The Three Core Approaches to Effective Philanthropy
I believe that there are three core approaches to philanthropy, each of which can be effective.
Strategic philanthropy has come to be used as a catchall phrase for effective philanthropy. However, I believe that there are three core approaches to philanthropy, each of which can be effective. Each type executes something quite different, and recognizing this distinction is critical to their success.
Charitable giving seeks to buy nonprofit program execution that will accrue to beneficiaries. It is classic “buyer” behavior, as defined by George Overholser in "Building Is Not Buying" (PDF). The charitable giver is concerned primarily with the value of the programmatic execution relative to grant size and cares little about the nonprofit enterprise for its own sake.
Philanthropic investment seeks to provide resources to nonprofit enterprises that increase the nonprofit’s ability to deliver programmatic execution. It is classic “builder” behavior, as defined in "Building is Not Buying." The philanthropic investor, like a for-profit investor, is primarily focused on the longer-term increase and improvement in programmatic execution relative to grant size.
Strategic philanthropy seeks to buy nonprofit goods and services in a way that aligns with a theory of change defined by the strategic philanthropist, or to invest in the growth of nonprofits needed for the theory’s success. Unlike philanthropic investors and charitable givers who provide resources to a nonprofit so that it may pursue a theory of change, strategic philanthropists are concerned primarily with their own theory of change.
The charitable giver and philanthropic investor both transact with the enterprise but do not seek to be the agent of change themselves.
Strategic philanthropists, like nonprofits, seek to be the agent of change. Nonprofits execute programs directly, while the strategic philanthropist outsources program execution. But just as a for-profit company that outsources their manufacturing still “owns” the product they offer, the strategic philanthropist “owns” their programs despite their outsourcing.
All three approaches are completely valid. Without charitable givers, the primary provider of philanthropic revenue to nonprofits would be missing. Without philanthropic investors, nonprofits would have no access to the capital they need to grow their enterprises. The strategic philanthropist is needed to create multifaceted solutions to complex problems that are beyond the scope of a single nonprofit. Now, none of this is to say that each donor must select one and only one approach. A donor may engage in philanthropic investing in certain circumstances and charitable giving in others. However, it is important that donors are cognizant of the type of approach they are taking so that they can execute well. In addition, it is important for institutional funders to recognize that the skill set need for strategic philanthropy (deep issue area expertise) is quite different from the skill set needed for philanthropic investment (organizational analysis expertise), and that it is unlikely staff members will have expertise in both domains. The point is not to maintain purity of approach, but to establish a frame of reference. For instance, if you are a charitable giver, it makes no sense to concern yourself with how much the CEO of a nonprofit from which you are buying program execution gets paid—no more than buyers of Starbucks coffee consider the salary of Starbucks’ CEO. The charitable giver should simply consider the value of the program execution relative to grant size and not the organizational attributes of the enterprise.
Philanthropic investors, on the other hand, should care deeply about executive compensation practices and other organizational attributes of their grantees, because they are related to the health and growth potential of the enterprise they seek to support.
Differentiating between approaches to philanthropy is important because it allows us to avoid debates that essentially stem from a lack of awareness of the different styles. For instance, there has long been a debate about the value of general operating support grants versus restricted grants. But this debate falls away when we recognize the distinction between an investment approach to philanthropy and a problem-solving, strategic approach. At its core, the investment style seeks to support the nonprofit enterprise. General operating support grants are the default choice because they are most useful in supporting the enterprise. Meanwhile, strategic philanthropy seeks to create a solution to a problem on the philanthropist’s own terms. The general operating support grant is preferred only if it best advances the strategic philanthropist’s solution.
I’m sure my definitions are flawed. I’m sure I’ve missed elements of this puzzle or mixed them up. But my hope is that they can begin to delineate the roles and responsibilities of the various actors that make up the social sector. It is a messy world, and no model will perfectly depict it. But by having internally consistent frames of reference, we can have a much more robust conversation about how to best practice the philanthropic art, because the answer to that question is very, very different for each of the actors I’ve described.