Five For-Profit Practices That Philanthropy Should Avoid

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When we interviewed a young tech executive in San Francisco about how she picked nonprofits to receive some of her newfound wealth, she said she wanted to maximize return on investment. The phrase “return on investment," or ROI, gave us pause. While it was very familiar to us as Stanford MBA graduates, the term was typically used in the context of our finance and investing classes, not philanthropy. Yet we heard it mentioned a number of times by the millennial, affluent donors in Silicon Valley—typically leaders of successful startups—we interviewed for our research on why, how, and where they give.

It's perhaps unsurprising that someone would use a familiar framework to make sense of an unfamiliar situation, but we were taken aback by how common it was for young donors in Silicon Valley to apply their for-profit startup principles to their philanthropy.

Our worry is not that these approaches are wholly ineffective. For-profit principles have benefitted philanthropy in many ways. However, our interviews with millennial business executives and conversations with MBA classmates have made us wonder whether some young donors have gone too far in applying certain for-profit principles from the Silicon Valley startup world to doing good. Here are five of those practices that we're calling into question:

1. Taking a Portfolio Approach That Emphasizes Breadth Over Depth

In the business world, we are taught to build a portfolio of investments that can diversify risk across sectors and companies. Private equity buyout funds target 10 or more investments per fund, while venture capital funds include even more.

In talking to our classmates and interviewees, their intuition is to approach philanthropy with a similar portfolio approach. Paul Brest and Mark Wolfson have argued that the portfolio approach is inappropriate for philanthropy and biases donors toward safe giving. Individual donors pursuing more than a handful of causes and organizations also risk spreading themselves too thin. One reason is the enormous amount of research that a portfolio approach requires—a donor we interviewed was sometimes spending 20 to 30 hours per week on her philanthropic work while maintaining her full-time job. Another challenge involves the depth of engagement that effective philanthropy calls for. As mentioned in Laura Arrillaga-Andreessen’s book Giving 2.0, a significant value of philanthropy is in non-monetary involvement: sitting on a board, providing advice, making introductions, helping fundraise, and volunteering time. This is nearly impossible to do with a portfolio of dozens of nonprofits. Going deep, rather than broad, may be a more realistic and effective approach for individual donors.

2. Evaluating Nonprofits Like For-Profit Investments

We have been taught to evaluate for-profit investments thoroughly, understanding all of the “upside” opportunities and the “downside” risks. Due diligence often takes months, involving multiple meetings, data requests, and reference calls. It is perfectly normal and accepted for investors to reject an opportunity at the end of lengthy review processes.

Our classmates and the donors we spoke with in Silicon Valley, even those not working in investing directly, feel compelled to put nonprofits through the same rigorous analysis. They find it appropriate to understand all aspects of the organization, meet with the entire team, and send intensive data requests. This can create a significant burden on nonprofits, whose staff and resources are often overstretched. It's also burdensome to those doing the assessment—many of our interviewees said the time involved with due diligence prevents them from getting involved with nonprofits.

There are other ways to evaluate a potential philanthropic gift without burdening resource-strapped organizations. Much nonprofit data are publicly available through organizations' websites or evaluators like GuideStar. Resources like Stanford PACS’ Guide to Effective Philanthropy, Laura Arrillaga-Andreessen Foundation’s nonprofit assessment guide, or the Hewlett Foundation’s tool for nonprofit evaluation can help determine the priorities of an assessment, helping to ensure that it focuses on asking nonprofits for the most important and otherwise unavailable information.

3. Giving Preference to Organizations That Produce Short-Term Results and Tight Feedback Loops

We took the iconic Stanford GSB Startup Garage course, where we learned that the best businesses get a "minimum viable product" out the door as quickly as possible, collect customer feedback, and release frequent improvements to their offerings. As a result, many of our classmates chose to start businesses that can show signs of failing or succeeding very quickly, allowing them to provide metrics that are of interest to potential investors.

Applying this thinking to philanthropy can bias donors toward organizations that show immediate impact. While this might not be unique to the business world, the startup mindset can further fuel this instinct. An organization that builds homeless shelters, for example, may seem more attractive than one that advocates for longer-term solutions that address structural causes of homelessness. It can also bias donors toward organizations that have a clear “customer” who can offer feedback, which elevates nonprofits that serve specific individuals over those that work with complex constituencies or fund research. Finally, it can pressure nonprofits to act quickly to “get a product out the door” when this could have negative consequences for vulnerable populations.

Our donor interviewees tended to care about long-term and more systemic problems (climate change and social justice, for example), but they supported nonprofits that leaned toward offering more direct-service, immediate relief, such as wildlife preservation or food banks. Overcoming this disconnect is important to make sure philanthropy considers long-term solutions along with short-term ones.

4. Searching for Clear Measurement or Return on Investment

At the Stanford GSB, we learned about Milton Friedman and his philosophy that businesses should prioritize optimizing for one, overarching goal: shareholder value. To track their progress, businesses and investors place a high value on measuring the performance of individual employees and entire companies.

Young business donors understand the value of measurement in the social sector, but they tend to expect philanthropic metrics to be as clear and simple as those of for-profit investing, such as ROI. While ROI can be beneficial when comparing similar organizations, a one-size-fits-all measurement approach to the entire social sector is harmful. Critics of measurement-obsessed effective altruism have also noted that it pulls attention away from important issues that are difficult to measure, local and smaller organizations, and new research and innovation. We found that many of our donor interviewees seeking clear measurement tended to favor established, large organizations over newer, innovative ones.

5. Leading With Speaking Rather Than Listening

The business world often rewards people who are quick to speak and sound confident. At the Stanford GSB, participation often encompasses more than 50 percent of our grades. Many classes are taught through the case method, in which the first person to talk sets the agenda of the discussion. We are told to speak confidently and drop phrases that might suggest a lack of certitude, such as “I think” or “I believe.” A tendency to talk before listening has been a common criticism of business executives that sit on nonprofit boards.

Given their reliance on donors' money, nonprofits may feel compelled to politely listen to whatever their benefactors have to say, regardless of the appreciation such outsiders might or might not have for an organization's work culture, operations, and deep expertise in a complex social issue. Donors who listen deeply and patiently rather than speak first tend to build better relationships and solutions.

Bringing Two Worlds Together

There are many differences between the organizational structures, practices, and goals of the social and private sectors. Appreciating the nuances of each approach can strengthen both. In the same way nonprofits have benefited from adopting smart business thinking, the private sector may benefit from some tenets of the social sector: clarity around mission and theory of change, investments for long-term gains, consideration of all stakeholders, tailored metrics, and the humility to listen before speaking. In a time of increasing inequality and wealth generation within the business world, our hope is that newer donors come into philanthropy with an open-minded perspective on how to drive change through the sector, rather than assuming that for-profit thinking is always the right approach.

Read more stories by Judy Park & Kavya Shankar.