By Holden Karnofsky

Imagine that, as a donor, you’re considering the following pitch:

“For 12 years our campaign has delivered a proven preventive health measure. For the $23 million we’ve spent cumulatively, we’ve directly and demonstrably saved several million lives.”

If those claims checked out, and you found these accomplishments to resonate strongly with your values, would there be any reasons not to support this campaign with your donation? If you got this pitch today, there would be a big reason not to support it: the above describes the smallpox eradication campaign, which ended in 1979 as it became clear that it had achieved total success, with no smallpox cases left to prevent.

Donating today to smallpox eradication would clearly be silly, but it’s just an extreme version of what we believe many donors are doing: giving to causes and programs they believe in, without checking whether those programs need – and can use – more money.

In trying to find the best charities to recommend to donors, we’ve found that this question of how (and whether) a charity is going to use additional revenue (as opposed to the funds it’s already spent or budgeted) is one of the hardest questions to answer.

We call it the problem of room for more funding.

There are several reasons that a charity may not use additional funds the same way it used past funds, or the same way as the donor hopes.

• A successful program can rely on many factors besides money, such as skilled labor, political support, and (as in the case of smallpox) appropriate target populations whose problems are suited to the solutions being offered. For example, we have argued that the surgery charity Smile Train appears to have a shortage of skilled surgeons, not a shortage of funds, for its core program.
• The programs donors want to fund don’t necessarily match the programs charities want to carry out. Thus, a charity may focus on one program in solicitations, when its intent is to use donations for another program or simply add them to reserves. We have seen charity representatives make explicit statements to this effect.
• Charities may be able to execute different activities with an additional $20 million vs. an additional $1,000 – the total amount of additional funding they’re getting matters. For example, see our review of the Schistosomiasis Control Initiative (SCI).

Understanding how your $100, or $10,000, affects a charity with a multimillion dollar budget is a challenge we’ve been struggling with for years. One answer we don’t think works is restricting/earmarking your donation. A charity can formally honor an earmark while effectively using your donation to fund other activities.

However, it does seem possible to answer this question using a very different method: requesting scenario analysis that asks how a charity’s activities would change at different levels of total unrestricted funding. This approach allows us to check back later and see the extent to which actual activities were in line with actual funding (and, if there is a discrepancy, to have a conversation about it).

Applying this approach has led us to much more concrete, and sometimes surprising, picture of charities’ room for more funding. For example, earlier this year we found that KIPP, a celebrated and GiveWell-recommended charity, has no short-term funding needs at the national level – but KIPP Houston has urgent needs.

We believe that this sort of scenario analysis can be practically, and relatively cheaply, produced by just about any charity. However, in practice we have found it very hard to get this sort of information because there doesn’t seem to be anyone else asking for it. We think that one of the most constructive things a broad-based charity accreditation service could do would be to push large numbers of charities to generate and share "room for more funding" analysis. For our part, we do this analysis for any charity that is a contender to become one of GiveWell’s top charities.

Dealing with "room for more funding" as a major grantmaker
One of the reasons that "room for more funding" is a relatively neglected topic is because it doesn’t seem to be as much of an issue for major funders. It may be difficult for an individual to understand the impact of their $100 or $10,000 – but a foundation able to commit $1 million up front can design and fund a project all on its own. However, we’ve lately been exploring (via GiveWell Labs) a giving style more similar to major grantmakers’, and at this early stage, we’re still finding the problem of "room for more funding" to be relevant. In brief,

• We prefer to fund projects that are primarily designed and proposed by charities, rather than imposing our own strategy.
• But with some of the stronger potential projects, we find ourselves wondering whether another funder would step in if we didn’t. By funding a strong project, are we causing it to happen, or merely saving another funder money that they’ll spend on other projects following their own priorities?

We have a lot of work to do in terms of understanding this issue, but it seems to us that "trying to fund what other funders won’t" can lead to some strange situations (for example, imagine two funders who each suspect the other of being interested in a project, and thus both hold out trying to see whether the other will fund it). Arguably the best philanthropist is not the one who funds the best projects – it’s the one who funds the best projects that wouldn’t get funded otherwise, and who therefore looks to a naïve outsider like a merely mediocre philanthropist.

We feel that the issue of room for more funding is severely under-discussed and under-appreciated. If and when we can raise the issue’s profile, we expect to see a lot of progress on solutions for gaining clarity into a group’s room for more funding: helping people find the best next thing (instead of the best past thing) to fund.

By Susan Wolf Ditkoff

Decisions in philanthropy are sometimes painted in terms of false dichotomies – either you’re thoughtful and strategic, or you’re whimsical and opportunistic. But in today’s rapidly-changing world, it’s hard to justify planning that is overly linear and time-consuming – spending years analyzing reams of data and writing lengthy planning reports, and then executing that plan for 3-5 years before asking whether it’s working.

