Dan Pallotta: The way we think about charity is dead wrong (2)
Well, you put those five things together -- you can't use money to lure talent away from the for-profit sector; you can't advertise on anywhere near the scale the for-profit sector does for new customers; you can't take the kinds of risks in pursuit of those customers that the for-profit sector takes; you don't have the same amount of time to find them as the for-profit sector; and you don't have a stock market with which to fund any of this, even if you could do it in the first place -- and you've just put the nonprofit sector at an extreme disadvantage to the for-profit sector, on every level. If we have any doubts about the effects of this separate rule book, this statistic is sobering: From 1970 to 2009, the number of nonprofits that really grew, that crossed the $50 million annual revenue barrier, is 144. In the same time, the number of for-profits that crossed it is 46,136. So we're dealing with social problems that are massive in scale, and our organizations can't generate any scale. All of the scale goes to Coca-Cola and Burger King.
So why do we think this way? Well, like most fanatical dogma in America, these ideas come from old Puritan beliefs. The Puritans came here for religious reasons, or so they said, but they also came here because they wanted to make a lot of money. They were pious people, but they were also really aggressive capitalists, and they were accused of extreme forms of profit-making tendencies, compared to the other colonists. But at the same time, the Puritans were Calvinists, so they were taught literally to hate themselves. They were taught that self-interest was a raging sea that was a sure path to eternal damnation. This created a real problem for these people. Here they've come all the way across the Atlantic to make all this money, but making all this money will get you sent directly to Hell. What were they to do about this?
Well, charity became their answer. It became this economic sanctuary, where they could do penance for their profit-making tendencies -- at five cents on the dollar. So of course, how could you make money in charity if charity was your penance for making money? Financial incentive was exiled from the realm of helping others, so that it could thrive in the area of making money for yourself, and in 400 years, nothing has intervened to say, "That's counterproductive and that's unfair." Now, this ideology gets policed by this one very dangerous question, which is, "What percentage of my donation goes to the cause versus overhead?" There are a lot of problems with this question. I'm going to just focus on two. First, it makes us think that overhead is a negative, that it is somehow not part of the cause. But it absolutely is, especially if it's being used for growth. Now, this idea that overhead is somehow an enemy of the cause creates this second, much larger problem, which is, it forces organizations to go without the overhead things they really need to grow, in the interest of keeping overhead low.
So we've all been taught that charities should spend as little as possible on overhead things like fundraising under the theory that, well, the less money you spend on fundraising, the more money there is available for the cause. Well, that's true if it's a depressing world in which this pie cannot be made any bigger. But if it's a logical world in which investment in fundraising actually raises more funds and makes the pie bigger, then we have it precisely backwards, and we should be investing more money, not less, in fundraising, because fundraising is the one thing that has the potential to multiply the amount of money available for the cause that we care about so deeply.
I'll give you two examples. We launched the AIDSRides with an initial investment of 50,000 dollars in risk capital. Within nine years, we had multiplied that 1,982 times, into 108 million dollars after all expenses, for AIDS services. We launched the breast cancer three-days with an initial investment of 350,000 dollars in risk capital. Within just five years, we had multiplied that 554 times, into 194 million dollars after all expenses, for breast cancer research. Now, if you were a philanthropist really interested in breast cancer, what would make more sense: go out and find the most innovative researcher in the world and give her 350,000 dollars for research, or give her fundraising department the 350,000 dollars to multiply it into 194 million dollars for breast cancer research? 2002 was our most successful year ever. We netted for breast cancer alone, that year alone, 71 million dollars after all expenses. And then we went out of business, suddenly and traumatically.
Why? Well, the short story is, our sponsors split on us. They wanted to distance themselves from us because we were being crucified in the media for investing 40 percent of the gross in recruitment and customer service and the magic of the experience, and there is no accounting terminology to describe that kind of investment in growth and in the future, other than this demonic label of "overhead." So on one day, all 350 of our great employees lost their jobs ... because they were labeled "overhead." Our sponsor went and tried the events on their own. The overhead went up. Net income for breast cancer research went down by 84 percent, or 60 million dollars, in one year.
This is what happens when we confuse morality with frugality. We've all been taught that the bake sale with five percent overhead is morally superior to the professional fundraising enterprise with 40 percent overhead, but we're missing the most important piece of information, which is: What is the actual size of these pies? Who cares if the bake sale only has five percent overhead if it's tiny? What if the bake sale only netted 71 dollars for charity because it made no investment in its scale and the professional fundraising enterprise netted 71 million dollars because it did? Now which pie would we prefer, and which pie do we think people who are hungry would prefer?
Here's how all of this impacts the big picture. I said that charitable giving is two percent of GDP in the United States. That's about 300 billion dollars a year. But only about 20 percent of that, or 60 billion dollars, goes to health and human services causes. The rest goes to religion and higher education and hospitals, and that 60 billion dollars is not nearly enough to tackle these problems. But if we could move charitable giving from two percent of GDP, up just one step to three percent of GDP, by investing in that growth, that would be an extra 150 billion dollars a year in contributions, and if that money could go disproportionately to health and human services charities, because those were the ones we encouraged to invest in their growth, that would represent a tripling of contributions to that sector. Now we're talking scale. Now we're talking the potential for real change. But it's never going to happen by forcing these organizations to lower their horizons to the demoralizing objective of keeping their overhead low.
Our generation does not want its epitaph to read, "We kept charity overhead low." (Laughter)
We want it to read that we changed the world, and that part of the way we did that was by changing the way we think about these things.
So the next time you're looking at a charity, don't ask about the rate of their overhead. Ask about the scale of their dreams, their Apple-, Google-, Amazon-scale dreams, how they measure their progress toward those dreams, and what resources they need to make them come true, regardless of what the overhead is. Who cares what the overhead is if these problems are actually getting solved?
If we can have that kind of generosity -- a generosity of thought -- then the non-profit sector can play a massive role in changing the world for all those citizens most desperately in need of it to change. And if that can be our generation's enduring legacy -- that we took responsibility for the thinking that had been handed down to us, that we revisited it, we revised it, and we reinvented the whole way humanity thinks about changing things, forever, for everyone -- well, I thought I would let the kids sum up what that would be.
Annalisa Smith-Pallotta: That would be
Sage Smith-Pallotta: a real social
Rider Smith-Pallotta: innovation.
Dan Pallotta: Thank you very much.