Should nonprofits spend like for-profits? Dan Pallotta says yes.
The way you think about charity is wrong. That’s according to Dan Pallotta, a man on a mission to free nonprofits from the belief that spending money on anything other than programs – whether it’s advertising, risky ideas, or staff salaries – is immoral. He’s spread that message to millions of people with a popular TED Talk (viewed more than three million times) and two books. The first book, Uncharitable: How Restraints on Nonprofits Undermine Their Potential, includes the story behind the sudden demise of his own company, Pallotta TeamWorks, which created the AIDSRides and three-day walks for breast cancer. They raised millions, but the company folded after being dropped by a big client, partly because of the cost of the events. His newest book, Charity Case: How the Nonprofit Community Can Stand Up for Itself and Really Change the World, explains his plan to give nonprofits the same economic freedom and access to capital as for-profits, as a way to encourage big ideas and risk-taking. He founded Advertising for Humanity, a full-service brand agency for the nonprofit sector, and started the Charity Defense Council, an advocacy group working to give this sector a voice. When it comes to solving the world’s problems, he says we face double-standards that give the for-profit sector “a Ferrari, and nonprofits a bicycle.” Contributing editor Vanessa Glavinskas spoke with Pallotta from Los Angeles.
THE ROTARIAN: You gave a popular TED Talk. During your 18 minutes, you say we need to give charities the same tools and permissions as the for-profit sector, or they will have no real chance of solving the world’s problems. Why?
PALLOTTA: The main issue is one of scale. The social problems are gigantic in scale. In 2013, 1.5 million adults and children died of AIDS[-related causes]. Poverty affects 15 percent of the U.S. population. In Africa, 175 million people are chronically malnourished. Then you have well-meaning organizations like the Red Cross and World Vision, and they’re doing $4 billion to $5 billion a year [in revenue] – meanwhile, Apple is doing $40 billion a quarter. The only way these organizations are going to grow is to increase public awareness of the work they do. And they need access to capital to create that kind of awareness. We need organizations that are of the scale of Apple and Google to tackle these problems.
TR: What’s holding them back?
PALLOTTA: They cannot invest in their growth because all the money that comes to them is in the form of donations, so that’s their only financial instrument. Institutional funders don’t want donations spent on anything other than programs, by and large. Governments don’t want their contracting money spent on anything other than programs, with a pittance for administrative costs, and individual donors want 100 percent of their money to go to programs. So there’s no capital left over for growth. Meanwhile, Twitter does an IPO and generates billions of dollars in capital for its growth. If there’s no access to capital, it’s like a fire that doesn’t have oxygen – it can’t breathe and won’t grow. If you look at the breast cancer three-day walks that we created, we needed $350,000 to launch those. It wasn’t easy to find that $350,000. But look what it turned into – it turned into $200 million. When you make it difficult to access $350,000, you make it difficult to create $200 million success stories. Meanwhile, look at what happens in Hollywood – they place big bets on ridiculous new movie titles. The nonprofit sector has never placed anything remotely close to a $150 million bet on a new fundraising idea. Imagine if Rotary International had $150 million to spend specifically on some new fundraising idea. It’s unfathomable.
“Imagine if Rotary had $150 million to spend specifically on some new fundraising idea. It’s unfathomable.”
TR: You mentioned the breast cancer three-day walks, which raised millions for the cause. To promote them, you didn’t hang up fliers – you took out full-page ads in major newspapers. Why is advertising important for nonprofits?
PALLOTTA: Because you’re competing with other advertisers for the consumer’s dollar. L’Oréal spends more than $1.5 billion on advertising to try to get women to buy more cosmetics. But for every 479 messages in a person’s day, there’s something like one message for a health and human services cause. Charities are not just competing with other charities; they’re competing with all the things that consumers can spend their discretionary income on.
TR: And nonprofits don’t think of it that way?
PALLOTTA: In the nonprofit sector, we spend months around a conference table debating what the message should be on our website. Meanwhile, nobody looks at the website because we don’t advertise the Web address to anyone. We have to free up more money and find sources of capital that will allow nonprofits to compete with the for-profit sector. You see what happens when there’s a natural disaster – the tsunamis, Hurricane Katrina – everybody knows about it. Why does everybody know about it? Because it’s on the news cycle over and over for a week or two, and there’s a massive swell of donations to that cause. Why? Because people are aware of it. You have all that free media in the form of NBC Nightly News and CNN and Fox.
TR: How do nonprofits find the money for an ad campaign? How do you start?