For instance, last Monday the Chronicle of Philanthropy featured the Gordon & Betty Moore Foundation’s approval of a critically-important, time-sensitive, grant that will track radioactive material in the oceans around Japan’s Fukushima nuclear reactor. While unsurprising that an environmentally-focused foundation funded an environmentally-focused nonprofit to the tune of $3.7 million, the foundation’s speed and agility in this instance was remarkable.

Within a few short weeks, the benefactor (Gordon Moore), the CEO (Steve McCormick), and Chief Program Officer for Science (Vicki Chandler) all agreed to “pounce on an opportunity” identified by the Woods Hole Oceanographic Institution – before it was literally too late to take the necessary measurements. And they did so while in no way lowering their standards – the Chronicle reports that Moore “grilled the grantee” with questions, identified and mitigated risks along the way, and engaged in an internal debate before deciding to approve the funds. The grant stands out as an excellent example of philanthropy that will make an extraordinary and unique contribution – by being both highly strategic and highly adaptive at the same time.

The world we live in now demands a more adaptive approach to strategy. More rapid prototyping of ideas and their execution. More mistakes when they’re still quick and cheap. More calculated risks and contingencies. Less cumbersome cycle-times for decision-making. Less argument about “who holds the pen” when writing the strategy (the philanthropist or the nonprofit) and more real-time adaptation and collaboration by all parties. Less emphasis on correctly predicting the future, and more emphasis on clear assumptions and the agility to adapt in light of new information and opportunities.

The level of uncertainty is now such that strategies can feel stale as soon as the (virtual) ink is dry. Which means that tools like scenario analysis, collaborative models, and decision-trees become far more useful strategically than a thorough but static approach. At Bridgespan, we’re often asked to help philanthropists and nonprofits think strategically, and we’re finding such tools are more critical than ever.

In other words: if not much is knowable, don’t over plan.

I’m intrigued by the questions that adaptive philanthropists are asking. For example, an adaptive strategy requires clear but flexible definitions of what success looks like, for whom, and what is known or assumed about the problem – but not a rigid roadmap of how to solve it. An adaptive strategy articulates clear criteria and a screening process for what will and won’t get funded (guardrails if you will) that help philanthropists quickly assess and decide among emerging opportunities – without succumbing to random opportunism or mission drift.

In other words, philanthropists with adaptive strategies have clear goals and criteria, but don’t pretend to know all the answers. They are nimble decision-makers, and don’t treat others (co-funders, grantees, beneficiaries) like vendors whose role is to simply execute in a desired fashion. They are open to new ideas wherever they may come from. They save some gas in the tank (if one is still allowed that metaphor) for opportunities that arise outside their walls – and perhaps the more unknowable the context, the more gas you need to keep in reserve. They communicate clear desires for all stakeholders to bring new ideas into the conversation. And above all, they demonstrate a clear and passionate commitment to continuous improvement, and impose on themselves the discipline of adapting and getting better over time.

While some of these ideas aren’t new, it’s still striking how few philanthropists (especially institutions) are actually set up to respond with adaptive strategies. Perhaps the increased pressure for performance is leading to the misguided belief that everything can be knowable and known in advance – a sure recipe for disaster.

So I’m curious – what adaptive strategies have you seen? Or has fear of acting trumped taking a risk? It seems that one thing is definitely changing: the key question is not just whether your strategy is “right,” but is it also adaptive?

In the wake of the Japanese disaster, charity rating organization GiveWell is demonstrating how impact focused transparency can be effective for foundations.

Ever since the Japanese earthquake, GiveWell has be posting information for donors interested in making a donation in reaction to the disaster. See links here, here, here, here, here and here. The posts are in depth, highly informed analysis with actionable takeaways. The posts explore the complex nature of the disaster and look at the unique characteristics of the specific event rather than offering general disaster response advice.

GiveWell’s advice moves money. The money given to the charities they suggest through their website represents only a minority of the money they actually influence.

So here’s my question. Why is GiveWell, on an annual operating budget of $350,000 leading the way with this advice? According to GiveWell, they’ve assigned one staff person who has spent about 40 hours on this project. Yet their work has been highlighted in the New York Times.

It isn’t as if large foundations have not also analyzed the Japanese situation. The Gates Foundation, for instance, made a $1 million grant to Mercy Corps in response to the disaster. Why doesn’t Gates invest 40 hours from one staff member in explaining their rationale? GiveWell is baffled as well:

“The situation in Japan is confusing to donors, and the Gates Foundation is better positioned than individuals (and better positioned than we are) to sort through the confusions. If it posted a substantive explanation of its grant – and answers to the natural questions this grant raises – it could be a great help to individual donors, who have given over $161 million (U.S. donors only) to the relief effort.”

If the Gates Foundation produced the sort of public analysis that GiveWell has, I would guess that they would influence other donations that would total more than the $1 million that they gave. Certainly the New York Times article would have included their thinking on the topic.

My point is not to pick on the Gates Foundation. No major foundation to my knowledge consistently produces public information explaining the rationale behind their donations as a way to influence other donors and enhance the impact of the foundation. I’m not even aware of one instance in which a foundation has followed this strategy (please email me details if you know of an example). [Update: I meant any large, staffed foundation. I work with and am aware of a number of smaller foundations that utilize this strategy. But by virtue of their public presence, larger foundations have more opportunity for their ideas to reach other donors.]

