By Rich Polt

The best communications campaigns are grounded with a single, clear idea. For truly iconic campaigns, the line between idea and slogan is blurred, such that all you need to hear is the message itself and you immediately know who it’s from: “Yes we can,” “Just do it,” “The other white meat.”

Achieving this kind of communications nirvana is not easy. It’s challenging for even the most focused, experienced and disciplined nonprofit (and for-profits for that matter) to develop a simple message and to deliver it to audiences in a compelling manner, again and again and again.

Unfortunately, by the very nature of the grantor-grantee relationship, clear messaging in this sector often falls prey to the compromises and hoop-jumping that is required to secure funding. The net result is not just weaker messaging and marketing campaigns, but ultimately diminished philanthropic and societal impact.

I recently saw this unintended and unfortunate dynamic with a nonprofit that had secured a sizable grant from a funder. While both funder and grantee undertook the collaboration because of clear mission synergies, the reality was that the funder brought tremendous leverage and its own marketing agenda to the mix. Despite both parties feeling that they were entering the relationship with eyes wide open, the nonprofit ultimately needed to have its external message take a back seat to that of the funder for the campaign. We’re not talking about a major conflict of messaging mind you. But it was enough of a nuanced shift that the growing nonprofit was no longer able to articulate its unique value proposition.

Communications is a discipline that by its very nature is squishy, subjective, and difficult to evaluate. In the same way that the Tactical Philanthropy community perpetually seeks better mechanisms for measuring philanthropic impact, thoughtful communications professionals lose sleep over how to best measure the return on their efforts. What does it mean to create buzz or to become a thought leader? So naturally, when we look at the interplay between two arguably nebulous disciplines – communications and philanthropic impact – it is difficult to quantify the problem.

This tension in funder-grantee communications mirrors the already documented tensions between funders and their grantees in other areas: program efficacy, mission drift, boardroom relations, etc. In a study by The Center for Effective Philanthropy on funder-grantee relationships, a key finding (detailed on the bottom of page 10) is that the “pressure grantees feel to modify their priorities in order to receive a grant” is an important contributor to the measure of the overall relationship. We know this is a very real issue. So it stands to reason that this also impacts the realm of communications.

While I am looking at this problem from the lens of the nonprofit, it is equally possible for the reverse situation to hold true. When smaller foundations, ambitiously working to create their own brand in the market, make grants to powerhouse nonprofits, they run the risk of having their messages eclipsed by that of their steamrolling grantees.

So what should be done?

A comprehensive analysis of this issue is outside the scope of this blog post and the sheer complexities involved indicate that no one-size-fits-all solution is practical. However, I do believe there are some basic preventative measures that both funder and grantee can take as they embark on a collaborative marketing effort.

1) Have a heart to heart. Both parties should acknowledge outwardly – from the very beginning – that they each have their own marketing agendas. Share these. Discuss key messages. Are there any messages that are so fundamental to identity that they cannot be compromised? Make communications part of the larger conversation about philanthropic impact and the intended outcomes of the relationship.

2) Know who is leading the charge. At the end of the day, one person needs to be responsible for the success of this campaign. Is it someone on the funder side or the grantee side? This fact alone says a lot about where ultimate messaging power should lie.

3) Sacrifice the rigidity of your message when it makes for stronger outcomes. If a nonprofit is participating in a campaign being spearheaded by the funder, than the nonprofit should be prepared to have the funder’s messaging and marketing agenda take center stage, even if it doesn’t completely mesh with its own messaging. At the end of the day, if the campaign is a success – and strong marketing helped bolster that success – than the nonprofit will be thrilled to have been a part of it. If this doesn’t sit well with the nonprofit, than hopefully they would have recognized the issue early by following suggestion #1 above.

On a macro level, I doubt anyone can say the degree to which differing grantor-grantee messages have degraded net social benefit. But having seen marketing campaigns fall flat as a result of this dynamic, I can say with complete certainty that it’s a problem (a.k.a. an opportunity) – one that merits our collective thought and consideration.

“I may occasionally put things too harshly, but it’s often because I’m one of the few people out there making noise. I’ve seen some extremely questionable donor advice out there and myths and misconceptions are commonly reinforced by the people that donors turn to to make smart funding decisions. And it’s very difficult to break through these continually reinforced myths and misinformation.

In general, I think there’s too much focus on making donors feel good. Donors aren’t stupid, but I think we often treat them like delicate children. I’ve had many readers contact me and thank me for either opening their eyes or confirming what they were beginning to believe from personal experience.

In the end, my concern isn’t about the donors. It’s about the people we’re trying to help. I focus on donor education because I discovered in the field that almost all bad aid practices could be traced back to trying to attract and please donors. So giving donors very real information is critical to me, and yes it does often show that they made bad funding mistakes in the past. But they did this because it was the best decision they could make given the information they had access to.”

