Category Archives: Philanthropic Capital Markets

VolunteerMatch Raises Growth Capital

March 31, 2008 – 7:39 am

This is my most recent column from the Financial Times. It ties into some of the discussions we’ve been having recently:

Non-profits look to invest in themselves

By Sean Stannard-Stockton

Published: March 29, 2008
(Link to original article)

When you donate to a non-profit organization, you expect your money to be used to help the people the non-profit serves. You want your money to help a pre-schooler, a homeless person or someone with a disease. But what about the non-profit itself? Are donors interested in investing in the growth of a non-profit, so that it can develop a sustainable business model and serve more people over time? Clara Miller and George Overholser think so.

Miller founded Nonprofit Finance Fund in 1980 to lend money to non-profits so they could invest in more energy-efficient light fixtures and equipment. The resulting lower energy bills reduced costs and allowed the non-profits to repay the loan and end up with a permanently lowered cost structure.

The organization has grown a lot since then. A couple of years ago Overholser, a founding executive of consumer finance giant Capital One and a venture capitalist, joined Miller to launch NFF Capital Partners, which focuses on helping non-profits attract equity-like capital to fuel growth.

As a reader of the Financial Times, you might have invested in a small but growing for-profit company, understanding that your money would be used to grow the firm to a level where it achieved positive cash flow and was able to self-fund future growth. But as a donor, it is unlikely that you have made a similar investment in a non-profit. If VolunteerMatch is any indication, an equity-like investment in a growing non-profit may be in your future.

VolunteerMatch is the largest online volunteer opportunity network. The site allows non-profits to advertise their need for volunteers, individuals to find and register for volunteer opportunities and corporations to manage their corporate volunteer programs. In 2006, 16m hours of volunteer services were completed through VolunteerMatch. At an estimated value of $18 an hour, the organization facilitated nearly $300m in social value on an operating budget of $3.1m.

Some non-profit organizations may be content to rest, confident that they are furthering their mission to do good. But Greg Baldwin, president of VolunteerMatch, wants to more than double the social value of the volunteer hours being facilitated by his network. He needs $10m to make it happen.

Working with NFF Capital Partners, VolunteerMatch is floating a prospectus of the kind more frequently seen for venture capital backed for-profits. The $10m offering consists of 40 units at $250,000 each.

VolunteerMatch is adopting a new accounting methodology to distinguish “growth capital” from the “revenue” of everyday donations.

The accounting methodology, called Segue and developed by Overholser, strives to make a distinction between the money provided by non-profit “customers” and “investors”. For-profit accounting differentiates between money that comes from selling the company’s products or services and the money offered by investors. But in the non-profit world, a donation meant to support an organization’s existing infrastructure and one meant to help it grow are lumped together.

Investors in VolunteerMatch’s growth capital offering are promised that their money will go into a special sub-account and that its use will be tied directly to specific growth initiatives. It is VolunteerMatch’s goal that by 2012 it will be self-sustaining and generating an operating surplus that will be used to fund future growth.

Its prospectus lays out an operating model that expects certain levels of support from corporate partners (who pay to use VolunteerMatch for their corporate volunteer programs), non-profit agencies (who have free access to basic services, but pay for premium access), and reliable ongoing contributions from volunteers.

While Nonprofit Finance Fund is changing the way that non-profits think about fund-raising for growth, some foundations are busy re-imagining how philanthropists provide support. Last year, the Edna McConnell Clark Foundation of New York launched the $120m Growth Capital Aggregation Pilot, which will raise funds from co-investors. The funds will be used specifically to grow three select non-profits to scale.

The world of philanthropy is changing fast.

While yesterday’s donors were content to give to a non-profit based on an emotional appeal, today’s donors want to know their money is really going to have an impact.

The writer is a principal and director of tactical philanthropy at Ensemble Capital Management and author of the blog TacticalPhilanthropy.com.

By Sean Stannard-Stockton | Also posted in Philanthropy | Comments (7)

Michael Edwards Responds

March 28, 2008 – 9:02 am

In my recent post on Albert Ruesga’s Metrics Mania comments, I mentioned a “growing backlash against philanthrocapitalism”:

At a time when we are seeing a growing backlashing against “philanthrocapitalism”, it is interesting to look at what is being grouped under that term. For many people, “metrics” and the push for more “evaluation” of philanthropy is an unwelcome element of a “business-like” approach to giving. I believe that evaluating nonprofits and philanthropy in general is necessary for a the Third Sector to become a high-performing, high-impact driver of social good. But as I wrote last week, I think that much “evaluation” takes a scientific approach to measurement that is borrowed from the hard sciences, while the lessons of the liberal arts (under which investing and financial markets should be categorized) are more appropriate.

