Doonesbury Plugs DonorsChoose

Product placement in a comic strip puts the focus on a well-promoted online charity venture.  But a look at the financial statements suggests that there may be bottlenecks ahead as the organization tries to scale up. 

The Sunday Doonesbury comic strip features a confrontation between baby boomer father Rick Redfern and his Gen Y son Jeff (who is 25 & still living with his folks) over how Jeff is wasting his time online.  Jeff puts Dad in his place by pointing out:

I spent the morning in my office at my private foundation on Second Life, where my avatar raised nearly $600 which I then took to donorschoose.org to buy textbooks for a class I adopted. 

DonorsChoose (EIN 13-4129457 Form 990) operates a web site where teachers in public schools can post proposals for funding learning materials or activities.  Potential donors can scan the proposals and fund them as they wish.  Donors Choose then purchases the materials or activities and delivers them to the teacher.  Then there's follow up with thank you letters from students and the teacher, photos, and an expense report.  (I'm picking up this information from the organization's June 30, 2006 financial statement, available on its web site.)

The brilliant thing about DonorsChoose is that it gets teachers to do an enormous amount of work for extremely small grants, and yet DonorsChoose and founder Charles Best gets the attention and the credit.  Mr. Best, no longer a teacher, now spends its time working on bigger deals:  DC is on the verge of closing on $11 million in funding from Pierre Omidyar (EBay), David Filo (Yahoo), longtime Vinod Khosla (a venture capitalist) and Reed Hastings (Netflix). 

The June 30, 2006 Form 990 shows that organization took in $7.8 million in contributions and paid out $2.6 million in student resources.  The expense side is listed in a separate schedule on page 16 of the Form 990 rather than on line 22 or 23 on page 2, which is where I would have expected to find it (along with a schedule showing who received the grants and how much). 

The additional contribution cash went to the bank, and the financial statement on page 6 shows that cash has gone from $1.3 million in June 2004 to $2.3 million in June 2005 and $4.2 million in June 2006.  I'm wondering whether this could be an indication of a bottleneck in the operation in converting the cash donations into purchases for the teachers.  (The purchasing process, it seems to me, will be a major challenge with the organization's business model and with its ultimate accountability.  I see serious risks here.) 

Let's also note some of the organization's peculiar financial practices.  Here's how the organization's financial statement defines program services (with my emphasis added):

Program Services include student resources and delivery, and student resource advocacy.  Student resources and delivery are amounts paid to process proposals, acquire and deliver project materials to the classroom, and to provide feedback to the donor.  Student resource advocacy consists of outreach to schools and to citizen philanthropists.

With an accounting footnote, the organization has defined activities that I think most people would consider administrative activities, donor relations, and promotion of DonorsChoose to be program activities.  DonorsChoose is hardly alone in taking such a broad definition of program activities, and they deserve a little bit of credit for honestly disclosing it.  But I think it's misleading.

Another issue with the Form 990 is that it was due four and a half months after the end of the fiscal year in June, 2006, which would have been November 15.  There's an extension requested to February 15 (the IRS grants a 90 day extension with no questions asked).  Then there's another extension request, and the return was not filed until March 20, 2007.  I don't think that a nearly nine month delay in financial statements is acceptable for an organization that will be primarily acting as a conduit for large volumes of donor money.  (As director of finance for a $30 million relief agency with worldwide offices, I was always able to produce audited financial statements for the board within three and a half months after the end of the fiscal year and a Form 990 before the first IRS deadline.)

The pay structure at DonorsChoose is modest (at this point), with founder Mr. Best at $116,000 plus $1,586 benefits, Treasurer/Chief Operating Officer Alfonso Malabag at $120,240 plus $16,244 in benefits, and chief marketing officer Brita Lombardi at $110,570 plus $3,434.  Note that the financial position currently earns more than the founder/president, which is entire appropriate, reflecting the essentially fiscal character of this venture.  But I would hope that by the next return we see the Mr. Malabag's jobs broken out to separate the financial from the operational responsibility. 

Comments

[Missy]

Thanks for writing about DonorsChoose.org!

We agree that the financial practices of high-growth nonprofit organizations should be scrutinized, and we welcome any questions you and your readers might have. We are proud to operate a philanthropic model in which a high level of accountability and transparency is offered to every donor, at every donation amount. We are confident that our practices adhere to the highest standards of integrity, evidenced by our "4-Star Charity designation by Charity Navigator: http://www.charitynavigator.org/index.cfm/bay/search.summary/orgid/9284.htm

We will do our best to address your key points below.

