Is it time to quit asking “what percentage of my donation is going to overhead?”


According to Dan Pallotta, it’s time to throw out the nonprofit rulebook and level the playing field if we are ever to see real social change.
This past week, Dallas Social Venture Partners had the extreme pleasure of hosting Dan Pallotta  for their 3rd luncheon in this year’s Social Innovation series. As a part of the DSVP goal to provide a forum for people to start talking about new and different ideas, this event did not disappoint. Comments made by attendees leaving the event included everything from “Holy Cow – I think I’ve found a new purpose in life….” and “We do need to reinvent the nonprofit sector” to “Did the Puritans really create “charity” to stay out of hell?”

Author of Amazon’s number 1 bestseller in the charity category “Uncharitable: How Restraints on Nonprofits Undermine Their Potential,” Dan Pallotta delivered his take on ‘Capitalism for Good’ and presented a compelling rationale for why today’s nonprofit paradigm needs to be not just transformed, but completely overhauled and turned upside down if we are to ever truly solve our social issues.

The sold out lunch crowd got an up close look at what Dan described as 2 rulebooks: one for charity and one for the rest of the economic world. “We blame capitalism for creating these huge inequities in our society. Presumably because capitalism is a very powerful thing - it would have to be powerful to create huge inequities in our society. Despite that power in our knowledge of it, we refuse to allow the nonprofit sector to actually use the tools of capitalism to rectify those inequities.”

In his interpretation, the charity rulebook discriminates against the nonprofit sector on five fronts:

1. Disparity in Compensation:

The nonprofit sector cannot compete with the for-profit sector when it comes to attracting top talent to lead their organizations. The for-profit sector allows for the payment of a competitive wage based on the value somebody produces without limit. Conversely, society does not like to see people earn a lot of money in charity. As Dan put it, “Interesting that we don’t have a visceral reaction to the notion that people want and do make a lot of money NOT helping other people. You want to make millions selling violent video games to kids, go for it and we’ll put you on the cover of Wired Magazine. You want to make a half-million dollars trying to cure kids with leukemia, you’re a parasite.”

2. Disparity in Marketing and Advertising:

The for-profit sector gets every advantage to maximize spending on advertising until the last dollar no longer produces a penny of value. But we don't like to see our donations spent on advertising and charity, even though by following the for-profit model, non-profits could create a market and demand for their products/services. The prevailing attitude is, if you can get advertising and marketing donated, that’s fine but donations should go to the needy. Almost as if the money spent on advertising couldn’t dramatically enlarge the amount of money to go to the needy. As founder of Pallotta TeamWorks, which invented the multiday AIDSRides and Breast Cancer 3-Days, Dan explained that had they not spent money for quality advertising and marketing to support the Aids and Cancer fundraising events, the half billion dollars raised for charity would not have ever happened. Another way he underscored this point, “Imagine if we told Apple, hey, the new iPad - you ought to advertise it but only to the extent you can get the advertising donated at 3 o'clock in the morning or on the last page of the sports section.”

3. Risk-taking

Not risk-taking in terms of program delivery, but rather, risk-taking in the pursuit of new donors to raise more money. Non-profits are terrified to try big, bold new community fundraising endeavors for fear that if it fails, it will be the end of them. Meanwhile, in the for-profit arena, it’s considered part of the business model to allow for a percentage of product endeavors to not realize their full potential. Unlike businesses, if a nonprofit does a large fundraising event and it doesn’t produce a 70% return to the cause in the first 12 months, the organization is called into question.

4. Time Horizon

The for-profit sector has an advantage when it comes to time horizon. Although a business, such was the case with Amazon.com, can go 6 years without returning a profit to investors in the simple interest of a longer-term goal to build market dominance, the same scenario would not be acceptable for a charity that had ambitions of building scale. As it exists today, for a nonprofit to go 5 years without any money going to the needy would be, in nearly all cases, unacceptable.


5. Capital
The discrimination between the for-profit and nonprofit in this area lies with for-profits being able to pay people for money in order to attract their capital. The nonprofit sector by definition cannot. This equates to the for-profit sector being in a position to monopolize a multi-trillion dollar capital market while the nonprofit sector is starved for growth and risk capital, which it is prohibited from spending anyway.

The effects of the separate rulebooks are sobering. To further underscore the rulebook issue, Dan pointed out, since the 1970’s, the number of nonprofit organizations that have grown to pass the $50 million annual revenue barrier is 144. The number of for-profits that have crossed are 46,136. In that same period of time, charitable giving has remained the same at 2% of the GDP. What does this tell us? Basically, that in the past 40 years, the nonprofit sector has not been able to take market share away from the for-profit sector.

So how are the rulebooks supposed to change? What should be the goal? Where do nonprofits begin?

Here are a few little hints from Dan:

The rulebooks can change when we think outside the box. In order to think out of the box, we need to understand the box we’re in. Digging into the 5 barriers is a great place to start.

The ultimate goal: “It's about giving nonprofit organizations enormously greater freedom to spend money on the things we typically demonize as overhead so that they can raise enormously greater sums of money and have some hope of achieving some fraction of the scale of the massive social problems they are chartered to confront.”

Nonprofits should begin by considering the nonprofit sector as a cause in itself.



Still hungry for more, check out Dan’s book.

Valerie Strong Knight is the owner of Sunshine Avenue, a full service multi-media marketing firm dedicated to illuminating the brand, products and efforts of socially responsible businesses and organizations.  Formerly a CSR executive for a Fortune 10 company, Valerie now focuses her time and energy on helping socially responsible organizations realize a greater return on their investments and partnerships.