How our puritanical thinking hurts charities

BY MARY-ELIZABETH HARMON
Founding Mother, Chard & Stripes

I know I’ve done this in the past:

Weighed whether to give to a charity based on how much would go to overhead costs.

But Dan Pallotta, founder of AIDS Ride and the Charity Defense Council, asks…

Who cares about overhead if the problems are getting solved?

Touché.

We’re dealing with problems that are massive in scale, Dan observes, but our charities can’t generate any. Scale is reserved for the likes of Coca Cola and Burger King.

If that’s distasteful to you, consider whether you might be contributing to it.

Ask yourself:

• When donating, are you relentlessly focused on overhead?
• Would you be fine with your cash being used to build scale for years, like Amazon had the luxury of doing before returning a profit to investors?
• Would you balk at your donations going toward advertising?

Since tracking started in the 1970s, charitable giving in the U.S. has been stuck at 2% of GDP.

Ask yourself again:

Without advertising, how can nonprofits snag market share from the for-profit sector when the latter has capital—and our implicit permission—to create campaigns that magnetize our money?

Pallotta has identified five areas in which our attitudes of nonprofits put them at a disadvantage:

#1. Compensation
“You want to make $50 million dollars selling violent video games for kids—go for it; we’ll put you on the cover of Wired magazine,” Dan says. “But you want to make half a million dollars trying to cure kids of malaria and you’re considered a parasite yourself.”

By paying nonprofit workers closer to their for-profit earning potential, charities might better improve the world without making doing well and doing good an either-or choice.

#2. Advertising and Marketing
Over nine years, more than 182,000 people participated in Pallotta’s AIDS Rides and Breast Cancer 3-Day events, raising a cumulative $581 million. That didn’t happen by hanging fliers in the laundromat but by buying full-page ads.

#3. Taking risks on new revenue ideas
If Disney risks millions of bucks on a film that flops, we shrug.

But if a nonprofit spends a million bucks on an idea that doesn’t reap a huge return—and quickly—we cry foul. This isn’t to say nonprofits are above wrongdoing, but that fear of failing and facing backlash keeps them doing what’s safe and not innovating.

#4. Time
Like I said, Amazon had years to build infrastructure before returning a profit to investors. Might it be wise to give charities more time to produce a return too?

#5. Profit to attract risk capital
Nonprofits can’t attract capital because they can’t be on the stock market. But without capital, they can’t scale. Since 1970-2013, 144 nonprofits made more than $50 million in annual revenue to compared to 46,136 for-profit businesses.

In Pallotta’s 2013 TED Talk, he traces this imbalance back to the Puritans, who used charity as a way to do penance for making money. “Financial interest was exiled from the realm of charity,” he says.

Using a business-like model, Pallotta turned $50K in initial funding for AIDS response into $108 million, and $350K to end breast cancer into $194 million. By investing in growth—not giving the initial funding straight to research—Pallotta’s organization could give much more.

But his model was attacked and his organization closed.

And 350 people lost their jobs because they were labeled “overhead.”

The choice is ours as to which epithet we prefer:

“We kept charity overhead low” or “We changed the world.”

P.S. Make sure to read the follow up I wrote to this here.