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I want to talk about social innovation

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and social entrepreneurship.

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I happen to have triplets.

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They're little. They're five years old.

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Sometimes I tell people I have triplets.
They say, "Really? How many?"

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(Laughter)

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Here's a picture of the kids --
that's Sage, and Annalisa and Rider.

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Now, I also happen to be gay.

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Being gay and fathering triplets is by far

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the most socially innovative,
socially entrepreneurial thing

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I have ever done.

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(Laughter)

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(Applause)

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The real social innovation I want
to talk about involves charity.

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I want to talk about how the things
we've been taught to think

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about giving and about charity

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and about the nonprofit sector,

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are actually undermining
the causes we love,

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and our profound yearning
to change the world.

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But before I do that,
I want to ask if we even believe

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that the nonprofit sector
has any serious role to play

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in changing the world.

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A lot of people say now that business
will lift up the developing economies,

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and social business
will take care of the rest.

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And I do believe that business will move
the great mass of humanity forward.

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But it always leaves behind
that 10 percent or more

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that is most disadvantaged or unlucky.

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And social business needs markets,

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and there are some issues
for which you just can't develop

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the kind of money measures
that you need for a market.

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I sit on the board of a center
for the developmentally disabled,

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and these people want laughter

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and compassion and they want love.

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How do you monetize that?

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And that's where the nonprofit sector
and philanthropy come in.

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Philanthropy is the market for love.

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It is the market for all those people

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for whom there is no other market coming.

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And so if we really want,
like Buckminster Fuller said,

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a world that works for everyone,

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with no one and nothing left out,

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then the nonprofit sector has to be

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a serious part of the conversation.

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But it doesn't seem to be working.

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Why have our breast cancer
charities not come close

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to finding a cure for breast cancer,

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or our homeless charities not come close

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to ending homelessness in any major city?

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Why has poverty remained stuck

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at 12 percent of the U.S.
population for 40 years?

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And the answer is,

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these social problems
are massive in scale,

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our organizations
are tiny up against them,

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and we have a belief system
that keeps them tiny.

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We have two rulebooks.

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We have one for the nonprofit sector,

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and one for the rest
of the economic world.

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It's an apartheid, and it discriminates

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against the nonprofit sector
in five different areas,

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the first being compensation.

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So in the for-profit sector,
the more value you produce,

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the more money you can make.

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But we don't like nonprofits to use money

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to incentivize people
to produce more in social service.

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We have a visceral reaction
to the idea that anyone

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would make very much money
helping other people.

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Interestingly, we don't have
a visceral reaction

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to the notion that people
would make a lot of money

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not helping other people.

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You know, you want to make
50 million dollars

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selling violent video games
to kids, go for it.

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We'll put you on the cover
of Wired magazine.

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But you want to make
half a million dollars

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trying to cure kids of malaria,

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and you're considered a parasite yourself.

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(Applause)

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And we think of this
as our system of ethics,

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but what we don't realize
is that this system

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has a powerful side effect, which is:

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It gives a really stark,
mutually exclusive choice

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between doing very well
for yourself and your family

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or doing good for the world,

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to the brightest minds
coming out of our best universities,

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and sends tens of thousands of people

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who could make a huge difference
in the nonprofit sector,

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marching every year
directly into the for-profit sector

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because they're not willing to make
that kind of lifelong economic sacrifice.

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Businessweek did a survey,
looked at the compensation packages

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for MBAs 10 years out of business school.

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And the median compensation
for a Stanford MBA,

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with bonus, at the age of 38,
was 400,000 dollars.

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Meanwhile, for the same year,
the average salary

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for the CEO of a $5 million-plus
medical charity in the U.S.

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was 232,000 dollars,
and for a hunger charity, 84,000 dollars.

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Now, there's no way you're
going to get a lot of people

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with $400,000 talent to make
a $316,000 sacrifice every year

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to become the CEO of a hunger charity.

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Some people say, "Well, that's just
because those MBA types are greedy."

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Not necessarily. They might be smart.