Saundra is one of the people pushing the shift from Intentions to Results. I enjoy her blog and think she’s a great source on effective development practices. My point was not to argue that people like Saundra should not ring the alarm about situations where good intentions are not in fact creating good results. Instead, I just think that this line of argument isn’t enough.

When I wrote:

“The Good Results shift in philanthropy is not going to really take off until the effective philanthropy movement figures out how to appreciate people’s good intentions while simultaneously working to channel intentions that do not produce results into more productive efforts.”

I was trying to suggest that we can’t just point to what is wrong with philanthropy that focuses on intentions only. We must also find ways to make effective philanthropy just as satisfying as intentions focused giving.

Saundra says that she isn’t concerned about the donors, that she’s focused on the people we’re trying to help. But donors are the ones giving the money. Her argument might feel good to someone who is focused on results, but it is the equivalent to a business person saying they don’t care about customers because they’re only focused on their shareholders. Donors are philanthropy. There is no philanthropy without donors. So we must focus on donors and find ways to channel good intentions into good results.

As a field we need people like Saundra to alert donors that their good intentions are not enough. But a quick google search of TOMS Shoes will show you that they have engaged a huge number of people who, even if misguided, are passionately trying to do something they think will help. We need to find ways to rechannel that passion, not extinguish it.

I agree with Saundra that the social sector often treats donors like delicate children. It is important that we tell donors when their requests or efforts are misguided. But we need to find ways to lead donors to more effective approaches to philanthropy rather than just stopping them in their tracks.

Good intentions may not be enough. But good results can’t happen without the good intentions of donors.

The study, by Aradhna Krishna, a marketing professor at the University of Michigan, shows that people give less to charity subsequent to buying cause marketing products. The study notes that some cause marketing products cost more than a traditional product and so the purchaser is incurring a financial cost that they may feel offsets charitable giving. However, the study goes on to show that even costless cause marketing product purchases result in lower charitable giving.

In addition, the paper shows that making cause marketing purchases reduces happiness. Charitable giving makes people happy, especially altruistic giving (as opposed to egoistic giving, in which the donor is primarily seeking benefit for themselves). The purchase of cause marketing goods is a type of egoistic “giving”, which replaces more altruistic giving as well as reducing total giving.

However, while the potential danger of the cause marketing concept is demonstrated well and the gut instinct of people like Lucy Bernholz and other anti-embedded giving advocates is shown to be valid, the study is far from conclusive. As the author readily points out, the results are drawn from a pilot field study and two laboratory studies that were very small in scale. Additional research is certainly needed.

The author also suggests some interesting ideas for follow up studies such as: What would result in greater happiness: giving to a charity related to a personal cause or being more selfless and giving to a charity unrelated to a personal cause? Buying a product one likes or doing a selfless act by purchasing a less preferred product because it is cause marking related? To what extent do other various forms of giving effect subsequent giving?

My big take away from the study is that it demonstrates well the idea that celebrating all efforts at doing good can be dangerous and it is important that we focus more on results rather than efforts.

Yesterday, Clay posted this fascinating article about his effort to run the Giving Pledge letters through Wordle, a site that turns text into a visual picture where the most frequently used words pop out.

Here’s the Wordle Clay created by inputting the text of all 48 letters.

The book The Seven Faces of Philanthropy years ago looked at the words that most resonated with different types of major donors. Now we have a real time snapshot of the words actually used by billionaire philanthropists.

You’ll find Clay’s full post here and Wordles made from the letters of Paul Allen, Mike Bloomberg, Eli Broad, Warren Buffett, Bill & Melinda Gates and Lorry Lokey here.

You can get an understanding of what philanthropic equity is via this column I wrote a couple of years ago. In short, “revenue” is earned income or fundraising done from donors who are making the donation so that the nonprofit can deliver their programs to the intended beneficiaries. “Equity” is donated money that is given by donors who are making the donation to support the growth of the nonprofit organization. In the for-profit world, customer money is revenue and investor money is equity.

George Overholser explained this concept in his seminal paper Building is Not Buying in which he termed donors providing revenue as “buyers” and donors providing equity as “builders”.

Four years ago, then president of Nonprofit Finance Fund Clara Miller gave George and Craig Reigel the go ahead to launch NFF Capital Partners. The group offers services to nonprofits that wanted to raise philanthropic equity. One critical aspect of the service is their Sustainable Enhancement Grant (SEGUE) accounting methodology. Since nonprofit accounting books all money coming into the organization as revenue, the team needed to build an alternate accounting system to track the philanthropic equity.

By 2010, NFF Capital Partners had led 11 philanthropic equity deals totaling $116 million and advised on another $196 million.

Their performance report shows that since initiating the deals, the nine nonprofits for which there is multiyear data have grown program delivery at an annual rate of 57% and grew revenue (excluding the raised philanthropic equity money, since it was properly accounted for as equity, not revenue) at an annual rate of 36%. This growth rate puts the organizations into the top 2% of fastest growing organizations in their cohort (organizations with budgets between $1 and $20 million).