That link in the paragraph above connects to the essay Philanthrocapitalism: After The Goldrush, by Michael Edwards. Edwards is also the author of the newly released book Just Another Emperor: the Myths and Realities of Philanthrocapitalism. Mitch Nauffts at PhilanTopic has written a brief review of the book. I’m in the middle of reading it and will comment further in the future. But in the meantime, Michael Edwards emailed me after reading the post in question:

Nice piece, thanks Sean. However, just so we are clear, it is misleading to conflate the “growing backlash against philanthrocapitalism” with opposition to “a push for more evaluation in philanthropy.” The two may be related in some people’s minds, but not in mine, nor I suspect in the minds of many others who are passionate about measuring social change but skeptical about the role of business metrics. I’d encourage visitors to your blog to read “The Myths and Realities of Philanthrocapitalism” (downloadable for free from www.justanotheremperor.org) and check out the examples of SCOPE, SPARC and Make the Road New York that are described in the book’s conclusion. All of these organizations take evaluation very seriously, and they are developing creative ways to measure their impact on both short-term service outputs and long-term structural or systems change. Isn’t that where the real debate should be?

In reply I wrote:

I found your essay fascinating and I’m about half way through Just Another Emperor. I plan to post about my opinions of your ideas once I finish the book.

Personally, I think that the definitions of the new words being thrown around in philanthropy is really important. I do think that many people see “measurement” as “business-like”. But I’m glad to hear you don’t. I’d like to give you full access to express your thoughts on my blog. From what I’ve read of your writings so far, I do disagree with a lot of it. But that should only make the conversation more interesting! Personally I think that nonprofits and philanthropy can learn a lot from business thinking, but that there are huge limitations to the analogy.

Michael is director of governance and civil society at the Ford Foundation, although his book notes clearly that he is writing “entirely in a personal capacity”. I look forward to the unfolding conversation around “philanthrocapitalism”. I believe that as the Second Great Wave of Philanthropy continues, we are in the midst of a battle over the future of philanthropy. How words get define, what ideas become cultural norms and who emerges as leaders will all greatly influence how philanthropy is practiced in this country.

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Philanthropy | Comments (2)

Letting Donors Vote for Board Members

March 27, 2008 – 8:43 am

A couple weeks ago we discussed the idea of letting donors vote for nonprofit board members. Some people liked the idea, others were concerned that nonprofits should be serving the needs of the broader public, not simply responding to donor’s desires. I’m mixed on the idea. On the whole, I think that to the extent nonprofits want to access social capital market money, the form of that capital must be designed differently than a donation. A lot of imagination still has to go into this process, but I have a hard time understanding how a nonprofit could ask for an “investment” instead of a “donation” and yet treat the transaction the same. That’s just marketing. If investing in a nonprofit is more than just spin, than the transaction involved must live up to the words that describe it.

Jeff Brooks, at Donor Power Blog, writes regularly about how nonprofits can “empower” donors in ways that help the nonprofit further their mission. Yesterday, Jeff weighed in on the donor voting debate and he’s given me permission to repost his thoughts here:

I think it’s a dynamite idea, even though the choice of board members is not likely to be very exciting to most donors. Really, on what basis would the average donor choose one board member over another?

Even so, I’ve never yet seen giving donors power of any kind not work. My guess is very few donors would exercise their proxy vote. But that they’d appreciate the chance, and that would lead to more giving, higher gift amounts, and better retention. That’s what happens pretty much every time you show donors that you respect them.

Commentary at Tactical Philanthropy seems to be running against the idea, because of the assumption that given the chance, donors are going to do something stupid. Like elect a moron to the board. Or force the nonprofit to betray its own mission.

Worst-case scenario thinking always takes you to such bogus places.

If I ran a nonprofit, I’d look for every way possible to involve donors. I’d want more than their money. I’d want their ideas, their hearts, their thinking.

If you’re afraid your donors are going to screw you, you’re in trouble. While you’re protecting yourself from your donors’ predations, they’ll be flocking to the smart organizations that respect them.

In the comment section to Jeff’s post, some reader suggested that it is unrealistic to think that donors would be able to make an informed decision about which board members to support. I think this is correct UNLESS the nonprofit was able to effectively communicate the organization’s mission, the steps the were taking to further that mission and the progress and setbacks that they faced. That sounds like the kind of nonprofit that I would be excited to support!

