[This post is part of a series from the Ruderman Family Foundation designed to introduce you to the evolving world of Israeli philanthropy.]

by Avner Stepak

Privatization of social services by the Israeli government in the past two decades has changed the structure of the nonprofit sector. It has created more and more new nonprofit organizations as well as forced the sector to become more dependent on philanthropy. Over 32,000 organizations exist today out of which close to half are active. It means that in almost every sub-sector of philanthropy one would find at least dozens of active Israeli organizations competing for financial resources. In this market situation the competition on resources is fierce and one can understand how many philanthropic projects emerge, even when not 100% funded, and how many organizations collapse financially.

One of the biggest challenges nonprofit organizations face is to actually say “No” to money. Who would have the courage to turn down a philanthropist’s generous offer? What if we lose him forever?

But when money is targeted at specific projects and is not accompanied by true coverage of overheads, nonprofits should actually say “No, Thanks.”

I have noticed a common practice of many nonprofits to creatively construct project reports for philanthropists – sometimes they exaggerate on the expense side, sometimes they just “round up” some figures and in other cases they “merge” several separate projects of different philanthropists into one.  However, even such unethical behavior cannot save many nonprofits from financially collapsing.

My first experience in the Israeli philanthropic world was with “Alon”, a nonprofit targeting children and youth at risk across the geographic and social periphery of Israel. I started as a volunteer and as a donor and later on joined the Board. At its peak, Alon activated 25 various projects across Israel. Each was theoretically 100% financed by various donors. However, in practice, in the best case scenario such finance covered the direct costs of a project, but almost none covered the overhead and salaries of the regional instructor, HR manager, CFO, CEO etc. So the more projects Alon took on itself, the heavier overhead became and the bigger was the cash flow deficit. At one point Alon collapsed. Like in many such “overhead cases”, it collapsed top-down, not bottom up. It wasn’t any specific project that was in charge for the situation, but the fact that Alon never learned to say “No” to donors wishing to initiate a new project and not accompanying it with overhead funding.

When you think of buildings it is easier to understand – if we have $3M to finance the cost of a new center for disabled children, but we have no money for the ongoing care of the building (let’s assume 3% a year) we’d rather not build it and leave a burden of $100k on the very thin shoulders of the typical Israeli nonprofit organization. But for some reason what seems obvious to many of us when it comes to concrete, does not work for us, when we think of different social projects which are less tangible.

We all want to know where our dollar goes; however, in the search for that, we many times lead the nonprofit organizations to wrong places. What I find a bit strange in some philanthropists behavior is the relatively large amount of time and resources spent on the input side (“I want to know exactly where every $ went”) and the relatively little time and effort we put on the output of our giving – checking how effective our donation was.

Given the fact that many of us come from the business sector, I find it even stranger. When we buy products or services we don’t ask the supplier how much of the money we’ve paid was spent on overhead, how much for marketing, salaries etc. I don’t see a reason why, except for some minimal audit, we would do so with nonprofit organizations. When we do so, we many times push these organizations towards the wrong places – focusing on direct project finance and neglecting the reality of overheads. Sometimes it leads them to some unethical behavior as I have mentioned earlier.

The Israeli government is also to blame for much of this situation – it does not set as an example for philanthropists on the overhead issue. On the contrary, many of the laws and financing system of nonprofits by government ignore overheads. So if the government would many times agree  to finance only the exact super-direct costs of a project, what can we expect from philanthropists?

In my personal and corporate donations I give at over 90% of my budgets to overheads of nonprofits. You will not find any specific project on “my name” around here. I don’t need it, because I know I am much more effective in giving the missing $$$ for overheads, probably one of the hardest to raise by nonprofits otherwise. But I cannot personally solve the problems of a whole financially disabled sector in Israel.

If we want to become more effective as philanthropists, we cannot allow ourselves to ignore the overheads of the nonprofit sector in Israel. When you decide to back a specific project, include 20% or so for overhead, because that is probably the only way to secure the future of both the specific project as well as the nonprofit itself.  If you want to become more effective in Israel, you’d rather back a nonprofit for the long term, than a specific project for the short term.

Avner Stepak, 39, From Sde Warburg. Co-Owner, Direcot and ex CEO of Meitav Dash Investment House, the 2nd largest in Israel, managing over $38B. Co-Founder of Midot Non Profit that promotes effectiveness of nonprofits and philanthropists.