The opportunity here is huge. Foundation giving makes up just 13% if US charitable giving. If you believe, as I would assume most foundations do, that their philanthropic knowledge is their key value rather than their raw capital, than the best way to leverage that value is by sharing it as a way of influencing more capital.

Having a lot of money doesn’t make you a great philanthropist nor a great investor. Knowing what to do with your money is the key to being a great philanthropist or great investor. Figuring out how to leverage your knowledge against the largest pool of capital possible is the key to being the best possible philanthropist or investor. Leveraging knowledge against the largest pool of capital possibly is exactly the approach Warren Buffett used to become the best possible investor he come become. Who is going to figure out how to apply this approach in philanthropy?

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.

You can see this dynamic working if you think about whether you would rather be given $100 today or be given it in one year. The difference in the value of the present and the future is called the “discount rate”. In all likelihood you would probably prefer to get $100 in one year rather than $10 today. But there is some point at which you become indifferent. If you are indifferent between receiving $90 today or $100 in a year, then you are using a 10% discount rate (approximately).

However, for some time I’ve been wondering about how this fundamental tool for financial decision making works when it comes to philanthropic decision making.

Which would you rather have, a crime free society and clean environment today or in the future? Clearly, sooner is better. But what if it is either/or? Anyone with a child is going to tell you they’d rather their children live in that better world than that they receive the benefit of it. This preference for the future is hardwired into our species as becomes evident any time a parent puts their children’s needs ahead of their own. It is so hardwired into our neurological makeup that adult humans will often choose to put themselves in physical danger if needed to protect the physical health of any child, let alone their own.

Why does this matter? Because positive discount rates erode the value of investments. If I offer you an investment which promises you a 10% return on your money, you’ll be indifferent if you have a discount rate of 10%. The lower your discount rate, the more attractive any given investment is. The higher the rate, the higher the prospective returns need to be to attract your attention.

But if humans have a preference for social good to occur in the future or to benefit our children rather than us, then it means we have a negative discount rate. It means, we’d rather $100 of social value occur in the future rather then $110 of social value occur today.

If this is true, it means that social returns on investment are radically higher than we might otherwise suppose because, unlike financial investments, we actual prefer that social impact accrue to our children and their children.

But this concept can’t be entirely correct. Many forms of social good are not discrete events, but rather conditions within which life occurs. Wiping out polio, as Bill Gates is urging the world to join him in focusing on, is not a discrete event. If it is wiped out now, more lives will be saved and less suffering will occur than if it is wiped out later.

This means that maximizing the value of philanthropy rests on three elements 1) we should seek to create long lasting positive conditions rather than just discrete, socially good events (which is one way to express a preference for correcting the root cause of a problem rather than treating the symptoms), because doing so will create social value that accrues to more people, 2) we should seek to achieve those conditions as quickly as possible because doing so will allow the benefits to accrue to the maximum number of people but, 3) when forced to make a trade off between activities that create benefits in the future vs. benefits today, we should prioritize the future given the hardwired negative discount rates that we use to value the future vs. the present when it comes to social impact.

There are probably a number of ways to reconcile these three elements. There certainly are some creative tensions between them and so different people may choose different approaches. But for me, they suggest that as a general rule, philanthropy should focus on creating impact that:

• Is lasting rather than fleeting (working on causes rather than symptoms), but;
• Is implemented as quickly as possible, but;
• Prioritizes the needs of the future over the present.

In other words, donors and foundations should: Act quickly to create lasting solutions that prioritize the needs of the future.

To my way of thinking, the best way to get that done is for donors to make rapid grantmaking decisions in support of nonprofit organizations that seek to tackle the underlying causes of social problems, using grants which build the long term sustainability of their grantees while recognizing that truly effective interventions take time to achieve success.

Will they call the session Speed-Freak Philanthropy? If they do, I’m sure it will draw quite a crowd. But even if they don’t, if you attend the Council on Foundations conference this year, look for a session featuring Jason Ricci and find out how even the biggest foundations in the world can ditch the stunningly long seven month grant cycle for a system that is more in step with the fast moving world in which we live.

Before I hand things over to Jason, I want to point out the Energy Foundation does $110 million in annual grants, making it one of the largest 50 grantmakers in the US. The fact that they are able to make grants seven times faster than the average grantmaker is evidence that a much faster approach to philanthropy is available to large foundations.

In addition it should be noted that the Energy Foundation is in fact a public nonprofit that is a partnership of other major foundations. This indicates that the Energy Foundation’s process might be fast, but it is not reckless since large foundations conducting slow due diligence find the Energy Foundation to be an excellent grantee. But it should also be noted that as a public nonprofit dependent on receiving grants, the Energy Foundation is subject to external pressures to perform from which private foundations are immune. This fact highlights the idea that a slow grantmaking cycle is a choice made by many large foundations and that when pressured to perform, a large grantmaker is able to greatly increase the speed at which they operate.

