A New Model for Financing Nonprofits
nytimes.com
nytimes.com
It is both. If the method works, this group of people won't profit from non-profits in exchange for nothing -- they'll get paid for picking non-profits that accomplish their declared goals.
Suppose $X is spent on non-profit donations, and Y% of non-profits don't meet their goals. Then only $X * (1 - Y) is deployed in a meaningful way, and $X * Y is wasted -- it's the hidden cost (Hc) of today's allocation mechanism. So long as the investors get paid less than Hc, contributing $X to the donor fund instead will result in a strictly better world.
I think this is promising. I would definitely consider contributing to this fund.
I don’t see how the insurers have any leverage to make the non-profits meet there goals. That means that they will probably only pick non-profits with a very good reputation. But then the donors could just give 100% to the non-profit.
Here is a 2016 white paper on their process for setting up a fund, https://npxadvisors.com/wp-content/uploads/2016/06/NPX-White...
Isn't it now the investors that will make sure non-profits reach their goals? They will theoretically only invest in things that they will expect to meet their goals, so that donors actually pay them back. So donors just have to decide which non-profit's goals they want to support, and then investors help them achieve those goals.
So if I understand it correctly, the primary advantage of this method should be that it helps well-performing non-profits to raise funds. And if a non-profit is high-risk but also high-value (in terms of what donors consider important to the world), they will have to donate more for investors to actually invest - but at least they'll know that they will only have to pay that if the non-profit actually achieves its goals.
Of course, the challenge then is how to properly set the goals and how to objectively measure whether they're achieved.
The big question then becomes why should a solely ROI-focused underwriter be better at this type of evaluation than a philanthropic foundation which (i) is actively interested in the goals (and probably also related goals/drawbacks not specified as metrics) to the extent of intending to lose money towards achieving them and (ii) likely to be a source of further funding, which means the nonprofit is more motivated both to engage with them and to actually hit the goals
Because juking the stats or a bit of weaselling in the way goals are stated is way easier and more reliable than building things or say, achieving actual health outcomes.
I’m somewhat skeptical.
But yeah, there's a lot of questions left, and I don't feel like I have a good grasp on what this would entail and all its advantages either.
They're not afforded the liberties of regular workers because they are criminals serving sentences.
Business School types look at the nonprofit sector. "Market feedback" seems to be missing. Nonprofits can be effective and efficient on the ground, but unpopular with donors. They can be popular with donors, while being ineffective on the ground. In some reductio-ad-absurdum cases, the majority of an NGO's budget is allocated to donor relations and fundraising.
IEIn other words, they are trying to solve capital allocation inefficiencies. There have been several efforts at solving this, often attracting interest/support from high profile business "gurus," writers and such.
For example..
GiveWell does "Cost-Effectiveness" analysis, so that willing donors can make choices on this basis. Earlier iterations "analysed" cost structure, highlighting admin/budget ratios. The Acumen Fund had/has an approach whereby many recipients are (at least partially) for profit, so that market mechanisms can come into play. Much of the "micro-credit" excitement was around this issue. Donors/Lenders would experience feedback. If a loan successfully bootstraps a business, it will be repaid.
This idea seems particularly financier-oriented. It implies a lot of confidence in financial instruments' (innovative types of securities) ability to capture and deconstruct things like risk, upside, downside, volatility expected value and such. The average banker is more likely to believe it than the average person, I suspect.
I'm both sympathetic and skeptical of this idea overall. I agree there is a lack of natural feedback loop, correcting and optimising capital allocation. I agree capital allocation and (moreso) incentives is a serious problem. OTOH, I'm skeptical of "financial engineering." There are always side effects to securitisation. This donor-bondholder model (being bond-based) would be risk avoiding, for example. I think that was/is a problem with micro-lending too. The "best" borrower is one who doesn't really need it, or has other options. They have the lowest default risk, but the loan probably makes a smaller difference to them.
Maybe the best idea is to simply donate money to people, instead of NGOs. I think free market systems and thinking has a lot going for it, but the financial markets side of it is not really one of those things. I'm more curious about ideas that involve market feedback mechanisms which makes aid recipients consumers, rather than making donors more like investors. There is room for both, but my chips are on the consumer side, personally.
