Global Issues TED Conferences

A new way to judge nonprofits: Dan Pallotta at TED2013

Posted by: Kate Torgovnick May
Photos: James Duncan Davidson

Photos: James Duncan Davidson

Dan Pallotta created two huge charity initiatives — AIDS Rides bicycle journeys and Breast Cancer 3-Day events. These initiatives raised $108 million for HIV/AIDS and $194 million for breast cancer. Both had their best years in 2002 … and then Pallotta’s nonprofit went out of business.

In the final session of TED2013, Pallotta shares why that happened: Major sponsors pulled out following a slew of bad press over the idea that his organization was investing 40% of their gross into recruitment and customer service. The backlash came from our basic — and wrong — cultural understanding of charity.

“What we know about charity and the nonprofit sector is undermining the causes we believe in and our desire to change the world,” says Pallotta. We expect businesses and nonprofits to use “two separate rulebooks,” he suggests.

“Business will move the mass of humanity forward, but will always leave behind that 10% of the most disadvantaged and unlucky,” he says — which is why we need philanthropy and nonprofits. But couldn’t the nonprofit sector use the same strategies as the business world to grow their profits and give more money to the needy? After all, says Pallotta, “How do you monetize the prevention of violence against women?”

The nonprofit sector as we know it isn’t working. In the United States, poverty has been stuck at 12% for the last 40 years. Homelessness has not been solved in any major city, and we have no cure for cancer.

“Our social problems are gigantic in scale, our organizations are tiny up against them — and we have beliefs that keep them tiny,” says Pallotta, the president of Advertising for Humanity and author of Charity Case.

Pallotta outlines five ways in which nonprofits are handicapped in their mission to help people.

1. Compensation

“We have a visceral reaction to the idea of people making a lot of money helping others. Interestingly, we don’t have a visceral reaction to the idea that people should make a lot of money not helping other people,” says Pallotta. “It gives a stark, mutually exclusive choice between doing well for yourself and your family and doing well for world.”

For example, the average salary for a CEO of a hunger charity is $80K. Meanwhile the average salary for someone with an MBA, after ten years of school, is $400K.

“We send people marching from the nonprofit sector into the for-profit sector, because they’re not willing to make that kind of compromise,” says Pallotta. “Not a lot of people with $400K talent will make a $316K sacrifice every year.” And actually, it turns out it’s more financially advantageous for these talented business minds to take the big paycheck, give $100K to a hunger charity each year, reap the tax benefits and get the label of “philanthropist.”

2. Adveritsing and marketing

“We tell for-profits to spend, spend, spend on advertising,” says Pallotta, but nonprofits are expected not to advertise — unless the advertising space and airtime is donated. People want to see their money spent directly on the needy.

But Pallotta points out that money invested in advertising can be returned dramatically amplified. He uses his own initiatives as an example. Over nine years, more than 182,000 people participated in Pallotta’s AIDS Rides and Breast Cancer 3-Day events, raising a cummulative $581 million.

“We got that many people to participate because we bought full-page ads,” says Pallotta. “Do you know how many people we would have gotten if we advertised with fliers in the laundromat?”

Pallotta stresses that nonprofits need to be able to communicate with the public the incredible work that they are doing — and to ask for bold commitments in return. “People are yearning to be asked to use the full measure of their potential for somthing they care about,” he says.

3. Taking risks on new revenue ideas

Nonprofits are not allowed to try new things, says Pallotta, because public outcry sounds so quickly at a failure. As Pallotta found by using a different model of spending — experimentation is a big no-no for nonprofits.

“Nonprofits are reluctant to attempt any brave, daring new fundraising endeavors, because they’re scared their reputations will be dragged through the mud,” he says.

This fear kills innovation. And if nonprofits can’t try new things and grow — how can they possibly tackle problems of the size that our world has?

4. Time

On the same note, Pallotta points out that it took Amazon four years to turn a profit. While businesses are given time to build the infrastructure they need, non-profits are not afforded this luxury.

“If a non-profit had a dream of building at a magnificent scale, but it would require six years for the money to go to the needy, we would expect a crucifixion,” says Pallotta.

TED2013_0072108_DSC_95355. Profit to attract risk capital

This point is a simple one: nonprofits can’t go after capital, because they can’t be on the stock market. And how do you build scale without capital?

Pallotta stresses that the nonprofit sector is at an extreme disadvantage when compared with the for-profit sector. The difference is dramatic. Since 1970, 144 nonprofits have crossed the $50 million annual revenue barrier. In the same amount of the time, an astounding 46,136 for-profit businesses have surpassed that mark.

So how did this happen? Pallotta looks to American history for the answer. He shares how the Puritanical spirit saw self-interest as a ticket to hell. But charity was seen as the antidote, a way to do penance. “Financial interest was exiled from the realm of charity,” he says.

