Creating a Smarter Philanthropic Marketplace

Many large foundations today are trying to measure the social impact of their funding to nonprofits in an effort to figure out “what works.” What they aren’t doing is sharing their insights widely enough with smaller and less-sophisticated donors. As a result, most funders are not adequately tapping into existing data and knowledge about proven strategies to better inform their grantmaking.

During a session on measuring impact that I participated in at the recent Yale Philanthropy Conference, Dean Karlan, president of Innovations for Poverty Action, noted that the majority of donors are “skeptical altruists”—they want to do good but are uncertain about which strategies most effectively address particular social problems. Likewise, Paul Penley of Excellence in Giving observed: “Many donors lack confidence in choosing where and how to give, so they end up just giving a lot of small gifts to a large number of nonprofits.”

Although mega-philanthropies (such as the Gates Foundation, Ford Foundation, and Hewlett Foundation) and certain regionally oriented private and community foundations are very influential, 75 percent of contributions to US-based nonprofits are actually from individual donors, and the wealthiest 30 percent make three-quarters of these donations. The 2010 “Money for Good” study found that only 35 percent of these donors conduct any research before making a gift, and just 3 percent give based on relative nonprofit performance. While some of these funders are supporting nonprofits to which they have a close personal allegiance, such as an alma mater or local religious congregation, and therefore do not want an in-depth analysis of the efficacy of the organizations, others could benefit from making more informed choices.

Smaller foundations that have few or no staff members face similar challenges. There are more than 90,000 foundations in the United States, yet the top tier represents more than 90 percent of the collective assets. This means that the vast majority of foundations are small- to mid-sized. In fact, 40,000 are family foundations, 60 percent of which have assets of less than $1 million. Smaller funders often do not have the financial resources to move the needle on a particular issue or in a specific community. Their leaders may want to make a difference through giving, but lack the right knowledge and tools to do so most effectively. Some spread their philanthropic dollars among a wide array of causes instead of concentrating on a particular goal or cause, making it especially hard to measure success. Many are stuck in the day-to-day routine of reactive checkbook giving, and don’t have the time, energy, or resources to understand the complexities of impact assessment.

How can we make the field-wide dialogue about assessing nonprofits and making data-driven grant investment decisions more accessible to smaller philanthropies and individual donors? There has been some recent progress. The Association of Small Foundations and National Center for Family Philanthropy have ramped up their educational offerings on the topic. Moreover, the Gates Foundation has subsidized the creation and distribution of helpful guides and videos geared toward educating individual donors on a range of issues, such as the importance of creating a roadmap or involving the next generation in philanthropy.

Nonprofit rating websites such as Charity Navigator and Guidestar recently have de-emphasized less-helpful metrics like administrative cost ratios and have increased the amount of information they provide regarding how nonprofits assess their own performance. GiveWell goes further and recommends specific nonprofits to fund based on their performance results. Even more, initiatives such as the Growth Philanthropy Network’s S & I 100, New Profit, and the Edna McConnell Clark Foundation’s True North Fund have each vetted and promoted particular nonprofits that have demonstrated evidence-based success and scalable models. This enables “littler guys” to piggyback on the good due diligence and contribute to an aggregated capital pool.

We need to do more. As fellow panelist Valerie Bockstette, managing director at FSG, stated, “Too many funders try to impose ‘solutions’ on a system rather than working through the emerging process with nonprofits.” Institutionalized philanthropy still concentrates on accountability too much, at the expense of learning. This causes some less-seasoned funders to unrealistically expect “report cards” with “return on investment” analyses on all their grantees. Even the large grantmaking institutions that promote this evaluative learning often do not provide enough resources for their nonprofit partners to do this assessment work well, setting a bad example for other funders.

Bigger philanthropies should join forces to develop shared metrics and better knowledge-distribution systems so that newer and more modestly sized grantmakers—as well as nonprofits—can learn more about what works and why, and use tools to track their performance. Innovative start-ups like Algorythm, which harnesses “big data” for predictive analytics, and veteran infrastructure support organizations like the Foundation Center can both help on this front.

Over the next decade, the role of philanthropy will likely increase as governments continue to struggle to address societal problems, a major intergenerational transfer of wealth ensues, and the number of high-net-worth donors grows. A study by the consulting firm 21/64 and the Johnson Center for Philanthropy revealed that younger donors are much more committed to nonprofit performance measurement and social impact than the previous generation. Their financial, legal, and other advisors will need to embrace this changing role of the next generation; they also need to do a better job enabling their clients to ask more thoughtful questions about philanthropy, and to become better consumers of data and knowledge that can positively influence their giving.

We face daunting social and environmental challenges, and philanthropy’s role in addressing them is becoming more crucial. Large and mature foundations must transfer more of their wisdom to small and newer funders, field infrastructure organizations need to develop better knowledge-and metrics-sharing systems, and advisors need to offer smarter advice. We can amplify social impact by engaging the philanthropic ecosystem's full spectrum and harnessing its collective wisdom.

Read more stories by Paul Connolly.