
A New Model for Financing Nonprofits - walterbell
https://www.nytimes.com/2018/05/15/business/dealbook/a-new-model-for-financing-nonprofits.html
======
clintonb
This seems more of a method for a group of people to profit from a non-profit
than it does a new method of actually financing non-profits. The non-profit is
still receiving a donation. Also, the thought of investors profiting $100K
from "inmate hours worked" does not sit well with me. Are the inmates being
paid a decent wage?

~~~
coffeemug
_> This seems more of a method for a group of people to profit from a non-
profit than it does a new method of actually financing non-profits._

It is both. If the method works, this group of people won't profit from non-
profits in exchange for nothing -- they'll get paid for picking non-profits
that accomplish their declared goals.

Suppose $X is spent on non-profit donations, and Y% of non-profits don't meet
their goals. Then only $X * (1 - Y) is deployed in a meaningful way, and $X *
Y is wasted -- it's the hidden cost (Hc) of today's allocation mechanism. So
long as the investors get paid less than Hc, contributing $X to the donor fund
instead will result in a strictly better world.

I think this is promising. I would definitely consider contributing to this
fund.

~~~
lixtra
Or shorter: You donate 1$. Of that only 0.9$ go to the cause and 0.10$ is used
as premium to insure that goals are met.

I don’t see how the insurers have any leverage to make the non-profits meet
there goals. That means that they will probably only pick non-profits with a
very good reputation. But then the donors could just give 100% to the non-
profit.

~~~
walterbell
Yes, it’s not clear which org is responsible for performance management of
each bond, e.g. such an org requires both individual talent/expertise and
institutional memory. What incentive does the nonprofit have to meet the
target goals, if they get paid in all scenarios?

Here is a 2016 white paper on their process for setting up a fund,
[https://npxadvisors.com/wp-content/uploads/2016/06/NPX-
White...](https://npxadvisors.com/wp-content/uploads/2016/06/NPX-Whitepaper-
vFINAL.pdf)

~~~
imh
I'd guess that additional funding is harder if you don't meet goals. A lot of
this seems to be pushing towards better measurements and priority alignment in
the first place.

------
dalbasal
There is a pattern, I think.

Business School types look at the nonprofit sector. "Market feedback" seems to
be missing. Nonprofits can be effective and efficient on the ground, but
unpopular with donors. They can be popular with donors, while being
ineffective on the ground. In some _reductio-ad-absurdum_ cases, the majority
of an NGO's budget is allocated to donor relations and fundraising.

IEIn other words, they are trying to solve capital allocation inefficiencies.
There have been several efforts at solving this, often attracting
interest/support from high profile business "gurus," writers and such.

For example..

GiveWell does "Cost-Effectiveness" analysis, so that willing donors can make
choices on this basis. Earlier iterations "analysed" cost structure,
highlighting admin/budget ratios. The Acumen Fund had/has an approach whereby
many recipients are (at least partially) _for profit,_ so that market
mechanisms can come into play. Much of the "micro-credit" excitement was
around this issue. Donors/Lenders would experience feedback. If a loan
successfully bootstraps a business, it will be repaid.

This idea seems particularly financier-oriented. It implies a lot of
confidence in financial instruments' (innovative types of securities) ability
to capture and deconstruct things like risk, upside, downside, volatility
expected value and such. The average banker is more likely to believe it than
the average person, I suspect.

I'm both sympathetic and skeptical of this idea overall. I agree there is a
lack of natural feedback loop, correcting and optimising capital allocation. I
agree capital allocation and (moreso) incentives is a serious problem. OTOH,
I'm skeptical of "financial engineering." There are always side effects to
securitisation. This donor-bondholder model (being bond-based) would be risk
avoiding, for example. I think that was/is a problem with micro-lending too.
The "best" borrower is one who doesn't really need it, or has other options.
They have the lowest default risk, but the loan probably makes a smaller
difference to them.

Maybe the best idea is to simply donate money to people, instead of NGOs. I
think free market systems and thinking has a lot going for it, but the
financial markets side of it is not really one of those things. I'm more
curious about ideas that involve market feedback mechanisms which makes aid
recipients consumers, rather than making donors more like investors. There is
room for both, but my chips are on the consumer side, personally.