The full report offers a short case study of each deal of which I’ll highlight two:

• DonorsChoose.org worked with NFF to raise $14 million in philanthropic equity with Omidyar Network and AIG as lead investors. To-date, DonorsChoose has burned through $6.5 million of their equity on the way to building their fee-supported business model, which is on track to achieving full sustainability. They now spend no time engaged in ongoing fundraising. Program delivery has grown at an annual rate of 58% and revenue has grown at a rate of 65%.
• Year Up raised $19.3 million in equity while working with NFF. Lead investors included Jenesis Group, Strategic Grant Partners and New Profit. Year Up depends on a combination of fundraising at the national and local site level as well as revenue from the corporate internships at which they place students. Since raising equity, they have grown students served by an annual rate of 31% and revenue at a rate of 18%. Year Up views themselves as now being at 74% sustainability with sustainability based on the degree to which local fundraising from the public and internship revenues cover total expenses.

The nonprofit sector suffers from a massive inability to scale. Since 1970, only 144 nonprofits have grown to surpass the $50 million a year in revenue mark. During that same time, 46,136 for-profits have cleared the $50 million hurdle. There is nothing fundamental about the nonprofit corporate structure that prevents growth. Yet accounting standards that fail to recognize nonprofit equity strip away the single most important building block to growing an organization. Without equity, an organization is forced to live on the revenue they gather each year and lack the ability to make meaningful investments in growth opportunities.

It is critically important that equity accounting be officially recognized in nonprofit accounting standards.

It turns out that a similar dynamic appears to be at work in philanthropy. But while the crowding out theory in macroeconomics is controversial and the magnitude may not be large, a new report suggests that government grants to nonprofits end up crowding out a stunningly large amount of private philanthropy.

In a paper by James Andreoni and Abigail Payne of the National Bureau of Economic Research (hat tip: John MacIntosh of SeaChange Capital Partners), the authors find that for every $1,000 of government grants given to a nonprofit, private donations fall by $757. This means that while the government is trying to supply the nonprofit with $1,000 in additional financial resources, in practice the nonprofit only receives an additional $243 due to the drop in private donations.

But fascinatingly, it appears that the drop in private donations is mostly self-inflicted. For every $1,000 in government grants, nonprofits reduce fundraising expenditures by $141, causing private donations to fall. Netting together the reduced fundraising expenses and the additional revenue, the nonprofit ends up about $385 better off financially for every $1,000 in government grants.

There are a lot of interesting ways to think about the implications of this data. The authors of the report reflect to some extent on the lack of a revenue maximizing approach to fundraising – bringing to mind some of Dan Pallotta’s critiques – and seem to suggest that nonprofits should just choose to not slow fundraising when they receive a grant.

But the report reminds me of a story my friend George Overholser tells about the ramifications of the nonprofit sector booking all grants as revenue without any accounting for equity (growth capital). George used to be a venture capitalist and work with a venture philanthropy organization. He relates a story about how in the morning he presided over a meeting where the venture philanthropy group made a large grant to a nonprofit. Everyone was very excited and it was high fives all around with the nonprofit executives leading the cheers. The excited executive director happily pointed out that the grant met their entire fundraising budget for the year and so now they could focus on their programs.

That afternoon, George presided over a meeting where the venture capital group made a large investment in a for-profit. Again it was high fives and excitement, except this time only the venture capitalists were cheering. Looking over at the for-profit executive team, George noticed they all seemed nervous. When he asked what was wrong, the CEO said, “well, now that we have the growth capital, the pressure is on to generate revenue!”

To the nonprofit executive director, it didn’t matter if the venture philanthropy donors called their grant an “investment”. The only accounting treatment for money coming into a nonprofit is revenue. But for the for-profit, the venture capital money really was an investment. It would be booked as equity, not as revenue, and from here on out their success in generating revenue would be measured against the amount of equity they had deployed to build their business.

I’ve written before about the importance of philanthropic equity, a concept that George pioneered, in the past. But I’ve never really thought about the way that the lack of appropriate nonprofit accounting actually creates a vicious crowding out effect.

I’ve always thought that the catchphrase “accounting is destiny!” that Clara Miller and George would throw around when they ran the Nonprofit Finance Fund was a little… nerdy. But it sure seems to me that our simplistic nonprofit accounting standards, paired with our moralistic views around spending money on fundraising, is a major culprit of our undercapitalized nonprofit sector.

If accounting is destiny, the nonprofit sector will not see the emergence of a significant number of high growth organizations until growth capital is officially recognized in nonprofit accounting.

