Tactical Philanthropy Blog

Nonprofit Analysis: Beyond Metrics

September 2, 2010 – 7:19 am

This is part six of a six part series exploring the sessions in the Tactical Philanthropy track at the Social Capital Markets conference.

Session Description: Nonprofit Analysis: Beyond Metrics
Over the last few years, mainstream nonprofit analysts and rating groups have moved beyond simplistic metrics like the "overhead expense ratio." Join three of these groups, Root Cause, GiveWell and Charity Navigator as they present their analysis of DC Central Kitchen, a prominent job training and meal distribution nonprofit. You’ll hear three robust approaches to analyzing nonprofits as a way to determine the degree to which a social investment in the organization may lead to impact.

  • Ken Berger, Charity Navigator
  • Andrew Wolk, Root Cause
  • Elie Hassenfeld, GiveWell
  • Michael Curtin, DC Central Kitchen

One of the worst habits of “new” philanthropy is to import simplistic versions of business practices to the nonprofit sector. One of the places we see this habit is in the idea that we need to build some sort of unified ranking system to judge nonprofits. While the idea that we can somehow score nonprofit effectiveness on a simple scale is appealing, it is a dangerous simplification of an important idea.

In the for-profit world, the urge to create simple systems to do things like pick stocks runs deep. But these systems are understood to be of little value or sometimes outright scams. The truly great investors use robust systems that evaluate investment opportunities across a variety of qualitative and quantitative areas.

So I’ve been thrilled to watch nonprofit evaluation groups move beyond simplistic measures and embrace the complexity, human judgment and uncertainty that is at the heart of understanding whether a nonprofit is good at what it does.

For this session at SoCap, DC Central Kitchen, the nonprofit founded by Robert Egger, has agreed to open themselves to evaluation by Charity Navigator (using their new methodology), Root Cause and GiveWell. At SoCap, each group will offer their evaluation of DCCK with the organization’s CEO Michael Curtin in the room to offer his own views.

Our hope for this session is that it will help demonstrate that there are multiple, valid approaches to evaluating a nonprofit. Kudos to DC Central Kitchen for being willing to open themselves to outside evaluation and engage in this process.

You’ll find more information about DC Central Kitchen’s commitment to transparency and achieving impact here.

Philanthropy Daily Digest

September 1, 2010 – 6:01 pm

Decriminalizing Fundraising

August 31, 2010 – 8:12 am

This is part four of a six part series exploring the sessions in the Tactical Philanthropy track at the Social Capital Markets conference.

Session Description: Decriminalizing Fundraising
Fundraising is generally seen as "asking donors for a favor." But what if fundraising is in fact no different from raising investment capital or selling a well-vetted product? This session will feature two 20 minute talks by George Overholser and Dan Pallotta, two of the most visionary and radical philanthropic leaders.

  • George Overholser, Nonprofit Finance Fund Capital Partners
  • Dan Pallotta, Springboard

Each of the sessions in the Tactical Philanthropy track at the SoCap conference will feature a different format. Storytelling, interactive experiments, case studies and debate will all be featured. In this session, George Overholser and Dan Pallotta have been asked to bring their A-game and each give a 20 minute talk to remember.

George is a former executive at Capital One and venture capitalist who joined the Nonprofit Finance Fund to build their growth capital practice. He’s a strong advocate for “philanthropic equity”, the idea that nonprofits need a new category on their balance sheet that accounts for capital meant to be used to grow their organization. At NFF, George created the SEGUE approach to accounting for philanthropic equity in the absence of official equity accounting and worked with a range of nonprofits to raise multimillion growth capital investments.

Dan is the author of Uncharitable, in which he argued that nonprofits are unfairly prevented from using the tools of the for-profit sector. Known for his outspoken arguments against overhead expense ratios and in favor of generous, incentive heavy nonprofit employee compensation, Dan is one of the most controversial voices in the field.