------
wjnc
The concept of social impact bonds is not used often enough, but not new [1].

I first read about them about a decade ago, tried to get some politicians and
civil servants engaged but alas.

And then in 2017 my firm, regular profit-seeking listed insurer, suddenly
participated in one... I was amazed.

We give a subset of insured the option of a different treatment with regards
to working while dealing with cancer (we insure the employer), a university
takes care of the experiment and experimental power, other business partners
deliver interventions and the banks have structered a SIB. All in motion right
now. I got together with my colleague: his biggest take away: structuring a
deal like this takes two to three years. He pulled it of partially because we
had investments in the business partners and hence a better relation to start
with.

If they can make that time to market go down, the amount of possibilities are
endless. Most entrepreneurs don't have the time navigating literally 4+
different tables (banks, corporations, university, government agencies) all
with agendas at the same time.

[1]
[https://en.m.wikipedia.org/wiki/Social_impact_bond](https://en.m.wikipedia.org/wiki/Social_impact_bond)

------
walterbell
More about Last Mile, [https://thelastmile.org](https://thelastmile.org)

 _”Because of his background in venture capital, he was invited to speak to a
group of men about business and entrepreneurship. He was so impressed by the
men’s level of business knowledge and desire to learn, he began to nurture the
idea of creating a Technology Accelerator inside the prison ... Since its
inception The Last Mile has generated a groundswell of support for criminal
justice across America. Never before have we experienced such a cooperative,
non-partisan effort to curb the problem of mass incarceration.

Imagine if we could break the cycle of incarceration and instead of spending
tax dollars for prison, we could spend these tax dollars on higher education,
and provide educational opportunities for youth in underserved
communities.This would enable them to choose a different path than one of
crime. With education and career training opportunities we could break the
generational cycle of incarceration. There’s plenty of proof that the impact
of one man’s incarceration is felt by families and communities for decades.”_

------
katzgrau
My opinion is that once you tie the shorter term goals of the nonprofit to
investor return on investment you've introduced a dangerous incentive for
investors to exercise leverage over that nonprofit and potentially misalign
its long term goals.

~~~
dandare
The traditional financial model has dangerous incentives on its own. Non-
profits need to show more accountability.

------
solatic
One of the primary ways in which charity performance is measured today is on
the percentage of money, from operating budget, spent on benefit programs, and
not on administrative expenses. This allows donors to know that their money is
reaching the intended beneficiaries and not administrators who are lining
their own pockets in the name of the needy.

Charities which adopt this model will be itemizing quick access to capital as
an administrative expense being passed onto their donors, in lieu of increased
benefit shown to donors who donate their money to charities not using this
scheme. It seems to me like this is a solution to a problem which does not
exist: if I, as a donor, want to donate my money to make a difference in the
world, why do I have to choose between a proven charity with lower
administrative costs and an unproven charity which is pushing its operative
risk onto me, by forcing me to compensate professional investors for the risk?
Why is that a difficult choice - why wouldn't I just go with the proven
charity?

I suppose this makes sense for you, as a donor, if you have a single issue
which drives your donation decision - say, somebody close to you died of some
disease or condition and you want to donate to an organization doing specific
work to cure that specific disease/condition, because you are motivated by
results in that specific area. So having institutional investors guarantee
results will help you make the decision to donate, because you see it as a
necessary cost for the specific results you're looking for. But I think most
people just want to know that their money is being spent well, and for those
people, percentage spent on benefit combined with reputation is a much better
metric.

~~~
chiefalchemist
> "One of the primary ways in which charity performance is measured today is
> on the percentage of money, from operating budget, spent on benefit
> programs, and not on administrative expenses."

The problem is, this is flawed. It's the wrong KPI. It's the wrong carrot.

For example, in order to maximize this ratio, the NPO "hires" an volunteer to
design and build their website. Unfortunately, this person, while kind hearted
and generous, is not very talented / experienced.

Long to short, the website "loses" over $500 per week in donations. Had the
NPO paid for a better site their ROI and general goodwill would be much
better.

Btw, the NPO does the same for their social media marketing. More
"opportunity" is left on the table.

