Scarcity By Design

Unpacking the Financial Structures that Undermine Effective Philanthropy

May 12, 2025

My last post looked at the current state of philanthropy and how it has evolved in recent years, changing practices and norms to be more inclusive, participatory, and grounded in voices of lived experience. These have been important and necessary changes, but there remain underlying dynamics in philanthropy that are holding us back from really tackling problems at the scale of the issue. One of the most significant is the dominance of a scarcity mindset and the ecosystem that converges around philanthropists to keep charitable dollars invested in endowments and donor-advised funds, rather than putting them to work on the issues at hand. This post provides an insider look at what’s holding philanthropists back from making bigger bets and putting more money to work for the community.

The Hidden Economics Behind Philanthropy’s Paralysis

One of the most dominant — and damaging — narratives that shapes progressive philanthropy today is this fundamentally false notion that resources are scarce. Many of the harmful practices that funders commonly employ are rooted in such a mindset of scarcity.^[1]
- Zaineb Mohammed, Director of Communications, Kataly Foundation

Charitable dollars ought to be doing the good they were intended for, not sitting stagnant to provide tax advantages for some and management fees for others.
- U.S. Senator Chuck Grassley, R-Iowa

To understand the systemic reasons behind the disparity between accumulation and deployment, we need to go back to its roots. The tradition of charitable giving in the United States predates the formation of the republic, starting with voluntary associations for common needs such as hospitals, fire departments and orphanages before the creation of a formal government, and was called out in Alexis de Toqueville’s Democracy in America as a unique and positive distinguishing feature of American culture. Donations to nonprofit organizations were subsequently made tax-deductible in the Revenue Act of 1917 on the premise that individual citizens have better visibility into local needs at a time when the federal government was raising taxes and did not want to dissuade charitable donations.^[2]

Since that time, a variety of vehicles have emerged to facilitate an upfront tax deduction for a donation where funds can be distributed at a later date. These include private foundations – standalone nonprofit organizations that require a 5 percent annual payout, a governing board, and annual IRS reporting – and Donor Advised Funds (DAFs), which are designated funds established under a nonprofit umbrella that honors donor wishes on when and how their funds are distributed. Individual DAFS have no discrete governance or payout requirements except to the extent that the umbrella organization requests it, which most do not. The first DAFs were created in the 1930s, and began growing in visibility and popularity in the 1990s. Today they are philanthropy’s fastest growing vehicle.^[3]

Unsurprisingly, this trend coincides exactly with the end of the Cold War, the rise in tech innovation, and the rapid acceleration in wealth inequality. As more people had “sudden wealth events” due to IPOs and other business success, they sought the advice of wealth advisors who encouraged them to shelter these gains from taxes and establish a DAF, which has no limit on size and can be created quickly, with almost no overhead.

Whereas DAFs had previously been the purview of community foundations and other mission-driven organizations, financial services organizations quickly recognized that maintaining control of charitable funds was a business growth opportunity and established subsidiary nonprofit organizations that offered DAFs for their clients. In so doing, they continue to earn fees for managing and investing those funds until they are granted, and since they have no desire to see those funds reduced, they create no incentives to put those charitable funds out into the world. The management and reporting on DAFs tend to revolve around financial performance and total asset size, rather than setting targets and timelines for deployment, and the visible fees they charge are low to ensure funds remain under their control.

As of December 2023, there were 1.8 million DAFs in the US holding an aggregate $252 billion in assets.^[4]According to the Independent Report on DAFs, DAFs now receive a sixth of all individual giving each year. And nine of the top 20 recipients of charitable gifts in the country, including the top three, are DAF sponsors.^[5]

To be fair, this number pales in comparison to private foundations, whose assets reached a record $1.6 trillion in December 2024,^[6] but while the total amount is smaller, DAFs are growing quickly and unique in that they provide no public transparency or accountability for the deployment of funds.

With both structures, there is a similar focus on capital preservation and growth, with foundations generally referred to in terms of their total assets (e.g. “a $1 billion foundation”) rather than their annual payout or investment in the community. This approach over-emphasizes the importance of funds in the bank rather than those that are put to work for charitable purposes.