By Sean Stannard-Stockton | Also posted in Fundraising, Philanthropy, Transparency, nonprofits | Comments (2)

The “Evaluation Revolution” & Problems with Measuring Nonprofits

March 19, 2008 – 9:26 am

In preparation for tomorrow’s Metrics Mania debate at the Hudson Institute, Gary Walker (former president of Public/Private Ventures) has written an essay titled “Reflections on the ‘Evaluation Revolution’”. As I write about the need for more evaluation of nonprofits and more funding for high performing nonprofits (and less for low performing nonprofits) I realize that many readers assume I am calling for more of the outcome and impact studies that have been used for some time. In fact, I believe that the kind of analysis needed is quite different.

The evaluations that Walker so eloquently discusses use a scientific framework. A framework that says we can quantitatively measure certain types of outcomes and that these results should be repeatable. This framework is borrowed from the hard sciences and I wonder how applicable they are in the social sciences. I believe that a better evaluation framework is that used in financial markets. Finance is not a hard science, it is a social science. One of my favorite books on investing is Investing: The Last Liberal Art by Robert Hagstrom in which the author lays out an approach to investing that draws on the lessons of literature, psychology, sociology and philosophy.

In financial markets much times is spent performing massive historical studies of what has or has not worked in the past. But every new investment decision must be made with the understanding that we’re not talking about physics here. Experiments are not repeatable. What worked last time, might not work this time. However, in the social sciences and in finance, we can study what has worked in the past and we can perform rational analysis about what might work in the future.

I’ve taken criticism in the past from people like Phil Cubeta who have suggested that I see philanthropy as a desk job where spreadsheets are run all day long. That is simply wrong and does not capture the kind of proactive philanthropic decision making within a social capital market framework that I think will lead to a nonprofit sector that performs at a much higher level.

I urge you to read Walker’s essay for a deconstruction of why traditional evaluation has not lived up to the promise.

By Sean Stannard-Stockton | Also posted in Effective Giving, Impact Measurement, New Philanthropy, Philanthropy | Comments (1)

Donors and Proxy Voting

March 12, 2008 – 9:17 am

I asked yesterday what a “perpetual interest” in a nonprofit (as discussed in the VolunteerMatch prospectus) might mean to a donors. Reader Carl Shulman read my mind and left a six word comment:

Voting rights to elect the board.

As a shareholder in a company, investors get a share of the profits and voting rights. These voting rights do not give them authority to dictate the day to day running of a company. They do however allow them to vote on the membership of the company board. Certain issues must also be approved by shareholders. And shareholders have the right to bring certain items to the board’s attention and require a vote by all shareholders.

Personally I find this to be a pretty appealing concept. I think that donors should not tell nonprofits how to operate on a daily basis (part of the reason why I favor unrestricted giving), but I do think that nonprofits should be accountable to donors. I would guess that if donors were given voting rights, that they would be more engaged and likely to give more money over time.

I’d love to hear what others think about this idea.

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropy, nonprofits | Comments (18)

VolunteerMatch and the Social Capital Markets

March 11, 2008 – 8:27 am

Greg Baldwin, president of VolunteerMatch, read my article about the social capital markets of 2033 and sent me an email:

I enjoyed your recent article in the Financial Times. I’m surprised our paths haven’t crossed yet.

I don’t know how much you know about VolunteerMatch, but we’ve decided not to wait around until 2033 for philanthropy to figure out it is time for some fresh thinking.

We are working on a growth capital project that is right up your alley.

He attached a “prospectus” for VolunteerMatch’s $10 million “Growth Capitalization Offering” (a prospectus is the word for a booklet describing a for-profit investment offer such as a new IPO):

The purpose of this offering is to expand and enhance VolunteerMatch’s capacity to engage a broad base of volunteers with diverse social purpose agencies throughout the United States, and to build a sustainable enterprise capable of delivering that mission indefinitely.

Units offered in conjunction with this prospectus represent a perpetual interest in VolunteerMatch. That interest is strictly philanthropic, with no provision for cash returns at any time. The investment is intended to: (1) bring material social and economic benefit to communities throughout the country, (2) support broad based civic engagement of millions of Americans, and (3) deliver a significant Social Return on Investment (SROI) in the form of valuable volunteer effort against tasks deemed valuable both by volunteers and the agencies that need them. Investments in these units may be tax deductible.

(1) As of the date of this offering, 10 units ($2,500,000) have been reserved under previous agreement with The Atlantic Philanthropies. $1,350,000 of this total is contingent upon a successful match of a minimum of 6 units ($1,500,000).

(2) Expenses associated with this offering have been pre-paid by VolunteerMatch, with the generous support of the Surdna Foundation. Proceeds will not be used for offering expenses.

