end of the spectrum, Jeff Sachs argues in The End of Poverty that we could end global poverty by increasing global giving.

(There’s a book’s worth of discussion that this opens up, which I’ll avoid for now and just point out that the US GDP last year was just under $14 trillion, so if my math is right the total spending on foreign aid by the West over 50 years is equivalent to two months’ worth of the U.S. GDP. Two months worth of output for .25 billion people vs. 600 months’ worth for ~3 billion people? So maybe it’s not that much after all…)

While Easterly’s focus is more on international NGOs (e.g. the World Bank), someone like my friend who raised the question about Kiva can’t be blamed for thinking, “Why would my $25 make a difference, and how can I know it’s being spent wisely?” To me this is just a step removed from the legitimate fear that the tzedakah collector is unfaithful or dishonest. The worry is that your money goes into the box with the intent of helping someone, but that someone isn’t helped as a result.

To me this helps explain why most giving in the United States is local and through religious organizations: it is much easier to feel confident that your donation will make a difference when you personally know the person asking you to give, are giving as part of an established community, and have first-hand exposure to the problems your donation is meant to address.

So what would Maimonides make of Kiva? There are lots of organizations doing international work that are incredibly effective and trustworthy stewards of people’s charity (yes, I think that Acumen Fund is one of them). The brilliance of Kiva is that it has found a way to create that personal connection and the sense of empowerment on the part of the donor, allaying the fear (conscious or not) that the $25 donation will be lost in a sea of larger donations, or will never reach its intended recipient. Kiva has used the Internet to get rid of the tzedakah box altogether, allowing the giver to “give directly to the poor without being asked” (Level 5 in terms of honorability, for those keeping score).

My own hope is that this is increasing the number of people giving and increasing people’s comfort with and habit of giving – especially by people in their 20s and 30s –and that this will lay the foundation for more generosity, education, and awareness of the problems of international poverty and the innovative solutions now available to address these challenges.