GiveWell has asked people to submit suggestions for how Village Reach can better sell their work. My interest in the challenge is that I believe that too many people who care about effective nonprofit work seem to believe that running strong programs is the key to success. In fact, nonprofits need to be able to run good programs AND raise money so they can bring their programs to more people.

Fundraising is rarely discussed within the smart giving movement. Yet, focusing on proven programs while ignoring fundraising is like a for-profit company that builds great products but doesn’t put enough time and effort into sales and marketing.

I believe that donors actually want to support great nonprofits. I believe that while great programs won’t sell themselves, that great nonprofits should be able to market what they do well. I believe that they key is to reorient the focus of nonprofit marketing to put the nonprofit itself, rather than the programs and beneficiaries, at the center of the story.

As an advisor to donors, I sometimes feel conflicted about offering advice on fundraising. However, understanding the story of a nonprofit is key to my clients’ willingness to support them and yet the story of the nonprofit itself is often buried. If nonprofits would put their own story at the center of their fundraising efforts, it would make the process of philanthropy better for my clients.

It is amazing to me how rarely nonprofits focus on their own story. So much fundraising talks about what nonprofits do instead of who they are.

But in this video, the nonprofit Acumen Fund has figured out how to tell a compelling story about themselves. The video references beneficiaries of course, but at its core, it is a story about Acumen Fund.

(If you are viewing this in an email, click here to see the video)

My suggestion for Village Reach, and for any nonprofit struggling to raise money in support of effective programs, is to realize that donors want to become a part of your story. As consumers, people buy products which help them be the person they want to be. I believe that donors want to do the same thing. We donate as a way to “self-actualize", to most fully become the person we believe we are.

There is a huge opportunity for effective nonprofits to build brands that donors want to be a part of. To tell authentic stories, which donors want a role in. Interestingly, I find that nonprofit groups which invest in other groups tell their own stories best. Groups like Acumen Fund and New Profit have learned to tell their own story in a way that donors want to be affiliated with them. Maybe that’s because these groups know that when they support another organization, they themselves are looking for groups which are able to tell an authentic story about themselves.

If the smart giving movement wants a world full of robust nonprofits, we need to recognize that sales and marketing is just as critical of a business function as program development and delivery.

(Sean: I invited Tom to write this post because while I believe that donors want to support effective nonprofits, there is evidence that they respond better to emotional fundraising appeals rather than results driven appeals.

By Tom Ralser

I love academic studies. I love some old-school ways of doing things. What I love the most is what works.

When I sent Sean a copy of The Traditional Fundraisers Coloring Book, a tongue-in-cheek look at how most fundraisers conduct capital campaigns, he replied that although he is certainly in favor of a more rational approach for funding to flow to deserving nonprofits, he respected the evidence that supported the contrary view that “donors react best to emotional pitches.”

I understand that emotional appeals work, and they have been honed to a fine edge by fundraisers for years. There is an entire industry built around it, complete with its own dogma, trade associations, and publications. To be completely honest, I have never seen a dollar raised because of numbers on a page. When given the choice between a page of statistics and a picture of a starving child staring you in the face, the emotional appeal will win almost every time. To have a real discussion about this, though, we need to move beyond a one dimensional and mutually exclusive playing field.

When I get requests for an Organizational Value Proposition^™, an ROI analysis, or some other version of quantitative crunching from a nonprofit, my first question is “What do you hope to do with it?” No matter how good or compelling the analysis, unless effective communication and sound fundraising techniques are used in conjunction with these magical numbers, they do no good. Conversely, a solely emotional appeal also has its limitations, namely that they are less effective than they used to be, often result in lower investment amounts, and do not do well in corporate “asks.”

The best toolbox contains both emotional and ROI/outcome-based approaches. Being in the funding business, I prefer to hit on all cylinders, or to use another cliché, use the right tool for the right job. Often the emotional connection is the entre to the “ask,” but the justification for larger dollars is accomplished by a more rational value proposition.

In the Rokia study mentioned by Sean, the fact that a statistical ingredient (distraction may be a better word) led to less giving is not at all surprising. Although somewhat antiseptic and not reflective of a real world fundraising situation (they were giving away $5 or less of newly received money, they did not have a connection with the cause to begin with, they were not approached by a professional with a strong value proposition in hand, only general statistics were presented, etc.), I am sure it is a very fine clinical study. It’s the translation of that study into a real world, in the trenches fundraising situation where the conclusions of that study wear thin. Give me those same subjects and realistic conditions in a true fundraising situation, and I can almost guarantee I will be able to get larger investments with a non-emotional appeal.

An analogy may help frame the debate. Buying an automobile is often considered an emotional event, and one that Madison Avenue has spent much time refining. Some people will buy for the image portrayed in the commercials. Some will buy for the color. Some will buy because it is “cute.” Some will even buy for the smell. There is a large segment, though, that buys for the numbers: horsepower, zero to 60 times, and miles per gallon. These are cold, hard, non-emotional numbers that often make the difference between parting with your money or not. . . just like fundraising.

