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Social Enterprise is Not the Answer to Fundraising Woes

square pegThere is an article in Forbes this month that bothered me. Carrie Rich, co-founder and CEO of The Global Good Fund, argues that more nonprofits should move from a “donor-driven organization” to a “revenue-producing social enterprise.” Instead of “relying on donor funding” more organizations should “create revenue-producing services.” In essence she is encouraging more nonprofits to figure out how to sell their services.

The problem with her argument, though, is that it encourages nonprofits to think one-dimensionally about funding sources instead of developing an overall financial strategy that may or may not include earned income.

Rich’s argument is that earned income, or what she calls “revenue-producing social enterprise” is a more sustainable and impactful way to create social change. She goes on to list all sorts of reasons (10 actually) that revenue generation (or earned income) is better than contributed income. These reasons include that revenue generation allows nonprofits to be “more responsive to change,” “attract employees who seek growth,” “accelerate growth and impact,” “become more financially sustainable and mature,” and the list goes on.

Rich is echoing a repeated dichotomy in the social change space between traditional, broken nonprofit approaches, and new, more sustainable and impactful social entrepreneurship approaches. Her line of argument stems from a distaste for fundraising done badly.

Believe me, I get it. Fundraising is broken. But just because traditional fundraising is flawed doesn’t mean we should eschew all contributed income.Yes there is deep dysfunction within the nonprofit sector – I talk about it all the time. But the answer is not to simply dismiss the sector and all of its trappings (and revenue sources).

Let’s remember that a nonprofit organization is often created to provide a public good that is not offered by the market. In other words, nonprofits are selling what someone is unable to purchase.

Thus, nonprofits typically have two customers:

  1. Those who benefit from the services (“Clients”), and
  2. Those who buy the services (“Donors”)

When social change organizations are able to conflate the two – when the client becomes the buyer – a social enterprise is born. And while that is great, it is rarely the case. Therefore, market-based solutions will never provide all the social change we need.

Every social change organization must analyze their overall strategy and develop a financial model that best delivers on that strategy. That financial model may have earned income elements, contributed income (individual, corporate and foundation grants) elements, government funding or, most likely, some combination of all of these. And every nonprofit should at least analyze whether earned income is right for their financial model. But social enterprise will never be right for all nonprofits, or even a majority of them.

Instead of completely throwing out “traditional charity models,” let’s make them better. Rich argues that one of the many reasons earned income is better is that it allows organizations to “afford the best technologies to help them succeed.” If social change organizations need more capital investments for technology (which they definitely do) then let’s make capacity capital ubiquitous in the sector. But let’s not erroneously assume that more earned income equates to more capital investment.

Let’s move past these social enterprise vs. charity debates and instead focus on helping social change organizations develop smart, sustainable financial engines that include the right revenue (and capital) mix.

Photo Credit: Yoel Ben-Avraham

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What Social Change Requires

ConstitutionIt is obvious to most in this country that our political system is quite broken. A gridlocked Congress, a shilling mainstream media, a checked-out electorate, and the list goes on. But last week I saw some hope.

I participated in a really interesting gathering in Baltimore hosted by the William and Flora Hewlett Foundation. As part of their Madison Initiative (a $50 million project to “support and improve the health of representative democracy in the United States”) Hewlett brought together 90 nonprofit and government leaders, consultants, journalists, heads of think tanks, and other foundation leaders to connect and analyze.

It was a fascinating few days. Through conversations and design-thinking sessions we were encouraged to stretch our thinking about solutions to the often depressing state of American government. I met some inspiring people who are creating solutions to our broken political system. (A few have agreed to be interviewed on the blog, so stay tuned.)

I am only tangential to this world of political reform, so for me it was interesting to see how conversations happening here can inform social change more broadly.

A few things occurred to me over the course of the three days about what effective social change requires:

Networks AND Institutions
Networks, loose connections of people and groups, exist outside of our 200+ year-old political institutions, but social change happens when networks organize themselves enough to pressure outdated institutions to adapt. This happened in the civil rights movement, recent global democracy movements, and the state-by-state legalization of gay marriage. But when networks and institutions don’t connect, social change doesn’t happen (like in the Occupy movement). So networks must organize enough to influence institutions, and institutions must open themselves enough to let networks in. Social change requires that the two work in tandem.