(3) In the event of over-subscription, VolunteerMatch may, at its discretion, increase the offering by up to 10 additional units ($2,500,000).

The prospectus then goes on over 45 pages to lay out relevant financial data, the story of the organization, the issue they are focused on, why their solution addresses the relevant needs, the impact they’ve had to date, their competition (their word not mine), their growth plans, their capital needs to fund that growth, risks, and a explanation of how the growth capital funds will be accounted for.

I’m intrigued by the phrase in the summary, “Units offered in conjunction with this prospectus represent a perpetual interest in VolunteerMatch.” At the end of the day, I think that this “perpetual interest” is more a framing of the donation rather than any kind of legal distinction from a regular donation. But I wonder if there might be ways that donor/investors might receive some kind of “ownership” rights in recognition of their support. I do not mean financial returns. If you were to gain a “perpetual interest” in a nonprofit you cared deeply about, what rights and responsibilities would you like that interest to represent?

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropy, Volunteering | Comments (6)

Do Nonprofits Want Funders to Be Critical?

March 5, 2008 – 9:25 am

A comment from an anonymous “director of development” was posted today on my Donors vs Investors III post (check out the growing conversation in the comment section of this thread):

Just to bring another perspective to this line of questions, here’s a fundraiser’s take. I’m sure there are lots of forward thinking, transparent non-profits out there who can speak candidly with anyone about mistakes and areas to improve, but my sense is that the vast majority are like my employer: they would never let any  information that might even suggest something less than sparkling about them be publicly revealed.

We have one foundation funder who is openly critical of us, and funds us with a contract and a set of concrete tasks the organization accomplish. I would call this funder a proactive investor. They didn’t just evaluate us, they made their findings known, and better yet continued to offer us money if we made an effort to clean up our act. Many staff are grateful for this funder, and believe our organization has improved with its participation.

So I guess my point is, perhaps a non-profit is best served by funders who can own their criticism, stand by it and use it as a tool. The many many non-profits out there who are less interested in critically evaluating themselves can benefit from proactive investors like the one I have described. And at least when I am in the room with this funder, I am more or less confident that what they say about us at conferences is what they say to my face.

Wow. I might be advocating for a more public dialog, but I’m surprised as anyone to hear a nonprofit employee say their organization has benefited from a major funder being openly critical.

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Effective Giving, Evaluation, New Philanthropy, Philanthropy, Transparency, nonprofits | Comments (7)

Do Donors Want to Provide Operating Support?

March 5, 2008 – 8:24 am

Conventional wisdom says donors do not want to provide operating support to nonprofits. But Jeff Brooks of Donor Power Blog thinks maybe donors just want some power to decide. In his post following up on Kiva’s supply & demand problem, Jeff suggests that maybe Kiva should give donor/lenders the option to provide operating support (an idea I suggested to Kiva founder Matt Flannery, but which he says he’s not interested in).

Says Jeff:

One organization that handles this well is DonorsChoose. They add an optional “fulfillment fee” of 15-25% to donors’ gifts, which donors can pay or not. As their How It Works page says:”Donors’ inclusion of the fulfillment fee is essential to the existence and success of DonorsChoose.org. Thankfully, 90% of our contributors choose to include it, and income thus earned allows us to continue our work.”

The magic that Kiva is missing out on here is giving donors the power. You just might be amazed at how open-minded, helpful, and flexible donors will be when you put the reins in their hands.

By Sean Stannard-Stockton | Also posted in Fundraising, Philanthropy | Comments (4)

The Donor Landscape of 2033 is Bright

March 3, 2008 – 9:35 am

My most recent column for the Financial Times:

The donor landscape of 2033 is bright

By Sean Stannard-Stockton

Published: March 1, 2008

Philanthropy is undergoing a transformational shift. While most donors continue to give in the same ways they have for 100 years, the vanguard of philanthropy is busily reforming the fabric of the charitable sector.

Often referred to as the “social capital markets” and characterized by a model of giving that mirrors the financial markets, this emerging model is still in its infancy. Since you can create only that which you imagine, I thought I would take a quick trip 25 years into the future to see what philanthropy might become.

For many donors, the year 2033 does not look a whole lot different from 2008. Many people simply write checks to charities and devote the bulk of their giving to non-profit organizations in their community.

But for some donors, the landscape is radically different. The “social stock exchanges” that became popular between 2011 and 2019 now include all but a few large non-profits and many small but ambitious start-ups.

These exchanges compete for non-profit listings. Exchanges include big national networks with some international organizations, down to small local exchanges.