I first read about them about a decade ago, tried to get some politicians and civil servants engaged but alas.
And then in 2017 my firm, regular profit-seeking listed insurer, suddenly participated in one... I was amazed.
We give a subset of insured the option of a different treatment with regards to working while dealing with cancer (we insure the employer), a university takes care of the experiment and experimental power, other business partners deliver interventions and the banks have structered a SIB. All in motion right now. I got together with my colleague: his biggest take away: structuring a deal like this takes two to three years. He pulled it of partially because we had investments in the business partners and hence a better relation to start with.
If they can make that time to market go down, the amount of possibilities are endless. Most entrepreneurs don't have the time navigating literally 4+ different tables (banks, corporations, university, government agencies) all with agendas at the same time.
”Because of his background in venture capital, he was invited to speak to a group of men about business and entrepreneurship. He was so impressed by the men’s level of business knowledge and desire to learn, he began to nurture the idea of creating a Technology Accelerator inside the prison ... Since its inception The Last Mile has generated a groundswell of support for criminal justice across America. Never before have we experienced such a cooperative, non-partisan effort to curb the problem of mass incarceration.
Imagine if we could break the cycle of incarceration and instead of spending tax dollars for prison, we could spend these tax dollars on higher education, and provide educational opportunities for youth in underserved communities.This would enable them to choose a different path than one of crime. With education and career training opportunities we could break the generational cycle of incarceration. There’s plenty of proof that the impact of one man’s incarceration is felt by families and communities for decades.”
Charities which adopt this model will be itemizing quick access to capital as an administrative expense being passed onto their donors, in lieu of increased benefit shown to donors who donate their money to charities not using this scheme. It seems to me like this is a solution to a problem which does not exist: if I, as a donor, want to donate my money to make a difference in the world, why do I have to choose between a proven charity with lower administrative costs and an unproven charity which is pushing its operative risk onto me, by forcing me to compensate professional investors for the risk? Why is that a difficult choice - why wouldn't I just go with the proven charity?
I suppose this makes sense for you, as a donor, if you have a single issue which drives your donation decision - say, somebody close to you died of some disease or condition and you want to donate to an organization doing specific work to cure that specific disease/condition, because you are motivated by results in that specific area. So having institutional investors guarantee results will help you make the decision to donate, because you see it as a necessary cost for the specific results you're looking for. But I think most people just want to know that their money is being spent well, and for those people, percentage spent on benefit combined with reputation is a much better metric.
The problem is, this is flawed. It's the wrong KPI. It's the wrong carrot.
For example, in order to maximize this ratio, the NPO "hires" an volunteer to design and build their website. Unfortunately, this person, while kind hearted and generous, is not very talented / experienced.
Long to short, the website "loses" over $500 per week in donations. Had the NPO paid for a better site their ROI and general goodwill would be much better.
Btw, the NPO does the same for their social media marketing. More "opportunity" is left on the table.
Chasing the false god of mission to admin ratio __is__ one of the key mindsets that undermine plenty of NPOs.
If a professional will prove to be a net-benefit to the non-profit (bringing in more donations than their salary) then in terms of benefit spend ratios, good charities have a hard floor of no less than 50%. In truth, if a creative professional is really worth their paycheck, then they're bringing in donations worth at least some multiple of their paycheck, which amortized across the charity, creates a soft floor somewhere around the 70-80% mark.
Saying that benefit-to-admin ratios are bad measures is like saying that code coverage is a bad measure - it's only a bad measure if you're trying to max it out at 100%. Running a charity completely off volunteer work is clearly infeasible, even if the overhead that volunteers introduce seems to be zero from a surface-level, pure bean-counting, balance-sheet perspective.
It's also, in effect, advocating for closing the books of NGOs. Mission-to-admin ratios, even if we take for argument's sake that they are poor ratios for management to focus on, are important to donors for obvious reasons. So arguing that NGOs can do better by not focusing on a metric that they are required by law to report and is squarely within donor interest is arguing to not need for the metric to be reported, so that the NGO can spend without judgement and hit some theoretical global max. Of course, allowing NGOs to close their books would be a disastrous incentive for fraud, embezzlement, and worse.