While George and Dan come from significantly different points of view, they share a belief that fundraising practices must be fundamentally changed and that accomplishing this goal will radically improve the nonprofit sector.

Click here to see the full SOCAP10 schedule, including the Tactical Philanthropy Track. Nonprofit employees can apply for a 40% discount here. Click here to register for the conference.

Philanthropy Daily Digest

August 30, 2010 – 6:01 pm

Individual Donors Practicing Unconstrained Philanthropy

August 30, 2010 – 8:25 am

This is part three of a six part series exploring the sessions in the Tactical Philanthropy track at the Social Capital Markets conference.

Session Description: Individual Donors Practicing Unconstrained Philanthropy
Many of the most well known, active participants in the social capital markets are institutions. But individual donors have fewer institutional constraints and can bear more social risk. These types of donors can make decisions faster, are able to act on less popular/overlooked areas that nevertheless promise big impact, and find it easier to forge collaborations. Join three individual donors who are doing cutting edge work in the social capital markets without the help of a large staff.

  • Katherina Rosqueta, The Center for High Impact Philanthropy
  • Dave Peery, The Peery Foundation
  • Jerry Hirsch, The Lodestar Foundation
  • Liz Alderman, The Peter C. Alderman Foundation

One of the reasons that I so enjoy working with individual and family philanthropists is that they tend to ignore the many self-imposed constraints that many large, staffed foundations seem to face. Unconstrained by the caution “culture” of much of institutional philanthropy, these donors are able to simply choose to operate on the leading edge.

This session will have a storytelling format. Katherina Rosequeta of The Center for High Impact Philanthropy, will play interviewer to three outstanding individuals who have chosen to doing things different.

Dave Peery, who manages his family’s philanthropy will talk about how his two person shop has ended up being featured in the Monitor Institute’s report on cutting edge practices for their efforts to do live strategic planning on Twitter, co-fund alongside groups like the Skoll Foundation and use video to help their grantees.

Jerry Hirsch, will discuss why he created the Collaboration Prize and became the biggest game in town for nonprofits seeking to merge or collaborate with others. While many funders wish that nonprofits would collaborate, Jerry actually focuses on funding effective and efficient use of resources without regard to issue area.

Liz Alderman will talk about how she and her husband Steve became “accidental philanthropists” when the death of their son Peter on 9/11 thrust them into a passionate effort to help people around the world recover from the mental health effects of being exposed to extreme violence.

You can get a sneak preview of Liz’s story in this video produce about her and Steve when they won the Purpose Prize.

Click here to see the video if you are viewing this post in an email.

Nonprofits Are Businesses

August 27, 2010 – 10:20 am

One of the most bizarre criticisms of the Giving Pledge is the idea that it will hurt the economy.

For example Forbes columnist John Tamny writes:

“But while it’s exciting to contemplate the giving nature of Gates and Buffett, if their true desire is to help their fellow man, they should hoard every penny of their significant wealth…

Some will no doubt benefit in the near term, but the removal of limited capital from the productive parts of the economy will ultimately reduce our standard of living, drive up unemployment and make individuals more–as opposed to less–needful of charity.

Conversely, money saved and invested constitutes capital offered to today’s and tomorrow’s businesses. When individuals save, they’re by definition providing capital to entrepreneurs, and the capital formation that results from saving naturally stimulates job creation. Considered in this light, savers and investors are conferring the ultimate benefit on others by virtue of their financial means supporting individuals eager to work.”

Tamny’s underlying assumption is that nonprofits are not productive, that they don’t stimulate job creation and do not enhance the standard of living.

Tamny’s understanding of the nonprofit sector is so misinformed that it is difficult to understand how Forbes editors published his column. It isn’t that Tamny’s opinion isn’t valid, certainly there could be an argument that for-profits produce more value than nonprofits, it is that Tamny seems unaware of the fact that nonprofits are businesses.

