As a consultant to philanthropists it may be predictable that I say this – but I think philanthropists are buying into a model that leads to very ‘safe’ decisions which lead to very modest outcomes and an ensuing feeling of dissatisfaction with their philanthropy.

There are four fundamental myths that most philanthropists seem to be working under which are outlined below, along with how to counter them.

The first myth is that charities without track records are not to be trusted. It leads to the mistake of seeking only established charities with lots of well-known supporters in order to guarantee efficiency and excellent proven impact monitoring. It is the investment equivalent of saying that you’d never want to lose your money in a business that fails, so let’s just invest in stock market listed companies who have already made it. 

If your ambition is to ‘help some people’ then this works as a strategy. However, for most of our clients who are giving away six or seven figures annually and want to make a major impact with their money, this is a terrible strategy. 

Suppose you are running a UK foundation that gives away £250k a year with the aim of providing equal opportunities for all young people to access education and reach their full potential. You support a bunch of proven programmes in this area and can count the number of beneficiaries per pound spent, but you feel like you’re not making any difference. How is that possible? Well, the truth is you may be making only a negligible contribution, because there is someone much bigger than you who has the exact same mission, that is investing in the same best-in-class programmes at over 23,000 times the amount you are giving – the Department for Education. Their annual budget is around £58bn.

This leads us to ask what is the purpose of government and what is the purpose of philanthropy. The purpose of government has to be to invest in proven programmes at scale, so that the best interventions around can be made as widely available as possible while ensuring taxpayer money is well spent. To make a real contribution, the purpose of philanthropy therefore cannot be to replace, top-up or replicate government expenditure. Instead, philanthropy needs to focus on doing what government is largely incapable of, namely  a) translating services to local communities, which government is very bad at and b) innovating new products, services and models (which government is also very bad at). 

Philanthropic capital – especially for individuals giving £100k to £10m/year – should be spent on risk and innovation. With this kind of money you can pilot new approaches, finance social entrepreneurs and monitor impact in order to subsequently inform government spending. Your £100k could unearth a new idea that could lead to tens of millions of pounds of government expenditure. But you have to risk it.  Like an angel investment. If we already knew the idea worked and we already had all the impact measurements, then government should already have taken it on.

The second myth is that charities are wasteful. This leads to seeking charities with the lowest overheads possible and insisting that funding should only be spent on programming. When I launched a charity, I was told that you should have 75% cost of sale and no net profit. When I launched a business, I was told that I should have 25% cost of sale, 75% gross profit, and 25% net profit to use for growth and innovation. The second model is clearly a better organisational model –  why we treat it as a cause for shame in charity when we call it good practice in business is anybody’s guess. More money needs to go to areas where charities have the ideas but not yet the answers. Meanwhile larger amounts should be going toward testing, researching, advocating, partnering and learning, rather than direct programming. Charitable expenditure is being skewed by bad funding and the sector’s impact is being limited as a result.

So the advice is that if you really want to change the world, seek charities with credible leadership teams but ideas that aren’t yet proven, and make sure they don’t spend more than 25% on cost of sale. Trust them.

The third myth is that you should follow your passion. This is based on the premise that people get the most satisfaction out of being involved with things they already care about. In ten years working with high net worth individuals, I’ve never seen this to be true. People are doing philanthropy because they get satisfaction out of fixing stuff – not so that they can be around problems. 

If I had two philanthropists, one who got to spend their entire time giving money to causes close to their heart without ever creating much difference, and the other who got to give to opportunities to create massive change in areas that they previously knew or cared nothing about, the latter is always more satisfied. Obviously if you can combine your passions with real opportunities to create change that is ideal, but it is wrong to simply assume that we should find things high net-worth philanthropists can support based on their passions rather than their ability to affect change.

The fourth myth is that the decision making processes we commonly use in this sector are of any value you should pick partners by getting applications, meeting teams and, if you are ambitious, visiting projects. I don’t believe any of these activities are anywhere near enough to help philanthropists make useful decisions.

I’ve spent ten years as a fundraiser, and so say this with all due respect to my fellow professionals, but I hate the role of the fundraiser – not always but too often their job is to convince you that their problem is the only problem, their solution is the only solution and their organization is the only organization.

Fundraisers can write fantastic applications, show you projects in action (or at least what they want you to see of them) and have you meet beneficiaries (or at least those they want to put in front of you). But that doesn’t tell you whether or not this is actually an incredible idea. For that you need insight. 

Creating social change is really hard. If there’s a gap to be filled it’s because in all the collective wisdom of everyone in this space in all the years gone past, we still didn’t make x, y or z happen. To judge applications you need to become an expert on the problem and you don’t do that by speaking to fundraisers – or even CEOs. You do that by speaking to experts with no money to raise, to other grant givers who have been where you’re looking to go, and by spending time with the communities you wish to serve. 

TSIC has invited clients to spend days with farmers in Rwanda, with social workers in Newham, and with primary school teachers in Camden. There has never been a pitch or a project at the end of it, just exposure to problems that there might be an interest to solve – in consultation with the key stakeholders and through insight into the worlds which people seek to change. Education about problems needs to come ahead of ideas for solutions – people think philanthropy is about giving away money but it’s not. I could give away billions tomorrow and make no difference if I was focusing on the Arts – because I know nothing about that sector. But give me a hundred grand and I can do incredible things for the school-to-work transition because I know the system and it’s failures and challenges because I spent last five years immersed in it through Future First.

This becomes even more important if, as per myth one, we aren’t looking to invest in proven solutions but in new ideas. To create systemic change, we need to be able to judge ideas, not applications. We cannot be limited by an absence of performance data, or an absence of a direct track record. The introduction of new ideas or concepts will invariably involve this. 

A lot of people think philanthropic failure is giving to charities that are too big and bureaucratic or – heaven forbid, – charities where fraud undermines your gift. But for me, philanthropic failure is being under-educated, over-precious and too risk-averse to put a money into an idea that could change the world but that sits without proof, without funding and therefore, without hope.

Jake Hayman is the Founder and CEO of philanthropy advisory firm, The Social Investment Consultancy – http://www.tsiconsultancy.com 

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