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It's cheaper for that person to donate

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100,000 dollars every year
to the hunger charity;

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save 50,000 dollars on their taxes --

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so still be roughly 270,000 dollars
a year ahead of the game --

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now be called a philanthropist
because they donated

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100,000 dollars to charity;

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probably sit on the board
of the hunger charity;

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indeed, probably supervise the poor SOB

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who decided to become the CEO
of the hunger charity;

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(Laughter)

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and have a lifetime
of this kind of power and influence

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and popular praise still ahead of them.

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The second area of discrimination
is advertising and marketing.

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So we tell the for-profit sector,
"Spend, spend, spend on advertising,

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until the last dollar no longer
produces a penny of value."

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But we don't like to see our donations
spent on advertising in charity.

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Our attitude is, "Well, look,
if you can get the advertising donated,

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you know, to air at four o'clock
in the morning, I'm okay with that.

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But I don't want my donation
spent on advertising,

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I want it go to the needy."

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As if the money invested in advertising

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could not bring in dramatically
greater sums of money

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to serve the needy.

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In the 1990s, my company created

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the long-distance
AIDSRide bicycle journeys,

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and the 60 mile-long
breast cancer three-day walks,

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and over the course of nine years,

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we had 182,000 ordinary
heroes participate,

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and they raised a total
of 581 million dollars.

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(Applause)

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They raised more money
more quickly for these causes

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than any events in history,

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all based on the idea
that people are weary

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of being asked to do the least
they can possibly do.

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People are yearning to measure
the full distance of their potential

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on behalf of the causes
that they care about deeply.

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But they have to be asked.

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We got that many people to participate

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by buying full-page ads
in The New York Times,

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in The Boston Globe, in prime time
radio and TV advertising.

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Do you know how many people
we would've gotten

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if we put up fliers in the laundromat?

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Charitable giving has remained stuck
in the U.S., at two percent of GDP,

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ever since we started
measuring it in the 1970s.

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That's an important fact,
because it tells us

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that in 40 years, the nonprofit sector

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has not been able
to wrestle any market share

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away from the for-profit sector.

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And if you think about it,
how could one sector

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possibly take market share
away from another sector

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if it isn't really allowed to market?

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And if we tell the consumer brands,

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"You may advertise
all the benefits of your product,"

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but we tell charities, "You cannot
advertise all the good that you do,"

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where do we think the consumer
dollars are going to flow?

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The third area of discrimination
is the taking of risk

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in pursuit of new ideas
for generating revenue.

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So Disney can make a new
$200 million movie that flops,

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and nobody calls the attorney general.

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But you do a little $1 million
community fundraiser for the poor,

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and it doesn't produce a 75 percent profit
to the cause in the first 12 months,

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and your character
is called into question.

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So nonprofits are really reluctant
to attempt any brave,

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daring, giant-scale
new fundraising endeavors,

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for fear that if the thing fails,

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their reputations will be dragged
through the mud.

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Well, you and I know

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when you prohibit failure,
you kill innovation.

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If you kill innovation in fundraising,
you can't raise more revenue;

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if you can't raise more revenue,
you can't grow;

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and if you can't grow, you can't
possibly solve large social problems.

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The fourth area is time.

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So Amazon went for six years
without returning any profit to investors,

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and people had patience.

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They knew that there was a long-term
objective down the line,

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of building market dominance.

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But if a nonprofit organization
ever had a dream

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of building magnificent scale
that required that for six years,

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no money was going to go to the needy,

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it was all going to be invested
in building this scale,

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we would expect a crucifixion.

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The last area is profit itself.

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So the for-profit sector
can pay people profits

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in order to attract their capital
for their new ideas,

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but you can't pay profits
in a nonprofit sector,

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so the for-profit sector has a lock

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on the multi-trillion-dollar
capital markets,

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and the nonprofit sector is starved
for growth and risk and idea capital.

