The nonprofit sector tries to solve big problems. So why don’t investors don’t make “big bets” on them?
Nell Edgington recently asked: Why Don’t We Make Big Bets On Nonprofits? The nonprofit sector deals with trillion dollar-size problems (poverty, struggling public education system, rising income disparity). They require trillion dollar-size solutions. The size of these solutions requires investors making “big bets.” Yet few do. Why?
I work in the nonprofit sector. I see three reasons investors don’t make big bets on us.
First, few nonprofits think systems. Big problems are systemic. They require systemic solutions. Nonprofits rarely think this way. They alleviate some of the harm caused by the system, but few (if any) have a plan to end systemic problems, like poverty.
By failing to think systems, most nonprofits are unknowingly politicized. They lean left (redistribute income) or right (a rising tide lifts all boats). Redistributing income assumes the poor don’t want to work. But they do, writes Oren Cass in his new book, “The Once and Future Worker.” A rising tide assumes everyone has a boat. The poor don’t. Either way, nonprofits lack an effective plan for making big changes because politics is downstream. The occasional big bet that they receive usually comes from a politicized investor.
The third reason investors don’t make big bets is nonprofits lack the infrastructure to make systemic changes. Most wouldn’t know what to do with a large gift—a point Alana Semuels makes in the Atlantic. After the Haiti earthquake, the Red Cross reportedly squandered the half a billion it received in donations. It lacked the infrastructure—high-performing staff, systems thinking, and technical expertise—to apply systemic solutions.
This is why many of the world’s wealthiest philanthropists create their own nonprofits. Some channel their funds through the Giving Pledge, where 184 philanthropists have pledged to give away half of their net worth before they die. But the results are mixed.
Take Paul Allen, co-founder of Microsoft. He signed The Pledge in 2010. At that time, he was worth $13.5 billion. Allen died in October, having given away just 2 billion. But his wealth had grown to $20 billion—48 percent more than he was when he signed the pledge in 2010. Allen didn’t make any big bets on nonprofits.
But he did make big bets elsewhere. Since 2010, Allen bought the Seattle Seahawks and the Portland Trail Blazers. He became a minority owner in the Seattle Sounders. He purchased a stake in DreamWorks. Allen invested where he expected to make a return.
And therein lies a win-win solution. Impact investing—stakeholders getting a return on their investment. The economic driver is profitability. If nonprofits thought systems and had the necessary infrastructure, they could get a seat at the table, advising impact investors so that we see profitability with social responsibility, a rising tide for all.
This win-win could end systemic poverty in Baltimore. Under Armour is headquartered in Baltimore. The company is building its new headquarters, part of the $5.5 billion dollar Port Covington project. The City of Baltimore has pledged $600 million to improve infrastructure. Both expect a return on their investment. The city envisions increased tax revenues. Under Armour, increased profits. But what about the poor?
They lose—at least as the project currently stands. Port Covington will increase property values, driving out those who can barely afford to live in the area. It’s unlikely that the rate of systemic poverty in Baltimore, climbing since 1970, will decline.
A win-win solution would solve this problem. It establishes the necessary hard and soft infrastructure for making new cities. Hard is profitable businesses, utilities, engineering, technology and public policy. Soft is finance, resilient families, education, the arts. Soft could include the faith community—if it thought systems and infrastructure.
The money is out there. But “no one wants to be the one who made a big bet and lost,” writes Ray Madoff, a professor at Boston College Law School who studies philanthropy. It is more a question of nonprofit leaders having the organizational structure and high-impact staff capable of assisting private/public partnerships that create flourishing cities. This is where investors make big bets. It’s a win-win.
 Issa Baluch and Jon Vandenheuval, Africa Risk Dashboard: Mitigation Architecture for Investors From Lessons Learned the Hard Way (Headline Books, 2017).
Thanks for this Mike! I will share this widely with my friends working in non-profits.
Thank you, Rochelle. Let’s see if we can get some traction with them.
I find myself lacking confidence in most non-profits because I don’t think they are effective stewards of the funds given to them. The proportion of funds given to the actual recipient versus the funds dedicated to administration and fundraising seems to be to small most likely due to a lack efficiency as well as vision. Their governance is often backed by insular boards who more or less rubber stamp the initiatives of the non-profit leadership.
Those that embrace great ideas and thoughtful approaches to “make a difference” in this world are not equipped with the leadership or structure to implement their ideas.
My favorite question to ask many non-profits seeking a donation is, “If you were blessed to receive a donation of (pick the number based on their current contribution total and triple it)how would it “turbo charge” your mission?” I have met none that have a cogent and compelling response to that question and certainly don’t have the talented leadership on board to administer such an increase in giving in a thoughtful and strategic manner.
I have no doubt why Gates and Buffet don’t trust others to administer their billions in a compelling manner.
During the Reagan era there was a movement to move away from government sponsored welfare initiatives and a desire t promote “faith-based” charitable initiatives. Unfortunately, I don’t think the public in general has a great deal more confidence in these charitable “faith-based” organizations than they do in government sponsored initiatives.
