Risk and Capacity Building: A Response To Dan Pallotta’s TED Talk

There are oh-so-many things to say about Dan Pallotta and his talk at TED.  The essential point of his presentation is that the nonprofit sector is at a disadvantage to the for profit sector because of the way we – as a society – think about nonprofits and charity.  Some of the many points he makes we can dismiss right off the bat.  For instance, his point that nonprofits can’t share profit to attract risk capital….  Well, yeah, they’re nonprofits.  And that means that they don’t have to pay taxes.  And that means that they can’t act exactly like a for-profit unless they plan on paying those taxes.charity

Many people have talked to me about Dan’s idea of paying top executives in the nonprofit arena more.  I won’t spend too much time on this either; this piece in the Stanford Social Innovation Review Blog makes some interesting points.  What I would point out is that many for-profit companies pay their top talent huge amounts of money and just as often as not they prove to be just as mediocre as the rest of us.  I think Dan exaggerates the impact that a single person can have on a nonprofit institution.

What I do think is really interesting about Dan’s talk is how we are much more tolerant of risk and long-term capacity building in the for profit world than we are in the nonprofit. Venture philanthropy is all the rage these days but the funny thing about it is that most venture philanthropy works and acts exactly like traditional philanthropy.  Yes, there is more of an emphasis on clear and measurable outcomes within a defined period of time. However, I would argue major investors in an organization have always wanted this.  What’s maybe changed is that lower-level investors now expect the same thing.

But aside for a demand for clear social outcomes, venture philanthropy still generally acts very differently then venture capital.  Major investments in fundraising and other capacity building is still exceptionally rare even though such investments can leverage a great deal more.

Patience on social returns that take longer than a couple of years is also a rare exception rather than the rule.  And then there is the complicity of nonprofits themselves.  We so rarely dream as big as we need to.  I was talking with a self-identified venture philanthropist recently that wants to fund riskier ventures and wants to encourage fellow philanthropists to do the same and I remember thinking to myself, “Would we believe a funder if they told us they were OK with failure?”  I’m guessing we wouldn’t.  I’m guessing that we would be thinking that if we want to have a chance at additional funding and a career going forward, we’d better show some concrete results pretty fast.  So we play it safe.  Privately, we all dream big but we seldom put it out there for funders to ponder.

So I agree with Dan wholeheartedly that our societal mentality holds the nonprofit sector back.  He’s very much right in saying frugality does not equal morality.  But, as Laura points out, money invested in marketing is only a means to an end.  The true output is the kind of social impact we have.  Sometimes that requires a lot of dollars, sometimes it doesn’t.  At times we may need to invest a lot in our marketing and fundraising but over time we are ultimately better off investing in our mission and its outcomes.  Many, many nonprofits (if not that vast majority) are able to keep their fundraising costs below $0.25 on the dollar and still be highly effective.  The fact of the matter is Dan’s organization engaged in the least efficient form of fundraising out there: event fundraising.  And while his cause lent itself to that model, most other causes don’t require this and can get a much better return on their dollars.  Even Dan’s organization could have done so by leveraging the people his walks attracted for major donor dollars instead of relying on a few big sponsors that left his organization fatally vulnerable.

Ultimately, I’m glad that Dan is raising these ideas.  It’s important that we talk about the respective roles of the for profit and nonprofit world.  And perhaps those people most in a position to be helpful will start to think of nonprofits differently and change the landscape.  But in the meantime, the nonprofit sector remains a market place just as the for profit sector does.  Efficiency does matter.  Diversity of revenue does matter.  Social return on investment is our ultimate metric, not dollars raised.  As Dan points out himself, ours in the market of love and you can’t measure that in money raised.

6 thoughts on “Risk and Capacity Building: A Response To Dan Pallotta’s TED Talk

  1. When my colleagues were walkers in Dan’s 60-mile walks, it was a great experience for them. But as a donor, I was struck by the implied nonprofit status without the right donation processing. That is, I don’t think the funds were tax deductible at all – and I think his high high costs were outrageous.

    I found his TED talk righteous and nonfactual. Thanks for this thoughtful rebuttal.

  2. What a powerful reminder that we must deliver BOTH powerful donor engagement – sounds like he understood the deep experience he could create – and the need for top quality donor stewardship. We’re caught on the donor acquisition hamster wheel forever (or until things come crashing down) if we don’t get that right too.

  3. I applaud Dan for continuing to raise these issues. For years he has been a voice in the wilderness and I am glad he continues to speak and write on the subject. The TED talk is succinct, and will allow more to hear his message and talk about it.

    And while I agree not all he says is gospel, we need someone like him to eloquenly state the case for thinking about the non profit sector differently. I especially like his highlighting the issue of ROI and the need to look longer term and be willing to accept some failures.

    The problem of employee turnover plagues non profits – and costs huge amounts of money. Dan suggests ways that might be addressed. There are many other important issues he is getting us to talk about.

    Thank you all for your thoughtful responses. I hope this discussion spreads and grows. If, as Dan posits, the non profit sector has not grown in the past 40 years, that is NOT a good thing! Leaders should be addressing the issue.

  4. Coming from the business world to work in a non-profit, I saw clearly what Dan was trying to say. I just returned from a two day financial training seminar for non-profit CFO’s. The number one problem everyone says they have is having donor’s pay for indirect / overhead costs. In the for profit world, everyone understands that you need to have an infrastructure in place to deliver goods and services. In the non-profit world, that is a dirty word. Donor’s don’t want to pay for “overhead”. Donors want to know how much of every dollar goes to provide services. 100% of every dollar goes to provide services. You need good people, you need computers, you need telephone lines, etc to deliver the services to fulfill your mission. I think that was the crux of what he was saying. Why can’t people make a living and feed their family while delivering on their mission. Why must I pay people minimum wage to take care of people that can’t take care of themselves?

  5. A quick perusal of the Urban Institute’s most recent report of income streams for nonprofits will starkly show that Dan is right, nonprofits are businesses. http://www.urban.org/publications/412674.html

    Nearly 75% of income from all the 366,086 organizations filing IRS 990 forms is from fees for service — business-like income. An additional nearly 3% comes from investment income. Less than 15% is from fundraising income and less than 10% is from government grants. Excluding customer-focused hospitals and universities changes these figures modestly, increasing fundraising income to 24% and government grants to 15%, while lowering fees for service to somewhere around 60%.

    My research shows these numbers have not changed much over the last couple of decades. What happens for the overall sector is not necessarily what happens at the subsector or individual organization level. My research also shows that the top fundraising organizations have captured an increasingly large share of funds raised.

    I think it is essential that people like Dan Pallotta raise these issues. For the sake of context, it is also essential to look at the composition of revenue that actually drives the nonprofit sector and not think it is all donation-driven.

    • Bill, thanks for your comments. Yes, the vast majority of nonprofits do earn money from fees for service. However, non-profits don’t pay taxes and this does change things, in my mind. There is a price to be paid for that privilege. Many people are philosophically opposed to the nonprofit sector competing with the for profit sector for this very reason.

      Still, I am happy Dan has started this discussion and I agree with many of his points. Just not all of his conclusions.

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