Nonprofits employ people, nonprofits buy goods and services from for-profits, nonprofits are an important economic engine of the US economy. In fact, nonprofits are a bigger portion of the economy than many other industries.

Today, I’m happy to share an outstanding video that highlights just how significant the nonprofit economy is. Not many sectors of the economy book over a trillion dollars in revenue and employ 10% of all US workers!

Click here to see the video if you are viewing this post within an email. The video was produced by Philanthropy Reports

How the Social Innovation Fund Selected Grantees

August 26, 2010 – 8:19 am

I have to move on to a bunch of other topics that have gotten stacked up in my blog post queue given all the Social Innovation Fund discussion. But I want to cover one more aspect of the situation first because I’ve gotten a number of questions about it (including from non-finalist grantees).

The event that drove the Fund to release so much information about the grantees and the grantmaking process was Paul Light, a reviewer for the fund, announcing that he had given one of the grantees (New Profit) the lowest possible rating and asking how it was possible that they had gone on to win an award. [Update, actually a quick reader correctly points out that a number of issues pushed the Fund’s disclosure, including Light’s comments, questions from the New York Times, Chronicle of Philanthropy, Nonprofit Quarterly and others]. While much attention has been paid to the fact that the Fund released the application material and reviewer comments, the Fund also released detailed information on the various rounds of reviews and the scoring of the finalist grantees.

The Fund went through a four stage process to score the applications. Notably, the Fund did not simply rank all the applications and give the grants to the top scorers. Instead, the Fund used a “playoff” system similar to how most sports award championships.

Phase I

16 separate three person panels of reviewers rated the 54 applications. Two panels were assigned to each application. They rated the applications with one of four scores, Excellent (I), Strong (II), Satisfactory (III) or Weak/Non-Responsive (IV).

Phase I

Click here for larger image.

All applicants which received at least one Excellent rating moved to Phase II. All applicants which received Strong ratings from both panels moved forward. Of the 15 organizations that received one Strong and one Satisfactory rating, 11 moved forward and 4 were disqualified because issues were raised by reviewers that would not have be clarified in Phase II. In total, 31 applications moved to Phase II.

Note that New Profit was one of three groups that received an Excellent rating from one panel and a Weak/Non-Responsive rating from the other. Like all groups which received at least one Excellent rating, they went on to Phase II. Also note that the single application which received Excellent ratings from both panels did not receive a grant. I’ll cover this further in a moment.

Phase II

All applications were reviewed by a newly assembled review board and rated on the same rating scale. However, this Phase examined the applications only on their use of data, evidence and evaluation.

Phase II

Click here for a larger image.

All applications which received an Excellent or Strong rating (all eventual grantee scored in this range) moved to Phase III, except the staff of the Fund eliminated one application that they determined was not responsive to the Fund’s requirements.

Those applications rated Satisfactory in Phase II and which received two Excellent ratings or an Excellent and a Strong rating in Phase I were moved to Phase III. Those that scored lower in Phase I were examined by the Fund’s staff for their alignment with the Fund’s portfolio criteria and two out of 10 were moved to Phase III.

All applications rated Weak/Non-Responsive in Phase II were dropped. In total 16 applications were moved to Phase III.

Phase III

The Fund’s staff and three external reviewers met and discussed the Phase III applications with an emphasis on their strength of relationships and collaborations, opportunity for scale, potential to impact public discussion, and the rigor of sophistication of evidence and evaluation. At the conclusion of these discussions, 11 out of the 16 applications were advanced to Phase IV.

Phase IV

The Fund sent a long series of detailed clarifying questions to the Phase IV applicants. After reviewing their responses, the Fund awarded grants to all 11 finalists.

