Small, unproven charities

Imagine that someone came to you with an idea for a startup business and offered you a chance to invest in it. Which of the following would you require before taking the plunge?

  • Familiarity with (or at least a lot of information about) the people behind the project
  • Very strong knowledge of the project’s “space” (understanding of any relevant technologies, who the potential customers might be, etc.)
  • As much information as possible about similar projects, both past and present

Unless you’re an unusually adventurous investor, you probably answered with “All of the above.” After all, there’s a risk of losing your investment – and unlike with established businesses (which have demonstrated at least some track record of outdoing the competition), here your default assumption should be that that’s exactly what will happen.

Now what is the difference between this situation and giving to a startup charity?

One difference is that with a charity, you know from the beginning that you won’t be getting your donation back. But this doesn’t mean there isn’t risk – the risk just takes a different form. Presumably, your goal in donating to a charity is to improve the world as much as possible. If the startup charity you help get off the ground ends up being much less impactful (on a per-dollar basis) than established charities, then your support was a mistake. If it ends up having no meaningful impact, you’ve lost your shirt.

And in my opinion, the worst case possible is that it succeeds financially but not programmatically – that with your help, it builds a community of donors that connect with it emotionally but don’t hold it accountable for impact. It then goes on to exist for years, even decades, without either making a difference or truly investigating whether it’s making a difference. It eats up money and human capital that could have saved lives in another organization’s hands.

As a donor, you have to consider this a disaster that has no true analogue in the for-profit world. I believe that such a disaster is a very common outcome, judging simply by the large number of charities that go for years without ever even appearing to investigate their impact. I believe you should consider such a disaster to be the default outcome for an new, untested charity, unless you have very strong reasons to believe that this one will be exceptional.

So when would I consider appropriate for a donor to invest in a small, unproven charity? I would argue that all of the following should be the case:

  1. The donor has significant experience with, and/or knowledge regarding, the nonprofit’s client base and the area within which it’s working. For example, a funder of a new education charity should be familiar with the publicly available literature on education, as well as with the specific school system (and regulations) within which the project is working. A funder of a project in Africa should be familiar with past successes and failure in international aid in general, and should spend time in the area where the project will be taking place.
  2. The donor has reviewed whatever information is available about past similar projects and about the assumptions underlying this project. If similar, past projects have failed, the donor has a clear sense of why they failed and what about the current project may overcome those obstacles.
  3. The donor has a good deal of confidence in the people running the nonprofit, either because s/he know them personally or because s/he has an excellent sense for their previous work and past accomplishments. (Enough confidence in the people can lower the need for the above two points, to some extent.)
  4. The donor feels that the organization is doing whatever it reasonably can to measure its own impact over time. The donor is confident that– within a reasonable time frame – if the project succeeds, it will be able to prove its success; if it fails, it will see this and it will fold. Until impact is demonstrated, there is no need for the kind of scale that comes with taking many donations from casual donors. As stated above, I believe that the overwhelming majority of charities do not meet this criterion.

If you know a lot about cars, you might try to build your own car. But if you don’t, you’re much better off with a name brand. Likewise, casual donors are better off funding charities that have track records; experimental charities should start small and accumulate track records. This is why we are comfortable with our bias toward larger charities.

Comments

Small, unproven charities — 12 Comments

  1. Great post, and it makes sense as an approach when considering startup charities.

    So what about you guys? #3 I’m fine with. I knew you before GiveWell and think you guys are more qualified than most people in the world to do what you’re now doing.

    #4 I’m not as sure about (and 1 or 2 for that matter). Even if you could prove that X # of readers used your research to direct Y dollars, what defines success? (E.g. how do you measure how much better off the world is due to those X people moving Y dollars differently?)

  2. Presumably, your goal in donating to a charity is to improve the world as much as possible.

    I can tell you right now that this is not the primary motivation for most donors, and especially not for most small donors.

  3. Ian: I could have made this post clearer by emphasizing that it is considering the question of investing in a small/startup charity, from the perspective of improving the world as much as possible. I agree with you that some donors are not at all interested in this goal for their charity.

    Ryan: it’s valid to raise this question for GiveWell’s donors (and Elie and I discussed it as I was writing this post). A few thoughts:

    • Regarding point 1, I would broadly say the relevant issues are (a) what does the donor market and potential demand for GiveWell’s research look like? (b) how significant are the differences between mediocre and excellent charities, and how feasible is it to distinguish them? (c) what are the other available donor resources? Most of our major supporters questioned us (and/or were present while others questioned us) on these points, though they generally took our word on the answers – that very little information was available on (a) and (b) (and our project is a relatively low-cost way of exploring them), and that no other public resources focusing on outcomes existed. (The last point was easier for donors to verify on their own, and I believe that many did so.)
    • Regarding point 4 – again, most of our major donors did question us (and/or were present for questioning) on this point.
      • At the time we were very focused on the “money moved” metric as our primary measure of intermediate progress; over time, we’ve recognized the limitations of this metric and are putting more emphasis on web traffic/engagement (our next self-review, which we will complete after our upcoming round of research, will address this issue more thoroughly).
      • Generally, I think most of us have felt that true/ultimate success would be fairly easy to detect regardless of intermediate metrics, since prominence is a key criterion (this is in contrast to many direct-service programs). Another important point that I believe most of our donors are convinced of is that Elie and I would not hesitate to walk away if prospects for success don’t look good.
      • As for how use/traffic translates into impact on lives changed, our analysis aims to answer this question directly by comparing more and less cost-effective charities, with as much evidence as is available. The more research we do, the better our case becomes, but our standing claims are available – with supporting evidence – for donors to evaluate.

