The traditional non-profit structure is a bad idea for an organization that requires a significant chunk of capital and produces uncertain results on a long timescale

A non profit can be organized as either a charity or a foundation. Each has different constraints, but in both cases non-profit structures are more at the whim of the entities giving them money than in the case where they are providing a good or service. It just comes down to leverage.

Charities enable donors to write off their donations as tax deductible (yay!) however, Charities need to get 33% of their income from donations and those donations need to come from ‘small donors’ who are each giving <= 2% of their total funding. Because of the funding rules, Charities raise money on a yearly or sub-yearly basis so they also need to give people a reason to give on that short timescale. Uncertain results on a long timescale don’t lend themselves to the sorts of updates that encourage people to give on short timescales. Additionally, the short-term donations mean that organizational funding can be quite volatile, which poses obvious problems for long term research. You can’t really let a researcher go for a year until funding conditions get better.

Foundations don’t have the requirement for regular small donations, so they are not as susceptible to the whims of a large group of people. Instead of regular small donations, foundations instead need to convince a few donors to give a lot of money. Big checks always come with strings attached. While the “check size” might be higher, it’s often distributed over time, so an unhappy donor can pull out. These donors also get lower tax write-offs, so one only has to imagine that they feel more ownership over the organization. So while the constraints on foundations are different, they still need to keep donors happy, which could push the organization towards shorter term, more sexy projects. Most philanthropists give to specific causes.

Of course, these are both worst case scenarios. However the fact that Philanthropies can easily become misaligned with their money factories makes it dicy to rely only on donations for long-term projects.

Taste in projects is more flighty than the desire for return on capital. As a result, Philanthropies are forced to show consistent short term progress. People usually want closer involvement when the money is buying a more ill-defined good than “more money.” In short, §Philanthropy and Non-Profit Constraints make the traditional non-profit structure a shaky foundation for an organization that requires a significant chunk of capital and produces uncertain results on a long timescale.


Web URL for this note

Comment on this note