Remember the one applicant which received Excellent ratings from both review panels in Phase I? They were only rated Satisfactory in Phase II. They advanced to Phase III, but were eliminated at that point. The reason I refer to the process as a “playoff system” is because the applications had to make a certain cut to move to each Phase, but at that point they started fresh against the new, smaller pool of applications. The applicant that received two Excellent ratings in Phase I was like the New York Yankees having the best regular season record, but being beaten by another team deep into the playoffs.

Is this process the right one for the Fund to use? That is up to debate. But it certainly is a rationale system. One thing I like about the process is that rather then trying to achieve a false level of precision, the process embraces ambiguity. The Fund didn’t approach this process as if they were hiring a government contractor where they would have been looking for who could deliver on specification at the lowest cost. Instead, the fund recognized that the process of investing growth capital is steeped in uncertainty. Deciding which applications were best was not diminished to a simplistic set of metrics. While doing so might have made the Fund’s final decisions easy to understand, it would not have resulted in the best selections.

This sort of process is very similar to how for-profit investors build a portfolio. Rather than simply rating investment opportunities on a set of simplistic criteria, for-profit investors use multiple quantitative and qualitative screens and ultimately make a decision that attempts to holistically capture a broad range of inputs.

The investment process, both for-profit and nonprofit, is thick with ambiguity. Turn on the financial news station any day and you’ll see two professional investors, both with strong arguments, debating whether a specific company is a good or bad investment. Amazingly, two investors will frequently have almost opposite opinions of an investment opportunity. This disagreement is said to “make a market” because every buyer needs a seller to execute a transaction.

The key to evaluating an investment process, either for-profit or nonprofit, is to examine the validity of their process rather than their actual decisions. This is because a good process will hold up over time, while even a bad process can get lucky and make good decisions in the short term.

The Social Innovation Fund’s selection process is valid. It centered on the use of external experts to evaluate the applications based on a range of inputs. While these experts sometimes came to opposite conclusions, this actual validates the process. If the experts had all agreed all of the time, it would have been evidence that the rating criteria were too simplistic and/or quantitative. Or as one reader has argued, the range of expert opinions may in fact be evidence of innovation.

Philanthropy Daily Digest

August 25, 2010 – 6:01 pm

Social Innovation Fund Application Repository

August 24, 2010 – 8:47 am

As I announced in my column yesterday, I am collaborating with the Chronicle of Philanthropy to host a repository for non-finalist Social Innovation Fund applications. The 11 finalist applications are available on the Fund’s website along with the comments of reviewers.

To kick things off, Social Venture Partners has published their non-finalist application, which you can find here.

Why is the Repository needed? My primary interest in the publication of Fund applications has to do with my belief that the applications represent a treasure trove of information about the practice of growth capital funding. Since 70% of all applications to the Fund were rated Strong (the second highest rating) or better by at least one review panel, we know that in many cases non-finalist applicants presented compelling arguments in their favor. In fact, in a number of cases, non-finalist applications received higher ratings than some finalists during first round reviews.

Another important reason to publish non-finalist applications is that they represent a potential “secondary market” for other funders. Take the application by Social Venture Partners. I would guess that the application scored well. There may very well be an interesting opportunity for a private funder to step in to support their $1.1 million grant request. If this were to happen, in addition to supporting a well thought out initiative, the funder may in fact help Social Venture Partners return to the Social Innovation Fund application process next year with a stronger application that includes evidence pointing to the success of their approach. Who knows, maybe SVP would be able to point to more compelling evidence of effective implementation and short term results than some of the finalist applicants.

This sort of secondary market is of significant interest to the Social Innovation Fund. One of the reasons I believe that they have held back on publishing non-finalist applications only due to public comments encouraging this approach is because they have spoken of their interest in the development of a secondary market for applications.

In an interview with Marta Urquilla, a senior advisor to the Fund, she told me, “We can only fund a limited number of applicants. That doesn’t mean the non-finalists don’t have merit. We think they’d be of interest to other funders… There are important questions here about forming secondary markets.”