The business of giving money away is particularly different for large private foundations and smaller “impact-oriented” foundations. Instead of expecting non-profits to solicit them for grants, these foundations’ “impact committees” and “program analysts” spend their days looking for and researching potential grantees. Given the considerable information disclosure required by the exchanges, much of the information required for grantee research is available online. Third-party evaluation firms provide regular reports on listed non-profits and these reports are a valuable input for the foundations.

While the cost to non-profits of conforming to the exchanges’ information disclosure requirements is steep, once listed they find grant dollars come looking for them rather than the other way round. Exchange-listed non-profits tend to have small fund-raising groups that focus on “donor relations”. They market the non-profit by attending “road shows” where they have the chance to make their case.

In the early days of the social stock exchanges, many funders and non-profits worried that the passion and joy of giving would be swept away, given the exchanges’ resemblance to financial markets. But the truth proved to be something else entirely. As funders became comfortable with the idea that sharing information with other donors provided greater social impact, a sense of community and camaraderie developed that set the social exchanges apart from the traditional financial markets. Non-profit presentations at the regular “road shows” were frequently interrupted by spontaneous conversations in the audience as funders debated the potential of each non-profit and canvassed for other people to join them in sponsoring their favorites. Working together, funders often organized big public funds that they would then direct at specific social problems. The non-profit competition for these funds was fierce but even those not funded felt the competition had helped them to improve.

Now in 2033, more and more individuals of moderate incomes are becoming interested in the social markets. Most Americans now have a donor-advised fund, since all big banks offer a zero-minimum, no-fee account that can be linked to your checking account. A quick search on Google Finance gives individuals access to multiple third-party evaluations of exchange-listed non-profits. International giving is even coming into vogue for the small donor now, so many “donor funds” managed by the largest foundations offer low-cost access to a basket of top-rated non-profits with particular causes.

The early 2030s are a good time for funders and non-profits in the US. Funding innovations are featured by the financial press and for-profit firms are constantly working to develop products and services for the social capital markets. But recently there has been some consolidation among the exchanges and some local non-profits fear funding will dry up for organizations without national scope. The default on a $1bn bond issued by a non-profit offering vaccines in Africa has sent shockwaves through the markets, and other non-profits have seen the availability of credit dry up. There are challenges in 2033 but it is an exciting time to be a philanthropist.

By Sean Stannard-Stockton | Also posted in Financial Times Column, New Philanthropy, Philanthropy | Comments (0)

Investors vs Donors III

February 29, 2008 – 9:41 am

To recap, my questions from my earlier post were:

  1. Why do investors take credit for picking great investments (”look how smart I am, I bought XYZ stock!”), while philanthropists, especially foundations, claim that the credit goes to the nonprofits they fund (”the grantee did all the work”).

  2. Why is it acceptable for investors to talk about investments they think are bad (”Don’t buy ABC stock, their management is terrible!”), while philanthropists never badmouth nonprofits, even if they think they are ineffective?

  3. Related to #2: Why do public companies generally ignore all the talking heads who say negative things about them, while nonprofits find it intolerable to have a prominent person speak negatively about them in public?

The responses from readers can be found here.

The primary response to Question 2 was that funders/donors do say negative things about nonprofits behind closed doors and within private circles. But that they do not do the same publicly for fear of damaging their relationship with grantees. The point was made that funders (unlike investors in public companies), must maintain a healthy relationship with grantees to do their job well. Most readers seemed to appreciate the positive long term impact on the sector of public criticism and general truth telling, but worried that in the short term it would be a large negative.

I think this is an entirely solid argument. Philanthropy is currently much more like venture capital than investing in the stock market (it is no coincidence that venture philanthropy approaches have gained a lot of credence in recent years). Venture capitalists invest in private companies where funding comes primarily from a small set of large funders. They also have an active role and continuing relationship with the companies they fund. This is different from stock market investing where most investors are passive holders of stock and do not interact with the company at all.

Within the context of philanthropy as a private marketplace, I think the arguments for why public criticism does not work are valid.

I don’t think philanthropy is going to be a private marketplace for much longer.

Individuals already give seven times the amount that foundations give each year. Combining the Fidelity and Schwab donor advised funds (representing organized individual giving) gives you an annual grantmaker that rivals the Gates Foundation. Most high net worth individuals are only in the early stages of realizing that giving is something they can approach with a strategy that maximizes impact and tactics that make the most of what they have.

Public criticism of publicly traded companies is no big deal because the shareholder base is so broad. But a venture capitalist going on TV and knocking a private startup might cause it to go bankrupt as funding dried up.