Until these “faith-based” organizations attract the best minds and leaders in the world today to their cause, I don’t anticipate much change. It is discouraging that we need to rely on second and third string leaders to execute these important endeavors. I look forward to seeing the results of the Gates Foundation because I think they are thoughtfully assembling some of the best leadership to their organization and they are strategic about picking projects where they can make a noteworthy impact on our world.
We often lament about how the church has lost its influence as the culture difference maker in our world. Centuries ago it was the hub of each town’s educational and healthcare initiatives. And yes, it did have the “systems” in place to influence the world in many jurisdictions in ways that no other institution could. It often attracted the best talent and minds in the world. Why? It was one of the only “systems” with a magnitude that was truly world-wide. That is not the case today. In fact, the church functions in a rather crowded field often led by many businesses that can adeptly reach across political and cultural boundaries.
The question we need to ask ourselves today, is the church equipped to attract the best minds, leaders, and resources? Does it or its para-church cousins have the administrative and strategic leadership to truly be agents of flourishing at a magnitude that makes consequential differences? Is it going to be outmatched by some of these other institutional players?
Should the church, instead be focused on offering our world a “brush” with the power of God’s love and grace in such a compelling way that the by-product is parishioners who are preoccupied with living in the Kingdom in the here and now for the sake of others?
I agree with Tim (and Mike) that most nonprofits can’t handle large influxes of money, but is that their fault? Companies who see growth spurts, rarely ride them to new levels very well.
Another problem with the current nonprofit model is the dumbing down of problems so donors are not scared away. Samaritan’s purse is criticized for their Operation Christmas child program because it does not address the systemic needs of the poor. But OCC is easy to sell and makes donors feel good, so it is popular. Less popular is S/P’s other programs that provide clean water and animals to farmers. Too difficult to sell…:-(
You might be onto something here, Mike, but it’s hard to tell. The top half of the article perpetuates the category error around the term “investment.” As far as I am aware, there are NO nonprofits that offer a return on investment because they are by definition non-profit. They solicit donations, not investments, the latter seeking a positive return (though obviously not all achieve one).
Your points about systemic thinking and infrastructure are good, but my head was still spinning about your misuse of the term “investment.” Further down you start to argue (I think) for for-profit enterprises that solve some of the big problems non-profits seek to address, but you don’t give any examples. Surely there are a few out there. Such a venture could truly seek investors (not donors), though they obviously wouldn’t be 501(c)3 organizations.
David is correct, an “investment” seeks a material result. A donation usually doesn’t. Perhaps too many NPO’s seek “donations” instead of “investments”, which is why some have trouble attracting the big bet.
ROI can be realized when “investing” in a NPO. For example, let’s say a local business owner invested money in a local non-profit whose mission was to end systemic poverty in their city. That NPO happens to be strategic and successful in working with the local institutions to implement systems that reduce the population living in poverty in that city from 10% to 5%. Our hypothetical city now has thousands more people living above the poverty line; more disposable income; increase in commerce; increase in property values; increase in tax base; a more attractive city to future businesses/entrepreneurs, etc. All are potential ROI for the local business owner/investor/resident.
A more concrete example is charity water. Invest in a water project and they promise to prove and monitor the specific project you fund with GPS coordinates on google maps, the # of people the project is serving, and remote sensors to ensure water is always flowing. This information and transparency is an expected return on your investment.
Of course there’s risk with all investments. The NPO’s that are more successful at implementing systemic solutions to the systemic problems they seek to solve would be less-risky investments. And maybe more attractive to the big betters
Thinking of my past 15 years of nonprofit experience, you make some valid points, but a few things may be missing. Yes, most nonprofits lack robust systems and systemic thinking. The explosion of nonprofits in the past 10-15 years has brought more specificity to attacking certain issues (through diverse methods). Imagine if collaboration and partnership had been infused along the way.
Instead, most nonprofits focus on uniqueness in order to attract donors (often at the donor’s desire), and resources are spread across too many isolated organisms. Also, in my experience a “typical” donor is focused on outputs and immediate gratification…which runs contrary to perseverance, patience, learning, and mustering toward gradual systemic change.
To Tim’s comments…The Gates Foundation is doing great work, yet don’t forget all the nonprofits, non-government agencies, and civil society organizations that are represented in the success/results. What seems appealing here is the ability to see the combined results of major initiatives spread across a variety of organizations…all represented in a Gates Foundation initiative.
Lastly, a caution about the charity water example offered by Pat. Does this information and transparency represent an ROI, or is it just a validation tool that the work (i.e. the product/output) was accomplished? I’d ask some questions like these to gauge ROI and impact: How is the local government engaged in the continued success of the water point? Has there been a reduction of diarrhea and other water-borne illness in the community? Has hygiene and sanitation been addressed too, or is there just a safe water point?
Thanks for an opportunity to engage and reflect.
I sit on the board of a non-profit that offers investors the opportunity to make loans that pay back with interest. We have done this as a way to fund our own work* and we have also set up a loan fund that is available to groups and individuals that are viable, but unable to secure bank funding for their efforts.
It is entirely possible to offer ROI to investors and still be a non-profit: “non-profit” refers to the organizations bottom line, it does not refer to the bottom line of any potential funders.
*although we no longer need to do this as we have reached the point of self-sufficiency. Specifically, our profit-generating arm is funding our missional work.