Philanthropy January 21, 2010, 5:00PM EST

Philanthropy: Rethinking How to Give

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The core concept is to look at this as a social investment, like a stock with a certain level of risk," he says. "So the rating we are looking to develop revolves around risk—what is the level of risk that you as a donor are willing to take on?" A small startup charity, for example, may have a more innovative but less proven—and thus riskier—approach to a problem than a larger, more staid organization.

To measure effectiveness, Berger says Charity Navigator's advisory panel is considering the use of crowdsourcing—gathering data through some type of Wiki format. Another possibility: David Hunter, a philanthropic consultant, has created a social-assessment tool that uses 26 questions to get at issues of how a charity gathers data on its initiatives and whether it is using that data strategically—for example, to better its programs. "I believe it not only provides a reasonable statement of the level of risk that a social investor takes, but it also should provide an organization with a diagnosis to improve its work," he says.

Charity Navigator's competitors have come up with alternative methods. Brooklyn-based GiveWell, launched in 2007, offers rigorous Wall Street-like research on nearly 400 charities. Its analysts plow through data and write lengthy, footnoted reports about each one. Few nonprofits have enough data or analysis to demonstrate their successes, and GiveWell recommends only those that can meet that high bar. "The charity needs to do a lot of analysis on its own," says GiveWell co-founder Holden Karnofsky. The upshot: GiveWell recommends just nine charities. Among them are Village Reach, which aims to improve the logistics of distributing medical supplies in rural Africa; Stop TB Partnership, which works to increase access to tuberculosis treatment; and the Nurse-Family Partnership, which supports programs that offer home visits by registered nurses to low-income, first-time mothers.

NONPROFIT PORTFOLIOS

Root Cause, based in Cambridge, Mass., has recently begun creating similar research reports with financial advisers in mind. Its first batch covers educational groups (specifically, those focused on school readiness) in Massachusetts. Palo Alto (Calif.)-based GreatNonprofits, started in 2007, allows donors, volunteers, and social-service recipients to write reviews à la TripAdvisor or Yelp; it currently has reviews of some 3,000 nonprofits. The opinions are also available on GuideStar. Perla Ni founded GreatNonprofits in the wake of Hurricane Katrina, when people kept asking her where to give. "People who are served by nonprofits know which ones are good and which ones are not," says Ni. "It's like asking people who stayed at a hotel to write a review."

Two groups have taken yet another route: creating portfolios of nonprofits. Recently launched Philanthropedia, based in Menlo Park, Calif., gathers the opinions of experts in different sectors and creates what it calls "expert mutual funds." These are portfolios of nonprofits in areas such as climate change, microfinance, and education, with a dozen or so "holdings" in each. To put together its climate change fund, for example, Philanthropedia queried 139 experts, including funders, nonprofit executives, and academics. Top holdings include the Natural Resources Defense Council, the Union of Concerned Scientists, the World Resources Institute, and the Pew Center on Global Climate Change. "A lot of the other approaches [to rating nonprofits] ask too much of donors," says Philanthropedia Chief Executive Deyan Vitanov.

Partners for Change, based in Chicago, is also working up a mutual fund-like strategy. Its portfolios, which it will share with financial advisers, will mimic those of successful foundations. So a donor interested in global health might be able to invest in a portfolio that looks a lot like the Gates Foundation's beneficiaries. Executive Director Jim Litwin expects to launch the system in the summer. He hopes that by targeting advisers rather than individuals, he'll be able to reach donors with $10,000 or more to give. As Litwin says: "These foundations have already done all the work on what the most effective organizations are, so why can't you leverage that knowledge of where to give?"

For individual donors, all of this information could help in better decision-making. For the field of philanthropy, it could have far-reaching implications. The hope is that if nonprofits know their programs aren't working well, they will revamp them. Also, if more of the $200 billion in annual donations ends up going to the most effective charities, it could push others to combine forces. "We're starting to see a shakeout," says Nancy Kelly, an accountant to nonprofit organizations at the Metis Group, a New York City-based accounting and business consulting firm. "You're seeing more competition for dollars and more merger activity than in the past 15 years. It is forcing nonprofits to look at their operations like a business."

Feldman is an associate editor with Bloomberg BusinessWeek in New York.