In 2013, Dan Pallotta gave a TED-talk that became one of the Top 20 TED-talks in history. Based on his experience running nonprofit organizations, Dan exposed the darker side of philanthropy, revealing the unusual – and unfair – constraints under which nonprofits are required to operate to fulfill their missions.
Based on his personal experience and those of other leaders in the nonprofit sector, Dan shines a light on the financial, regulatory, and social challenges faced by philanthropic ventures. In particular, he examines the requirement that charitable organizations must dedicate donated funds to specific uses dictated, not by their organizational needs, but by the donor of the money. When contributions are earmarked only for one aspect of the mission – to only purchase food, to use an example close to home – it leaves holes in the budget that organizations must scramble to fill, often to the detriment of their efficiency and ability to achieve their social goals.
To continue with our own example, it’s very nice to donate money to buy food; you know your money is specifically feeding hungry children, and that’s exactly what you want. But money that can only be used to purchase food can’t be used to lease another warehouse in a new service area, hire people to staff it, buy delivery vehicles, pay for repairs to the forklift, or attract top talent at competitive rates to manage and grow the mission. So many organizations are expected to scrape together their organizational costs or – worse yet – operate entirely on a voluntary basis, that their ability to enact real change in the world is severely impacted.
For-profit businesses have countless ways to make money: sell products, offer shares, take out loans, seek investment capital; the opportunities for financial enrichment are nearly limitless. But for nonprofits - who may not sell products, who may not list on the stock exchange, who can’t qualify for a loan due to the fluctuating nature of donations, and who can’t even use the money that is donated to fund all areas of the organization – operational costs can sink a mission before it can really even begin to make a difference in the community.
Watchdog efforts aren’t necessarily a bad thing – certainly there is plenty of opportunity to mismanage funds in any organization – but criticizing nonprofits for overhead ratios (the percent of budget devoted to operational costs vs mission-focused spending) does more to limit philanthropic efforts in this country than it does to protect donors’ money. Without the funds to grow, charitable organizations can’t meet the ever-increasing demands for help. As government funding for housing, food assistance, and education shrivels, more people fall into poverty, more philanthropic help is needed, and organizations can’t generate enough charitable gifting to keep up with increased need.
It's a vicious system, and it only hurts those who need help the most. But it can be changed. Here are some of Dan’s ideas:
Think Like a Business: Allow charities to pivot to earned revenue, customer service, and market generation.
Invest In Overhead: Destigmatize operational spending so nonprofits can attract the talent and scale the efforts that can make a huge difference to growth, innovation, and impact.
Embrace “Venture Philanthropy”: A concept coined by John D. Rockefeller III in 1969, in which venture capital “invests” in new nonprofit projects with the goal of growing and expanding the mission. Depending on the project, this can become lucrative for both investors and the charity, which is able to use the money generated from the project to serve its core clientele.
Interested in the changing landscape of charity? Here are more resources:
Uncharitable
· Brody, Liz. Entrepreneur, “How Nonprofits Are Flipping the Script With ‘For Profit’ Strategies to 10X Their Impact”, May 20, 2024.
· Fass, Amy. Stanford Social Innovation Review, “What the World Gets Wrong About Nonprofits”[link], June 7, 2022.
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