Just in case you don’t read his full comment, don’t miss the reference he makes to Fluxx, the open source grant management system designed by The Energy Foundation to power their speed-freak philanthropy.

Here’s the comment left by The Energy Foundation’s Jason Ricci:

“At The Energy Foundation, we’ve spent the last two years tackling the speed problem. When I joined EF as Chief Information Officer in 2009, the average time it took to get a grant out the door was about 90 days. And, while that’s half the average that Sean quoted, it was still in my mind too slow. Fast forward to today, and our average grant takes 27 days – from initial request to final approval and checks out the door. Here’s some background and insight into how we made this happen.

1. We no longer bring individual grants to the board for approval. Our board agreed that we needed to make grants faster, and had confidence in our ability to choose grant recipients wisely based on our program team’s knowledge of the sector. Our board no longer approves each grant. Instead, our board meetings are focused on allocating funds for future grantmaking strategies. I’d like to see more boards move in this direction.

2. We analyzed our grantmaking processes with a fine tooth comb. We make an average of 800 grants totaling over $110mm each year. We have a lot of requests moving through our organization, and with a staff of 80 we were overwhelmed. By spending a few months understanding our processes, we were able to identify the bottlenecks and where things were falling through the cracks.

3. Armed with an assessment of our processes and workflows, we spent the next few months standardizing those processes across programs. This took a lot of negotiating, but in the end we wound up with a solid and documented way of doing business at the foundation.

4. We built a grants management system that allowed us to manage and track all of our requests and grants. The workflows we mapped out are now built directly into our grants management system – everything flows smoothly from one approver to the next and nothing gets lost. Ever.

5. The fact that we had to build our own grants management system was not ideal, but it was clear that none of the existing vendors had a solution that solved our pain points. So, we decided early on to open source the code to the rest of the grantmaking community so others could benefit from the work we put into our system. There are now several other foundations who have adopted Fluxx to streamline their own business processes. You can check out the project at http://projectfluxx.org if you’re interested.

One other note – I’ve been on both sides of the game, and I can tell you from the nonprofit’s perspective the current state of foundation grantmaking is extremely frustrating. I’ve also been in the startup/VC world for a long time, and it’s a whole different world over there. I’ve been involved with startups who have raised $5mm in 2 weeks, all based on a crazy idea and a prototype. VC’s are willing to take enormous risks in search of enormous returns. They understand that 9 of their investments will fail, but that 1 will hit it big and make those other 9 failures worthwhile. The startup community doesn’t hide their failures in a closet – in fact, they celebrate them. Why can’t we do the same?”

By John MacIntosh

I joined SeaChange Capital Partners after a career in venture capital. In my experience on the inside, the venture capital market is a dynamic system where three key “actors” (managers, directors and funders) struggle through a fog of uncertainty with

• closely aligned interests (in terms of mission and time frame);
• a clear delineation of roles, rights and responsibilities; and
• transparency in communication.

The system is supported by trust, explicit contracts, underlying legal and accounting frameworks, and an ecosystem of accountants, lawyers, and intermediaries.

Viewed from the outside, this system has attractive features like “close monitoring”, “supportive funders”, “long-term commitments”, “clear metrics and measures”, “accountability”, and “rigorous due diligence”. Not surprisingly, a number of nonprofit organizations have tried transplanting some of these into their work.

Unfortunately, the transplanting strategy fails to appreciate that these things have emerged and are sustained in the venture capital market because of the more fundamental background context. As “emergent properties,” they cannot be successfully transplanted into the nonprofit world without certain enabling conditions. Moreover, these “things” are verbs describing the actors’ response to their environment, not nouns that can be picked up and used: due diligence is a process, not a checklist; reporting is a ongoing activity, not a “dashboard”; accountability is a function of accepting roles, rights and responsibilities, not something acquiesced to up front; etc.

An alternative to transplanting venture capital strategies to the nonprofit field would be to create – even if artificially and imperfectly – the background conditions that might enable these things to emerge.

Imagine that I’d like my $100 million foundation to function like a venture capital firm.

The transplanting strategy would be to study some leading venture firms, adopt their diligence checklists, investment agreements and dashboards, and exhort my team to “be more active”, “take the long-view” and “think like investors”.

An enabling strategy on the other hand recognizes that since venture capital practices have emerged as-needed to make equity investments, they might also emerge if my foundation were required to make as-equity-like-as-possible grants.

For example, I could construct bylaws limiting my foundation to ten grants each to be funded for twenty years (i.e. effectively perpetual) by the income from $10 million of assets; each grant could be ended early only if another funder took over the remaining obligation; and program officers would have incentives tied to the long-term (5-7 year) performance of grantees.

In response, my foundation might naturally begin to act more venture-like without any explicit directive to do so:

• We would be really careful about due diligence because of the limited number and long-term nature of our grants. We would try to find organizations with missions, values, leadership, directors, and co-funders that we felt confident about over the long-term;
• We would be wary of making grants without governance rights, such as a board seat, restrictions on changes in the mission or leadership, and limits on the growth of the funding base;
• We would be explicit about how to measure the “performance” of each grantee given the requirements of the incentive scheme.

