Non-profit organizations have impacted my life in so many ways. As I reflect about after school programs that helped me develop, scholarships I received for college, and what encouraged me to become an activist, the common denominator is the various non-profits organizations that I have impacted my life. At times I worry about how many of these life-changing organizations will not survive through these difficult economic climates. Dan Pallotta, an aids activists, might have a solution to how we fund the next generation of non-profit organizations.
Dan Pallotta seeks to drastically change our viewpoint on how we fund non-profit organizations. He dispels a lot of the mythology around administrative and operation cost that the foundation sector requires non-profit organizations to follow. Pallotta, in his TED Talk, discusses the illusions built into the idea that overhead cost is hindering the non-profit sectors ability to grow significantly, and in some cases, stopping growth all together.
Only 144 non-profit organizations over the last forty years have crossed the 50 million annual revenue barrier, compared to nearly 50,000 private sector companies crossing the same threshold in the same time period. Pallotta is essentially trying to articulate a contradiction that is intrinsic in the set of rules we make for private businesses compared to the set of rules we give to charities.
He describes this double standard as an “apartheid” system and starts off by outlining five specific contradictions or differences in the rules that the non-profit sector is forced to follow, compared to the remainder of our capitalist economy. What is most important is that Pallotta seeks to outline the debilitating corollary of these five constraints placed on non-profits, if they wish to remain legitimate in the eyes of philanthropic torch holders.
The first barrier Pallotta explains is based around compensation. This is the larger societal problem that pushes students from around the country to choose business school over social work school. Pallotta described it as people either having to choose their families or choose to help the world, and you can often help the world better with more money, so it incentives a lot of gifted professionals to choose private sector careers over non-profit jobs.
The second barrier is around philanthropic rules about advertising and marketing. Many private donors require their contribution to go directly to those in need and nothing else. Pallotta said that this tactic could be antithetical towards a goal of allowing non-profit organizations to invest and raise awareness on an issue they are working on. Allowing investment will give the non-profit sector an opportunity to make more money and have more reach with their programming. The second barrier flows right into the third barrier, which revolves around taking risk. Pallotta contends that people in the non-profit sector are afraid to take risk because they know if they fail, then their reputation will be blemished. However, Pallota describes failure as an ability to access innovation. Without risk, you are not allowed to fail, without innovation there are few opportunities to grow.
The forth and fifth obstacles that stifle non-profit organizations, are the rules around time and not allowing “profit to attract risk capital.” For real change and growth to occur it takes time. Pallota used the example of Amazon and how they took several years to make a profit and start growing significantly, but the shareholders were patient because they understood how investing in the future of this company would bring back high returns. Very few non-profits are given time to invest, grow, or development. Funding groups want to see outcomes in the next year (usually without paying the non-profit organizations to measure these outcomes) or else the funding body will disinvest in the non-profit. And finally because charities are not allowed to attract capital, Pallota argues, “they are kept out of the multi-trillion capital funds” that would allow for more innovative, creative, and ambitious projects to be set up.”
If we can change these five barriers then non-profit organizations will have the ability to grow and flourish well into the future.