New donation platforms are reducing inefficiencies in charitable giving by minimising risk. But there still remains a missing component.
We live in a world filled with intractable problems - poverty, malnutrition, medical access, climate change, natural disasters. Fortunately, it’s also a world filled with tenacious do-gooders with solutions and benefactors willing to offer financial support. Unfortunately, the “marketplace” that matches humanitarians with financial resources is what economists would describe, very inefficient.
The donations marketplace, for instance, is characterised by a lack of verifiable information about the quality of recipients, making donors cautious. It is also highly disaggregated on both the recipient and donor sides, thus increasing transaction and search costs - it takes substantial effort by donors to find trustworthy recipients that align with their desired goals. Transactions are further plagued by high-donor inertia (intentions rarely translate into action because of the transaction costs) and donors worry about the potential social good that may accrue from any one charitable investment. All of these issues contribute to inefficiencies reducing value-creating opportunities between donors and recipients. Alternately, one might consider them as risks - risks associated with finding the right receiver, risks associated with the actions and intentions of the receiver and risks from the external environment he operates in.
A new breed of start-up donation platforms connecting donors directly to grassroots projects are attacking these inefficiencies with a new business model for charitable giving and are forever changing the way people give. They are proving to be effective forces for change but can they transform a sector fraught with operational challenges?
A new business model
GlobalGiving is an organisation of individuals dedicated to driving change in their communities. From running orphanages and schools, to helping survivors of natural disasters, these people are do-gooders to the core. GlobalGiving pre-screens projects to ensure that they are legitimate and will comply with a set of basic criteria. Projects are presented to potential donors along with details on the organisation’s governance systems, financial profile, directors, affiliations, social policies, bringing hitherto unprecedented levels of transparency to this market. Potential donors can screen a large number of projects and find something that fits their donation philosophy. GlobalGiving provides regular feedback on the fund-raising goals of the project, the utilisation of the funds and the progress of the project. Reputation-based feedback systems can be further incorporated.
From the donor’s point of view, this provides unprecedented transparency, certification and a large plethora of options to make their donations, reducing transaction costs and risk associated with the ability and intentions of the receiver. From the receiver’s point of view, this provides access to a much larger pool of donors than previously possible. At a basic level, these platforms are no different to platforms like eBay and Amazon which brought the same transactional efficiencies and transparency to markets for goods and service.
There are still risks
While these platforms limit some of the risks associated with poor information, they still don’t reduce other inherent risks associated with project funding. For instance, despite best intentions, the project itself may turn out to be less effective than one imagines or the local government/society may block the project. Essentially, charitable investments are exposed not just to risks beyond the receivers’ intentions, abilities and credentials, but also to uncontrollable external factors.
One approach is reducing risks and then diversifying them away: investing in a portfolio of charitable donations rather than putting all the money into one investment, for example. Essentially, this functions as a managed fund (like a hedge fund or a mutual fund) where an entity would collect donations from many donors and part-invest into various projects. The “fund manager” can determine the allocation of funds based on project performance and donor criterion. Such a portfolio of charitable investments would be less risky than any one donation in terms of its social impact. Further, just as there are funds for different investment strategies; one may have funds for different social objectives; however, it’s not clear if any organisation is doing this systematically.
The example illustrates how one can apply innovation techniques to generate new game-changing ideas—it’s what we term “renaissance innovation”. The ideas of renaissance innovation—innovation by reinventing the economic systems, business models or operating models of an industry—apply broadly. Michael Dell, for instance, decided that it was better to start assembling computers on order, rather than in advance of orders. Amancio Ortega felt that when it comes to fashion apparel, speed and responsiveness to the latest trends was much more important than keeping costs low. Each represented a different operating model for the industry and companies they started - Dell Computers and Zara - and used the strength of this different operating model to become industry leaders and forever transformed their respective industries.
Their learning applies to for-profits, non-profits, to the private sector and to the public sector all the same and serves as a strong tool for individual, corporate and social entrepreneurs. In fact we believe some of the greatest problems that the world faces today might be better solved by reinventing the economic systems and business models rather than hope for technological miracles.
Karan Girotra is an assistant professor of technology and operations management at INSEAD. This article was adapted from The Renaissance Innovator, a blog about renaissance innovation, authored by Karan Girotra and INSEAD professor Serguei Netessine.