One of the biggest trends in charity in the last few years is venture philanthropy, through which individuals invest in charities that make important social change while also generating a return. While venture philanthropy can make a significant impact, it also comes with its own pitfalls.
Philanthropists may be tempted to evaluate charities in the same way that they consider for-profit companies. After all, venture philanthropy hopes to generate a return that can be reinvested for an even greater impact. However, for-profit companies operate very differently than philanthropies. Creating environments that make charities act more like industry can create significant problems in the long run.
While venture philanthropy can be a good thing, people need to make sure they do not engage in certain practices that are acceptable in the for-profit world. Four of the most tempting practices to avoid are:
1. Emphasizing short-term results.
In the startup world, attracting investors often depends on the ability to show results in a relatively short period of time. When a startup can get a minimum viable product out the door quickly and then get customer feedback to improve it, they can show investors that they are growing and building revenue.
However, the same approach does not work in philanthropy and favoring organizations that can make an immediate impact can prove dangerous. Short-term solutions often do not address the deeper issues at hand.
For example, funding homeless shelters can be attractive, but working to solve the structural causes of homelessness will have a much longer-lasting impact. The problem is that the latter approach involves much more time and investment without any sort of immediate payoff.
Emphasizing short-term results can cause other issues, too. This trend could cause nonprofits to push their “products” out the door faster, which could in turn have negative consequences for the vulnerable populations they are trying to serve.
Looking for short-term results can also cause philanthropists to favor organizations with a clearly defined “customer” that can offer feedback. This may cause them to overlook equally deserving entities that are focused on research or that have more complex constituencies.
2. Speaking rather than listening.
In the business world, projecting confidence is important. Business schools teach people to lead conversations and speak assertively. If you are interested in investing in nonprofits, speaking instead of listening can lead to money wasted on projects that are unnecessary or even harmful.
Nonprofits generally need the money they receive from donors, so they will politely listen and likely even take cues from you in order to encourage you to give. However, the nonprofit likely has more in-depth knowledge about the issue it is working to address than you do.
As a philanthropist and investor, you may have more to offer more than money. However, your advice needs to be tailored to the organization’s actual needs. That can only happen when you listen instead of speak. Nonprofits have different cultures, processes, and expertise. Funders need to recognize and respect this fact before they speak.
Likely, when the nonprofit talks about the issues it faces, funders may have some insight. Listening first fosters a dialogue that leads to more effective intervention, rather than time and money wasted on efforts that the nonprofits know will not produce results. Through listening, a better relationship can be built, and better solutions can be found.
3. Thinking about breadth over depth.
Sound investing requires diversification. The best portfolios are those that have breadth and can thus weather changes in the market. As some investments decrease in value, others will increase. Some people take the same approach to philanthropy and donate to numerous charities with the hope that at least one will make a significant impact on an issue.
This approach, some philanthropists have argued, causes people to favor safe giving rather than philanthropy that can produce impactful, lasting results. Effective philanthropy involves significant research. When individuals invest in multiple causes, they may not have the time to conduct this research and instead choose popular organizations exclusively.
Additionally, while financial support is obviously appreciated, philanthropists may have equally valuable nonmonetary contributions to make. When donors sit on boards or otherwise engage with the charities they support, they can have a really significant impact. However, this level of support is difficult to sustain if you are supporting a wide range of causes, especially if philanthropy is not your full-time job. Volunteering time to one or two special causes helps donors really make an impact.
4. Implementing for-profit style evaluations.
In the for-profit world, investments need to be thoroughly vetted so that investors know both the risks and potential benefits. Due diligence can easily take months and investors may still walk away from an opportunity after investing that much time. Some funders feel the necessity to put nonprofits through a similar, rigorous analysis.
It may be tempting to ask to meet with the entire nonprofit team and scour the organization’s financial data. While this tendency is driven by good intentions, it can put a significant burden on nonprofits that are already stretched thin with few resources and overworked staff, especially if you walk away at the end.
Philanthropists need to take a different approach to the evaluation of charitable giving that does not burden the organizations they might end up supporting. A great deal of data about nonprofits is available through organizations like GuideStar and tools like those offered by the Laura Arrillaga-Andreessen Foundation and the Hewlett Foundation. When philanthropists look for information from these sources, they can limit the requests they make of nonprofits themselves while still being rather thorough in their vetting process.