Editor's Note: Smile Train is a significant breakthrough in the non-profit world. It was also a place we sent one of our first donations as a foundation. Still, I didn't know the story told here - it's inspiring and typifies the end game I seek in our work. That is, to support charities who develop good business disciplines so that they can do more good. [more]
"Bottom-Line Philanthropy"
By Stephen J. Dubner and Steven D. Levitt
The New York Times - Published: March 9, 2008
Brian Mullaney’s epiphany occurred back in 1994 in Vietnam. He was traveling as a board member with Operation Smile, a charity that performed cleft-repair surgery on poor children around the world. Because the organization flew in doctors and surgical equipment from the United States, its time and capacity in a given locale were limited. “On every mission, 500 or 600 children would show up begging for treatment,” Mullaney recalls, “but we could only help 150.” In a small Vietnamese village near the Chinese border, there was one kid who played soccer every day with the volunteers; they took to calling him Soccer Boy. When the mission was over and Mullaney and the others drove away, he saw Soccer Boy chasing after the group’s bus, his cleft lip still unrepaired. “We were in shock — how could he not have been helped?” That’s when Mullaney realized that charities like Operation Smile were badly in need of a new business model — or any business model at all, really — and he set out to invent one.
Rafe Furst’s epiphany came just last year while attending a closed-door conference in Grand Rapids, Mich., that featured some of the most prominent cancer researchers in the United States. Furst might not seem the likeliest person to be in such a room. He is best known as a professional gambler, a proud member of a high-profile, high-I.Q. poker gang known as the Tiltboys. He has an undergraduate degree in symbolic systems and a graduate degree in computer science, both from Stanford, and in 1999 he banked a small fortune by selling an online promotions company he helped found. (Disclosure: Furst is a friend of ours, and we are both investors in a more recent start-up of his, its mission unrelated to this article.)
Furst and some other Tiltboys began donating a portion of their poker earnings to the Prevent Cancer Foundation, and in 2004 he was invited to join its board. He viewed the Grand Rapids conference as a way to learn more about cancer and how it was being fought. Instead, he says: “I fell down a rabbit hole. I saw that there were some messed-up things going on here. The system is just not designed to solve this problem.” The cancer-research community, he felt, was made up of countless well-meaning individuals who, collectively, turned into a hive of competing interests and misaligned incentives, where financing dollars and even information were hoarded.
So Furst, too, conceived a new charitable business model. His idea is little more than a commingling of two long-proven incentives: prizes and profits. Inspired by the X Prize Foundation’s sponsorship of innovations in space travel and other realms, Furst wants to establish a giant prize, as much as $10 billion, that would go to the party or parties that achieve a “cure” for cancer, as defined by the prize committee.
And where will that $10 billion come from? “I don’t want Bill Gates,” Furst says. “I want your average millionaire down the block who wants to make a difference.” Furst says he believes the landscape is thick with would-be philanthropists, especially younger people, who would like nonprofits to operate a bit more like the for-profit worlds they inhabit. This means establishing realistic and powerful incentives.
Cancer researchers would certainly be incentivized by the $10 billion prize. But how to incentivize the donors? Furst would offer an annuity, similar to the annuities paid out by charitable-remainder trusts. A donor to such a trust gives money or property to a charity and receives an annuity based on its value until his or her death. “That’s a cool idea,” Furst says. “But I thought, How can we make it so you don’t have to die?”
An early contributor to what might be called the Cure Cancer Annuity Fund would receive as much as a 15 percent return on her money until the $10 billion was fully funded; after that, she would receive a 5 percent return. (This would be dependent, of course, on the fund’s ability to generate such returns; Furst is confident that some hedge-fund friends of his could make that happen.) The annuity would stop only when the goal — a cure for cancer — was reached and the principal was paid out to the winners. Furst’s greatest insight may be the recognition that, for many people, the act of altruism is not as pure as it might seem. In this case, whatever pain a donor may feel from giving is countered by the pleasure of also getting something back.
For now, Furst’s idea is still in the planning stage. Brian Mullaney’s idea, meanwhile, has already borne much fruit. The incident in Vietnam with Soccer Boy made him realize, he says, that cleft deformities “are not a medical problem; they’re an economic problem.” As a philanthropist, offering surgery to only a fraction of the children who needed it made him heartsick. As a businessman — at the time, he ran an advertising agency — it made him cringe. “What store turns away 80 percent of its customers?”
Mullaney helped conceive a plan. Instead of using Operation Smile’s hard-raised millions to fly doctors and equipment around the world for limited engagements, what if the money were used instead to train and equip local doctors to perform cleft surgery year-round? Mullaney figured that the cost per surgery would drop by at least 75 percent, and he saw no reason not to try it. Operation Smile’s leadership saw things differently, so Mullaney and a few others left the organization and started a rival group, Smile Train. Along the way, Mullaney got out of the advertising business and became the new organization’s president.
Smile Train works as a charity because it is run like a business. Fixing a child’s cleft lip or palate is a relatively cheap procedure with outsize payoffs: cleft children in many countries are ostracized and have a hard time going to school, getting jobs and marrying, and the surgery reverses those disadvantages. Indeed, when pitching a reluctant government, Mullaney refers to cleft children as “nonperforming assets” who can soon be returned to the economic mainstream. He fights bad incentives with better ones: when Smile Train learned that midwives in Chennai, India, were being paid off to smother baby girls born with cleft deformities, Mullaney started offering midwives as much as $10 for each girl they instead took to a hospital for surgery.
Smile Train has also harnessed technology to create efficiencies in every aspect of its business, from fund-raising to charting patients’ outcomes. It developed surgery-training software that helps educate doctors around the world. There are high-tech quality-control measures: using digital imaging, a Texas cleft expert grades a random sample of operations performed by Smile Train doctors around the world, in order to know which surgeons in, say, Uganda or China need more training. These are the sort of innovations that likely make Smile Train one of most productive charities, dollar for deed, in the world. Over the last eight years, Smile Train has performed more than 280,000 cleft surgeries in 74 of the world’s poorest countries, raising some $84 million last year while employing a worldwide staff of just 30 people.
Mullaney estimates that Smile Train is close to reaching a historic break-even point: it will perform more operations each year than the number of children born each year in developing countries with cleft deformities. This means Smile Train may be well on its way to putting itself out of business. “That,” Mullaney says, “would be a dream.”
http://www.nytimes.com/2008/03/09/magazine/09WWLN-freakonomics-t.html