PALLOTTA: Well, you start slow. You start by testing things. And then you gain confidence and find out what works, and you start to spend more. Where do you find the capital? Maybe it comes in the form of a major donor, a major contributor who “gets it” and will allow their funds to be used for that purpose. I think we need to set up special capital funds for nonprofits. We need venture fundraising funds that nonprofits such as Rotary can take their ideas to, and the fund can invest in them.
TR: There’s an ingrained mentality that to be good stewards of donations, the vast majority must go directly to programs. You say that’s because people confuse morality and frugality. What do you mean?
PALLOTTA: We’ve been trained to think that it’s our fiduciary duty to keep costs down and maximize the amount of money going to programs. Anything else is immoral. Anything else is unethical. But I think it’s our fiduciary duty to make the biggest difference possible. And if that means we need to funnel money not into programs, but into something that can grow revenue so we can do more good, it’s not only our fiduciary duty, it’s our moral duty. But we’ve been taught the opposite. Right now, in the interest of funding programs in the short-term, we are annihilating our potential to fund programs on a much bigger scale in the long-term.
“Right now, in the interest of funding programs in the short-term, we are annihilating our potential to fund programs on a much bigger scale in the long-term.”
TR: Is part of the problem that many nonprofits market themselves as having low overhead?
PALLOTTA: Yes. And, in the long-term, it’s killing nonprofits and sending the conversation backward. There’s a tension right now, because the BBB Wise Giving Alliance, Charity Navigator, and GuideStar issued a joint press release in 2013, saying overhead is not the only thing [to consider in judging nonprofits]. But then there’s a temptation on the part of savvy marketers to tell donors that 100 percent of the money goes to the cause.
TR: Right, the three prominent charity-rating organizations are shifting their model to emphasize judging nonprofits on impact rather than low overhead. Have you seen this change the conversation?
PALLOTTA: No, you’ve had 30, 40 years of relentless indoctrination by the watchdog agencies, the media, and state attorneys general, teaching everyone to ask about overhead. Now, I’m glad [the organizations] said that, but there’s an enormous amount of work to do to get people to know that they did.
TR: Why is it your mission to get the word out?
PALLOTTA: You do what the universe wants you to do. It’s my path. When I was in college, I learned about hunger and wanted to do something, so I did a bike ride for hunger. I’m gay, and when my friends began to develop AIDS, we created the AIDSRides. My mom is a breast cancer survivor, so we created the breast cancer three-day. Then we went out of business for the most ridiculous reasons, and I thought, “I have to write a book about these ridiculous reasons.” And then people said, “We like your book, but how do we get everyone to know?” So now I’m focused on getting everyone to know. It’s just one foot in front of the other.
TR: So, how should charities be judged?
PALLOTTA: They should not be judged simply. They should not be judged in five minutes. People should take the time to know the charity they are going to support in the same way that many take the time to research the politicians they are going to vote for. In the course of long-term analysis, people should be asking three fundamental questions: What are your goals? What progress are you making toward those goals? And how do you know?
TR: One of Rotary’s goals is to eradicate polio. We’ve made great strides, but hit a difficult point now that 99 percent of the world is polio-free. Also, for many people, polio is no longer a problem that affects their day-to-day lives. How do we inspire donors to help finish the job?
PALLOTTA: The chance that polio could come over here on an airplane is not the reason we should contribute. The reason we should contribute is the suffering of that one person who does have it. Who leaves a job 99 percent done? We didn’t go 99 percent of the way to the moon. Rotary International has a chance to tell one of the first total eradication success stories. Let’s get behind that. That’s an inspiring story to tell.
TR: Who needs to take the lead to change our mentality when it comes to judging charities? The nonprofits? The funders?
PALLOTTA: Both. That’s why we created the Charity Defense Council – to change the way the public thinks about charity. Nobody has taken that on. That’s not the role of the independent sector. That’s not the role of the Council on Foundations, that’s not the role of the Association of Fundraising Professionals. There was a huge vacuum there. The Charity Defense Council is going to do anti-defamation work, it’s going to do public education work, it’s going to do legal defense work, it’s going to actually organize the sector. And we have a great advisory board now: We have the head of the Nature Conservancy, United Way, Kiva, Goodwill, Share Our Strength, and others. In the next 12 months, you’re going to start to hear a lot more about us.
TR: You say we don’t want our generation’s epitaph to read “We kept overhead low,” but rather “We changed the world.” But first, do you really think you’ll be able to change how people think about charity?
PALLOTTA: How can you change the way the public thinks about charity? Well, you make that your goal. When I look at the way public attitudes have changed about gay people in my adult lifetime, I know that it’s not impossible to change people’s minds about charity. After all, we’re in the business of change. — Vanessa Glavinskas