Philanthropy is not yet a public market. The arguments presented against public criticism are all valid and correct today. We need to be preparing for tomorrow.

Venture Capitalists do talk about startups that they think are great. So do some foundations. Note the constant promotion of Nurse-Family Partnership by the venture philanthropy focused Edna McConnell Clark Foundation. You can read a great article about their approach here (note the reporter labels it as “controversial”). Maybe this positive commentary is a bridge to future criticism. Reader “young staffer” writes:

Foundations and donors actually don’t do enough to tout their successes and to make a strong, public case championing the relative effectiveness and strength of their best grantees. It’s not just that the grantees did all the work; it’s that we talk only about how our grantees do good things and yours do too. I think it would be way easier to get the ball rolling towards more criticism if it started from a place of making a case for the best social investments rather than highlighting the worst.

So why then don’t more “expert grantmakers” (mainly large foundations) publicly promote their knowledge? Reader Renata Rafferty writes:

Philanthropy in our society is frowned upon if it is considered self-serving. Therefore, to boast about one’s wise philanthropic investment “picks” would be, well, boastful and self-serving.

Look, if you have a billion dollar endowment and 30 employees working on a focused set of issues, it is not “boastful and self-serving” to talk about your “wise philanthropic investment picks”. If you are not making wise philanthropic investment picks there is something seriously wrong. I assume that large foundations are smart grantmakers. I’m not suggesting that they shout from the rooftops how great they are in an attempt to convince people. I just want there to be a public conversation about social investing the way we have a public conversation about the stock market.

Don’t forget that we’re talking about all of this within the context of a country where most people think nonprofits waste donations. It is hard to imagine that criticism could be all that damaging. You can’t fall very far once you’re already laying on the floor. Maybe Americans would have a better view of nonprofits if they heard experts talk negatively about some of them and positively about others. Realize that the underlying assumption that donors who want low “overhead expenses” from nonprofits is that the nonprofits are a value destroying entity that just gets in the way of the money going to the actual cause.

When a hedge fund manager goes on CNBC and talks about her favorite stocks, it is not “boastful and self-serving”. She is an acknowledged expert and the public appreciates (whether they agree or disagree with her picks) the opportunity to hear her thoughts.

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Effective Giving, Grantmaking, Media, New Philanthropy, Philanthropy, Transparency | Comments (13)

Fortune Magazine on Kiva

February 27, 2008 – 1:18 pm

If you read one article about philanthropy this month, make it “The only nonprofit that matters” in the new issue of Fortune. Click here to access. It is an excellent review of Kiva.org and other organizations of this type. I found a couple things interesting:

  1. Fortune refers to DonorsChoose as a “peer” of Kiva’s. When I suggested that DonorsChoose, Global Giving and others were competitors, Kiva denied this comparison. I think they are all more similar than different. Global Giving later wrote on their blog that they agreed with my take.
  2. The article notes that DonorsChoose users can elect to send a portion of their gift to DonorsChoose to cover overhead rather than have 100% go to the project. They say 90% of users choose this option. When I suggested that Kiva use a similar pricing mechanism to fix their current supply/demand imbalance, Flannery said (scroll to bottom) that the 100% going to the project was a critical part of Kiva’s value proposition.
  3. Kiva has been criticized for not being “real philanthropy”, because users make loans not gifts. I think Kiva is so important because they’ve figured out how to give users both hard data (default rates on loans) and soft data (info directly from the borrower to the lender on how they’re doing. In the article Flannery says, “We think the users want information more than they want their money back.”

In case anyone is new to this discussion, I want to make it clear that I think Kiva is doing great work. I make the above points because I think that the philanthropy community should care deeply about Kiva’s decisions because I think they are creating a model that will find huge success.

You can read my prior thoughts on this issue here.

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropy, Transparency, microfinance | Comments (0)

Investors vs. Donors

February 27, 2008 – 8:30 am

I have some questions and would love your feedback.

  1. Why do investors take credit for picking great investments (”look how smart I am, I bought XYZ stock!”), while philanthropists, especially foundations, claim that the credit goes to the nonprofits they fund (”the grantee did all the work”).
  2. Why is it acceptable for investors to talk about investments they think are bad (”Don’t buy ABC stock, their management is terrible!”), while philanthropists never badmouth nonprofits, even if they think they are ineffective?
  3. Related to #2: Why do public companies generally ignore all the talking heads who say negative things about them, while nonprofits find it intolerable to have a prominent person speak negatively about them in public?