For a real-time fundraising example, this month we will be finishing a campaign for a local chapter of a national youth organization. We went over 40 percent over goal in an eleven month campaign, raising almost $2 million. The campaign was based entirely on a value proposition/ROI approach. Did we have pictures of children in our campaign collateral? Yes. Is this what got several $200,000 plus investments? No. Every one of the dozen or so campaigns we are now engaged in uses an ROI approach, some almost exclusively.

I think the discussion may be more instructive if it heads toward what numbers are used, how they are related to the specific prospect, and how close they dare to tread toward the “What’s in it for me?” end of the spectrum. At the end of the day, when I am charged with raising several million dollars in 12 months or less, I am going to use the most effective means available, and an outcome-based approach is the hands down choice.

The opening session of the Tactical Philanthropy track at the 2010 Social Capital Markets Conference (SOCAP10) began with a discussion on changing the nonprofit fundraising landscape. The session featured George Overholser of Nonprofit Finance Fund Capital Partners and Dan Pallotta of Springboard. Both speakers have challenged the tenets applied to nonprofit fundraising with the belief that unchaining the sector will generate much greater societal benefits and impact.

Their presentation provided a solid rationale for why we collectively need to embrace the ideas of ‘decriminalizing fundraising’; if done, this should position philanthropy to provide funding that would scale nonprofits appropriately in order to solve societal programs.

George began the session by noting that nonprofit and for-profit enterprises are very similar and that their formal tax status only truly differentiates them. But that distinction hampers nonprofits in multiple ways. George told a compelling story highlighting Earl Phalen’s efforts to raise support for his tutoring program; the story is detailed extensively here (PDF). In short, Earl consistently struggled to raised significant funds for this nonprofit, while a friend building a similar after-school program decided to change his organization’s tax status and managed to raise $40 million in venture support after six meetings. In order to duplicate that fundraising success, Earl would have had to engage in approximately 20,000 meetings over an eleven year period.

Nowadays, nonprofits only truly engage in large scale fundraising campaigns when they seek capital to purchase buildings or endowment support. Those fundraising efforts are easier since they reflect tangible requests, have a known price, and deliver perpetuity. To free up fundraising to generate significant support beyond capital and endowment support, the nonprofit and investment sectors will need to agree on several concepts. Those include an agreement to support nonprofits based on their respective business plan needs instead of funders’ various theories of change and core standards. The sectors will need to continue to experiment and compare social return models, but funding must be freed up for growth to truly occur.

Dan focused on the religious origins of charitable giving and the cultural challenges we face in changing how society values nonprofits. Ironically, we blame capitalism for the huge inequities in our society, but simultaneously we refuse to let the nonprofit sector truly use the tools necessary to rectify these inequities. The dichotomy between how we view nonprofits and for-profit enterprises is evident in five areas:

• Compensation: in short, society does not accept high salaries for people who work for charities. As a result, we fail to look at high salaries as opportunities to attract talent into the nonprofit sector.
• Marketing: we don’t like to see donations spent on marketing efforts. However, those marketing efforts are needed to extend the reach of charities and build demand for their services. Marketing should be used to build the sector so that we can drive charitable giving levels above the historical norm of 2% of GDP.
• Risk-taking: nonprofit are discouraged from taking risks for new sources of revenue; and yet, such risk-taking is expected of for-profit companies.
• Investment in long term revenue growth: charitable fund raising efforts are tied to twelve-month periods instead of long-term timeframes. As such, nonprofits – outside of capital or endowment campaigns – are hampered in their ability to focus on significant and long-term efforts to apply revenue toward organizational growth.
• Profit: the nonprofit sector cannot use profit as an incentive for raising growth capital .

In the end, we fundamentally undermine charities’ ability to reach their potential.

In general, the audience seemed to agree with the speakers’ position. There were little to no objections to their key points. The questions from the audience reflected more practical inquiries related to changing perceptions and attitudes toward nonprofits and freeing them up to truly grow the sector.

The core of that change will require a new leadership movement, an abandonment of a dependency on overhead ratios, and a willingness to provide growth capital. And yet, I feel the conversation has just started and that we need a lot more insights into new strategies and tools to truly decriminalize fundraising.

By Steve Goldberg

I’m struck by the inherent futility of fundraising. Like Sisyphus endlessly rolling that rock up the mountain, a fundraiser’s job is never done. Every day they face the same implicit question: “What have you done for us lately?” Although some organizations have supplementary funding sources, for most nonprofits most of the time, it comes down to fundraising.

For the more than 90% of nonprofits that raise less than $1 million each year, fundraising is essential just to maintain baseline operations. And no matter how great the need or effective the nonprofit, program growth isn’t possible without increased fundraising. As we think about moving the needle of social change, it seems short-sighted to expect fundraising heroics to bear most of the burden.