    FYI, we have a reasonable amount of documentation dealing with the question of whether/why we should exist over time. See our business plan history (including our initial plan, which addresses many of these questions, and our year-1 self-evaluation) and this board meeting, which contains the first annual review of staff.

  4. I think this is a really important way of looking at charity success, failure, and impact. The pool of money is finite, and sucking it up with value-less programming is damaging and unethical.

  5. Fascinating way of looking at things. Mohammad Yunnis would have an entirely different take on small grass roots organizations and their integrity.

    Those of us who lost 30-40% of our worth and donor base in the last 8 months may not have as good a grasp of sound investments as we thought. I’m not sure I want to rely on that good old approach in the coming days.

    I would also like some solid numbers rather than speculations as basis for these opinions.

  6. I work with both for-profits and nonprofits. Practices that investors and bankers use to evaluate start-up business should be used by donors investing in small nonprofits. These practices are similar to the ones you mention, Holden.

    But I disagree with you bias against small start-up charities. Every nonprofit, like every business, was a start-up at some time. Someone had to be willing to take an educated risk.

    Like a start-up for-profit business, the “credit” worthiness of a nonprofit depends on the market need (social ill) it is addressing; how its product/service addresses that need; if it’s done enough homework to understand the pitfalls, competition and challenges; and the organization’s leadership.

    Chief among them is leadership: When investors and bankers are determining whether to put their money into a company that has no track record, they look at the management team.
    *Are they passionate about what they’re doing?
    *Will their passion weather the ups and downs of entrepreneurship?
    *Do they have the skills and knowledge to go around, over and sometimes through hurdles, such as aggressive competitors; changes in regulation or technology, new markets opening or old ones closing.

    Developing leadership for nonprofits is an important task for all of us — donors, foundations, and rating agencies. We need to build networking systems and provide professional support to nonprofit leaders to they have the tools to leap hurdles and out-think challenges. Instead of relegating start-up nonprofits to pulling themselves up by their bootstraps, let’s evaluate them rigorously, as we do start-up businesses, and weave a safety net of professionals and peers who can help them?

    Both experience and networks increase the likelihood of success.

  7. Geri, I agree with everything you said if we are talking about “What sorts of charities should be funded?” GiveWell, however, specifically targets individual/casual donors. I think there are different roles for different kinds of donors and that individual/casual donors are not well suited to fill the role of supporting startups.

  8. Geri, banks basically don’t fund companies without a track record, unless it’s for something with a proven business model with assets that can be repossessed — something like a dry cleaners. When you talk about investors putting money into a company with no track record, you’re basically talking about venture capital. Which is in no way accessible to retail investors; it’s for institutions only. Likewise, institutional donors are better positioned to address the needs of start-up charities.

  9. Ian, it’s actually not correct that startup funding is the domain of institutions, only. In fact, the earliest rounds of financing for startups are essentially always “retail” as you describe it. Conventional small businesses are basically entirely debt-financed via banks (either directly through small business loans, or indirectly, through credit cards).

    Startups that aim for venture-style growth are almost always funded first from the founders, family and friends, and later by individuals (angel investors), before they reach the point where any institutional VC would give them the time of day.

    As I recall, in aggregate, angel investors provide more capital to startups each year than VCs do.

    Granted, angel investors are individuals with relatively high incomes or assets, but they certainly are not institutions. (Accreditation currently only requires either 200K/year income or $1M in assets.) And they are likely to be some of the very same people who are prepared to donate more than the average individual, and are seeking useful ways to identify worth charities — likely even in the sweet spot that a GiveWell might target. ;)

    Now, on might still argue that startup charities should be left to institutional/highly sophisticated donors. But I don’t think that can reasonably be argued based on the analogy to venture funding.

  10. J.S., I agree with you that Ian is mistaken to focus on “institutional” investors, but I think his comment would hold if you replaced “institutional” with “sophisticated and/or directly connected to what they’re investing in.” I stand by the original argument that individual, casual donors are not well-suited to fund startup or even intermediate-stage charities.

  11. Holden, I might be more inclined to agree with you, if there were ample choice of domains and charities readily selectable based on a purely results-based methodology. But since the one thing we all seem to be able to agree upon is that, at least at the moment, there are very few such choices, I think that even casual individual donors are likely to feel a broadening of the evaluation criteria makes sense, and reasonably so.