Other features of venture capital might be less likely to emerge:

• Would nonprofits agree to be funded on our terms? Probably only if the funding was meaningful and they had developed real trust in our people. (So to get things done, we would need to behave.)
• Would a secondary market develop for our grants? How would funders reluctant to pay for “overhead” or “capacity building” feel about paying us for our right to make a series of “great” grants in the future? Would we really pay other funders to relieve us of the contractual obligation to make a series of grants to a poorly performing grantee? (Imagine the headlines written by the nattering nabobs of nonprofit negativity!)
• Would the incentive program allow for risk-taking? Would people stick around for 5-7 years? Would the inability to rotate grants leave the team bored and uninspired?

I am confident that enabling venture capital practices would be more successful than transplanting them—but I probably wouldn’t do it. In fact, it seems fanciful to voluntarily restrict my potential activities when the distinctive characteristic of philanthropy is freedom.  (If you only have to give away 5%, why agree to do more?  If you could otherwise rotate grants and change strategy, why not leave the option open?  If measures are imperfect, why make them truly high stakes?)

Unfortunately game theory shows that when self-control and commitment are difficult, “bridge-burning” can be the only viable strategy. (Does anyone doubt these are problems in the nonprofit sector? I struggle with them every day.) Unfortunately, it takes courage, self-knowledge, and conviction about your goals, so I don’t expect a revolution any time soon. Most likely, for-profit practices will continue to be transplanted ad-hoc into often inhospitable terrain with mixed results. But hopefully, a few brave souls will burn some bridges and see what emerges.

The Smart Money Award is about bringing recognition and praise to funders who are willing to embrace the idea that sometimes, in order to maximize your impact, it is best to “follow what works.” The award celebrates funders that decide to lead by following the good work of others, helping to scale up or replicate an already proven initiative developed by someone else. We hope to remove any stigma associated with the concept of following, and instead highlight how it can be a powerful “next practice” in philanthropy.

“Smart Money” and “Following” are concepts I believe are powerful, but missing, elements in philanthropy. I blogged about my view on these concepts in a post titled Signaling, Smart Money & Philanthropy.

I’m now happy to announce that the Smart Money Award has a website and has announced the first official recipient chosen from the nominations we’ve received to date.

Here’s the press release from Smart Money Award.

First Bi-Monthly Smart Money Award Winner: the McKnight Foundation

Last Sunday, June 26^th, marked a little-known but very important date in philanthropy. It was the anniversary of the announcement of Warren Buffett’s 2006 gift of over $31 billion to the Gates Foundation—perhaps the single largest act of followership that the field of philanthropy has known. In a field of “leaders,” Buffett’s gift recognized that sometimes the best way to demonstrate leadership is actually to follow the good work of others.

With the spirit of Buffett’s gift in mind, we are pleased to use the anniversary of his largesse to mark the announcement of the winner of the new Smart Money Award, a bi-monthly* recognition given to the most important acts of followership in the field of philanthropy.

The winner for this first period is the McKnight Foundation, for the powerful act of following represented by its $100 million commitment to three re-granting institutions that are leading the effort against climate change: ClimateWorks, the Energy Foundation, and RE-AMP.  The McKnight Foundation, after thinking rigorously about the challenging task of affecting climate change, decided it would be most effective to forego acting alone and instead join the efforts of others already in progress.

The McKnight Foundation had long worked with the Energy Foundation in its efforts to promote alternative energy in the Midwest. And when McKnight’s Board of Directors saw Design to Win, the 2007 report that laid out a comprehensive plan for tackling climate change, they were moved to make a gesture that was quite extraordinary for a foundation of McKnight’s scale and focus. The Foundation committed to provide $100 million over five years through three established intermediaries to help implement the Design to Win plan. The Board felt that there was no need to reinvent the wheel, given the urgency of the situation, the existence of partners that they trusted, and a plan with a clear and compelling logic.

McKnight’s vice president of program Neal Cuthbert explains it quite simply: “We have a long history of working with established intermediaries to try to put decisions in the hands of the people closest to the work. We often find that the best thing we can do is to support smart people who know what they’re doing and get out of the way.”

In receiving the Smart Money Award, the McKnight Foundation is the second organization to be selected as a winner for an honor that is about bringing recognition and praise to funders who are willing to embrace the idea that sometimes, in order to maximize your impact, it is best to “follow what works.” The award celebrates funders that decide to lead by following the good work of others, helping to scale up or replicate an already proven initiative developed by someone else. Followership is a way to make smarter investments, and the Smart Money Award committee feels that McKnight’s commitment to ClimateWorks, the Energy Foundation, and RE-AMP is an ideal example of that.

As McKnight’s Cuthbert points out, “This is a field where the necessity of authorship is so high that it often gets in the way of so much good work. So on behalf of the McKnight Foundation, we’re honored to win the Award.”