An insightful article in the MIT journal, Innovations, by Matthew Bishop and Michael Green, authors of Philanthrocapitalism, offers “a fundamental rethinking” about “how to finance the growth of a good idea into a world-changing social innovation.” In “The Capital Curve for a Better World,” Bishop and Green make a persuasive case that “the next frontier in raising the efficiency of social innovation has to be the capital markets for good,” and that “a concerted effort is now needed to design an effective and efficient capital curve for social innovation.”

The authors envision “a productivity miracle in the social/citizen sector,” that could enable effective nonprofits to become more than “islands of excellence,” and break through the limits of “successful, but not successful enough, organizations”:

The challenge is (1) “to figure out which forms of money—grants, debt, equity, government funds, for-profit funds, paying customer—are most effective at which stage along the journey from good idea to having massive social impact,” and then (2) “to … put in place [the systems] to ensure that the resources that exist are available to the most promising ventures at different critical junctures.”

This framework suggests an emerging discipline of “moving money” that holds out hope for reducing our over-reliance on fundraising. Fundraising relies on building relationships with prospective donors and telling engaging stories about the nonprofit’s work.  It represents the personal connection of philanthropy, one that’s inherently time-consuming and labor-intensive. Moving money is data-driven: it depends on creating new value from market intelligence.

Fundraising is useful for even small donations, but spending time and effort to move money around only makes sense for sizable, usually aggregated funding looking for investment opportunities that individual donors can’t find on their own. If nonprofit capital markets became more adept at moving money, it could reduce the need to repeatedly raise new money in small amounts.

Hewlett Foundation president Paul Brest advanced the idea in 2007 that “information about an organization’s performance can usefully guide investment decisions.” A 2008 Keystone Accountability study explored how online markets “can serve as not just a convenient way of donating money but also a means of encouraging effectiveness by directing money to the highest-achieving organizations.” But a 2009 Hewlett-funded analysis of 55 online platforms concludes that “the limited evaluative analysis that has been developed is not reaching, or failing to influence, a large proportion of donors.”

An ecosystem of money-movers is still evolving, comprising intermediaries (SeaChange Capital Partners, Global Philanthropy Network), analysts (New Philanthropy Capital, Root Cause), rating organizations (Charity Navigator, GreatNonprofits), sector leaders (Alliance for Effective Social Investing, Social Capital Markets), and advisors (Tactical Philanthropy), to name a few.

More than $300 billion in private philanthropy doesn’t raise itself every year, and fundraising doesn’t have unlimited capacity to increase the amount of money to fund nonprofits. As the social sector looks increasingly to “scaling what works,” the state-of-the-art of moving money must keep advancing, too.

The Clearinghouse is interesting because of the way it offers some of the attributes of a stock exchange. There has been a lot of talk in philanthropy about social stock exchanges, but I’ve often found the implementation of this concept of little interest. This is because when most people think of a stock exchange, they think of the prices of stocks moving up and down as the primary characteristic. A social stock exchange which attempts to mimic the pricing elements of a stock exchange is interesting, but I’ve yet to see an implementation that is particularly exciting. Instead, stock exchanges are valuable not only because they publicly reveal prices, but because they have certain requirements for organizations to be listed and ongoing requirements to stay listed.

Once an organization is listed on a stock exchange, it must adhere to higher levels of public disclosure than a non-listed company. Being listed on a stock exchange is called “going public” and a listed company is a “public company” as opposed to a non-listed or “privately held” company.

This all matters to philanthropy because the organizations listed on the new Social Impact Exchange are offering public access to documents such as due diligence reports, business plans and the results of independent evaluations (it appears that currently there are not standard documents that all listed organizations must have, but see the documents listed for the nonprofit Ways to Work as examples).

My friend George Overholser, has often pushed back on my urging for nonprofits to share more information about themselves publicly. George’s point is that most nonprofits are the equivalent of privately held companies, who may be damaged if they share too much of their internal issues with the public. While I’ve generally thought that nonprofits should have a higher required level of transparency than privately held companies, George’s point has always resonated with me. With the advent of the Social Impact Exchange, we have the beginning of a mechanism whereby a nonprofit that is ready to “go public” can list their organization and in exchange gain access to a wider range of philanthropic investors.

In addition, the Exchange plans to only list organizations who have demonstrated extremely high levels of impact and scale readiness or have demonstrated a significant level of effectiveness, and are increasing their capacity for scale readiness (groups qualifying under each standard are identified separately). This means that if the Exchange can establish credibility for their vetting process, 1) organizations who get listed will gain a marketing advantage due to their “making the grade” and 2) donors can have an increased level of confidence in Exchange listed organizations.

The Social Impact Exchange is more than just a list of nonprofits. It also hopes to be a hub for related research, publishing, education and training as well as an annual conference, business plan competition and regional meetings.

