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Dan Pallotta: The way we think about charity is dead wrong

Dan Pallotta has a good point on the use of funds by a charity and how money received can be invested to create more money to use for charity.

An interesting point to note here would be – when does this loop stop and the money go to the stated cause?

I will illustrate. If an organisation had a million dollars and two options – 1. Feed a hundred thousand starving people in a country [because that’s what the money was raised for] or 2. Invest it wisely in fund raising, so that the organisation would have 10 million dollars the next year which would feed a million starving people the following year. Hunger is an immediate and time sensitive problem.

It would be interesting to note what he would do. I raise this point because every action you take has a consequence. The decision to invest money received by an organisation to raise more money is good, but what’s the consequence? A hundred thousand people might not get food for a year.

One of the key points on deciding how to use your funds would be – what do you tell the donor when you raise that money? If your donor is willing to give you the money to raise more money – you don’t have a problem – but I think you’d have an expectation mismatch when that money is significantly used to raise more money. Why not just start a corporation and receive equity from shareholders and use that money like Dan said you should.

We work with not for profit organisations and our organisation allows anyone, anywhere to contribute to social causes with time, not money. This way, they are involved in the organisation, understand what they do and then can make an independent assessment about whether they would like to contribute money or not.

A donor cannot be judged for wanting to know how his money has been spent. You can however, give the donor a choice between organisations that are grassroot, organisations that multiply their money for wider reach and any hybrid that lies in the middle.

5 comments

  1. I like what you are saying here as this is one of the huge issues with donating money….where is it actually being used. Many of the companies here in the US that take donations for charitable funds are actually not using the money for those charites but for events to get more money. Thankfully there are websites now that tell donors approximately how much money is being used on the causes itself and how much is beign used to get more charitable donations.

    There is always another option to your point that a portion of the money be invested to show profit to help more in need, but the bulk of the money goes towards those that it was intended to help…sadly many organizations do not think this way and those that were intended to be helped are pushed asside.

    • Thank you very much for your opinion Mary. You are correct – tracking usage of the funds is critical to accountability. I’m sure there’s really no one right answer to the points that Dan has raised. It would depend on the donor, the agency and the target and how they have agreed to work with each other. A lot of people here use non profit organisations just to save tax and with no real intent to help anyone but themselves. There are many organisations that work selflessly at helping their target causes as well.

      I must express my opinion on this – As a donor, I would not want my money spent primarily on raising further funds. If I wanted to solve a systemic issue, I would contribute my money to an organisation that is involved in advocacy and changing policy.

  2. Yes, there is a huge debate around non-profit versus for-profit approach to solving social issues. Whilst I couldn’t watch Dan’s talk (some reason it did not load / play), having done non-profit work, I’m personally keen to have an up-close understanding of how a for-profit can benefit people at the bottom of the pyramid / lead to solutions to immediate issues such as food scarcity. I think the answer may rest mid-way somehow. And yes, whilst it may be difficult for a non-profit to raise money to help raise more money, a for-profit is legitimately able to do that. This is where a business-solution strategy plays a crucial role.

    • Thank you for your views.

      Interesting.

      An important point to note while using a for profit venture for social work is income tax. Any sort of money earned in a venture of this kind is taxable by the government. This is a huge advantages of a not for profit organisation – the money you receive as donations, isn’t taxable.

      When you get a tax break from the government and you are using other peoples’ money, it should come with certain responsibilities.

      Therefore, I think you are right, an organisation that fits somewhere in the middle, might pose as a solution to the issue being discussed.

  3. Dan has a good point on the use of funds by a charity and how money received can be invested to create more money to use for charity.

    An interesting point to note here would be – when does this loop stop and the money go to the stated cause?

    I will illustrate. If an organisation had a million dollars and two options – 1. Feed a hundred thousand starving people in a country [because that’s what the money was raised for] or 2. Invest it wisely in fund raising, so that the organisation would have 10 million dollars the next year which would feed a million starving people the following year. Hunger is an immediate and time sensitive problem.

    It would be interesting to note what he would do. I raise this point because every action you take has a consequence. The decision to invest money received by an organisation to raise more money is good, but what’s the consequence? A hundred thousand people might not get food for a year.

    One of the key points on deciding how to use your funds would be – what do you tell the donor when you raise that money? If your donor is willing to give you the money to raise more money – you don’t have a problem – but I think you’d have an expectation mismatch when that money is significantly used to raise more money. Why not just start a corporation and receive equity from shareholders and use that money like Dan said you should.

    We work with not for profit organisations and our organisation allows anyone, anywhere to contribute to social causes with time, not money. This way, they are involved in the organisation, understand what they do and then can make an independent assessment about whether they would like to contribute money or not.

    A donor cannot be judged for wanting to know how his money has been spent. You can however, give the donor a choice between organisations that are grassroot, organisations that multiply their money for wider reach and any hybrid that lies in the middle.

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