So if the metric will exist, and will be focused on, good financing schemes will work with that metric in mind instead of wishing it didn't exist.
That's the point. If that metric is a KPI - and often it is - it can be taken to a counter productive extreme. Which __does__ happen
> Btw, the NPO does the same for their social media marketing. More "opportunity" is left on the table.
This is true in the cases where the money not spent with this organization is spent either with a less efficient (by some metric) organization, or on non-charitable causes such as a new car or a new cat for the potential donor instead. If the more expensive website simply relocates charitable donations from one important cause to another, the total goo might actually decrease even if the ROI on the website was good for the individual organization. If an investment brings in "new" money, it's obviously worthwile.
I guess my point is that it's good to compare organizations on various metrics, but not to the degree where they start using their resources to outcompete each other instead of doing good.
The caricatured history of the idea is basically: (1) Smart people looked at NGOs, say international aid NGOs. They note that some spend a lot of money raising money. There are ugly examples like for profit chuggers with a >50% commission. Other examples where "donor country" administration budgets are far larger than "recipient country" budgets. (2) They create a KPI, that basically defines two categories of expense "admin" and "work." Looking over existing NGOs, a low "admin %" structure correlates strongly with effectiveness (3) Foundations adopt this, optimizing to the KPI (4) The KPI does not survive transition from measure to goal. This is a recurring problem. If that is what attracts donations, NGOs can improve their admin/total cost ratio. Improving this ratio directly does not cause an improvement to overall effectiveness, even though a correlation existed pre-intervention.
This happens a lot in business, what was a good measure does not make a good optimisation goal. Selling financial products may be a good measure of a bank teller. It means he engages with customers, and knowing which products products they might want. Once you make it a goal and pay tellers a bounty, they achieve this goal by pressuring or tricking customers. Wells Fargo recently did this, and ended up incentivising tellers (and managers) to commit outright fraud.
Meanwhile, such broad measures bucket things in ways that do not make sense. Chuggers are incentive-pay fundraisers who sign up donors to make monthly contributions. They get big bounties, often more than the charity gets. When a donor realises that half his donation went to the door-to-door salesman, they feel totally ripped off.
In terms of the administrative/total budget KPI, a fun run is just like a chugger. Fun runs are costly to run, and less than half of what you pay actually goes to charitable causes. But, the "donor" is probably fine with this. They paid to participate in a run, raising money and awareness in the process.
Basically, this article describes another idea for solving a hard problem... one that isn't solved.
I wonder how they're dealing with due diligence. Organizations lying about their numbers is rampant, especially in early stage. I once met with an administrator of one of the larger prison workforce development programs in SoCal and they told me that when they measured and reported program participants, they actually only measured the number of inmates that entered their program. They didn't measure completion rate, let alone long term outcomes.
What does "inmate hours worked" mean? How do you prevent a race to the bottom where the org optimizes for butts in seats instead of actual outcomes?
So of course someone has looked at the billions going to charity and tried to figure how they can get commissioned on it as well.
While it's of course theoretically possible that this increases donor efficiency somehow, that's an extraordinary claim which requires evidence and proof. The initial reaction should be extreme skepticism.
Better capital allocation could make the NGO sector way more effective, and help it actually solve issues like extreme poverty, infant nutrition and basic healthcare. Currently, one charity could be doing the same thing (say, rural inoculations in Bangladesh) 10X more effectively, but raising far less money.
If a financial market can skim their 6% while solving this problem, the return in terms of the number of people inoculated could be 60% or 600%.
I share your skepticism though, of solving these issues with with a new type of security. I think money markets may be the best example of free market failures.
But I think what may be happening us that it allows the donors to delay payment? The charity gets the money right away and the donors can pay later.
I'm not sure the high-stakes incentives are a good idea? The donors have incentive to claim that the goals technically weren't met (even if they mostly were) while the bondholders have incentive to hide any problems. It would be interesting to know more about how the deal was designed.