Revenues vs Expenses
Whenever individual donors fully fund a project on DonorsChoose.org, we purchase the resources within 10 days. Our revenues on the 990 were higher than our program expenses last year for two reasons:

First, we've been raising funds for our national expansion. (The $11mm in national expansion funds is being supplied by DonorsChoose.org backers; no website donations designated for classroom projects are set aside for expansion funding.) A significant fraction of this $11mm was booked as revenue during 2006, but we'll be spending it out over the next 5 years to build our infrastructure and to help fund classroom projects in schools new to DonorsChoose.org. At the end of 5 years, we aim to be self-sustaining and no longer expect to seek operating grants of this nature.

Secondly, we carry a surplus of funds in our system. These funds include foundation grants that have not yet been applied to proposals and unredeemed gift certificates.

Our impact page ( http://www.donorschoose.org/about/impact.html ) represents real program dollars delivered to classrooms. (Note that the chart is for calendar years, while the 990 tracks our fiscal year which is July-June.) These numbers are "live" as they come directly out of the database that drives our website, so it's the best way to see how much has gone directly to the public schools.

Timeliness of Filing
Last year we did file our 990 late, but we're working very hard with our independent auditor to make sure this year's tax filing is on time.

One of the challenges of running a transparent micro-philanthropy site is tracking all of the transactional details. For each funded classroom project, we have a fiduciary responsibility to spend each donation on only that project's materials. Therefore we are tracking the purchase of every pencil, every microscope, every book, every bus trip, etc. across dozens of vendors and thousands of projects. With 28,210 donations last year, restricted to 21,903 specific projects, the accounting quickly gets complex.

Program Services
At DonorsChoose.org, a donor is not obligated to pay for any overhead costs. When you fund a project, you can choose to have 100% of the donation go towards the direct project costs, or make an additional "fulfillment" gift to DonorsChoose.org. This additional gift is entirely optional.

If you choose to support our overhead costs with this optional gift, it will go toward those Program Services needed to enable our "philanthropic marketplace." In bringing classroom projects to life, DonorsChoose.org 1) authenticates and reviews teacher essays and resource lists; 2) purchases resources and tracks shipments, and 3) routes packages of classroom thank-you notes and photos to our donors. This work includes keeping the website running, providing customer service to teachers and donors, attracting teachers to the site, and encouraging donors to visit our web site to fund these projects.

Improving the efficiency and automating the process by which we purchase and distribute the donor-funded classroom resources is one of our primary focuses as we grow. For example, it used to take us hours to purchase the materials for a project; now it's a matter of minutes, thanks in part to the integration of e-procurement technologies into our web system.

Amount of Work Required from Teachers
DonorsChoose.org has attracted tens of thousands of teachers because we require much less work than a typical grant proposal; less time spent grant-writing, tracking, and reporting:
* DonorsChoose.org provides an open field where the teacher writes a few, jargon-free paragraphs about a student learning experience they want to make possible. The process takes about half an hour.
* Most grant processes send teachers a check, require them to procure the resources they need, and then require a detailed expenditure report; DonorsChoose.org purchases resources for the teacher, ships them to their classroom, and compiles an expenditure report automatically.
* Once a grant is fulfilled, reporting on many grants consists of pages of text and data and receipts. Reporting on a DonorsChoose.org project is a creative classroom activity, where students write thank-you notes to donors. Teachers have told us that they find this is a valuable experience, because it helps students develop their writing skills and teaches them to demonstrate gratitude.

The large number of teachers using DonorsChoose.org is the best testament to the comparative ease and efficiency of submitting projects at DonorsChoose.org. More than 18,000 teachers have posted classroom projects at DonorsChoose.org and 43% of them have returned to submit a second grant. They come back not only because posting a project is relatively easy, but also because the chance of their project getting funded is 60%.

We hold ourselves to the highest standards of accountability, and we welcome the opportunity to share the financial and operational details of our exciting philanthropic model.

My contact info is below. You can also direct any questions to César Bocanegra, our EVP of Operations (cesar at donorschoose dot org) and Andy Kaplan, our CFO (andyk at donorschoose dot org).

Thanks for writing about us and don't hesitate to be in touch if you have any further questions!

-- Missy Sherburne, EVP of Program, DonorsChoose.org
missy at donorschoose dot org