Millennials AND Boomers 
Echoing Robert Egger’s guest post this past summer on this blog, both Millennial and Boomer generations have a deep commitment to social change and the critical mass necessary to make it happen. But they would be even more effective at creating social change if they worked together, instead of against each other. Millennials need to recognize that Boomers fought for system change in their day (civil rights, women’s rights) and Boomers need to recognize that Millennials are creating similar kinds of system change, just with new tools and technologies. The two must find connections and collaborate more often. And I think Gen Xers (of which I am one) can play a critical role in translating between the two generations.

East/West/Rural/Urban Geographies
This is a huge country and sometimes that reality gets in the way of change. Red vs. blue, rural vs. urban, Eastern time zone vs. Western time zone, coastal vs. flyover states, there are many ways to slice our country. It amazes me how often people focus on geographic differences instead of common values and goals. But true change comes when we break down those walls and have a conversation based on shared values rather than opposing frames of reference. The only way we move beyond impasse is for each side to listen with a completely open mind (free of assumptions and stereotypes) to the other side. And occasionally leave our comfort zone and meet others where they are.

At the end of the day, political reform is no different than any other social change we seek. To create positive change we must move beyond the dichotomies. We have to think much bigger. Perhaps the answer to our political woes is the same as the answer to our other social challenges, as E.M. Forster put it, “Only connect!…Live in fragments no longer.”

Photo Credit: Wikimedia

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Flipping the Default Setting on Philanthropy: An Interview With Kathleen Enright

KE1_websiteIn today’s Social Velocity blog interview, I’m talking with Kathleen Enright, founding president and CEO of Grantmakers for Effective Organizations (GEO). GEO is a diverse community of more than 450 grantmakers working to reshape the way philanthropy operates and advance smarter grantmaking practices that enable nonprofits to grow stronger and achieve better results.

Prior to GEO, Kathleen was at BoardSource, where she was responsible for building public awareness of the importance of strong nonprofit boards. Prior to joining BoardSource, Kathleen was a project manager for the National Association of Development Organizations Research Foundation where she directed a Ford Foundation funded project to encourage collaboration between nonprofits and local governments.

Kathleen speaks and writes regularly on issues of nonprofit and grantmaker effectiveness at national and regional gatherings of executives and trustees and in various publications including Investing in Leadership: Inspiration and Ideas from Philanthropy’s Latest Frontier and Funding Effectiveness: Lessons in Building Nonprofit Capacity. She is also a contributing blogger for The Huffington Post.

You can read other interviews in the Social Velocity Interview Series here.

Nell: GEO has been around for 15 years working to “advance smarter grantmaking practices that enable nonprofits to achieve better results.” In that time, has the work gotten harder or easier? Is the foundation community more effectively contributing to nonprofit results?

Kathleen: We have some new data on that exact question. GEO’s fourth national study of staffed grantmaking organizations is due out next month. The headline is that while the field is moving in the right direction on many fronts, we still have a long way to go.

We appear to have reached a “tipping point” on a few issues. At long last, the majority of staffed foundations in the US report seeking and using grantee feedback to inform their work. As good practices like this one become more common — even expected — it’ll become harder and harder for holdouts to justify the status quo. Similarly, on general operating support — one practice that has stubbornly held steady for years — we’re finally seeing movement in the right direction.

The reality is that there’s a lot of work still to be done. In our last survey we learned that during the economic downturn — when nonprofits needed flexible, reliable, long-term dollars the most — many foundations backpedaled on things like funding multiyear grants. That the new survey shows we’re back to pre-recession levels is a positive step, but we have a long way to go until we’re able to flip the default setting in philanthropy. Achieving this goal means making it so that multi-year, general operating support is the assumption and program officers and grantees need to make a specific case for why a program-restricted or short-term grant makes sense.