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Well, you put those
five things together --

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you can't use money to lure talent
away from the for-profit sector;

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you can't advertise
on anywhere near the scale

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the for-profit sector
does for new customers;

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you can't take the kinds of risks
in pursuit of those customers

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that the for-profit sector takes;

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you don't have the same amount of time
to find them as the for-profit sector;

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and you don't have a stock market
with which to fund any of this,

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even if you could do it
in the first place --

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and you've just put the nonprofit sector

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at an extreme disadvantage
to the for-profit sector,

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on every level.

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If we have any doubts about the effects
of this separate rule book,

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this statistic is sobering:

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From 1970 to 2009,

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the number of nonprofits that really grew,

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that crossed the $50 million
annual revenue barrier,

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is 144.

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In the same time, the number
of for-profits that crossed it

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is 46,136.

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So we're dealing with social problems
that are massive in scale,

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and our organizations
can't generate any scale.

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All of the scale goes
to Coca-Cola and Burger King.

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So why do we think this way?

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Well, like most fanatical
dogma in America,

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these ideas come from old Puritan beliefs.

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The Puritans came here
for religious reasons, or so they said,

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but they also came here because
they wanted to make a lot of money.

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They were pious people,

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but they were also
really aggressive capitalists,

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and they were accused of extreme forms
of profit-making tendencies,

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compared to the other colonists.

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But at the same time,
the Puritans were Calvinists,

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so they were taught literally
to hate themselves.

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They were taught
that self-interest was a raging sea

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that was a sure path to eternal damnation.

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This created a real problem
for these people.

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Here they've come all the way across
the Atlantic to make all this money,

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but making all this money
will get you sent directly to Hell.

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What were they to do about this?

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Well, charity became their answer.

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It became this economic sanctuary,

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where they could do penance
for their profit-making tendencies --

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at five cents on the dollar.

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So of course, how could you
make money in charity

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if charity was your penance
for making money?

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Financial incentive was exiled
from the realm of helping others,

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so that it could thrive in the area
of making money for yourself,

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and in 400 years, nothing has intervened

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to say, "That's counterproductive
and that's unfair."

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Now, this ideology gets policed
by this one very dangerous question,

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which is, "What percentage of my donation
goes to the cause versus overhead?"

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There are a lot of problems
with this question.

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I'm going to just focus on two.

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First, it makes us think
that overhead is a negative,

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00:11:51,237 --> 00:11:54,030
that it is somehow not part of the cause.

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But it absolutely is, especially
if it's being used for growth.

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Now, this idea that overhead
is somehow an enemy of the cause

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creates this second, much larger problem,

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which is, it forces organizations
to go without the overhead things

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they really need to grow,

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in the interest of keeping overhead low.

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So we've all been taught
that charities should spend

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as little as possible on overhead
things like fundraising

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00:12:20,255 --> 00:12:23,629
under the theory that, well, the less
money you spend on fundraising,

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the more money there is
available for the cause.

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Well, that's true
if it's a depressing world

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in which this pie cannot
be made any bigger.

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00:12:33,120 --> 00:12:36,485
But if it's a logical world
in which investment in fundraising

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actually raises more funds
and makes the pie bigger,

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then we have it precisely backwards,

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and we should be investing more money,
not less, in fundraising,

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because fundraising is the one thing

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that has the potential
to multiply the amount of money

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00:12:49,860 --> 00:12:52,677
available for the cause
that we care about so deeply.

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I'll give you two examples.

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We launched the AIDSRides

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00:12:57,074 --> 00:13:00,146
with an initial investment
of 50,000 dollars in risk capital.

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00:13:00,606 --> 00:13:05,585
Within nine years,
we had multiplied that 1,982 times,

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00:13:05,609 --> 00:13:09,799
into 108 million dollars
after all expenses, for AIDS services.

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00:13:11,218 --> 00:13:13,131
We launched the breast cancer three-days

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00:13:13,155 --> 00:13:16,618
with an initial investment
of 350,000 dollars in risk capital.

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00:13:16,983 --> 00:13:21,713
Within just five years,
we had multiplied that 554 times,

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into 194 million dollars
after all expenses,

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for breast cancer research.

