Volunteer firefighter Mark Bezos kicks off the hour with a story of a small, seemingly insignificant act of heroism. Through a tiny act of kindness, he realizes the dozens of possibilities we have in a day to be heroes in our own humble ways. Next, self-named “renegade ecolutionary” Ron Finley describes the garden that he began on the sidewalk in front of his house in South Central Los Angeles, meant for anyone to eat from. Finley expresses the importance of the yin and yang of giving and receiving — one cannot simply take, but must create a cycle of giving.

The second half of the show continues with Dan Pallotta, who wonders why we are so much more willing to invest in a private company’s enterprises than we are to donate to a non-profit. Pallotta stresses the paradigm shift that we need to enact — away from viewing non-profits as things that must produce results in the here-and-now to seeing them as organizations that can grow and thrive on long-term investments. Amanda Palmer closes the show, sharing her experience as a musician in a budding economy built on trust. As she talks, she emphasizes the importance of the simple act of asking when you need something — and the joy that comes from the connection found through mutual support.

To hear TED Radio Hour’s “Giving It Away,” check your local NPR schedule to find out when the show airs today. Or listen to it via NPR’s website »

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Dan Pallotta: The way we think about charity is dead wrong“350 employees lost their jobs because they were labeled overhead,” says Palotta in today’s talk, given at TED2013. “This is what happens when we confuse morality with frugality.”

This wasn’t just a problem for the newly unemployed or Pallotta’s wounded sense of pride. As he explains in this talk, the real issue is that everything we have been taught to think about charity is wrong. In particular, the single yardstick generally used to measure the worthiness of a charity – how much money goes directly toward the people it seeks to help and how much is used to cover overhead — is dangerously unhelpful. According to this thinking, the “best” charities are the ones with the lowest overhead. In fact, that focus may actually be preventing charities from making a real impact.

“The things we’ve been taught to think about giving and charity and the non-profit sector are actually undermining the causes we love … Our social problems are massive in scale, our organizations are tiny up against them — and we have a belief system that keeps them tiny,” says Pallotta, the author of the book Uncharitable. “We have two rulebooks—one for the non-profit sector and one for the rest of the economic world. It’s an apartheid.”

It’s time to change the way we think about giving to charity, says Pallotta. “Don’t ask about the size of their overhead,” he urges. “Ask about the size of their dreams.”

Curious to hear more on this new way of evaluating nonprofits, we asked Pallotta to share his thoughts on how to find a charity to support and what questions to ask along the way. Here’s what he had to say:

I want people to consider themselves a philanthropist no matter how much or how little they are giving. Even if you are giving $25, you are still a philanthropist. I advise people to figure out what cause they want to have an impact on, and take time doing research to find out the organization they feel is doing the best work on that problem. Then, make them your charitable partner for life. Continue to follow their progress, continue to learn about them, and continue to invest in them. You make a lot of inquiries before you buy a car or before you cast your vote for president – do the same thing before you cast your vote for a charity with your contribution.

1) How do I find the right charity for me?

Start with a broad search and narrow it from there. You can use websites like GreatNonprofits.org, Philanthropedia and GiveWell.org. They each have flaws. I say—use them, but don’t rely on them.

Then, do in-person interviews with your top two or three. Call the charity and ask for a tour or overview meeting. That’s why charities have development departments — to nurture and build relationships with donors. If you are going to make a long-term commitment to an organization, even if the money isn’t huge, you owe it to yourself to do this kind of research in the same way you would go to a dealership to test-drive a car.

I also recommend looking at a charity’s annual report. Does it inspire you? Does it seem to have a sense of mission, bravery, boldness — or is it cautious and formulaic? Check out Invisible Children, Share our Strength, and Charity Water to see examples of organizations that are inspiring, right down to their materials. Though in general, don’t just rely on a website.

2) Ask: what progress is the charity making toward its goals—and what metrics does it use to measure that?

Ask the charity to provide you with program data that tracks their activities — and ask how they measure their own progress. This question may be the most important of all — it really gets at what data they collect, how serious they are about that data collection, and how they shift behavior or strategy based on what the data is telling them.

But note, it doesn’t necessarily matter if the organization is effective. Some problems can be extremely difficult to solve, and you don’t want to punish the charities working on those problems — otherwise we’ll only get charities working on easy problems. Think about if you had asked Jonas Salk how effective he was one year before he found the cure for polio. He would not have been very effective at that point, but that doesn’t mean you would not have wanted to invest in him.

Bringing cold, hard business sense to running charities can help transform the philanthropic landscape for all and for the better, says Pallotta. “Overall, for each charity I give to, I ask myself if I believe in their business model and if I feel they have a bold future ahead of them,” he says.

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.

5. 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.”