Nell: According to the most recent State of the Sector Survey by the Nonprofit Finance Fund, 41% of nonprofit leaders cite long-term financial stability as a top challenge, yet only 9% of them feel they can have an open conversation with funders about operating reserves. How do we bridge that gap and make it easier for nonprofit leaders and funders to talk openly about and invest effectively in financial stability? Do you think foundations’ appetites for capacity investments are growing, or waning, and how do we make capacity investing more appealing to funders?

Kathleen: Our field study will expand on this point as well, but the perception gap is huge. Funders declare themselves willing to talk about financial health, but grantees still don’t feel safe to do so. My takeaway here is that foundations need to do much more to signal to grantees that they are open to having such a discussion. Closing this perception gap won’t happen in one go. We need to find ways to normalize these conversations, including the questions or fears a grantee might have.  We need to be conscious that sometimes our funding practices act as nonverbal cues that close down conversations about financial stability. It’s hard to believe a funder is earnest about discussing financial health if they aren’t already doing the basics, like offering flexible, long-term support. Ensuring that nonprofits feel empowered to have these conversations will only happen through word and deed.

It really comes down to a fundamental shift in how many funders think about nonprofits. When a funder thinks about grantees as merely suppliers who offer what amounts to an appealing product that leads to a bit of tunnel vision. However, when grantees are seen as crucial actors in efforts to create lasting change on the complex social challenges a funder cares about, they are much more likely to take a broader, long-term perspective.

In terms of the appetite for capacity investments, we held a series of “listening sessions” with nonprofit leaders last year to learn more about their experiences with capacity-building. Most staffed foundations in the US do provide some sort of capacity building support, so some of what we wanted to uncover is how to make the most of those investments. Based on those sessions and 15 years of experience on this question, we believe that by taking an approach that is contextual (tailored to the unique needs of the grantee), continuous (taking the long view), and collective (considering how the parts add up), grantmakers will be well positioned to provide capacity building support in ways that effectively support nonprofits to achieve lasting impact.

Nell: In recent years there have been studies and efforts aimed at getting more donors to channel donations to nonprofits that can prove results. How optimistic are you that we can change donor, particularly foundation, behavior toward funding based on results? And what will it take to get there?

Kathleen: It’s reasonable for foundations to want to make sure their funding leads to impact. And with technology making data collection easier, it’s natural that there’s a lot of buzz in the field about evidence and results. But it’s complicated terrain.

Not only do we lack a shared agreement on what proof or evidence means, most grantmakers and their nonprofit partners are focused on complex social problems with no easy answers. There was an excellent article in Forbes on the limitations of what the authors call “moneyball philanthropy,” where too great on an emphasis is placed on a clear or measurable cause and effect between the work and the impact. The bottom line is that if foundations only fund those things with “proven” results, they’ll miss opportunities to support important work on systems that has the potential to be game-changing.

Job number one in our view is to understand what’s working, what’s not and how we can continuously learn and improve. It often means taking risks and understanding what went wrong. The reality is that many nonprofits are ill-equipped to build the appropriate information infrastructure or conduct evaluations because they haven’t received the financial support to enable them to build that capacity.

So before we move too far in the direction of funding only based on results, grantmakers must consider how we can help grantees build their sophistication around evaluation. It’s a first step — and an incredibly powerful one — to help nonprofits grow their impact. This may mean providing flexible funding or tailored funding to support the development of evaluation plans, staff training or paying for third party evaluators. GEO members like the Bruner Foundation, Hartford Foundation for Public Giving, and Mile High United Way have worked diligently over many years to strengthen nonprofit capacity for evaluation. Their work suggests that such investments often have much farther-reaching positive effects on the organizations they support. We produced a short video on the Hartford Foundation’s work to build grantee evaluation capacity (which actually draws from the Bruner Foundation’s impressive body of work) that you can find here.

Nell: Foundation money only accounts for about 2% of all the money flowing to the nonprofit sector, which is a fairly small piece of the funding pie. Is there a role, and if so what is it, for foundation leaders to lead other larger sources of funding in the sector (government, individual) toward more effective giving?

