Billions of Drops in Millions of Buckets: Why Philanthropy Doesn’t Advance Social Progress
by Steven H. Goldberg
302 pp., $39.95
Steve Goldberg is probably the most ambitious man in American philanthropy. He expects the nonprofit world to live up to its own hype and solve—yes, solve—the knottiest social problems. Note the subtitle of his book: “why philanthropy doesn’t advance social pro-gress.” Not “can’t” or “won’t,” mind you, but simply “doesn’t.”
He has a point. Despite all the efforts of philanthropists, social indicators have weakened for the average American over the last 30 years; from educational attainment to preparing for an aging population, we are not ready for the nation’s big long-term challenges. Yet Goldberg thinks that the answers to those problems are within the reach of philanthropy, if only money were spent more wisely. And he has a plan to fix it.
Goldberg is taking on the problem that we have called “creating an effective capital curve for social innovation.” The for-profit financial markets have evolved to match business opportunities with the right kind of capital: friends, families, and fools for start-ups; venture capital for the start-ups that grow up to become high-potential firms; and public debt and equity markets for large corporations. In contrast, Goldberg explains, the nonprofit capital markets are very good at start-ups and pretty good at funding behemoths of the charity sector, yet they fail to grow successful mid-sized organizations quickly enough.
Take the example of one of America’s most successful mid-sized nonprofits, Teach For America (TFA), which is widely lauded as a triumph of American philanthropy. Wendy Kopp founded TFA in 1990 with a vision to “eliminate educational inequality” by getting the brightest and the best of America’s graduates to teach in the schools where 13 million poor children get a rotten education. Having placed nearly 20,000 teachers, reached nearly 3 million children, and, crucially, proven that their corps members do a better job in the classroom, TFA stands out as a huge win.
Yet, with no disrespect to Kopp or TFA, Goldberg stacks up those achievements against Kopp’s original goal. By his calculations, after 20 years of spectacular growth for a nonprofit, TFA is still only reaching 3.3 percent of the total need it set out to meet.
So why can’t we get philanthropic capital at the scale needed to let organizations like TFA grow to meet demand? Well, that’s the message of the (over-)extended metaphor of Goldberg’s title: billions of dollars in charitable donations are spread among too many small organizations, and the philanthropic capital market does a poor job in getting the cash to high-performing organizations that need to grow to scale. “Charitable donations find their way to grantees through a haphazard combination of luck, charisma, and razzmatazz that is poorly suited to the importance of their work,” Goldberg explains.
The problems of the philanthropic capital market, such as it is, are well-known—a balance between institutional weaknesses in the nonprofit sector and the failure of grantmakers to really pursue impact. So far, so familiar. But where Billions of Drops is particularly useful is in analyzing some of the more recent developments intended to meet these challenges. Venture philanthropy as practiced by Venture Philanthropy Partners or the Edna McConnell Clark Foundation—putting in cash and expertise to accelerate the growth of successful nonprofits from, say, $1 million turnover to $50 million—wins Goldberg’s approval. But, he observes, it remains a tiny minority of foundation grantmaking.
Goldberg also thinks that the big challenges are at the next level up, what he calls “$100 million problems.” This is the scale at which another group of intermediaries, like SeaChange Capital Partners, has emerged, matching the best nonprofits with serious growth capital. Welcome though this innovation is, Goldberg deftly uses a comparison with the for-profit world to show that it is not enough: organizations like SeaChange are like boutique, private-placement firms in the for-profit world—a useful part of the financial system but a niche nonetheless. There needs to be a systemwide solution.
But what? If the depth and sophistication of the for-profit capital market comes from measures of profit, captured in the prices of publicly traded stocks, what would a similar mechanism look like for the nonprofit sector?
Here, Goldberg wisely cautions against an overly literal translation from the for-profit to the nonprofit world. Yes, prices are the secret to the success of markets, but—quoting F. A. Hayek—he reminds us that prices are not a perfect measure of value, just a very efficient way of sharing information and opinions among millions of actors. It is the information-sharing function that any nonprofit market needs to emulate.
Goldberg’s big idea is that part of the answer lies with “prediction markets,” which sounds more complicated than it is. Thousands of Americans are involved in prediction markets through betting websites, political websites, and stock-picking sites. Not only have these tools proved popular, they have also been remarkably successful in predicting the results of football games, political elections, and even stock prices. Why not adapt this model to the social sector?
Goldberg proposes an “Impact Index” (IMPEX), which would offer a real-time measure of what thousands of people in the nonprofit sector think about whether, say, TFA can really improve test scores in 1,000 schools. If you think TFA can do it, bet that its price on IMPEX will go up; if not, bet the other way. Then, see what the majority thinks. No asset is being traded on IMPEX. It is simply an information exchange. IMPEX is about harnessing the wisdom of crowds to assess and rank nonprofit performance, flooding the market with new information about where donors think they will get the most bangs for their bucks.
Goldberg’s idea is elegant indeed, but it’s hard to see how it would really work in practice. In particular, what would make enough of the right people want to keep ranking and assessing nonprofit performance? How do we know these judgments aren’t already reflected in mass giving behavior anyway? It all feels a little half-baked. That, perhaps, is the book’s greatest flaw. It’s too mercurial. IMPEX is the culmination of the argument, but is presented as little more than an untested concept.
Yet this is also the book’s strength. Whatever you think of IMPEX, Goldberg is right to be thinking big and thinking creatively. He revels in roving from philosopher of science Thomas Kuhn to Chris Anderson’s The Long Tail, and from the cutting edge of business and technology to what we can learn from ant behavior.
There is no one magic bullet for building an efficient capital market. That, indeed, is the lesson from the for-profit capital markets. The social sector may look enviously at stock markets, but one of the biggest trends in finance in the last decade has been the rise of private equity, based on the premise that stock markets are less than efficient and often undervalue companies. Intermediation is a constantly evolving space.
Even if IMPEX is unworkable, Goldberg shines a welcome light on an important problem. Billions of Drops will stimulate and inspire, even if it doesn’t inspire agreement. Maybe online philanthropy sites like Kiva.org and DonorsChoose.org will turn out to be the most effective way to unlock the wisdom of crowds to get the money to where it will do the most good. Or, perhaps expert analysts like New Philanthropy Capital or Charity Navigator (with which Goldberg is now working) will get donations flowing to the best nonprofits. Maybe the breakthrough will come from something like the Global Impact Investing Network, recently created by a group of foundations and banks to figure out what impact means when it comes to social investing. Or perhaps it will be some other idea entirely. Watch this space.
Matthew Bishop, the New York bureau chief for the Economist, and Michael Green, an economist and writer, are co-authors of Philanthrocapitalism: How Giving Can Save the World.