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00:13:26,970 --> 00:13:30,284
Now, if you were a philanthropist
really interested in breast cancer,

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what would make more sense:

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00:13:31,625 --> 00:13:35,476
go out and find the most innovative
researcher in the world

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00:13:35,500 --> 00:13:38,880
and give her 350,000 dollars for research,

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00:13:38,904 --> 00:13:42,523
or give her fundraising
department the 350,000 dollars

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00:13:42,547 --> 00:13:46,832
to multiply it into 194 million dollars
for breast cancer research?

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00:13:47,800 --> 00:13:50,825
2002 was our most successful year ever.

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00:13:50,849 --> 00:13:53,983
We netted for breast cancer
alone, that year alone,

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71 million dollars after all expenses.

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And then we went out of business,

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suddenly and traumatically.

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00:14:03,309 --> 00:14:08,023
Why? Well, the short story is,
our sponsors split on us.

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00:14:08,047 --> 00:14:10,110
They wanted to distance themselves from us

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00:14:10,134 --> 00:14:12,991
because we were being
crucified in the media

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00:14:13,015 --> 00:14:16,393
for investing 40 percent
of the gross in recruitment

288
00:14:16,417 --> 00:14:19,781
and customer service
and the magic of the experience,

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00:14:19,805 --> 00:14:22,668
and there is no accounting
terminology to describe

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00:14:22,692 --> 00:14:25,842
that kind of investment
in growth and in the future,

291
00:14:25,866 --> 00:14:28,810
other than this demonic
label of "overhead."

292
00:14:30,778 --> 00:14:36,152
So on one day, all 350
of our great employees

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00:14:36,176 --> 00:14:37,802
lost their jobs ...

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00:14:40,660 --> 00:14:42,485
because they were labeled "overhead."

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00:14:43,818 --> 00:14:46,358
Our sponsor went and tried
the events on their own.

296
00:14:46,382 --> 00:14:47,715
The overhead went up.

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00:14:47,739 --> 00:14:51,508
Net income for breast cancer research
went down by 84 percent,

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00:14:51,532 --> 00:14:54,450
or 60 million dollars, in one year.

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00:14:55,984 --> 00:15:01,381
This is what happens when we confuse
morality with frugality.

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00:15:03,359 --> 00:15:06,525
We've all been taught that the bake sale
with five percent overhead

301
00:15:06,549 --> 00:15:09,500
is morally superior to the professional
fundraising enterprise

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00:15:09,524 --> 00:15:11,190
with 40 percent overhead,

303
00:15:11,214 --> 00:15:14,491
but we're missing the most important
piece of information, which is:

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What is the actual size of these pies?

305
00:15:17,674 --> 00:15:21,593
Who cares if the bake sale only has
five percent overhead if it's tiny?

306
00:15:22,313 --> 00:15:25,145
What if the bake sale
only netted 71 dollars for charity

307
00:15:25,169 --> 00:15:27,193
because it made no investment in its scale

308
00:15:27,217 --> 00:15:29,598
and the professional
fundraising enterprise netted

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00:15:29,622 --> 00:15:31,928
71 million dollars because it did?

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00:15:32,571 --> 00:15:34,166
Now which pie would we prefer,

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and which pie do we think people
who are hungry would prefer?

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Here's how all of this
impacts the big picture.

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I said that charitable giving is
two percent of GDP in the United States.

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00:15:45,492 --> 00:15:48,182
That's about 300 billion dollars a year.

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00:15:48,206 --> 00:15:51,569
But only about 20 percent of that,
or 60 billion dollars,

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00:15:51,593 --> 00:15:53,546
goes to health and human services causes.

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00:15:53,570 --> 00:15:57,196
The rest goes to religion
and higher education and hospitals,

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00:15:57,220 --> 00:16:00,118
and that 60 billion dollars
is not nearly enough

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00:16:00,142 --> 00:16:01,697
to tackle these problems.