Kathleen: Institutional philanthropy has incredible insights and wisdom that could be enormously helpful to help steer other dollars intended for the public good.  One of our newest board members, Peter Long, President and CEO of the Blue Shield of California Foundation, is an advocate for creating more “open source philanthropy”. His idea is that, as a field, we’ll be able to make faster progress if we’re generous with our thinking. What if every funder interested in improving health outcomes could benefit from the Robert Wood Johnson Foundation’s wealth of knowledge? This is especially important for newcomers, as building this open knowledge base both gives them a place to start from as well as gives them an opportunity to build our collective knowledge. Being “experts” in philanthropy is a role that foundations can — and should! — embrace.

Another way foundations can show leadership is by pooling resources to address complex issues. The Washington Families Fund is an example of just how powerful it is when foundations come together and work with public entities. As a public-private partnership, the Fund is capitalizing on the resources of foundations — including GEO members like the Campion Foundation, Bill and Melinda Gates Foundation, Medina Foundation, Meyer Memorial Trust, and Seattle Foundation — coupled with the on-the-ground capacity of government entities like the Washington State Department of Commerce to reduce homelessness in their region by 50 percent by 2020. Examples like these demonstrate just how powerful public-private partnerships can be.

Photo Credit: GEO

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How Do We Fund Nonprofit Leadership Development?

LeadershipSomething pretty exciting is going on. Perhaps I’m an eternal optimist, or I’m suffering from confirmation bias, but it seems to me that more funders are starting to talk about investing in the capacity of nonprofits, particularly around nonprofit leadership development.

The Stanford Social Innovation Review kicked off a new blog series this month focused on the topic. Over the next three months, six foundation leaders will blog about why they have made investments in the leadership development of their nonprofit grantees and what the return on investment has been.

This is phenomenal because the more we talk about and demonstrate the return on investment of nonprofit leadership development, and really of any capacity investments, the more likely we will be to see other funders follow suit.

As Ira Hirschfield, president of the Evelyn and Walter Haas, Jr. Fund, points out in the inaugural post in the new SSIR series, less than 1 percent of overall foundation giving went to leadership development between 1992 and 2011, while the private sector allocates billions of dollars to it.

Why are we not investing in our nonprofit leaders? If we truly want to create change to some of our most pressing social issues don’t we need the strongest, most effective leaders possible?

As Hirschfield puts it so well:

Foundations ask a great deal of the organizations we support…in short, we hope grantees will deliver transformational results for the people and places they serve. So it’s striking how seldom we back that up with funds to help organizations develop and strengthen the ability of their leaders to meet those high expectations. People are not born with everything it takes to manage and motivate a team, build coalitions, and lead change…Leaders who have the opportunity to reflect on their strategies and hone their skills make better choices, develop innovative solutions and forge stronger collaborations. This is what leadership development is about—and to the extent that foundations decide it is important and fund it, then we and our grantees will be better positioned to achieve our goals for impact.

In other words, foundation funding will go further if funders also invest in the leaders of those organizations they fund.

It seems like a no-brainer. And it is a no-brainer in the for-profit world. But as we so often do in the nonprofit sector, we are selling the sector, and its leaders short.

But it is not enough (nor are we anywhere near it anyway) for funders to understand the need for investing in nonprofit leaders. Nonprofit leaders themselves need to stop apologizing and start demanding (in a nice way!) investment in their own capacity. And leadership development is only one of the many areas in which nonprofits need capacity investment. Nonprofits also require fundraising expertise and staffing, program evaluation, technology and systems, and the list goes on.

So if we are to have any hope of moving this topic beyond the blogroll, nonprofit leaders and funders need to start having better conversations about what it will really take to accomplish their joint impact goals. Because if, at the end of the day, we are all looking to achieve more impact, then capacity to deliver on that impact must be part of the conversation.

If you want to learn more about capacity investments from both the nonprofit and funder sides, download the Power of Capacity Capital book, and if you want to learn more about nonprofit leadership, download the Reinventing the Nonprofit Leader book.

Photo Credit: Clinton and Charles Robertson

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Big Cities Don’t Own Social Innovation

social innovationWe spend a lot of time in this country talking about innovation, particularly on the East and West coasts. But I was reminded recently that innovation can happen anywhere, even in the “fly over states” (which is such an obnoxious term, by the way).

I was in South Boston, Virginia last week to deliver a Financial Model Assessment to the Halifax Educational Foundation. They fund the Southern Virginia Higher Education Center (SVHEC), which is a fascinating model of higher education innovation.

