Philanthropic Capital Allocation

My friend Daniel Ben-Horin, founder of CompuMentor/TechSoup (the nonprofit behind NetSquared), took issue with the “Some nonprofits just suck” comment of CompuMentor board member Mike Brown and my subsequent post on the subject.

Daniel (this is an excerpt of his comment, read the whole thing here):

Mike is my good friend and our Board member at CompuMentor/TechSoup, but I think this remark is unfortunate and I likewise disagree with your gloss on it, Sean.

I think it’s essentially a matter of distinguishing between content and context. The content here is self-evidently true, in the sense that more or less ipso facto a subsection of every group is the least qualified in that overall group…

The context is another matter. If you’re standing in front of the NRA and want to say "Gunowners suck," than I say, "more power to you and excuse me while I get out of range." Truthiness to power; good for you. But if you stand up, from a position of authority, and tell a group of people who have in many cases worked for nothing or very little to try to accomplish something beneficial that some of them "suck", I am not very impressed. It feels like piling on. Is it possibly true that anyone in the nonprofit world doesn’t already know that some nonprofits do a poor job in some (or many) areas? I don’t think so.

I think Mike’s real point is that some nonprofits really have no claim to be taken seriously as business models. And I think that’s actually a pretty interesting point and more nuanced than it might appear… The trend toward a more business oriented approach to social maintenance and improvement is a relatively recent development. I won’t take the space here to describe it, but will just note that one of the unintended consequences of this trend is that nonprofits that can’t spell bizness modl now feel obliged to claim that they have one. That doesn’t mean they suck! It means they are confused about where they fit into the present funding climate and are climbing on the latest buzzword…

Knowing Mike and what a warm, fuzzy and empathic individual he is (most of the time), I believe he misread the room. Obviously he struck a chord with you, Sean, and I’m sure some others, but for many of the people there (based on the feedback I’ve heard; I wasn’t present myself) it felt like a person in a position of power, a VC, an "Expert Reviewer", a board member of the host organization, taking the opportunity to state the obvious in an unnecessarily belittling way.

Mike Brown responds (again, this is an excerpt, you can read his whole comment here):

…One of the major challenges in the non-profit sector is that the efficient markets principle we hold dear in the private sector doesn’t hold as well in the NPO world. In the for-profit world we value the fact that resources tend to accrue to the organizations that generate superior returns…

…Unlike in other realms where competition channels resources to the most efficient or effective consumer of resources, in the non-profit sector resource allocation and efficiency/effectiveness are not always or easily correlated. Efficient /effective NPO’s don’t always thrive and inefficient or mismanaged NPO’s sometimes consume resources better allocated elsewhere…

Yesterday, I made the point that any organization (foundation, NPO, or for-profit) must set some criteria or filter for its resource allocation to ensure that the resources are deployed as effectively as possible. I provided the example that if my goal is to provide housing for people and my resource is hammers, I should offer the hammers to the builders that can build more housing than the builders who are slower or lazier (all else equal)… Most people understood that I was making this point clearly yesterday when I said, "Some non-profits suck; just like some for-profit businesses suck" as I then spent the next five minutes explaining exactly what I meant. The people who understood this point told me so directly after the NetSquared panel I moderated. Apparently, some took offense to my "inflammatory" remark. Those who took offense felt that I was undermining the hard work of good people in all NPO’s who have dedicated their careers to helping others. To them I say, learn the meaning of the term "hyperbole" and stop being so sensitive. Obviously I care deeply about the sector and appreciate the great work effective NPO’s are doing. Why else would I spend the time that I do supporting NPO’s with my time and resources?

My take on Mike’s comment at the conference was:

In a world with limited resources, we need to get comfortable with the idea that nonprofits that are trying hard and have lots of passion — but aren’t cutting it — don’t need a pat on the back. They need to be ignored and we need to let them go out of business.

Personally, I do not buy into the hype that nonprofits should behave more like for-profit businesses. At least not in the sense that they must create business models based on earned income strategies or that being dependent on philanthropic funding is somehow a deficiency. But I do feel strongly that there is only a limited sense in our culture that nonprofits can and should be expected to be highly effective organizations. Certainly many people in philanthropy establishment get this, but it is not a widely held concept.

