What’s changed in the social sector since Dan Pallotta wrote his best-selling book “Uncharitable” in 2008? According to Dan, an entrepreneur and philanthropy innovator, not much. Find out why.
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00:07 - 00:59
Hi, everyone. Welcome to Inspired Investing. I'm your host, Clare Golla, Head of Philanthropic Services at Bernstein. This podcast is where we connect and share insights with listeners like you who are engaged in the non-profit philanthropy and broader social sector. Now for my guest today, Dan Pallotta. This is an awe-inspiring bio, so I'm just going to hit the high points. Inventor of the multi day charitable event industry. This was the breast cancer walks and aid rides and a model that has been since adopted repeatedly to raise billions of dollars for important causes in the last ten years. Dan, you've given over 400 talks in 38 states and nine countries on philanthropy and innovation. Very impressive. And you're a bestselling author, entrepreneur, innovator, and recipient of so many prestigious awards. Thank you so much for joining us today.
00:59 - 01:02
Yeah, thanks for having me, Clare. A pleasure to be with you.
01:02 - 01:40
I was just joking with someone about him, like Dan is a celebrity in this industry. I'm so excited to have him on. So, I'm going to ask a question based on really two sort of biggies from your bio. Right? You wrote Uncharitable in 2008 and then you gave your TEDx talk in 2013. And it was another factoid here, the 16th most commented TED talk of all time, big audience, big conversation. Now you're releasing a documentary under the same name. And so, I'm really curious about a maybe you could share a little bit about the background of the genesis of the original book and then what's changed over the last ten years. What do you see that has changed about the audience or how this may be received?
01:40 - 02:15
The genesis of the original book Uncharitable, which was originally published by Tufts University Press, it just in about two months ago was reissued by Brandeis University Press was to share the insights I had about the dysfunctional way we treat nonprofit organizations. I had created, as you said, the AIDS Rides and the Breast Cancer Three Days and the Out of the Darkness suicide prevention walks. And I did that as a for-profit entity.
02:15 - 03:02
Our company was called Pallotta Team Works. And, you know, it began because I'm gay and lost a lot of friends to AIDS and felt that the AIDS community needed something much bigger than a Saturday morning AIDS walk in response to the loss and the grief. And it grew. And we had 400 full time employees in 16 US offices. We were raising about $150 Million a year, and we were being criticized for best practices. We were being criticized for doing things that would be utterly unremarkable in the for-profit sector because we were in the nonprofit space, even though we were a for-profit company, you know, we were doing charitable events. We were just charging a fixed fee, not a percentage or any of that.
03:02 - 03:35
So, we'd hire we'd try to steal someone away from MTV, you know, for marketing, and they'd be making 600 grand at MTV. So, you know, maybe we can steal them for 400 grand, $400,000. You're paying someone $400,000. That's unconscionable. You just ran $100,000 ad in The New York Times. That's unconscionable. That's money that could have gone to people with AIDS. Well, no, no, it couldn't have, because it wouldn't have been there if we hadn't run the previous ad, which raised 2 million bucks. You know, you're taking all of these risks with these new event concepts.
03:35 - 04:00
And so that's what Uncharitable was about, the economic injustice of having these two rulebooks, of putting the nonprofit sector in an economic prison, letting the for profit sector roam free, and then somehow thinking you're going to create equality that way when you, you know, you're trying to solve inequality and then you lop an unequal set of rules on the players that are supposed to solve for inequality.
04:00 - 04:54
And so what's changed? I think a lot has changed in the institutional funding circles. You know, like the Ford Foundation, Darren Walker coming out on 60 Minutes saying this overhead thing is a charade. We have been willing participants in it. Frankly, we've known that we weren't giving enough money to cover the overhead costs on a project, so they doubled their overhead ratio. MacArthur Foundation did the same thing. Packard Foundation did the same thing. Open Society Foundation did the same thing. So things have started to change. But I liken it to where the gay marriage conversation was not in 1990, but I would say around 1940. Okay, so it's just the beginning. The conversation has been labeled, you know, nobody knew you could have a conversation about this before. I would say that's where that's where we're at right now.
04:54 - 05:21
Okay. It's so interesting how you describe this sort of starvation, right, of non-profit organizations in terms of the overhead. When I was in the nonprofit sector, I remember the ratios, right, saying you can't have more. More than X percent, right, going towards operating. And now I'm in the investment industry and it's like unheard of not to see a J curve or actual right. So, like you have to spend money before you actually are able to generate those returns.