One of the goals of the Smart Money Award is to remove any stigma associated with the concept of following, and to instead highlight how it can be a powerful “next practice” in philanthropy.  The idea was developed at the Monitor Institute’s Future of Philanthropy workshop.  The inaugural Smart Money Award, given out at the workshop, went to the W.K. Kellogg Foundation for its $16.5 million grant to the Buffett Early Childhood Fund’s initiative to improve education for children from troubled families.

Every other month a new Smart Money Award winner will be selected, and each of the funders’ stories will be posted on our website to promote the powerful impact that following can have in the world of philanthropy.  Then, at the end of each year, on June 26^th, a funder (selected from the bi-monthly winners) will receive the Annual Smart Money Award.

We are always taking nominations for individuals or foundations that exemplify the act of following and welcome your submissions (which are rolled over after each month).  If you know of other great examples of followership in philanthropy, we’d love to hear about them. Please let us know by nominating them!

You can follow us on Twitter @smartmoneyaward

*We mean every other month, not twice a month.  How is it helpful to have a word mean both every other month and twice a month?  It just seems like you’re asking for confusion.

So today, I’m happy to announce the Smart Money Award.

The Smart Money Award is about bringing recognition and praise to funders who are willing to embrace the idea that sometimes, in order to maximize your impact, it is best to “follow what works.” The award celebrates funders that decide to lead by following the good work of others, helping to scale up or replicate an already proven initiative developed by someone else. We hope to remove any stigma associated with the concept of following, and instead highlight how it can be a powerful “next practice” in philanthropy.

“Smart Money” and “Following” are concepts I believe are powerful, but missing, elements in philanthropy. I blogged about my view on these concepts in a post titled Signaling, Smart Money & Philanthropy.

At the workshop, we awarded the first Smart Money Award to the W.K. Kellogg Foundation for their $16 million grant to support a project of the Buffett Early Childhood Fund. Commenting on the grant at the time it was made, Kellogg president Sterling Speirn said he “saw no reason to start from scratch when a good approach to advocacy and education was already in place.”

In announcing the award at the workshop, we gave the certificate pictured above and a check for $50 to Kellogg vice president Anne Mosle who explained the rationale behind the grant saying “we don’t believe we have to lead everything.”

Now obviously we had fun with this. But we are quite serious about the award. We believe that “following” can actually be an act of true leadership, as is so compelling demonstrated in this video:

Link to “Leadership Lessons from Dancing Guy”.

So where do we go from here? Our plan is to launch a simple website explaining the award and soliciting nominations for future awardees as soon as possible. Our goal is to announce the next award on June 26, the anniversary of the announcement of Warren Buffett’s 2006 gift of over $31 billion to the Gates Foundation—perhaps the largest act of philanthropic “followership” ever made.

I’ll keep you updated on this project as we move forward. Keep in mind that this was something that we hatched in about 45 minutes in a group of people who for the most part didn’t know each other. But the audience members at the Monitor workshop did chip in another $50 to fund our next award. So we’ll keep operating under the assumption that we’ll find what we need along the way and see what happens!

The informal working group designing the Smart Money Award:

• Sean Stannard-Stockton, Tactical Philanthropy Advisors
• Lance Fors, SV2
• Gabriel Kasper, Monitor Group
• Kelvin Taketa, Hawaii Community Foundation
• Mayur Patel, Knight Foundation
• Eugene Kim, Blue Oxen Associates
• Edward Wexler-Beron, Monitor Group
• Bob Hughes, Robert Wood Johnson Foundation

However, for some time GuideStar has been looking at ways to offer visitors more evaluative information. Now, they’ve launched TakeAction @ GuideStar.

Click here to visit the new website.

The site seeks to help donors select which nonprofits to fund, objectively making available rating information from GiveWell, GreatNonprofits, Philanthropedia and RootCause.

One interesting aspect of the new platform is that it reorients the way in which users seek information. GuideStar, like many nonprofit databases, has traditionally assumed that users are looking for information about a specific nonprofit. Their search interface prompts people to enter an organization name. This format makes sense if we assume that users are checking to see if an organization is compliant and has no red flags. But if a donor is seeking the best organization, they need to search by cause area since they presumably do not already know the organization they are looking for. The TakeAction platform reorganizes the GuideStar database by cause area.

One more step towards helping donors make smart decisions about their giving, even if it doesn’t quite turn GuideStar into “the one platform to rule them all”.

This is a dramatic declaration on Peter’s part. Peter is the kind of academic who talks about r-squared statistics in blog posts. For him to write that the “untheorized work that comes down to judgment and gut assessment… explains a lot more of the achieved social impact than anyone wants to admit,” is a shot across the bow of the philanthropy industry from someone who should more naturally side with the philanthropic process folks.

Personally, I think Peter is right. It isn’t comfortable to believe that the intangible art of judgment and gut assessment is the most important driver of philanthropic success. It would be far easier if we could all just learn specific, repeatable processes, that while complicated, insured that our giving was effective. But I think the evidence from other fields fully supports the importance of judgment over process.