Today, Pallotta is horrified that only one question is used to evaluate a charity: What percentage of my donation goes to the cause versus overhead?

“It makes us think that overhead is a negative, that it is somehow not a part of ‘the cause,’” he says. “This forces organizations to forego what they need for growth.”

Pallotta shares how his organization used a more-business like model — taking $50K in initial funding for AIDS Rides and multiplying it to $108 million, and taking an $350K initial investment in Breast Cancer 3-Day walks and multiplying it to $194 million. Pallotta says that his organization could have gone the route of just giving the initial funding to research, but by investing in growth, they were able to give so much more.

“[And yet] 350 employees lost their jobs because they were labeled overhead,” says Palotta. “This is what happens when we confuse morality with frugality.”

Pallotta notes that charitable giving in the United States has remained stuck at 2% of the gross domestic product for the past four decades. What if, instead of requiring charities to tighten their belts, we let them grow and try to increase their marketshare?

Pallotta shows an interesting pie graph. Two percent of the US GDP equals $300 billion, with about $60 billion going to health and human services charities. But what if charitable giving could be boosted just 1%? That would be an extra $150 billion a year — just for health and human services charities.

“Our generation does not want its epithet to read, ‘We kept charity overhead low,’” concludes Pallotta. “We want it to read that we changed the world.”

And so next time you’re investigating at charity, he pleads: “Don’t ask about the size of their overhead — ask about the size of their dreams.”

Dan Pallotta’s talk is now available for viewing. Watch it on TED.com »

Comments (40)

  • Pingback: On Non-Profit Capacity | It's About The Art

  • Pingback: Admin Bandit Is attitude holding not for profits back from success? » Admin Bandit

  • Pingback: Using stickers to advertise your campus organization

  • Pingback: The Way We Think About Charity Is Dead Wrong | StiftungsSalon

  • Pingback: A New Model for Giving to Great Causes Online

  • Pingback: Il faut changer notre mentalité à propos de l’évaluation des OBNL ! | Gouvernance | Jacques Grisé

  • Pingback: Open the Door | Age of impact

  • Pingback: Thinking Outside Of The Box Can Lead To Success…And Sometimes, Devastation | Toward A Sensible Organization

  • Pingback: The Uncharitable World of Policy: Dan Pallotta TED - Social Work Helper

  • Judy Pearson Martens commented on May 31 2013

    I’m just seeing this now, so forgive my tardiness in these remarks.

    Like some of the other commenters, I too am involved in the non-profit world (www.survivorsconvention.com). My co-founder and I have put our careers on hold, borrowed and dipped into retirement big time (while earning nothing ourselves) all in the belief that it’s the right thing to do.

    Our work is personal – we’re both cancer survivors. I very much agree not only with Pallotta’s points, but the supportive comments as well.

    Doing nonprofit work is, as a matter of fact, very much like being a cancer survivor. The experience is not really understood unless you or someone you love has walked down that path. I don’t think those who are the biggest naysayers of a profitable nonprofit have ever been involved at the ground floor level.

    Think about it this way. If nonprofits are not allowed to have operating funds or pay their staff, then only the very wealthy (who can afford to donate 100% of their time with no pay) are able to be involved. And that in turn cuts out the majority of us and our altruistic desires.

  • Pingback: Leadership in the Nonprofit Sector: It’s About Vision—Not Money (Guest Post by Howard Freeman) «

  • Pingback: My First Ted Event: TedXTimesSquare | PJ Kaiser

  • Laura Lee Dooley commented on May 3 2013

    This is an issue we’ve had to deal with at my organization, World Resources Institute. Our CFO just posted his thoughts on this issue in response to Dan’s video at http://bit.ly/107FEl7

  • Pingback: A New Way to Judge Nonprofits | Jericho Road Pasadena

  • elan star commented on Mar 28 2013

    For decades I have thought this is the best model. To find an initial creative manner to actually do this is brilliant.
    Why do we demonize anyone who does anything creative when government wont and distracted coporations dont. then wher eis our future this is not a moral question this is a
    doubt issue What Dan is proposing is the Only way to thange the sectors. To co create something new Refine it later…creat sommething new now and then modify it Fantastic pioneer. Bravo!

  • Pingback: Time to Rethink Non-Profits? « burbaugh

  • Christopher Hui commented on Mar 22 2013

    Provocative. He is an intelligent man and has some interesting perspectives.

    But here’s the key in these paragraphs.

    AIDSRide raised a total of $581 million gross, but contributed only $108 million for AIDS services in the US!

    This means that running a couple of bicycle rides costs a staggering $473 million USD!

    I’m thinking that Mr Pallotta and his buddies made quite a lot of profit in the process. He just happened to capture the imagination at the right time, in the right place when AIDS was at the forefront of public consciousness.