In the investment management industry that I work in and the venture capital industry that Mike works in, success is defined by the results of how we allocate capital. No one cares about how slick of a concept a company has, or how big they are. The metric is “what was your return?”. Measuring the “return” on money invested in a nonprofit is a very difficult concept. But at the least, we need to have a framework where pointing out that some nonprofits aren’t any good at what they do and resources allocated to them is a waste, doesn’t inspired a debate or hurt people’s feelings.

Here’s the thing about Mike’s comment, it wasn’t directed at nonprofits. Nonprofits know that some of them are effective and some aren’t. His comment, or at least my take on it, was directed towards allocators. We measure what we care about and in philanthropy we tend to measure how much capital is given, not how effectively it is allocated. This is why “Some nonprofits just suck” was such a powerful line. Mike wasn’t speaking from a position of power down to the nonprofits in the room. He was talking about how the sector, all of the players (and the room was a diverse cross section), allocate capital.

In the for-profit sector, market forces drive poor companies out of business. Therefore, we don’t need anyone running around reminding people that some for-profit companies suck. But this hasn’t always been the case. In the late 1990’s, the technology bubble, an event of mass psychological hysteria, broke the efficient market system for awhile. During that time, capital allocation was terrible. Companies that destroyed value were given massive amounts of capital. Anyone who questioned these allocation decisions were told that they didn’t understand the New Economy. During that time a website called F**ked Company came about. The site pointed out companies that Mike Brown might say “sucked”. At that time, the for-profit sector desperately needed this pointed out to them. With the lack of market forces and the lack of reliable outcome metrics in the nonprofit sector, we still need to be reminded that just because a company has 501c3 status doesn’t mean that giving them money does any good at all.


  1. This is a reply to Mike Brown’s last post in the previous thread,and will serve as my response to Sean’s above.

    Mike, It is true that if some number of armpits are not getting sufficiently deodorized, the private sector marketplace will figure out how to solve that ‘problem’ and will do so with a fair degree of efficiency. Deodorant makers will compete. The more efficient will prosper. The less efficient will be acquired or merge or fade away. If someone comes up with a great new deodorant, they will secure investment and be afforded a chance to compete in the marketplace. It’s a wonderful thing and we all come out of it smelling fresh as a daisy.

    However, if some number of people are starving or being subjected to genocide or are dying from h.i.v. or can’t get access to clean water etc., the private sector marketplace doesn’t work quite as well, does it? It’s not a marketplace problem at all! It’s a government problem, a policy problem, a political problem, a social problem. And that means it becomes, on one level or another, a problem that is addressed by the nonprofit sector. There is certainly not the same rush to corner the market on hungry people that there is to corner the market on non-deodorized people!

    So that is what I believe is the larger context in which your remarks at N2 and your comment above needs to be considered. The marketplace principles which you cite so approvingly have already been waived on a fundamental level *before* we get down to allocating hammers to the better (or worse) builders.

    I have no quarrel whatsoever with the premise that even given this context, it makes all kinds of sense to evaluate quality of nonprofit management and operation and make resource allocation decisions based on this evaluation. Of course we need to do that. And we already do that. Every funder, small or large, is implicitly or explicitly comparing Nonprofit A to Nonprofit B before writing a check. There are inefficiencies in generating data to enable these comparisons, and I support efforts to decrease or remove these inefficiencies, so donors can make more confident (and more!) decisions to provide support.

    However, when you write, “Unlike in the private sector where organizations frequently merge or acquire to achieve scale or become more efficient, this happens much less frequently in the NPO world because there is no readily-exchangeable compensation available to the stakeholders of the organization that cedes control to another,” I take issue with the part after “because”. That’s *not* the reason, in my opinion, that m&a isn’t a strong engine in the nonprofit world. It is way more complex than that. The reasons go back to what I tried to adduce with my deodorant vs hunger example. The market is broken from the get-go. There really isn’t a “market” in the private sector sense of the word. To my mind, you’ve latched onto one consequence of a much larger problem and annointed it as the cause of what ails us here.