While this effort is still in its infancy, I think the organizers have gotten some key elements right. With the high profile funding from Robert Wood Johnson Foundation and the involvement of Duke University, the Social Impact Exchange is one to watch.

A different sort of model is playing out in Los Angeles on Wednesday. The Social Innovation Fast Pitch event being held at the University of Southern California, features nonprofits that have been vetted by USC, Social Venture Partners-Los Angeles and the Social Enterprise Institute.

The Social Innovation Fast Pitch is not just an event where 10 nonprofit leaders give their 3-minute elevator pitch to compete for $20,000 grants in front of an audience of 350 people. It’s really a professional development program for social entrepreneurs that builds skills they’ll use every day. It teaches them how to talk to people about their organization in a much clearer, more compelling way. What we’ve observed is that too often, the message gets stale, and people tend to use too much jargon. They may not be clear about their “ask”, or may put themselves in a box by focusing their “ask” only on money or on assumptions they make about their audience. In addition, they just don’t get the feedback from listeners about what they like and connect with – or don’t like. These organizations are doing amazing, innovating and impactful things, but from some of the applications, you’d never know it!

The program addresses these ineffective communication habits head on. This year, 22 nonprofits were selected from a pool of 65 nominations to go through the 2-month training program. We recruit dozens of volunteers from the business community to provide group coaching in multiple practice sessions, and also pair each nonprofit leader with 1 or 2 of the coaches to mentor them between sessions. Of course, what often happens is that the feedback prompts them to look at bigger, strategic questions about the organization. The difference over a short period of time is truly amazing! Program participants tell us that – based on what they’ve learned – they change the way they talk about their organization in almost every setting: to people they just meet, to the media, to their boards, and to funders.

This year’s event runs from 4:00 – 7:30 pm on Wednesday, November 11, 2009 at USC. In addition to the 10 presenters, the program features Andy Rappaport, a venture capitalist and social entrepreneur, who will share his views on social change and risk-seeking philanthropy. The program is co-hosted by Los Angeles Social Venture Partners, the Social Enterprise Institute, and the University of Southern California.

For more information or to register for the event click here.

I’m particularly intrigued by the concept, because it mirrors the way I speculated that nonprofit funding might occur in the future in a column I wrote for the Financial Times in early 2008.

Smith wrote:

Feelings, not analytical thinking, drive donations. According to a new study (PDF link) conducted by Deborah Small, a Wharton marketing professor, and colleagues George Loewenstein & Paul Slovic, if organizations want to raise money for a charitable cause, it is far better to appeal to the heart than to the head.

From Knowledge@Wharton

One pitch for charity described the needs of Rokia, a young girl in Africa who is desperately poor and faces starvation. Another pitch talks about food shortages affecting more than three million children, many of whom are homeless. Which pitch is more effective? Not surprisingly, it’s the first.

That people would want to give money to identifiable victims like Rokia rather than unnamed famine victims may not seem all that surprising. But Small and her colleagues, in a series of field experiments, delved deeper into the issue of sympathy and how it relates to charitable giving. The researchers found that if people are presented with a personal case of an identifiable victim along with statistical data about similar victims caught up in a larger pattern of illness, hunger or neglect, overall donations actually decline. In addition, they found that if people are told about the inconsistent levels of sympathy evoked by identifiable and statistical victims—the “identifiable victim effect,” in the words of the researchers—people reduce their giving to identifiable victims but do not increase their giving to statistical victims.

This study is also highlighted in the book I’m reading right now titled “Made to Stick: Why Some Ideas Survive and Some Die”. The book explains that when the analytical part of our brain is activated, even by unrelated math problems, our empathy/altruism declines. Essentially the authors argue that the analytical part of the brain is separate from the emotional part of the brain and when analytics are activated the intensity of our emotional reactions decline.

But this doesn’t mean that money is best raised by offering donors empty emotional calls to action! The authors of Made to Stick are focused on what makes ideas have an impact on people and stay with them (from urban legends to Jared the Subway Diet Guy to The Girl Effect Video). Their point is not that people are best manipulated by emotions, it is that humans are better at absorbing and preserving certain types of information better than others.

One of the best ways that humans process information is when it is presented in a story format. Good stories offer compelling evidence for their underlying truth. But not by bombarding the listener with statistics. Instead good stories use narrative to build a convincing case.

This idea is often summed up in the philanthropy world as “No Stories Without Numbers and No Numbers Without Stories” (I’ve said this myself in the past). But I think this is actually wrong. Numbers are not the key. In fact the evidence suggests numbers may be the wrong way to go in this case. I think instead it is No Stories Without Truth and No Truth Without Stories.