If you’ve read this blog for awhile, you probably think these are leading questions and that I have a firm bias about which approach is better. But I’m truly asking these questions with an open mind. Recently I met with the director of philanthropy-focused grantmaking at a large foundation. I brought up the idea that publicly talking negatively about ineffective nonprofits (especially those that the foundation thought were not “fixable”, say because management was incompetent) would produce a positive social impact by directing other donors’ funds away from the bad nonprofit and towards more effective competitors. She told me that it was a primary value of the foundation to not harm grantees.

I think that is a very compelling counter argument and I’m interested in how readers view my three questions above and the idea that not harming grantees means never saying anything negative about a nonprofit.

By Sean Stannard-Stockton | Also posted in Effective Giving, Evaluation, Foundations, Grantmaking, Philanthropy | Comments (9)

A Kiva User Responds

February 11, 2008 – 6:46 pm

Danielle Hamilton, A Kiva user who has been commenting on their “sold out” status recently left the following comment:

For the long term, I hope they expedite their research process,
streamlining their review system, allowing more researchers to be
available, thereby increasing the amount of borrowers. This seems to be
the hold-up, so to speak.

As for the ‘exclusivity’ of the service, I could care less for the
cool factor, whether Bill Clinton has mentioned it, or that it was
featured on Oprah. I do care that they have an excellent review
process, amazing repayment stats, excellent collection rates, and
regularly updated business bios to let me know the status of the loan
and repayment schedule. I receive regular e-mails updating me on the
repayments, which prompts me to browse the site again, finding other
businesses that need help.

It’s frustrating to see other blogs & newspapers compare Kiva to
GlobalGiving or other donation sites, trying to capitalize on Kiva’s
success in the MicroFinance realm. These are completely different! I’m
not giving a donation through Kiva. It’s a loan that will be repaid,
and I can plug my $25 back into another business. It’s comparable to
the Grameen Bank, on a smaller scale. If I wanted to give a donation, I
could do that with thousands of other websites and nonprofits,
including the 2,000+ nonprofits that I currently work with. (Note:
There ARE currently 5 opportunities for MF through GlovalGiving, but it
is obviously NOT their main focus.)

~Danielle
http://www.HumaneFundraising.com

In a separate comment she writes:

I feel that I’ve had more contact about my loan through Kiva than I’ve
had from dozens of nonprofits that I’ve supported over the years.

I think that’s a telling comment as to why Kiva has been so successful. In a world where donors get limited feedback on the impact their are having, it is thrilling to hear real feedback from the borrower.

Danielle also complains about comparing Kiva to Global Giving (I had suggested that Kiva could refer donor/lenders to other “social exchanges”). Clearly lending is different from charitable giving. Yet in the financial markets debt investments (bonds) do compete for investor dollars with equity investments (stocks). My point is that as we see more social exchanges developed, they may want to broker agreements to send donors to each other when they can’t execute a transaction (a similar concept is already in place with stock

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropy, microfinance | Comments (0)

Kiva’s Supply & Demand “Problem”

February 8, 2008 – 9:45 am

Recently, Peter Panepento, a reporter for the Chronicle of Philanthropy wrote about my Kiva brainstorming on the Give & Take blog:

The founder of Kiva, a charity that encourages donors to make loans to needy entrepreneurs, took questions about his organization’s supply-demand dilemma during Tuesday’s weekly Chronicle online discussion.

And one of the most pointed questions came from Sean Stannard-Stocton, a financial consultant and the author of Tactical Philanthropy, who suggested that the organization change its lending terms to direct less money to the recipients of its small-business loans.

Mr. Stannard-Stockton suggested that Kiva should keep 10 percent of the pledged money as a contribution. That money would then be used to build a support staff that can identify more potential loan recipients.

Peter is an excellent reporter and someone I like personally very much. But I think the quote above mischaracterizes my position on Kiva. Here’s my thoughts on Kiva:

Kiva has a supply & demand imbalance. This is a new type of problem because historically the nonprofit/philanthropy world has not used exchanges and market based model to distribute aid. I’m intrigued by the implications of the imbalance and the precedent that Kiva will set by how they respond to the imbalance.

As reader Phil Steinmeyer points out (as does David from Ashoka), the imbalance may not be a problem but actually a huge positive. Steinmeyer writes:

I can see two sides to this:

1) If the supply/demand situation is unbalanced LONG term, then yes, they should put more effort into ways to balance things. Flannery’s response seems based on the idea that they have an excess demand (donors) much greater than 110% or so of supply (projects). But the value of taking a 10% slice for Kiva itself is NOT so much in reducing demand by 10%, but rather, in using that money to hire staff and increase supply.