In investing, Warren Buffett has a process, but it is his intangible gift for spotting value that makes him great. If the reverse was true, then anyone who read the vast literature covering the process that Buffett uses could fully expect to replicate his success.

In writing, novelists around the world study the writing styles of the greats. But The Elements of Style won’t make you Ernest Hemingway.

In economics, thousands of men and women run rigorous studies in an attempt to predict how the economy will behave. Yet we know that this process fails them time and again and fails to even adequately explain historical events.

This is not to suggest that process doesn’t matter. In the book Blink: The Power of Thinking Without Thinking, Malcolm Gladwell explains the incredibly important role of judgment and gut assessment in expert decision making. But he does not declare process and rigor is not important. In seems to me that systematic processes are necessary but not sufficient building blocks on which to develop effective philanthropy.

Unless we heed Peter’s warning that “judgment and gut assessment… explains a lot more of the achieved social impact than anyone wants to admit",” all the efforts to build a more effective philanthropy will do nothing more than create elegant mental models that sound great, but fail to make the world a better place.

The document is pretty user friendly and at 24 pages is certainly digestible by anyone who is interested. Note that this is only a “draft”. The Corporation is soliciting comments from the public until January 15. The final NOFA will be released in February 2010.

In July, I wrote a post explaining what the Social Innovation Fund is and another about why I think it matters. What I’d like to do now is kick start a public debate on the NOFA. If you plan to offer comment on the document directly to the Corporation (which simply entails sending them an email at SIFinput@cns.gov), then I’d like to suggest that you forward me a copy of your comments for publication. Rather than simply have the comment process be one of the public sending responses to the Corporation (who understandably has said they won’t respond to each comment), let’s turn the process into a public conversation.

I realize that this week and next will be dead quiet on this blog and others. So I’ll plan to kick start this conversation in January. In the meantime, if you do submit a comment on the NOFA, please forward me a copy at sean@tacticalphilanthropy.com.

With the permission and encouragement of both Pauls, I’m republishing an excerpt of the debate below. Just to be clear, any emails sent to me are strictly off the record unless permission is requested. Brest’s email was a private email among a group of people. I republish it here only after Paul B. suggested the idea and Paul S. gave his permission.

Please see yesterday’s post for the “medical school example” referred to below. Note that Shoemaker does not write in all caps because he is yelling at Brest, but to distinguish their remarks during inline comments within the emails (although Shoemaker does love using all caps, emoticons and bold, italicized text in most of his emails!).

Paul Shoemaker: In the scenario, e.g., where the funder is interested in cancer research within a medical school, who else then funds the overall school’s “overhead,” administrative, etc. expenses?

Paul Brest: That’s just what overhead rates are for. In the case of universities the overhead rates are well defined.

Paul S: “OVERHEAD” RATES, IMHO, ARE LARGELY A FALLACY. NO ONE HAS ANY DEFINTION OF OVERHEAD THAT IS REMOTELY CONSISTENT. AND ONE PERSON’S OVERHEAD IS ANOTHER PERSON’S INVESTMENT IN HUMAN CAPITAL. EVEN IF SUCH RATES WERE DEFINABLE, HOLDING A NON-PROFIT TO X RATE, PRE-DEFINED, IS ARTIFICALLY CONSTRAINING AND LESSENS THE NON-PROFIT’S ABILITY TO ADJUST ITS SPENDING BASED ON CURRENT CONDITIONS AND OPPORTUNITIES. I JUST DON’T THINK OVERHEAD RATES ARE A VALID, USABLE, TRULY DEFINABLE THING.

Paul S: I know the analogy never translates 100%, but one thing I constantly recycle in my mind is some entity – VC, bank, individual investor, etc. – putting money into a private sector company but telling them they can only use the money for X, but not Y. How does that company ever build a whole, fully-functioning company, even if only some of their investors attach such requirements?

Paul B: The nonprofit and business sectors aren’t identical. If I were to use a business analog, though, a project grant is more like purchasing services than investing in the company.

Paul S: THEY ARE CERTAINLY FAR FROM IDENTICAL, I AGREE. BUT EVEN WHEN I AM PURCHASING GOODS OR SERVICES FROM A FOR-PROFIT COMPANY, I CANNOT THEN TELL THAT COMPANY HOW TO SUBSEQUENTLY AND SPECIFICALLY USE THOSE FUNDS (E.G. USE MY MONEY FOR R&D, BUT NOT SALES & MARKETING). AND IF THE FOR-PROFIT WORLD DID WORK THAT WAY, IT WOULD BE SIGNIFICATLY LESS SCALABLE AND EFFECTIVE THAN IT IS TODAY (AND NO, I DON’T THINK CAPITALISM / FREE MARKETS ARE “PERFECT” BY ANY MEANS J). THE FUNDAMENTAL PROBLEM WITH ANY KIND OF RESTRICTIONS ON FUNDING ARE HOW MUCH THEY HANDICAP AND CONVOLUTE THE NON-PROFIT’S ABILITY TO OPTMIZE ITS OWN SPENDING TO ACHIEVE ITS GOALS AND SOCIAL OUTCOMES.