05:21 - 05:48
In a simple, a simple way of thinking about it. You know, I would I tell people, even sophisticated donors, you want to know why nonprofits aren't producing the results? You want to know why they haven't changed the world in the way you thought they might? That's not what you asked them to do. We asked them to keep their overhead in their salaries low. So, guess what they did. And having an impact, producing results became entirely secondary. Because you don't get rewarded for producing results, you get rewarded for keeping your overhead low.
05:48 - 05:52
Right? Mean it discourages taking risks, right? Or innovation to a certain extent.
05:52 - 06:24
It discourages innovation and discourages investment in fundraising. You know, interestingly, higher education gets it. You know, USC had a $6 billion endowment, took them 50 years to raise it. They raised the next 6,000,000,000 in 5 years. You know how they did that? They doubled the number of major gift officers they had from 270 to 550. Now, there is not a Health and Human Services charity with anywhere close to 270 major gift officers. But there should be because they're trying to end hunger and poverty and everything else.
06:24 - 06:57
So, here's a question. So, you're talking about colleges and universities, right? Fundraising machines in a lot of ways. And so a lot of these prestigious schools where you've given keynote addresses and, you know, in the likes, like they're graduating, the top business schools are graduating folks who want to become social entrepreneurs. B Corporations are a real thing. Do you think that there's a talent shift? Do you think more MBAs and folks are going into, say, social services or something like that, or do you think there's opportunity there or does something dramatic have to change in order for that to happen?
06:57 - 07:56
Do I think more people are going, No, I don't. But let's define terms here. The Kauffman Foundation, I forget who ran it. Karl Something he wrote this wonderful blog called All Entrepreneurship is Social. And I think that bears some meditation. How do we define social entrepreneurship? Is Apple a social enterprise? I mean, the Apple Watch saves lives. The iPhone helps people who can't see. Apple's always talking about trying to change the world. What exactly is a social enterprise? Do MBAs want to go into something that's doing good? Yeah, you know, I guess they probably do. But they look at that in traditional ways. If I can get a job that pays six times more, hell, I'll take that and I'll just sit on the board of a charity and donate money. But in terms of any change in influx of MBA talent into the nonprofit sector, into the Health and Human services portion of the nonprofit sector, I don't see it.
07:56 - 08:23
Okay. So, this is interesting because we work with lots of entrepreneurs, right? And I would argue that most of them recognize at this point that there is a symbiotic relationship, right, between profit and purpose, kind of like what you're describing. No matter I think no matter what your company is like, the whole idea of having this sort of North Star or, you know, sort of purpose is really important. What do you think needs to happen to make this change?
08:23 - 09:16
Let's make a distinction between this social enterprise world and big corporations and social entrepreneurship and what I call charity. Nonprofits don't like me using that word charity. I actually think it's a beautiful word, and it's the way the general public relates to a charity, as I define it, as the Health and Human Services portion of the nonprofit sector that's fighting homelessness, domestic violence, improving literacy, you know, health care for people, you know, in clinics who otherwise wouldn't have it. That is a place where you can't monetize that as easily as you can. What we think of as social enterprise, some MBA starts a company putting solar panels on roofs or whatever you can monetize that really, really easily. How do you monetize the prevention of a suicide? How do you monetize housing a homeless person?
09:16 - 09:44
And so that's where philanthropy comes in. Philanthropy, as I said in that Ted Talk is the market for all those people for whom there is no other market coming. So that's where you want an influx of talent. But so long as we tell the homeless shelter, it would be immoral for you to hire anybody and pay them more than $100,000 because really you're dealing with homeless people, right? It would be immoral. Then you're just not going to you're just not going to draw that talent into the sector.
09:44 - 10:05
If you started to look at it as maybe we don't want to hire on the cheap to end homelessness, maybe we want to bring the best talent in so our attitudes need to change. You know, we need to take the halos off our heads when we demand low salaries in the nonprofit sector and stop thinking that we're doing something good and realizing that we're doing something incredibly counterproductive.
