Seed philanthropy - a short note

Total philanthropic spending by the US alone is larger than the gross domestic product of all but the fourteen largest nations in the world. That is before you add philanthropic spending by the rest of the world. And still, almost half of the world lives on less than $2.50 US per day, almost a billion people have no access to clean water, a quarter of the population cannot read and write – two thirds of them women – and millions die of preventable diseases. Something here is terribly wrong.

It is clear that the traditional philanthropic model is broken. A new trend however is emerging. ‘Smart philanthropy’. But what does it actually mean? Here is a typical philanthropy scenario. An individual or an organization with financial means suddenly decide to throw some cash at addressing a particular problem. It could be prompted by a death in the family from a particular disease, a recommendation from a PR person, or it could be that the wife of an investment banker had a life changing experience on holiday in India. In any case, in the grand scheme of things, the choice is typically arbitrary. Money is put in the bank, staff hired, initiatives started. If you are lucky, the donors would then receive a nice report giving them some idea of what the money was actually spent on and in some even more rare cases an idea of the outcomes. Now let us go back to one of the most fundamental principles of economics and remind ourselves that money and resources that these well wishing individuals or organizations just threw at a problem are actually scarce. That is they could be used for another purpose. A better purpose? And how do you define better? These questions are rarely asked. Somehow as soon as a word ‘social’ or ‘philanthropy’ is uttered the fundamental principles of resource allocation are thrown out of the window. One metric that actually is frequently scrutinized is the proportion of donor funds used for the end purpose versus the proportion used for management and administration of those funds. This is a misguided attempt to instill some efficiency amongst such organizations. Now, before I get my head bitten off, we, at Jumpstart-up, are all for efficiency. And this mistake is very easy to make. It comes from forgetting of a simple truth: people respond to incentives. One of the largest costs and also one of the most valuable resources of a philanthropic organization is… yes, people! So to cut costs we end up recruiting staff at below market rate, failing to attract the best, the most professional talent and making the organization even more inefficient and ineffective. To illustrate how smart philanthropy is different from the approach above, let us go back to the building blocks of philanthropy. First we need a cause. In an ideal world we should be able to look at some website and see exactly where efforts are needed the most versus efforts already in place, at any given moment in time. Until that happens some arbitrary preference will always be present but one does have a choice in how that particular cause is addressed. Applying the same economic principle of scarce resources we should be able to tell how a particular approach to addressing a problem compares to the best alternative available option. This implies that we need to have a clear definition of what those goals are and be able to have a clear measure of outcomes or outputs from these initiatives versus the resources used to achieve them. And just because these outcomes are not always expressed in monetary terms does not mean that they cannot be measured. We can always count how many young girls go to primary schools as a result of a particular initiative versus other available market or government solutions. Incidentally this also implies that we think through the possible and likely consequences and take into account the fact that the government might decrease spending on education to counteract our initiative or that it may be less effective in how it spends the same amount of money to achieve the same goal, in which case their response is not necessarily a bad thing. The key here is that this thinking process a) takes place and b) is clearly communicated to the donors so that they are able to make a more informed choice as to where and how to allocate their money. Let me now use another example to illustrate a further difference between traditional philanthropy and smart philanthropy. Not long ago I was having lunch with a possible large donor for Jumpstart-up – a wealthy, much respected, very sharp, self-made man who does a lot to support his community and has a great passion for entrepreneurship. As it turned out he and a number of other expats have put some money together to provide clean water and sanitation for hospitals and schools in Africa. Not trusting a traditional philanthropy route they maintained a close involvement with the project to ensure that the money was spent appropriately and taking account of their extensive business and management experience. Now, what happens if they suddenly stop this financial and practical commitment? Easy - the project dies. What if there was a way to achieve the same outcome – provision of clean water and sanitation to the same schools and hospitals – but in a way that makes this project self-sufficient after some initial seed support? This is perhaps the most important aspect of this new concept of smart philanthropy. And this is also what Jumpstart-up is all about. One way to see if something is viable is to find out if someone somewhere is willing to pay for it. This does not mean the price must be high, but it must be appropriate. And it does not mean that each unit of service must be charged for. It just means that overall an enterprise needs to be cash positive at some point and that sometimes we must be creative and entrepreneurial in finding ways to generate such value. After all, money is simply a measure of value. And generating it allows an enterprise to attract the best possible resources to deliver that good or service. The Aravind Eye Clinic in India is a great example of this. They found a way to generate so much value for some clients that they are able to subsidize and offer free surgeries to those who cannot afford to pay for them. In our eyes smart philanthropy has a role to play in taking such socially motivated enterprises from their inception to a point where they become financially self-sufficient. This means generating enough revenue to cover their costs. This also means generating sufficient revenue to access more traditional sources of funding in order to finance their growth and expansion. After all, if you find a way of doing something really well and it has an impact, should you not try and broaden that impact? In most cases this approach does mean having to provide a lot more than just capital in order to get these ventures to that stage. It is about developing particular skills, finding creative solutions. It is also a way of thinking that is frequently missing among mission driven entrepreneurs so there is a lot of psychology involved in helping them out. And since donors typically do not have that much available time, this is where intermediators have a role to play: sourcing donor capital, sourcing appropriate high impact projects, bringing together the right resources and expertise, and shepharding them to success. Let us go back to our example of water and sewerage services in Africa. What if instead of simply putting in all that money and practically running the projects themselves, these donors decided to find a bright local team and teach them the skills necessary to make such a project happen and used these projects as experience building. What if this team became so good at these types of projects that it was able to charge the wealthier clients a higher fee for its work and then provided a subsidized service to hospitals and schools? The amount of support work involved in helping these high impact ventures is frequently too costly for commercial funders to come in at this stage. However the benefit from putting these ventures on the right track is huge. That is why this is a perfect example of an area where philanthropy has still a big role to play.