Almost 30 years ago community leaders in this tiny, rural town 75 miles from Raleigh, North Carolina realized that their primary industries of tobacco, textiles and furniture were fading fast. In order to revamp their local economy, they decided to create a hybrid higher education institution (part community college, part incubator, part workforce development site, part educational broker) that would prepare the next generation workforce.

The SVHEC renovated two 150-year old abandoned tobacco warehouses (one to LEED certification) into 100,000 square feet of high-tech classrooms and labs featuring advanced machining and simulation technology focused on nursing, advanced manufacturing, 3-D modeling, and the business of art and design. Their goal is “to re-tool southern Virginia’s rural workforce for jobs in the New Economy.”

They have created an example of what innovative higher education can look like. The video below describes the center, which although located in the middle of rural America, rivals most large city higher education institutions:

The SVHEC recognized early the threat that changing times posed to their community and created a solution that not only recycled beautiful old buildings, but more importantly breathed new life into a rural economy on the brink of extinction. Theirs is truly a model for innovative rural economic development.

And it is testament to the fact that social innovation can happen anywhere.

Because social change doesn’t require big names, huge ideas, or deep pocketbooks. It simply demands a confident vision and the leadership and tenacity necessary to execute on it.

Photo Credit: SVHEC, Steve Helber

 

 

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Guest Post: The Language of Crowdfunding, Philanthropy and Impact Investing

dictionaryNote: Fifth and last in my list of guest bloggers this summer is Laura Tomasko. Laura is a network developer at the Council on Foundations, where she follows trends related to private capital for social good. Here is her guest post:

Perhaps like some of you, I dedicate a good portion of my internet reading to blogs like Social Velocity, Re: Philanthropy, and Philanthropy 2173. When I am browsing a blog unrelated to nonprofits, philanthropy, and impact investing, I do a double take when I come across a topic from my professional sphere.

One of those non-work related blogs that I read is Popville, which chronicles activities in Washington, DC neighborhoods. This July and last, two local businesses sought financing through crowdfunding platforms, and reached out to Popville readers for support. Both cited the community focus of their enterprises as reasons to financially support their efforts. What ensued in the comment thread of both posts provides a snapshot into how those outside of the philanthropy and impact investing field understand and discuss crowdfunding, charitable giving, and investing with the intention to generate social and financial returns.

Last year, a local business named Pulp posted to Popville to request “donations” to improve the store and website, including repairs to fixtures, new paint, windows, and other related costs. Even though they said they wanted donations, Pulp actually sought no-interest loans, a distinction clear on their Clovest crowdfunding page but not on Popville. Confusion and opinions swarmed the comments section as people tried to figure out whether Pulp wanted a donation or a loan, and shared their musings on the whole situation.

This July, another local business, Three Little Pigs (TLP), used Popville to promote their Kickstarter campaign, accurately requesting donations for infrastructure improvements to enhance the business that will allow them to build a community space on their third floor. In exchange for donations, TLP offers gifts, like a pound of maple-cured bacon, to donors.

The comments to both posts provide insight into how local residents react to financial requests from community-focused small businesses. Such requests may increase given the passage of the JOBS Act and the Securities and Exchange Commission proposed rules that allow non-accredited investors to get an equity stake in a local business through crowdfunding platforms.

Here are common themes about local businesses raising money on crowdfunding platforms raised by commenters:

  1. Is This Charity?
    While both businesses used words associated with philanthropy to appeal to the charitable sense of local residents, neither provides a charitable tax benefit to the readers. This created confusion and commenters wrote in to ask whether the business would provide a tax benefit or repay the money. One Pulp commenter asked, “Does anyone know what the tax implications are to this approach? I doubt they realize the tax-exemption you typically see with donations to non-profits. Or do they? Could this be an interest free loan as well as a tax-free donation?”Questions such as this one suggest that those using crowdfunding platforms to raise money need to clearly state what they ask of their potential supporters and what they will get in return. For example, they should distinguish between how the funding will benefit the community and whether it is a charitable donation, a donation without a tax benefit, or loan.