    So, from that point of view, when I read your admonition to “learn the meaning of the term “hyperbole” and stop being so sensitive,” I have to push back. I know you pretty well and know that you do indeed care deeply about social issues and devote substantial time and resources to addressing them. But that still doesn’t validate this particular choice of words, in my opinion. You are still situated in a particular and quite privileged relationship to this sector and its work. It’s great that you support that work and you, and everyone else who has skin the game, has every right to advocate for improvement. But if your advocacy takes the form of denigratory language, you shouldn’t be surprised if people forcefully object. And if your response to their objection is your “learn…sensitive” response above, I guess we’ll just have to agree to disagree on whether that is helpful and appropriate. Perhaps our linguistic exploration should proceed from “hyperbole” to “noblesse oblige” –

  2. Holden says:

    I have thoughts on the market metaphors, but for now I just want to state that I am really offended by the whining about offensive language. Forget about how privileged Mike is and think about how privileged the people running a food pantry are, relative to the people eating there. Forget about the power that funders wield over NPOs, and consider that NPOs are the ones that truly have others’ lives in their hands – the lives the people who REALLY need help. If they do their work with sloppiness or hypersensitivity or anything other flaw, the people who pay are the ones who can do the least about it.

    NPOs are the ones who have the responsibility to take criticism, deal with blunt language and extract the useful feedback, and do whatever else it takes to help people in need. If they don’t do that, they are being irresponsible with their own power.

  3. Antony Chiang says:

    No discourse like this should go on without the uniquely insightful perspective of someone like myself … my primary credential being the timekeeper at Mike’s panel at NetSquared.

    However, I should perhaps warn that in addition to that impressive role, I have the distinct privilege to be part of the team expanding TechSoup’s impact internationally (and thus needing to be very nice to Daniel in this blog comment), as well as having worked in the cross roads of the non-profit / for-profit / technology intersection for quite some time.

    My first reaction to the minor uproar I have to admit was “Really? Intentionally provocative but what was the big deal?”. Reading Daniel’s initial feedback about “content vs. context” was helpful (see I warned that I was going to be nice to Daniel). Got a good chuckle out of the NRA example, and I would say that essentially Mike was at a NRA/NPO panel where he said “some gun-owners/NPOs suck” and indeed got “didn’t get out of range/feedback regarding his insensitive language”.

    To be fair however, here is some additional “context” that should be noted. First, this was a new model for NetSquared where the purpose was for 21 projects to persuade attendees to vote to fund them in a VC style pitch. Second, one of three key judging/voting criteria was “Economic Sustainability”, also phrased as “having a plausible financial model”. And the format was a panel set up to question each project representative on that factor (the other two being social impact and technical innovation). Third, Mike’s role was moderator (not just expert panelist). Here’s my point in more detail:

    First, this was a competition. The nonprofits were there to compete for dollars, as well as drum up interest by resources like volunteer Yahoo developers and expertise in marketing / finance / strategy. The model and the whole conference reminded me very much of other “social enterprise” competitions, modeled on VC pitch competitions, where ‘business plans’ are presented for ‘startup venture funding’ to an audience of foundations/VCs. And I would add that the NetSquared community is a deliberate mix of VCs / Corporate / NPO / Foundations / Experts. So every organization there in my mind was buying into the social enterprise model, at least for two days.

    Second, worthy projects were supposed to demonstrate economic sustainability. I was at all four of the economic sustainability panels. And I have to say that precious few of the projects demonstrated persuasively any economic sustainability. Panelists and audience members kept asking the same questions of all of the projects that it got to the point where moderators were asking projects to introduce themselves and then answer one key question right off the bat “What is your planned mix of earned income versus donation/grant income” usually followed by “how will the earned income be …. well … earned”. Sometimes the answer was “we’ll be 100% (or mostly) grant funded” and frankly that put the damper on any useful questions or suggestions other than to suggest funders who had an interest in their type of project. A perhaps meandering way of saying that the context was very much ‘market place’, and capital flowing to the most effective users of capital. Daniel’s point is well taken that in the NPO ecosystem, the ‘market’ context is a new fad and not of general applicability, but at NetSquared at least I interpreted social enterprise as being the accepted model.

    Third, Mike took his role as moderator with more gusto in my opinion than any of the other moderators. Maybe I’m just saying that because I had to catch his attention every four minutes to tell him the clock was ticking and he was always in the middle of fostering lively debate. At the outset, he encouraged everyone to ‘ask the hard questions, this isn’t softball”. He played fast and loose with the format of the session for the purpose of creating a more lively discussion, where all the other moderators followed it exactly. My impression is that he was trying to push participants in general (both project founders and audience) to ask hard questions, go deep and get really valuable feedback / resources than if just easy ones were asked.