Paul B: And now a question for you. If you made, say, a $1000 GOS [general operating support] grant to a university the chances are that about a penny would go to cancer research. So what should someone who wants to support a university’s cancer research program do?

Paul S: THE WAY I WOULD HOPE THE WORLD WOULD WORK IS THAT A NON-PROFIT / UNIVERSITY, ETC WOULD BE VERY CLEAR ABOUT THEIR GOALS, WHAT THEY INVEST IN, HOW THEY WILL USE THEIR FUNDS, ETC. AND THEN A  FUNDER WOULD MAKE GOS / UNRESTRICTED GRANTS BASED ON THAT INFORMATION. IF ALL FUNDERS BEHAVED IN THAT WAY, THEN ULTIMATELY MY GOALS FOR CANCER RESEARCH WOULD BE MET.

I WOULD NOT BE ABLE TO SAY MY $1,000 LED TO X, BUT THE ULTIMATE PURPOSE FOR MY $1,000 WOULD BE MET. AND IF I LATER LEARNED THAT THE UNIVERSITY WAS NOT INVESTING IN THAT RESEARCH EFFECTVELY, I WOULD DECIDE TO DISCONTINUE FUNDING (UNLESS THERE IS SOME OTHER “PRODUCT” THAT I STILL VALUED). MAKING MY GRANT FOR CANCER RESEARCH A “PROJECT GRANT” DOES NOT, ON THE WHOLE, MAKE MY GRANT ANY MORE EFFECTIVE WHILE IT DOES RESTRICT / CONSTRAIN THE ORGANIZATION’S ABILITY TO BUILD A FULLY-FUNCTIONING ORGANIZATION.

Paul B: [referencing the medical school example] A grant to Stanford Medical School is not GOS under the IRS definition; only an unrestricted grant to Stanford University as a whole is. Stanford will allocate a GOS grant among millions of activities based on what it sees as the needs of the time: teaching Italian, particle physics research, the women’s lacrosse team, the law school, overseas campuses, you name it. Even if Stanford had the best cancer research center in the world, the institute would only receive a trivial part of a GOS grant to the University, given these other needs. If a donor particularly interested in cancer research could only give GOS, he or she would wisely seek an institution that only does cancer research so all of the funds would go for that purpose.

The way Stanford keeps its core operations functioning, even when most grants are restricted, is by charging overhead costs. With respect to government grants, overhead is defined extremely precisely by OMB Circular A-21 and the rates are negotiated with universities. (There’s a similar circular for nonprofits other than universities.) Individual donors and foundations try, usually successfully, to circumvent the overhead rates. Well, shame on us! I tried to get IS [Independent Sector] interested in the overhead problem some years ago, but it never caught on. It would be great if organizations like SVP [Social Venture Partners] and GEO [Grantmakers for Effective Organizations] got interested. They’d certainly have my support.

Paul S: OK, within a monolithic / huge institution, especially public, like a university, I see some of your logic for non-unrestricted support. Yes, an unrestricted grant in such a scenario has the potential to be spread across a great range of potential purposes. I will say that, taken to the extreme, if EVERY funder to a university ONLY funded their piece of research, etc. they wanted to focus on, we would be back to the same fundamental problem of “who will sufficiently fund the administration, infrastructure” then?”

But on institutions of significant complexity / diversity of work AND scale, I can see some logic, Paul. I am almost ready to say I’d be willing to live with the downsides you correctly describe in return for the upsides of completely unrestricted funding (with explicit organizational, published goals and institutional accountability). I also confess I’m too ignorant about funding streams for large public educational institutions

I will say that “With respect to government grants, overhead is defined extremely precisely by OMB Circular A-21” is an expression that, prima facia, seems doomed to inaccuracy, inaccuracy, severe rigidity, and a lack of understanding that will lead to all kinds of debilitating handicaps and restrictions. Same goes for “a similar circular for nonprofits.” And if in fact, they often successfully circumvent the overhead rates, and we all know they do, then what a ridiculous waste of time and resources in the first place.

For 98% of non-profits. I’ll stand my ground J (and I know you’d stand with me on much of that). I will also add that so many of these discussions about GOS / unrestricted vs. project-specific grant focus on the negatives and risks of unrestricted grants and not enough on the significant positives and benefits. Much less staff resource wasted, much greater flexibility in resource allocation / optimization, trust placed in the hands of non-profits who are closer to the real work, ability to fill in gaps in infrastructure, etc. There are more. And the ultimate purpose for unrestricted funding is it is a significant advantage of helping a non-profit build a much stronger, sustainable and salable organization.

Paul, when you say “I tried to get IS interested in the overhead problem some years ago, but it never caught on. It would be great if organizations like SVP and GEO got interested. They’d certainly have my support” I was vaguely aware of that, but I’d love to hear more and in fact, maybe we are ready to take that on collectively

Brest writes:

You can read the full essay here.