10:05 - 10:43
It's a very well-taken point. So, we have across the country been very busy over the last few years with an influx of unrestricted, much larger multimillion dollar gifts to a whole community of organizations that never had access to this size of unrestricted gifts in the past. And many of those organizations are grappling now with the messaging as to like, yes, we are being invested in, but that doesn't mean that it was sort of a one and done. What would your advice be for an organization, you know, receiving that type of gift today?
10:44 - 10:57
Invest heavily in forward-thinking, long term fundraising operations. Otherwise, when the gift goes away and you spent it all on programs, you're going to be right back where you started. And I would say the same thing to the philanthropist.
10:57 - 11:28
Let's make a few assertions here with respect to whatever change is happening. What Mackenzie Scott is doing is great unrestricted to giving like that is great. It's a tiny, tiny, tiny percentage of the $400 million Americans give to philanthropy every year. And a tiny fraction of the 1.3 $1.4 trillion size of the sector as a whole. So, it's not like it's a pervasive sea change. It's a few people doing something that's encouraging.
11:28 - 12:07
Second, be careful when you give a nonprofit unrestricted money because you have restricted them for so long. You have trained them for so long not to spend on fundraising that they're going to place their own restriction on it just because they're as deeply embedded in that mindset as you were in the past. And they don't have any literacy or facility, many of them with fundraising, with retail fundraising. So, they're scared of putting the money into that. So, they're just going to keep pouring it into programs, which means when it runs out, that's the end of it.
12:07 - 13:06
And I've seen this with iconic billionaire philanthropists. I've seen them dump a ton of money into things, scale up the organization. The organization didn't make any investment in fundraising. So, when the money runs out, you know, they can't live at that scale anymore. If you've identified a nonprofit organization that really has an idea, a compelling idea, a real innovation that it's bringing to bear on the solving of a problem, then you want to scale that innovation up. Scaling that innovation up means investing in fundraising. What do I mean by investing in fundraising? I don't know. Could be higher. A lot of new major gift officers, If that's their strength, it could be higher new grant officers, if this is a foundation play, could be start some big retail fundraising event like we did. Could be put a lot of money into direct response. Television advertising could be put it into direct mail. I don't know. Find out what the organization strength is, but make the investment in fundraising so that they can remain at that scale independent of your funding once it runs out.
13:06 - 13:49
So I love this. I have this conversation with foundations a lot, with foundations who are trying to figure out what's the most effective way we could be giving our dollars. But I love the idea of flipping it on its head and saying yes, like invest in your overhead, right? Invest in the future financial, health and sustainability of this organization. And the only way you can do that is by keeping the lights on after you build this beautiful new facility, because we see that with a lot of capital campaigns of organizations that we work with, they raise all the money and, you know, to build the facility. But then not only just keeping the lights on afterwards, but continuing to raise money. Right. To investing in that infrastructure. That's a great that's a great idea.
13:49 - 14:34
Honestly, the foundation's giving away this money in a way. They don't do that. They don't have any literacy and fundraising either. They didn't grow up as fundraisers. They don't understand fundraising. It doesn't it doesn't dawn on them. So that's my biggest message to people with serious money Stop giving your money to programs. You're annihilating all of the leverage in your money. Put the money into a carefully vetted fundraising plan. Look at the plan like you would if you were making an investment. Is there a team that can actually make this plan happen? Are there enough resources? Is there some data going into it? Is there a business plan for fundraising? But put it into fundraising and if you do that correctly, you can give it as debt instead of a gift.
14:34 - 14:55
If you gave if you loaned a nonprofit, you know, $5 million for three years to hire new major gift officers for three years, and they're able to turn that into $15 million a year, there's more than enough money to pay you back your capital and you can go give it to and loan it to another nonprofit to start to do the same. That's how we built the AIDS rides in the breast cancer.
14:55 - 15:43
Three days with debt. At first it was debt from the charities. They loaned the money to cover the negative cash flow. Then it was from a sponsor. We said, don't give us sponsorship dollars, give us negative cash flow. Low debt so that we can start these events on a big scale. Then we went to our bank and said, You like all this deposit business? $180 Million in Deposit business. Start loaning us money to launch new event concepts and see the nonprofit sector doesn't understand capital. Even capitalists, capitalist philanthropists don't understand capital When it comes to the nonprofit sector. Nonprofits think of their petty cash as their capital. Whatever I have in petty cash, that is what is available to me to invest in a new fundraising business, right? So, I get $7,000.