    This amounts to misappropriation of funds and fraud on Bernie’s scale given the fact that he raised the money on the premise of a lie — that the money was going to treat AIDS. Simply put — if I had donated $100 dollars to AIDSRide back in 1990, only $18.59 USD would have ever made it to the beneficiaries. Perhaps less. I wonder how many of those sponsors would be satisfied with the way their hard earned money was distributed.

    Worse. I worry about how this endangers the entire non-profit sector. If the benchmark is to contribute just 18.59% of my donation to the cause, I am likely to become quite cynical and stop giving altogether. Fool me once, shame on you; fool me twice, shame on me .. ..

    I wonder if Mr Pallotta thinks it would be good to put that declaration into one of his expensive full-page colour adverts along with full disclosure of salaries and bonuses? If a bank failed to disclose such costs and expenditures, people would go to jail for a very long time.

    The “success” of his programme lay in the fact that they managed to con people with a sob story and extract 81.41% to pay themselves in the process. He was simply lucky that charity isn’t regulated in the same way as financial institutions.

    The fact that he believes his time is “worth it” is galling. If he really is that talented or capable, why didn’t he make his money elsewhere and donate his time to the AIDSRide venture? This could mean more of the $581 million would end up in the right place.

    If charitable giving is stuck at a fixed percentage of 2% gross as he says (and I believe this to be correct), then all he has succeeded in doing is take money from other charities to fund his profit / operations / costs / bonuses and salaries.

    I know this much to be true. I make a fixed amount in income. In any given year, if I give to A, then I give less to B. It is not a bottomless moneypit of goodwill that he is mining from. He conveniently neglects to connect these particular dots in his argument.

    Clearly he believes he has done good, but I think he may have bent the spoon to fit his mouth.

    He is clearly persuasive and a good presenter. But let’s carefully consider the content before siding with the stylistics.

    • Brad Ogilvie commented on Mar 22 2013

      I think you hit great points, Christopher. But another perspective, as a former director of one of the beneficiaries, was that our $50,000 investment in the Rides netted us over $1.5 mill, so that was huge for us. We were also able to translate this into a strong network of supporters, donors and friends that continue to this day. My organization embraced the spirit of community. Unfortunately, greed (Dan’s, other beneficiaries, and my own corporate board) focused too much on money rather than mission. I remember meeting with Dan to try and bring more collaboration/engagement/creativity to PTW and the beneficiaries. Neither was having it, despite the fact that we all shared mission and purpose. It’s an example of how I think Dan’s focus on the salaries missing the bigger point.

    • Fred Reggie commented on Mar 22 2013

      Mr. Hui,

      Having spent the better part of 30 years working with, in, and on behalf of nonprofit organizations as a national board member, program director, and consultant, I consider myself well-qualified to evaluate your post as an uneducated rant.

      1. You criticize Mr. Pallotta for making “quite a lot of profit in the process”. How much profit did he make? Do you know? Do you really believe that entrepreneurs who strive to make this world a better place have no right to profit from the good they do? Mr. Pallotta never masked the fact that his was a for-profit enterprise; there was no deception.
      2. A net of 18.59% is not bad for any business. My involvement in nonprofit work enlightened me over the years to the fact that many organizations go to great pains to create the illusion of low cost-of-fundraising ratios. They fear the blowback they might get from people, like you, who do not understand the business side of operations.
      3. You accuse Mr. Pallottta of “misappropriation and fraud”. I do not know your profession or position in business, but do you honestly believe or expect that 100% of your donation should go directly to the cause? If so, Mr. Hui, you are grossly naïve.
      4. When you suggest making a full disclosure of salaries and bonuses on promotional materials you imply that banks are required to disclose such costs and expenditures and that failure to do so would send people to jail for a very long time. I am not aware of any requirement that for-profit private businesses have to divulge any such information to the public.
      5. Your statement that he managed to “con people with a sob story” to pay themselves 81.41% in the process is recklessly ignorant. Are you aware of the costs associated with putting on these events? He delivered $108 MILLION (and nearly $200 million to another) to an organization that, otherwise, would not have received any of it. If he made money for his company, who cares? Should he have sold cookies in the churchyard after Mass and sent the $75.50 he made to the organization? Would that be better because the cookies were donated?

      Mr. Hui, Dan Pallotta has shown us all what it means to dream big and help those in need. All nonprofit organizations would benefit greatly if his sensible philosophy and passionate vision were understood and embraced by the public. I admire Dan Pallotta for taking the lead on what, hopefully, will become a bouleversement of an archaic paradigm and bring hope to the many who are in need of spiritual, emotional, and physical healing.

  • Pingback: Non-Profits & The Business of Social Good