Chasing the false god of mission to admin ratio __is__ one of the key mindsets
that undermine plenty of NPOs.

~~~
mrmanner
> Long to short, the website "loses" over $500 per week in donations. Had the
> NPO paid for a better site their ROI and general goodwill would be much
> better.

> Btw, the NPO does the same for their social media marketing. More
> "opportunity" is left on the table.

This is true in the cases where the money not spent with this organization is
spent either with a less efficient (by some metric) organization, or on non-
charitable causes such as a new car or a new cat for the potential donor
instead. If the more expensive website simply relocates charitable donations
from one important cause to another, the total goo might actually decrease
even if the ROI on the website was good for the individual organization. If an
investment brings in "new" money, it's obviously worthwile.

I guess my point is that it's good to compare organizations on various
metrics, but not to the degree where they start using their resources to
outcompete each other instead of doing good.

~~~
chiefalchemist
Measurement / incentive __always__ runs the risk of "be careful what you wish
for." The idea that the mentioned ratio creates more good is a bad assumption.

------
zachlatta
Sounds like a cool idea. I run [https://hackclub.com](https://hackclub.com)
and can tell you first hand how much of a nightmare nonprofit fundraising is
for early nonprofits. Talk about an inefficient market.

I wonder how they're dealing with due diligence. Organizations lying about
their numbers is rampant, especially in early stage. I once met with an
administrator of one of the larger prison workforce development programs in
SoCal and they told me that when they measured and reported program
participants, they actually only measured the number of inmates that entered
their program. They didn't measure completion rate, let alone long term
outcomes.

What does "inmate hours worked" mean? How do you prevent a race to the bottom
where the org optimizes for butts in seats instead of actual outcomes?

------
CPLX
The finance industry essentially succeeds by jumping between two people making
an exchange and skimming off as much profit as they can get away with. A giant
vampire squid if you will.

So of course someone has looked at the billions going to charity and tried to
figure how they can get commissioned on it as well.

While it's of course theoretically possible that this increases donor
efficiency somehow, that's an extraordinary claim which requires evidence and
proof. The initial reaction should be _extreme_ skepticism.

~~~
dalbasal
To play devils advocate..

Better capital allocation could make the NGO sector way more effective, and
help it actually solve issues like extreme poverty, infant nutrition and basic
healthcare. Currently, one charity could be doing the same thing (say, rural
inoculations in Bangladesh) 10X more effectively, but raising far less money.

If a financial market can skim their 6% while solving this problem, the return
in terms of the number of people inoculated could be 60% or 600%.

I share your skepticism though, of solving these issues with with a new type
of security. I think money markets may be the best example of free market
failures.

------
BerislavLopac
There is a strong tendency to tout new, unproven methods as "revolutionary"
and (shudder) disruptive. In reality, many non-profits have been continuously
trying many different financing models, and those that don't work are quietly
discarded and moved on. Celebrating something unproven doesn't really help --
Theranos, anyone?

------
skybrian
At first glance this seems like a silly idea. It requires raising over twice
as much money, since at least half of it gets paid back to bondholders.

But I think what may be happening us that it allows the donors to delay
payment? The charity gets the money right away and the donors can pay later.

I'm not sure the high-stakes incentives are a good idea? The donors have
incentive to claim that the goals technically weren't met (even if they mostly
were) while the bondholders have incentive to hide any problems. It would be
interesting to know more about how the deal was designed.

------
thelock85
This is interesting but could generate perverse incentives. Hard-to-measure
_impact_ KPIs are a major reason why social ventures form around non- instead
of for-profits (perhaps because very few individual investors see short-term
economic benefit from an increase in the “greater good”). Combining $$$ ROI
with philanthropic success means fewer and fewer nonprofits funded to solve
hard, messy challenges.

------
jpdus
This is a good idea, but not new at all. For more details on the concept and
some examples where RBF (Results based financing) is already successfully
used, refer for example to Instiglio, a NGO consultancy in this space:

[http://www.instiglio.org/en/publications-and-
resources/](http://www.instiglio.org/en/publications-and-resources/)

------
tslug
I hope this works out, but it's easy to see how it can be abused. When those
abuses are addressed, the fix will undoubtedly lean on the usual fundamentals
behind investing in both non-profit and for-profit ventures: due diligence on
the idea and team deploying it, taking risks, hard work, and a good bit of
luck.

------
iamgopal
Does software foundation counts towards nonprofits ?