  2. Should You Donate to a For-Profit?
    Many commenters bemoan the idea of a for-profit business asking for donations instead of raising the necessary capital through the sale of goods and services. There seems to be an expectation that the business should either flourish or fail based on the value of the good or service, and donations should not supplement either course. While some were happy with the idea of donating to a for-profit, most did not support the concept.

  3. What About Traditional Financing?
    Several wondered why the businesses did not get loans through banks or pay for these expenses using a credit card. Others supported crowdfunding as a way to get around the hurdles of traditional financing. While one TLP commenter in support of traditional financing noted, “There are plenty small business loans and lines of credit they can apply for at the mentioned banks,” one in favor of crowdfunding stated, “If you can’t meet every requirement, the major banks will usually turn you down due to high risk.”

The confusion and concern that arose from these two crowdfunding experiences suggest that language matters and concepts like crowdfunding and impact investing are still new to people accustomed to distinguishing charity, which generates social benefit, from business and investing, which seek to generate financial revenue.

In addition to local businesses on crowdfunding platforms, mainstream media use language associated with charity to describe impact investing activities. An interesting example is coverage of the bridge loan that Laura and John Arnold made to the National Head Start Association during the 2013 government shutdown. Covering the story, the New York Times uses the headline, “$10 Million Gift to Help Head Start Through Shutdown” and Politico writes, “Philanthropists pledge $10 million to restore 7,000 Head Start seats.

Tucked within both articles, after terms like “donation” and “gift,” are brief mentions that the money might be paid back as a no-interest loan if government restores funding after the shutdown. However, to those scanning headlines and not reading the entire article, it is not clear that the Arnolds have made an impact investment in the form of a bridge loan to the Association.

With increased interest in social entrepreneurship and impact investing, many use charitable language to describe financial transactions ranging from donations to impact investments. Until the concept of impact investing becomes as mainstream as charitable giving, taking the time to distinguish between the two could increase awareness, and eventually adoption, of both traditional and untraditional forms of financing for social good.

Language matters and those raising capital from local residents, as well as those in the media writing about these transactions, should differentiate between the desired financial transaction and its charitably-minded purpose. Crowdfunding may bring impact investing to new audiences, and let’s make sure that the message gets there clearly and accurately.

Photo Credit: zeh fernando

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How to Fundraise for a Stronger Nonprofit [Slideshare]

In order to add to the growing Social Velocity Slideshare library, I’m delighted today to offer How to Fundraise for a Stronger Nonprofit.

If you want to get your nonprofit out of the (all too common) starvation cycle of never having enough money to achieve your goals, you must raise capacity capital. Capacity capital is not the day-to-day revenue you need to keep your doors open. Rather, capacity capital is a one-time infusion of significant money that can help you grow or strengthen your nonprofit. It is money for things like: technology, revenue-generating staff, systems, a program evaluation.

This Slideshare helps you understand capacity capital and how to raise it. And if you want some additional guidance for launching your own capacity capital campaign, download the Launch a Capacity Capital Campaign Step-by-Step Guide.

You can see the growing library of Social Velocity Slideshare presentations here.

How to Fundraise for a Stronger Nonprofit from Nell Edgington
Photo Credit: 401kcalculator.org

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Making Nonprofit Giving Smarter: An Interview With Jacob Harold

Jacob HaroldIn today’s Social Velocity blog interview, I’m talking with Jacob Harold, CEO of GuideStar, the clearinghouse of information on nonprofits. Jacob came to GuideStar from the Hewlett Foundation, where he led grantmaking for the Philanthropy Program. Between 2006 and 2012, he oversaw $30 million in grants that, together, aimed to build a 21st-century infrastructure for smart giving. Jacob was just named to the 2014  NonProfit Times’ Power and Influence Top 50.

You can read other interviews in the Social Velocity Interview Series here.

Nell: It has been over a year since the Letter to the Donors of America about the overhead myth. Where are we today in getting donors (and board members) to understand that overhead is a destructive mindset? 