In my interview with Fund director Paul Carttar, I urged Paul to consider releasing non-finalist applications. While he declined to do so, citing promises they had made to applicants regarding confidentiality, Paul did say, "How we leverage this universe of applicants is a key question because they are a real asset… The goal of the Fund is not just to fund great organizations. What this is really all about is changing how capital is allocated in the philanthropic sector.”

So I want to reiterate my call, supported by the Chronicle of Philanthropy, for all non-finalist applicants to submit their application for publication. While the Fund has said they will not publish the applications themselves, Ms. Urquilla did tell me that applicants own their applications, are free to publish them and the Fund encourages them to do so.

Directory of Non-Finalist Applications (updated as they are received)

To submit a Social Innovation Fund application to the Repository, please e-mail it to editor@philanthropy.com. If you’d like to discuss your submission, please e-mail me at sean@tacticalphilanthropy.com.

Next Steps for Social Innovation Fund: A Call to Action

August 23, 2010 – 8:29 am

CNCS This is my most recent column in the Chronicle of Philanthropy. You can find a full archive of my columns here.

Lessons in Social Innovation: a Call to Action
August 23, 2010 | Chronicle of Philanthropy

Over the past few days, debate among nonprofit experts about transparency at the Social Innovation Fund has mushroomed into speculative second guessing that risks undermining this critically important philanthropic experiment.

The fund, while making some early strategic mistakes in the degree to which it made public information about applicants, has moved quickly to rectify the situation and deserves full credit for delivering on its promise to supply growth capital to high-performing nonprofits.

At the heart of the Social Innovation Fund is an exploration of an underappreciated approach to philanthropy.

Rather than simply paying nonprofits to carry out their programs, as the government and most large foundations typically do, the fund focuses on expanding high-performing nonprofit organizations. This type of growth capital is largely absent from the philanthropic marketplace, a primary reason why proven approaches are so rarely able to reach their potential.

Some nonprofit commentators have criticized the Social Innovation Fund’s budget as too meager, but it is important to note that the fund’s budget—a combination of government and private dollars totaling $123-million—makes it a significant grant-making entity. Many foundations give more than that in a year, but most foundations earmark only a minority of their grants to spread good ideas and build the capacity of nonprofits.

If the Social Innovation Fund is in fact a revolutionary experiment in providing growth capital, why has there been so much consternation about the fund’s transparency of its grant making?

I am a big believer in the idea that the fund should push the envelope on transparency in an effort to help the nonprofit world  learn as much as possible from this audacious experiment.

While I have been a vocal supporter of the fund, I have advocated for it to make public all of the applications. My reasoning for this was not so much about ensuring that the fund played by the appropriate rules as it was about my belief that these applications represent a treasure trove of detailed information about the practices of grant makers providing growth capital. However, the fund decided early not to release the applicants’ proposals.

Marta Urquilla, a senior adviser to the fund, told me that the decision came out of public comments received from nonprofits.

According to Ms. Urquilla, numerous potential applicants told the fund that a policy of publication of applications would reduce the likelihood that they would indeed apply. Therefore, in an effort to maximize the number of applications and ensure the highest possible talent pool from which to select grantees, the fund made a strategic decision to promise applicants that their applications would not be made public.

That was a mistake.

One of the primary goals of the Social Innovation Fund is to identify more effective approaches to solving critical social problems and broadly share this knowledge. The best way to accomplish this is to make public all of the applications detailing the existing approaches to solving critical social problems deployed by the applicants.

A secondary reason for publishing all applications is to preemptively discourage second guessing and speculation as to which organizations applied, which  ones did not receive a grant, and why. Unfortunately, it is this second category that risks curtailing the Social Innovation Fund experiment before it can even get started.

On Thursday, Paul Light, a prominent nonprofit scholar and an application reviewer for the Social Innovation Fund, wrote in a Washington Post column that his panel had issued the lowest possible rating to one of the Fund’s 11 winning grantees.