2) On the other hand, if the surge in donors is temporary, it may be undesirable to change the terms. Look at the Wii - the hot video game system of the moment. It is priced at ~$250, and has been largely sold out almost since it’s release over a year ago. But part of the reason why it has been so popular was it’s attractive pricing relative to other systems (especially the PS3). If Nintendo raised the price, they could bring things into balance in the short term, but might hurt themselves long term, by losing the ‘low price’ vibe they have going.

Nonprofits are use to operating in environments where they have to chase funders, but social capital markets set up a situation where donors must compete to fund nonprofits as well. By being “sold out”, Kiva may be creating a situation where they are increasing their chances of long term success (would you rather go to a restaurant where there was always an open table or one where you had to make a reservation months in advance? Without any other information, which restaurant do you assume is better?).

But let’s assume for the moment, that the most good can be achieved if Kiva’s supply and demand is in balance long term (most markets achieve stability over time, even if in the short run they are imbalanced). My point is that the best way to balance supply and demand is to have “prices” adjust rather than by putting caps on how much supply or demand is allowed in to the system.

In response to my question, Flannery wrote:

Your idea of only sending 90% of lender money to entrepreneurs would save us 10%, which wouldn’t get us that far. Our supply/demand disequilibrium is much greater than that. Secondly, it breaks the purity of our p2p (peer-to-peer) intentions. It’s really powerful to say “100% of your loan goes to the entrepreneur” and that’s something we are not going to back away from as long as I’m here.

First I’d like to say that I agree with Matt’s point of the power of “100% goes to the entrepreneur.” But he’s missed the point of my suggestion (which is offered as a way of brainstorming, not a recommendation because I’m not in a position to second guess Matt, he understands microfinance far better than me). What I suggested was:

Another way to balance supply and demand would be to reduce the lending terms (for instance lenders only get 90% payback of their loan back with the other portion being a gift to Kiva or to someone else in your financial chain).

I’m focused on what does the lender “pay” for the transaction of working with Kiva? Currently, they pay nothing. They get all their money back, but they forego the interest they would make in a normal loan, so they do have an opportunity cost from lending through Kiva. What if they were paid negative 5% interest? We already know lenders will over supply the market at a 0% interest rate. Might some lenders be willing to accept a negative rate for the “privilege” of engaging with Kiva? Market theory suggests they would, but we don’t know how it would affect demand. Giving lenders a 90% payback would not reduce demand 10% has Flannery implies. Under this concept, you’d have to believe that a 0% payback would result in no lenders, but we know that many people do in fact accept a 0% payback (ie. a donation). Supply and demand changes with price along a curve and the slope of that curve determines how much the supply and demand changes. If the price of gasoline doubles, would you drive half as much? History shows us that demand for gas is “inelastic”, meaning that it does not change much as the price changes. What if the price of store brand cola doubled? Since it would cost more than Coke or Pepsi, demand would probably fall to zero. This is an example of a highly elastic demand curve.

We don’t know the elasticity of supply for Kiva. But I hope they experiment and find out.

Also, both Flannery and Panepento assume that anything not paid back to the lender would go to Kiva. When money is lent through Kiva, it is lent to a microlender who then lends the money (and charges interest) to the actual borrower. If the donor/lender accepted a negative interest rate, the savings could accrue to Kiva, the middleman or the final borrower. My focus is on the “price” charged to the donor/lender and how this will affect supply.

Lastly, let me stipulate again that all of this is just brainstorming. A lot of assumptions have to be made because we do not have much historical experience with social capital markets. For instance, a closer look at Steinmeyer’s example of the demand for Wii systems and the relevance to Kiva suggests that maybe Kiva lenders are not “supply” at all, but in fact are “buyers” of a luxury product. Maybe Kiva is selling “good” and lenders are buying it.

It can be a Looking-Glass world sometimes.  But that makes this all the more interesting.

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropy, microfinance | Comments (0)

Google, Information & Philanthropy

February 7, 2008 – 9:25 am

Google.com lets users create custom search engines. Here’s an interesting example of how Google technology can be used to create more efficient information distribution in philanthropy.

Developed by E-Democracy.org, the custom search tool is described this way by the creator:

To assist E-Democracy.Org’s grant prospecting efforts I put together a little (big actually) Google Custom Search covering foundations, some government funding sites, and sites with fund raising advice for non-profits.

You can use E-Democracy’s custom search engine here and create your own here.

(hat tip: Lucy Bernholz)

By Sean Stannard-Stockton | Also posted in Open Source Philanthropy, Philanthropic Technology, Philanthropy, Social Media, nptech | Comments (0)