    With the disclaimer of fading memory, I seem to recall that this controversial statement (and subsequent explanation/observations) was made in the context of a project that wanted funding to give away free websites and free web tools. So absolutely no economic sustainability around what they wanted to get funded. And panelists and audience members alike were trying to get the project reps to at least consider charging some who could afford, or place advertising, or other ways to create earned income. And philosophically, should we be giving resources to just any nonprofit, when some are less effective (s**k) than others. Foundations and other funders certainly don’t just give grants to any org that asks. Mike wasn’t saying the project being questioned s**ked. My interpretation of this part of the panel was an observation that this organization should consider thinking like a funder and give free sites to ‘worthy’ NPOs and charge all the rest perhaps. Or at least that’s what I was thinking at the time as yet another alternative way to try to get this org to consider earned income strategies. On the one hand I admired the org reps’ refusal to budge from their specific vision. And even a hyperbole didn’t work. On the other hand I didn’t think they were ‘competing’ very well to at least say “hmm those are some interesting suggestions we’ll consider and hopefully this demonstrates that we have some possible viable models of economic sustainability”. Or another way to say this – this project was in the wrong competition if they wanted to blatantly keep their specific vision/strategy and expect to win.

    And one final observation regarding part of this thread, is that I remember Mike introducing himself as “Mike from TechSoup”. I wonder how many in the audience read his bio and knew his vocation, but my guess is most didn’t. My hunch tells me they would have been offended by the phrase no matter who said it.

    Which leads me to my lesson learned. S**k is not in the warm fuzzy cup is half full nonprofit vocabulary. It’s not so much being PC as it is having one vocabulary with my buddies, another with my toddler, and another at the office, and yes, one at NetSquared. So while disagreeing with Daniel’s specific analysis, yet coming full circle to his observation that the context here was a nonprofit conference. When all is said and done, this wasn’t a rough and tumble VC pitch competition where you better have a tough skin, it was a NetSquared conference. Warm, yes. Fuzzy, yes. Dedicated to non-profits, yes. Culture and language of non-profits … a definite yes. Dare I say ‘sensitive’… also yes. Nonprofit staff are a self selecting bunch of folks (hugs all around please). It was perhaps the most collaborative competition I have ever seen. “No one left as a loser” was actually a truth at this one. Cliché but true. Everyone got a free trip to the conference, ended up with at least some extra dollars and a boatload of great connections and feedback. Competitors were not tech entrepreneurs, and instead talked like nonprofits talk and asked how they could work together on overlapping goals. So my final verdict … content = accurate. Vocabulary in this context = did not cross the line for some (myself included) but did for others.

  4. Antony Chiang says:

    Thought I would share one reasonably relevant story to the capital allocation topic. The day after NetSquared, TechSoup hosted the exec director of Charity Technology Trust, our UK partner in the TechSoup Global program. In presenting CTT, he spent a good ten minutes on the climate of the NGO sector in the UK. UK currently has about 150,000 NGOs (about 1/10th the US). One of the most interesting points is that there are 30,000 new NGOs created in the country in the last year and that this new trend is continuing. More importantly, William said that the total national giving levels including institutional and individuals had remained flat for the last five years and would likely remain unchanged. So more NGOs are going to be all fighting for smaller slices of the same pie.

    William went on to tell a fascinating story (much better told by him than my second hand version here) of speaking with a founder of an Irish NGO, who was the father of one of several children killed in a bombing 10 years ago in a popular mall. The bombing was a huge international story. He founded this NGO to create a peace center in honor of the children, where kids from both sides would meet and get to know each other. Tons of money poured in, every important and unimportant politician came, Nelson Mandela came to visit. Now fast forward years later with the media attention fading to black (how many of us are still giving to Katrina and Tsunami victims?), and geo-political changes in the landscape.

    I think William talked about how the father emotionally describing how the NGO had run out of money, funding it himself and so on. And one observation coming from a business background, although William certainly did not have the heart to say so to the father, was that maybe it was time to close. Or at least explore changing the vehicle or tactics through which to continue to honor the childrens’ memories. And what potential consequences are potentially in store that there are not as strong or direct ‘market’ forces at work filtering the creation of NGOs or causing the bankruptcy and dissolution of NGOs as in the for-profit sector.

    What this might mean as individual donors and institutional funders is that our responsibility to allocate effectively (perhaps to compensate for diluted market forces) will become harder and harder if the trend noted by William is happening internationally and domestically. But maybe in the end it doesn’t matter for many who give, because we give for other reasons. If I gave to a certain cause and discovered it was 50% less effective than the next org working on the same cause, I don’t think I would have regrets. Something about their vision or message or my connection to the organization, gave me the motivation and opportunity to give to the cause. Somewhere lies the balance between giving responsibly (acting as an efficient allocator of resources) and the spiritual reasons for giving.