These structural elements are further reinforced by wealth advisors who encourage new philanthropists to take their time and decide what matters most to them personally before taking action, reinforcing the idea that it is still “their money” rather than emphasizing that they have become stewards of public funds with a responsibility to put them to good use. Being an effective philanthropist is no small task given the complexity of the issues, and so even the most well-intentioned are reticent to act quickly and do something that might be perceived as foolish or ineffective.

With no incentive to cede control, some say financial advisors are “wheeling and dealing” with large sums of money and “the assumption is unless you are a billionaire, there’s no foundation and no governance.” As a result, new philanthropists can take years to develop and activate their giving and established philanthropists often pivot their strategy regularly, taking time off from granting to retool their approach.

Many also talked about logistical and psychological barriers to more active giving, such as the complexity of choosing and managing legal structures, fear of doing something that is not considered “smart,” and the positional loneliness that comes from having significant money and power. In the worst-case scenario, some donors take a “set it and forget it” mentality, leaving funds sitting in DAFs, moving between DAFs, or making the minimum payout from foundations into DAFs, creating no social impact. DAF-to-DAF transfers alone accounted for $4.4 billion of DAF grants in 2023 (8% of total DAF giving that year) and a consistent $16.8 billion over the four years from 2020 to 2023.^[7]

In addition to structural and systemic challenges, management styles also come into play. With established philanthropies, the dominant organizational style typically reflects the founder’s orientation and since most wealth is made through business, the typical expectation is for philanthropy’s management style to align with the founder’s business values and practices.

Similarly, highly technical founders often try to quantify social impact in order to compare the impact of apples and oranges, a challenging proposition when tackling complex social and environmental problems.

In both cases, spouses and children often have a different approach, and as family influence grows there can be a significant shift in both the way they give and the scale of the giving. That said, those working in multi-generational family philanthropy noted that charting a different course can be hard, especially for the second generation, and it can still have a chilling effect on confidence and risk-taking.

Where established philanthropists have tended to create foundations that reflect the zeitgeist of their founders, new donors are predominantly choosing very lean models of philanthropy, often using family offices or philanthropic advisors instead of program staff. The people around wealthy families have increased power to influence their philanthropic path but often “financial advisors and lawyers know estate planning, not programs.”

Philanthropic advisor Kimberly Dasher Tripp points out that a large number of new donors want to be more active and desire an on-ramp or manual on how to get started, including archetypes, pros and cons, and case studies that illustrate effective paths forward. She says that this is creating an opportunity in the philanthropic marketplace for more leadership in providing these "ways in," more peer networking and more staffing support.

This is also opening up possibilities for deal flow vetted by experts, as leaner staffing models create a desire for better grantmaking recommendations. By “moving intelligence rather than information” and establishing a more efficient B2B (built for advisors) model for driving social impact, more donors can move more dollars. Philanthropic professionals can also make giving more joyful and engaging for new donors, rather than daunting and stressful, by helping them to move past barriers and enabling donors to partner with and learn alongside peers and grantees.

Agility is also missing in progressive philanthropy. As media and philanthropy executive Bonnie Benjamin-Phariss asked, “where is our DARPA for the major challenges before us, such as education,” providing smart people with grants to try something completely new or offering small “get to know you” grants to organizations with no strings attached? We need new ways of achieving social change that empower the front lines, creating a broader and more diverse toolbox for social change that includes more strategic partnerships and mergers between existing organizations serving the same purpose. Philanthropy needs to embrace complexity and risk, work with root causes, and invest for time.

Despite all its progress and good intentions, philanthropy today instead remains predominantly an inefficient system built upon a premise of wealth accumulation, preservation, and management for growth that risks reinforcing the systemic issues it seeks to reform and limiting its ability to be successful at scale. Most donors have a “scarcity mindset” that despite their significant wealth, it is not enough and so they conserve their funds and only deploy once risk has been minimized, often by reducing the size or the duration of support. And market uncertainty only further feeds the impulse to preserve rather than deploy.

Yet those with the magnitude of resources to make significant philanthropic investments are – by definition – in the best position to take risks, weather the storm, and prove what works. The reality is that philanthropic capital is at its most catalytic when used as risk capital, allowing organizations to innovate, enabling new models to scale, and supporting the health and wellbeing of those who choose to work in critical but low-paying social impact roles. In the next post, we’ll look at opportunities where risk-forward philanthropy can have outsized impact in the hope that it will stimulate a more ambitious approach to how philanthropic dollars can be deployed.

The Elephant & Butterfly

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