Jacob: I’m glad to report that the response to the first overhead myth letter far exceeded our expectations. Hundreds of articles have been written about the letter. It comes up almost every time I hold a meeting or give a talk. For at least a few people, I think it’s been a deep affirmation of something they’ve known a long time. And, indeed, many others in the field have been working on this: the Donors Forum, Bridgespan, the National Council on Nonprofits, and others.

But we also know that we have a long road ahead of us. The overhead myth is deeply ingrained in the culture and systems of the nonprofit sector. It will take years of concerted effort for us to fully move past such a narrow view of nonprofit performance to something that reflects the complexity of the world around us. But it’s essential if we want to ensure we have a nonprofit sector capable of tackling the great challenges of our time.

Nell: The Letter to the Donors of America was obviously focused on the donor side of the problem, but how do we also change the mindset of those nonprofit leaders who perpetuate the Overhead Myth in their reporting, conversations with donors and board members, etc.?

Jacob: This is a critical aspect of the challenge. Every year nonprofits send out something like one billion pieces of direct mail to donors that prominently display their organization’s overhead ratio. It’s no wonder that donors think that’s a proxy for performance—we’ve trained donors to think so!

That’s why the CEOs of Charity Navigator and BBB Wise Giving Alliance and I are currently working on a second overhead myth letter—this one to the nonprofits of America. We’re still finalizing the text, but in it we will be calling on nonprofits to be more proactive about communicating the story of their programmatic work, their governance structures, and the real costs of achieving results. And, more, we want to recruit nonprofits to help us retrain donors to pay attention to what matters: results. In the end, that means that nonprofits have to cut the pie charts showing overhead versus program—and instead step up to the much more important challenge of communicating how you track progress against your mission.

Nell: At the Social Impact Exchange Conference you announced some pretty exciting plans with the GuideStar Exchange to, in essence, create a marketplace of information about nonprofits so that the best nonprofits receive more resources. Talk a little about your plans for the Exchange, and most importantly, how you plan to bring nonprofits and donors there.

Jacob: The GuideStar Exchange is our mechanism for collecting data directly from nonprofits. By going straight to nonprofits we can build on the data we already have from the IRS Form 990. The 990 is a regulatory document, it’s not meant to offer a comprehensive view of nonprofits and their programs—that’s what we’re trying to do with the Exchange. And it also lets us get information much more quickly!

So far we’ve had great success. More than 100,000 nonprofits have shared data with us through the GuideStar Exchange and more than 38,000 have reached one of what we call our participation levels—Bronze, Silver, or Gold. But we have a long way to go if we want to approach a comprehensive view of the marketplace. So we’re adding new incentives for nonprofits to share data through the Exchange, building new ways to distribute that data through other channels and improving the user interface to make the process easier. Right now we’re collecting quantitative financial data and qualitative programmatic data but later this year we’re going to release a tool for collecting quantitative programmatic data, too.

This comes back to the overhead myth campaign. If we’re going to ask donors to go beyond the overhead ratio when considering nonprofits, we have to offer an alternative. GuideStar Exchange is a critical part of that alternative: a chance for nonprofits to tell their story in a structured way that forces them to articulate in clear terms what they’re trying to accomplish, how they’ll get there, and how they’ll measure progress along the way.

Nell: The Money for Good reports that came out a couple of years ago rather discouragingly found that the majority of donors don’t give based on nonprofit results. With the GuideStar Exchange you obviously think that is changeable, so how do we go about changing donor interest and behavior?

Jacob: Well, I had a different read of that data. It is absolutely true that the Money for Good research showed that most donors don’t give based on nonprofit results. But it also showed that a significant portion—about 15%, depending on how you cut the data—do. That may not seem like much, but that represents 30 million people responsible for close to $40 billion in annual giving. So there’s already a huge unserved market, even if it represents a small portion of the entire system of philanthropy.

And at GuideStar we see this every day. We have 7 million unique users a year. And that’s just on our website, our data was used another 22 million times on other platforms last year through just one of our distribution mechanisms. So people want data. And as we get more and more programmatic data—data that is oriented towards results against mission—I’m absolutely confident that we’re going to unlock new behaviors among donors, nonprofit executives, journalists, and others. The nonprofit sector is about to enter a new phase, and I think it’s going to be remarkable.

Photo Credit: GuideStar

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