Mr. Light wrote, "I have no idea how this applicant reached the winner’s circle. … I can only surmise that this applicant was invited to revise and resubmit. … Given the applicant’s impressive lobbying effort on behalf of SIF, its success raises inevitable questions about fairness, conflicts of interest, and undue pressure."

While Mr. Light’s concerns are valid, and I share his interest in the fund publishing more information about the applicants, it appears his speculation of conflicts of interest and undue pressure is without merit.

According to the Social Innovation Fund, each application was reviewed by two groups of reviewers. Out of the 54 applications reviewed by two committees, only 12 received identical scores from each committee.

In nine instances the scoring differed significantly and in three of those cases one panel assigned the highest rating while the other assigned the lowest rating.

Mr. Light’s post hit a nerve because it was widely assumed that his reference to an "impressive lobbying effort" referred to New Profit, a grantee at which Paul Carttar, director of the Social Innovation Fund, once worked.

While Mr. Light never named New Profit, an analysis of the distribution of ratings published by the fund after he published his column shows that New Profit was the only grantee to receive the lowest possible rating from one of the panels.

This does not, however, mean that conflicts of interest marred the process.

Paul Carttar has had a varied career at some of the country’s most prestigious nonprofit organizations. When he was named director of the fund, he was issued a detailed four-page letter explaining the process for selecting grantees and identifying situations in which he would be required to recuse himself.

Most important, as director of the fund, Paul Carttar was not in charge of selecting grantees.

Paul Light was not the only person asking questions. The Nonprofit Quarterly, The New York Times and others—including me—all published articles and blog posts questioning the fund’s rationale for not making more information about the applicants public.

By Sunday night the fund had published explanatory matrixes laying out reviewer ratings from each phase of the process, finalist applications, and the comments of application reviewers.

The fund has now made public as much information as might possibly be asked about the winning applications.

While it is impossible to prove a negative and state definitively that no conflicts of interest or undue pressure marred the process, there is no evidence to suggest that the process was anything but fair.

As we put to rest the second guessing and speculation about the process, let us not forget that the primary reason for the fund to make public information about all applications is because doing so can best help the fund achieve its goal of broadly sharing knowledge about effective approaches to solving social problems.

However, the fund did make oral statements of assurances to the applicants that their applications would not be made public. Therefore, the fund should announce immediately that next year’s process will include an explicit notice to applicants that all applications considered for grants will be made public.

The Chronicle and I have started a public repository for all applications to get the conversation out in the open. We urged  all applicants to submit their proposals. Social Venture Partners, one of the organizations that did not win a grant, has already agreed to publish its application, and we will make it available soon.

The repository is not meant in the least to shine negative light on any of the applicants. Fully 70 percent  of the applications were rated "strong," the second highest rating, or better by at least one committee that did the first round of reviews.

Many of the proposals, winning or losing, reflect years of experience deploying growth capital in support of high-performing nonprofits and will help to advance the field of knowledge.

We are at a critical juncture.

The Social Innovation Fund is an extremely ambitious attempt to help create a philanthropic capital market for supplying growth capital to high performing nonprofits.

The effort was almost derailed over the past few days, but quick action by the Social Innovation Fund has got things back on the right track.

Now it is up to the unsuccessful applicants to keep things moving in the right direction. They were promised that their applications would not be made public. But voluntarily doing so now, with the encouragement of the Fund, will cement the Social Innovation Fund’s commitment to transparency and help it reach its goal of broadly sharing knowledge about what works.

To submit a Social Innovation Fund application to the repository, please e-mail it to editor@philanthropy.com. If you’d like to discuss your submission, please e-mail me at sean@tacticalphilanthropy.com.

Sean Stannard-Stockton is chief executive of Tactical Philanthropy Advisors, in Burlingame, Calif., and author of the Tactical Philanthropy blog. He is a regular columnist for The Chronicle of Philanthropy.