The reason the Rokia Study bothers some people is it seems to imply that we should just feed donors tear jerker stories to get them to open their wallet. Instead, I think the message is that when you are trying to convince someone of the importance of a philanthropic effort, you should figure out how to present the truthful core of your message in a story format. It is only authentic stories that hold real truths about the world that “stick” over time. These kinds of stories are like wonderful, filling meals compared to the artificially flavored “candy” of the tear jerker that is just meant to extract money from donors.

So I was thrilled to see that the Wall Street Journal included the FORGE story yesterday in a special section on how for-profits and nonprofits are working to survive the financial crisis. In the article titled Helping Themselves, Wall Street Journal reporter Shelly Banjo profiled a number of nonprofits that are thinking creatively in an effort to survive:

It isn’t just the economy that’s battering nonprofits. Many have been victims of recent financial scandals, and several have had to shut their doors as a result.

That has eroded trust among donors, and the only way to regain that trust is for nonprofits to be open about their finances, operations and policies, says Sean Stannard-Stockton, principal and director of tactical philanthropy at Ensemble Capital Management LLC of Burlingame, Calif.

Mr. Stannard-Stockton points to Forge, a nonprofit that implements community-development projects — such as building libraries and schools, running job-training programs and facilitating microloans to farmers — for refugees in Africa.

Forge hasn’t been caught up in the recent financial scandals, but it encountered other difficulties. Forge started out sending students, each of whom committed to raise $5,000, to work with the refugees. But in 2007, the organization eliminated the volunteers and instead employed the refugees themselves to design and lead the projects. That also eliminated a chunk of the organization’s revenue stream just as Forge was losing other donations amid the economic downturn, leaving it to face a $100,000 budget shortfall for 2008.

In response, Forge founder Kjerstin Erickson began blogging about her mistakes and Forge’s situation on socialedge.org, an online community for entrepreneurs, nonprofit professionals and philanthropists to discuss approaches and solutions to social problems. She began by telling her story and unveiling her financial records to the public, down to details including staff salaries and budgets.

Within days, bloggers, nonprofit consultants, foundations and donors caught wind of the story and began asking more questions and offering suggestions. Some readers stepped up to offer Ms. Erickson free consulting help, and a foundation followed with a $50,000 donation. Eventually, increased donations erased Forge’s budget gap.

"Public confidence goes up, not down, when people quickly and honestly admit their mistakes and explain how they are going to move forward," says Mr. Stannard-Stockton, who picked up Forge’s story on his own blog.

Philanthropy experts warn that nonprofits can’t rely on transparency to bail them out of a financial crisis. "Transparency isn’t a tactic you use to fund-raise, it’s a value for your organization to adopt," Mr. Stannard-Stockton says. But it does build trust and understanding among donors, making them more likely to continue giving.

You can read the full article, which profiles a number of efforts, here.

Thanks to all of you that helped FORGE help themselves!

My takeaway from the FORGE case is that there is tremendous strategic leverage when foundations, influential individuals and nonprofits work together for the good of the sector.

Curtis is a man of action and so he has taken it upon himself to organize a gathering of people from the sector to talk about how nonprofits can improve their capacity to fundraise from individual donors. Curtis rightly recognizes that fundraising revenue from individuals is more sustainable than revenue from institutional funders.

Describing the event (which I will be a part of and will be held at the Silicon Valley Community Foundation on May 11), Curtis writes:

The nonprofit sector is sustained by four main sources of funding: 1) state contracts; 2) foundations; 3) corporate giving; and 4) individuals. The first three will all be certainly cut in the near future: state funding due to the budget crisis; foundations due to heavy endowment losses in the stock market; corporate giving due to a deep recession.

If nonprofits are to thrive amidst this climate, they must expand their individual donor base. And yet, some of the most outstanding nonprofits have relied heavily on those first three sources and have under invested in their capacity to reach individuals. If donors wish to multiply the impact of their own (often shrinking) dollars, helping nonprofits build this capacity is one highly leveraged response to the current financial crisis.

Curtis has brought together a great group of people including:

• Bill Somerville, Philanthropic Ventures Foundation
• Mauricio Palmas, Silicon Valley Community Foundation
• Loretta Gallegos, Packard Foundation
• Anne Marie Burgoyne, Draper Richards Foundation
• Dave Peery, Peery Foundation
• Sean Stannard-Stockton, Tactical Philanthropy
• Lindsay Austin Louie and Lance Fors, SV2

He’s also assembling a group of individual donors. The key group of course is the outstanding nonprofits that he’s bringing to the table. The three groups will spend the day talking about how the nonprofits can increase their capacity to fundraise from individuals.

Here’s where you come in: Curtis is looking for recommendations of nonprofits that should be invited. If you have someone in mind, shoot me an email and I’ll pass it along to Curtis. The criteria are:

• pursues a mission with a relatively broad appeal
• possesses some distinctive that makes it stand out
• led by an individual that presents well
• has a small individual donor base but is motivated to grow it
• available to be in silicon valley on May 11

He’s looking for outstanding organizations. Who should be there?