There’s a great TED talk (here) that got me thinking. In it, Dan Pallotta – who essentially created the multi-day charitable event industry – argues that the way we judge charities is wrong. There’s an obsession with keeping overhead low and an understanding that salaries for those in charge should be kept to a minimum. After all, they’re working for charity. But this isn’t the best way to succeed. When a business wants to grow, society understands that it’s necessary to reinvest its earnings into creating more earnings. It’s worth hiring the best leaders (even with high pay) because they bring more value than they cost. And it shouldn’t be any different in the non-profit sector. The best way to raise more money is to reinvest a big portion of what they’ve earned so far. Pallotta’s charity events, despite comparatively high overhead, have grown exponentially faster than others and have, as a result, raised a much higher overall dollar figure. And that’s what matters, right?
Okay, I’m convinced.
But then I think about if one of the charities that I give money to told me that their CEO takes a big chunk of the proceeds and a majority of the rest goes towards marketing to get more donations and it just feels… wrong. I don’t want my money going towards overhead.
So: either I’m being irrational or there’s a piece of the equation that I’m missing.
Pallotta establishes – and I agree – that the best way for a charity to grow and raise more money in the long term is to reinvest their profits. Yet I still don’t feel comfortable donating to charities that operate in this way. Is that a contradiction? I’m not sure it is. Not necessarily. If my goal in giving to charity is to maximize the charity’s overall proceeds then yes, it’s a contradiction. But that isn’t my goal.
Let’s step back for a second: If I give $100 to charity and they reinvest all of that money to convince my neighbor to donate $101, is that a good thing? There’s been a net drain on society of $201, yet the charity only has $101 to show for it. That’s not good. I don’t feel like that was money well spent.
Compare that to a company that does the same thing. If I spend $100 on a new gadget and they reinvest all of that money to convince my neighbor to buy the same gadget for $101, is that a good thing? I’d argue that it is. My neighbor got something that he values at over $101 (otherwise he wouldn’t have bought it) and the company made additional revenue. Sure, we’re talking about small numbers so it seems insignificant, but it’s clear that everyone benefitted.
So what’s the difference???
It’s the fundamental problem with philanthropy today: When you give to charity, you are trading your money for the feeling that you’re helping.
And that leads to the societal beliefs that overhead and salaries should be low, and all the donations should go directly to helping the cause. Because, if they don’t, then the person donating didn’t get their end of the bargain. Their money didn’t help the cause.
When a charity spends $1 million on marketing – even if it has a positive ROI and generates $2 million in donations – that’s $1 million of contributions from people who gave money to help a cause and didn’t. Or, phrased another way, $3 million was given to help a cause and created only $2 million in real change.
In economics, we talk about growing the pie. And Pallotta’s speech assumes he can follow that logic: it’s worth reinvesting because it grows the pie. But donating to charity isn’t growing the pie, it’s just shifting wealth around. It’s a one-way transaction. So a reinvestment into getting more people to donate isn’t growing the pie the way reinvesting in a business would, it’s just a net loss for the sake of shifting the wealth around in a more favorable way.
So let’s recap quickly: Pallotta’s logic is flawed because a bigger overall dollar figure isn’t all that matters when people are giving out of sympathy. The best example is imagining a charity that reinvests so much into good marketing that they raise $1 trillion dollars. But only $1 billion of that money actually goes to help. They’ve created a huge bottom line, but because the cost of that bottom line was so massive (and the people giving didn’t get anything of value in return) it isn’t worth it. Donating to charity is a transaction where you are giving money in exchange for being able to help. And when the majority of those giving money don’t get to see their dollars put towards good, it doesn’t matter how useful that money was in creating more donations. It’s an overall societal loss.
So how can we fix this?
We need to change the way we see philanthropy. Businesses operate on the principle that they can provide more value than their costs of producing that value. In other words, they create transactions where both parties selfishly benefit and there’s profit leftover.
Why can’t charities do the same?
That’s the idea behind a charity I’m working with called GiveGetWin. Except – and here’s the secret sauce – there’s more ways to deliver value than just in dollars.
Essentially, what we do is ask someone doing something interesting to provide us with some value free of charge for us to sell. Often, that’s a handful of 1-on-1 consultations. Sometimes, it’s a product that they usually sell.
In exchange, we market the hell out of the deal and, in doing so, raise awareness of what they’re doing and drive a bunch of traffic to their page. Plus, it looks good on them and raises their credibility.
Great – they’re benefiting personally and doing good for charity.
Eventually, people who are interested in what they are selling find our deal and are amazed by the incredible value. The prices are shockingly low and, in many cases, the offers are things they wouldn’t be able to buy elsewhere.
Great – they’re benefiting personally and doing good for charity.
At the end of the day, all the profits generated by the deal go towards helping change the world. Today, we’re developing educational infrastructure in Mongolia. Tomorrow it could be something different. Because those giving are doing so for their own sake (with the added benefit of helping charity), we aren’t tied to one cause. We don’t rely on sympathy to raise money. Those who give are getting something for it. And this gives us the freedom to spend the money however it’s best suited to generate the most value.
Coincidentally, despite all this, we have an awesome team of volunteers and are able to give 100% of all our earnings to charity. But the point is that, the way things are set up, nobody would have that negative gut feeling if we reinvested our proceeds in growing. The transactions don’t consist of trading money for the feeling that you’ve created change. The change is an awesome byproduct of mutually beneficial deals.
And I haven’t even told you the best part. My job? Well, I do a lot of things. But a main portion of that is finding people who are doing cool stuff that I admire and reaching out to them. I explain how we operate, spend some time chatting with them about how we could structure a deal, and work with them to put something amazing together. It’s an awesome opportunity to connect with really incredible people and I consider myself lucky to be able to do it.
Great – I’m benefiting personally and doing good for charity.
Written by Zach Obront
Zach Obront manages recruitment and development and GiveGetWin, a new kind of charity for the 21st century. You can read more of his writing at www.zachobront.com and find out more about GiveGetWin at www.GiveGetWin.com.