  5. Daniel: I love your post.

    Antony: While I agree with Mike’s position that nonprofits must be accountable / responsible, I believe that evaluating an organization’s “sustainability” is an incredibly complex task, one that no one’s really figured out how to do.

    I’ll explain with an example. Say we have Org A and Org B. Org A found that the poorest kids in the neighborhood are the ones who need computers and training the most; but in choosing to focus on these kids they also ruled out the possibility of charging them much (or charging them at all), because they are the *poorest* kids. To accomplish their mission of digital excellence for all, they chose to act where their work would have the greatest impact. Now Org A depends heavily (or entirely) on foundation funding as a result.

    Org B quickly realized that normal market forces don’t play in the nonprofit sector. As a result, Org B found clients, such as the local public school system, who they could “donate” large quantities of recycled / refurbished computer equipment to at prices comparable to (and often higher) than what Dell charges for newer equipment. Org B is “sustainable,” because they focus on a market that has funds and can afford overpriced services, and thus exclude those who cannot. Org B now gets more foundation dollars than Org A, because they are “sustainable” and have a growing corporate fan club.

    These are both real-life examples, incidentally 🙂 I’m sure we can all identify organizations that fit either of these models.

    Now, let’s assume the market will continue to be imperfect, and that many points will fall far outside the ideal price / demand curve. In this situation, Org B will be sustainable indefinitely, because they will always find schools and other organizations who will *thank* them for the privilege of paying too much money for computer equipment.

    Org A will continue to get rapped for not charging what Org B charges, and VCs comparing the two will see that Org A is delivering comparable equipment for free while Org B has a analyzed exactly what the market will bear in terms of pricing.

    The reason this comparison fails is because we have no common metrics for measuring social impact, and I submit that a mission-driven organization *must* (by definition) allow its social impact (mission) to supersede profit margins. Org A is a *better* organization, and is more worthy of support, because it focuses efforts where they will do the most good. In terms of where foundation dollars will, therefore, do the most good, Org A wins. But Org B *looks* like it presents a better case, because we insist on applying this definition of “sustainability” that = “profit margins” and discounts social impact. Instead of trying to figure out the marginal income per computer “sold”, we should be trying to figure out the marginal social impact per computer donated, so we can measure the social value of donating a computer to a family who can afford $300 vs. a family who needs a donated power strip because they couldn’t afford it, let alone the computer.

    Lastly, you’re partially right: was created to provide free web tools and services to nonprofit organizations. However, what you may not know is that many of our founders, donors, partners, and current board members are venture capitalists and owners of internet-based businesses.

    If I multiply the average cost of our hosting provider’s services by the number of organizations they are currently hosting for us, for free, I arrive at a number somewhere between a quarter and a third of a million dollars, annually. This is a recurring in-kind donation; they’ve pledged to continue indefinitely, no matter how many more organizations we sign up. Another hosting company has offered to step in should this agreement ever falter. If we got no new clients after today, that’s still a not-insignificant donation we receive every year precisely because we provide these services for free, and this is seen as having the greatest social impact because of the audience it serves.

    This is why I reject the comparison between our hosting (and other) services and other “budget” service providers; we never intended to be a “budget” provider and compete in that space at all.

    There is no difference between $5/month service providers and $10/month service providers. There is a world of difference between $0/month service providers and $1/month service providers.

    If we focused on orgs that could pay, made the decision on who could pay (which involves major amounts of paid staff time, compared to our current model), and then charged a fee, we would lose a very large portion of the funding and donations (in-kind and cash) that we are currently fortunate enough to receive.

    Is it “sustainable” to turn our backs on a quarter of a million bucks of donations from a hosting company for the privilege of moving away from our core mission, in the hopes that this will satisfy a profit-driven notion of “sustainability”? Are our existing donations misplaced, encouraging our unhealthy lack of profits on services?

    The point I’m trying to make is that someday, when donors begin to hold their foundations more accountable and start judging their performance, I have a hunch they’ll be more interested in “what social good was done as a result of my dollar” than “how much money did this organization make as a result of my dollar”.

    In closing, yes, we need metrics. We need to be able to quantitatively demonstrate the social impact and ecological sustainability of nonprofit projects. However, your definition of “sustainable” appears facile; we need an entirely different definition, not a partially-applied definition based on a marginal profit model.