Why Would You Give Money to Bill Gates?

In June I wrote a post about Olivia, a 7-year-old girl who had given $35 to the Gates Foundation. Last year, the Gates Foundation received $10.4 million in gifts from donors like Olivia. In the post, I pointed to these unusual gifts as evidence that individual donors are focusing more and more on the impact of their giving.

At the time, I wrote:

Why did Buffett give money to the Gates Foundation? He thought they were better donors. Why did 7-year-old Olivia donate to the Gates Foundation? She thought they were better donors.

The Gates Foundation actual encourages people to give money directly to their grantees rather than to the foundation. But at least some donors seem to think that entrusting their money to the Gates Foundation is the best way to go. When these donors think that the Gates Foundation is a better donor, what does this mean? That the Gates foundation knows which nonprofits are better than others.

Investors regularly entrust their money to professionals with the belief that these professionals are better at managing it then they are. There are reasons that I think most donors will not want to do this with their philanthropy. But I do wonder whether large private foundations might become high profile “brands” that represent excellent giving. If they could attract outside donations, they could commit more capital to the organizations they fund. In fact, they could permanently increase their payout rate.

Now Jacob Harold of the Hewlett Foundation addresses this concept (which he calls “regranting”) in a recent article in Alliance Magazine:

In the US alone, there are over 97,000 foundations and grantmaking public charities. About 5,000 of them have paid staff. Like all institutions, they vary in effectiveness. But in that group are some superb professionals – people with decades of experience on the world’s most complex social issues, who are plugged into vast networks that include the best of the old and the new, the North and the South. They are not necessarily smarter, but they are better positioned to make philanthropic decisions than an average donor – no matter how brilliant that donor may be in her day job as a teacher or doctor or cabinetmaker…

US foundations are required by law to publicly disclose their grants, but disclosure is not enough: donors also need tools and products to make information usable and regranting easy.

For example, a ‘side-by-side fund’ could allow a donor to mimic the giving of one programme area of a particular foundation. Like an index fund, it would distribute dollars in proportion to another portfolio, in this case a foundation programme area. Or donors could skip the middleman altogether if they could easily find out where and why institutional givers gave their money. Organizations including Nonprofit Knowledge Network, Partners for Change and Root Cause are working to design such products.

…Most individual donors are not yet inclined to give up control of their giving. But with better information and more convenience they just might. Every year, millions of people give up control of their financial investments to professionals. Outsourcing to professionals is just another form of control: you pick the person or the institution instead of feeling overwhelmed by the choices before you.

I believe that there is deep knowledge about good philanthropy in the professional grantmaker community, but that there are few incentives and minimal structures in place to share their knowledge with individual donors. What that means is that the knowledge is being used to influence the 13% of charitable dollars that foundations control, but not influencing the 82% of charitable dollars that individuals control. Transferring this knowledge from professional grantmakers to individual donors is something we’re working on with the Tactical Philanthropy Knowledge Network.

One of the core ideas behind Jacob’s piece is that the knowledge of which nonprofits to fund is the fundamental knowledge that is valuable. I think this is one type of valuable information, but practicing effective philanthropy means much more than just picking nonprofits to fund. Given a nonprofit landscape that includes well over a million nonprofits and given that donors don’t want to just “do good” in general, but instead want to focus on specific issues (from economic development in Africa to supporting disabled veterans in Modesto, CA), it is more important that we transfer the knowledge of “good philanthropy” rather than offer “good picks” of nonprofits to fund.

But sidecar funds or regranting as Jacob pictures it are important tools that deserve to be more widely used. The biggest obstacle to my way of thinking isn’t getting people to “give up control of their giving” as it is “branding” the regranting opportunities in ways that offer donors the emotional satisfaction and connection that making a grant to a single nonprofit does. The Gates Foundation has developed this brand whether or not they meant to intentionally. For the people who gave Gates $10.4 million last year, it was emotionally satisfying to support the foundation. You might suppose that these givers were robotically, logical donors, but there’s no doubt in my mind that 7-year-old Olivia felt emotional satisfaction from her gift to Gates.

Successful portfolios of the type that Jacob describes will not be simple pass through entities, they will be groups like New Profit and Acumen Fund who have established themselves as entities worth investing in not simply as a regranting opportunity, but as a worthwhile direct investment.