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00:16:02,349 --> 00:16:06,699
But if we could move charitable giving
from two percent of GDP,

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00:16:06,723 --> 00:16:13,361
up just one step to three percent of GDP,
by investing in that growth,

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00:16:13,385 --> 00:16:17,420
that would be an extra 150 billion dollars
a year in contributions,

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00:16:17,444 --> 00:16:19,802
and if that money
could go disproportionately

324
00:16:19,826 --> 00:16:21,685
to health and human services charities,

325
00:16:21,709 --> 00:16:24,948
because those were the ones we encouraged
to invest in their growth,

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00:16:24,972 --> 00:16:28,730
that would represent a tripling
of contributions to that sector.

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00:16:29,313 --> 00:16:30,921
Now we're talking scale.

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00:16:30,945 --> 00:16:33,429
Now we're talking the potential
for real change.

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00:16:34,571 --> 00:16:37,666
But it's never going to happen
by forcing these organizations

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00:16:37,690 --> 00:16:39,518
to lower their horizons

331
00:16:39,542 --> 00:16:43,161
to the demoralizing objective
of keeping their overhead low.

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00:16:45,137 --> 00:16:48,469
Our generation does not want
its epitaph to read,

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00:16:48,493 --> 00:16:50,620
"We kept charity overhead low."

334
00:16:50,644 --> 00:16:55,168
(Laughter)

335
00:16:55,192 --> 00:16:59,024
(Applause)

336
00:16:59,048 --> 00:17:01,255
We want it to read
that we changed the world,

337
00:17:01,279 --> 00:17:02,994
and that part of the way we did that

338
00:17:03,018 --> 00:17:05,607
was by changing the way
we think about these things.

339
00:17:06,306 --> 00:17:08,433
So the next time
you're looking at a charity,

340
00:17:08,457 --> 00:17:10,538
don't ask about the rate
of their overhead.

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00:17:10,562 --> 00:17:12,877
Ask about the scale of their dreams,

342
00:17:12,901 --> 00:17:16,457
their Apple-, Google-,
Amazon-scale dreams,

343
00:17:16,481 --> 00:17:18,950
how they measure their progress
toward those dreams,

344
00:17:18,974 --> 00:17:21,609
and what resources they need
to make them come true,

345
00:17:21,633 --> 00:17:23,396
regardless of what the overhead is.

346
00:17:23,420 --> 00:17:25,024
Who cares what the overhead is

347
00:17:25,048 --> 00:17:27,383
if these problems
are actually getting solved?

348
00:17:28,367 --> 00:17:31,343
If we can have that kind of generosity --

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00:17:31,367 --> 00:17:33,495
a generosity of thought --

350
00:17:33,519 --> 00:17:36,395
then the non-profit sector
can play a massive role

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00:17:36,419 --> 00:17:39,851
in changing the world
for all those citizens

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00:17:39,875 --> 00:17:42,468
most desperately in need of it to change.

353
00:17:45,816 --> 00:17:48,946
And if that can be
our generation's enduring legacy --

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00:17:50,662 --> 00:17:53,534
that we took responsibility

355
00:17:53,558 --> 00:17:56,053
for the thinking that had
been handed down to us,

356
00:17:56,077 --> 00:17:58,893
that we revisited it, we revised it,

357
00:17:58,917 --> 00:18:02,999
and we reinvented the whole way
humanity thinks about changing things,

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00:18:03,023 --> 00:18:06,499
forever, for everyone --

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00:18:06,523 --> 00:18:10,317
well, I thought I would let
the kids sum up what that would be.

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00:18:11,301 --> 00:18:13,152
Annalisa Smith-Pallotta: That would be

361
00:18:13,176 --> 00:18:15,158
Sage Smith-Pallotta: a real social

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00:18:15,182 --> 00:18:17,008
Rider Smith-Pallotta: innovation.

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00:18:17,428 --> 00:18:19,079
Dan Pallotta: Thank you very much.

364
00:18:19,103 --> 00:18:20,358
Thank you.

365
00:18:20,382 --> 00:18:27,329
(Applause)

366
00:18:29,518 --> 00:18:30,691
Thank you.

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00:18:30,715 --> 00:18:33,753
(Applause)