15:43 - 16:18
What can I do with that? If you wanted to do an age ride on the scale that we did it and you're going to spend hundreds of thousands of dollars on advertising and hire a big staff before any money is going to come in, you might go into the red a million bucks. So, you need $1 million in debt. You need $1 million loan to see you through that period. Then you can build something of scale with that formula. Our events were grossing $18 million a year, each one each event with a with $1 million in debt. Nonprofits need to start to ask, What do I need to do this thing right at scale?
16:18 - 16:58
Yeah, I would argue, I think that first of all, there's an enormous stigma right around leveraging and using debt to finance anything across the nonprofit sector. There are plenty of people within the nonprofit sector who do understand capital. There are plenty of people, you know, philanthropists who do understand capital. But I feel like the messages have been so ingrained in all of our brains, right? That we need to think differently about nonprofits. Like we have all these people who go to a board meeting, you know, once a quarter, and it's like all of the concepts that they may be using in other parts of their career or their life, they're not. It's like as if it's this really, really different business model.
16:58 - 17:18
And the fact is there's many more commonalities. I would argue then there may be gaps that need to be filled through philanthropy and through government and through other sort of dollar. But to your point, I mean, if if we're working towards financial independence, right, for organizations, then then it costs, right? It costs something. Yeah.
17:19 - 18:10
Look, I don't think we should be working towards financial independence. I think we should be working towards solving problems. What do you need to solve the problem? What problem are you trying to solve? And by when are you trying to solve it? On the point about capital, I might disagree because do nonprofits understand capital? Some of them do. Some of the bigger ones do, but they understand it in the narrow domain of collateralized debt, like building a building or housing or something. When it comes to fundraising and building a revenue stream, they don't understand capital and they don't use capital. They their imaginations are limited by what money they have on hand rather than by a thought that I could go to some capital market and raise the capital. I need to underwrite the negative cash flow.
18:10 - 18:48
I don't know of a nonprofit that has taken on debt to hire ten new major gift officers. They should, if major gift work for them and they can't swing, they don't have the capital to pay for it right now. They should go to a donor and say, I don't want a $5 million gift. I want a $5 million loan to hire three new major gift officers. That's the domain where capital is not understood. The local florist understands it. The local baker understands it better than nonprofits. They know they put together a budget. Nonprofits don't think that way when it comes to building a revenue business. And they are businesses. You know.
18:48 - 18:50
They are. Absolutely.
18:50 - 18:56
So, here's my question for you. You're and I know we're getting close to time. The documentary has had a soft launch, correct?
18:56 - 19:18
No, not yet. We've done a few screenings of it to private audiences and the reaction has been off the charts. And we just had some news very exciting news yesterday that might allow us to distribute this on a much, much bigger basis than we had originally thought. So, it's coming. It's in the next few months. It's coming. It's done.
19:18 - 19:27
That's great. I'm going to wrap it up with this question so like what action are you asking people to take with the documentary? Sort of like what does success look like to you?
19:27 - 20:20
The documentary teaches people don't ask about overhead, don't ask about salaries, ask about what problem you're trying to solve and what good the organization is doing towards solving that problem. Turn this around if you want them to solve problems. What do I want people to do when they come out of the documentary? I want them to get other people to go see the documentary. That is the only thing I want right now because this is very much like gay marriage. It's about changing minds. It's about getting a critical mass of people to start thinking in a different way. So, yes, I want you to take the lessons of the documentary, apply them to your nonprofit, start investing in fundraising, start using capital. But more than anything, I want you to. Get your whole board to watch this movie, get all your donors to watch it, get your whole staff to watch it because your staff is not. People say, you know, you're preaching to the choir when I'm speaking to staff and the choir is not all singing the same song.
20:20 - 20:32
Yeah. All right. This is great. And I can't wait for the documentary to come out. We'll definitely be, you know, trying to get the word out as well. So thank you so much, Dan, it's all we have time for. Thank you for joining me.
20:32 - 20:34
Yeah, that was great. Clare. Thanks.
20:34 - 20:35
And thank you all for listening.
20:35 - 20:56
Everyone, if you'd like to learn more, please see the link in this episode's description. If you enjoyed this episode, please like and subscribe to inspired investing on Spotify, Apple Podcasts or wherever you listen to podcasts. Also, please email us with your thoughts, questions and feedback to insights at Bernstein and be sure to find us on Twitter at Bernstein.