Would retroactive public goods funding fix non-profits?
Having started both for-profit and non-profit ventures, I’ve found that the grass is always greener: for-profits have beautiful machinery for a busted metric (cash), and non-profits have busted machinery for a beautiful metric (impact).
Is there a best-of-both worlds-arrangement? Probably not, but we can certainly do better.
One recent attempt comes from Vitalik Buterin and the Ethereum Optimism team. In their paper, called Retroactive Public Goods Funding, they advance the idea that unrestricted prizes would establish an incentive loop for non-profits that draws inspiration from venture capital-backed exits:
The viability of this loop rests on the following claims:
More public good would be done if people had “exit incentives” that compare to venture-backed initiatives. For simplicity let’s just think of exits as unrestricted cash prizes.
It’s easier to agree on what was useful than what will be useful. A system for rewarding impactful public goods projects is easier to get right than a system for predicting impactful public goods projects.
Prizes for impactful work are possible to quantify and justify. Free, high-quality education for your country; 90% vaccination for eligible people in your city; an open-source, interoperable healthcare API. The question “How much would this be worth if it were real?” should be answerable for governments and organizations.
The mere introduction of a prize, an unrestricted exit for non-profits, would naturally be welcome to its operators. Today, non-profits have to chart a difficult course in which they wean off grants, which are often highly restricted, and make the leap to earned revenue, typically by delivering value in a completely new way. Consider an education non-profit that seeks to make a high-quality education free to anyone, anywhere. The non-profit may initially receive grants from mission-aligned donors. But over time, those donors may no longer wish to “prop up the mission,” or their funding priorities may change, leaving the non-profit vulnerable. So the non-profit seeks earned revenue, for example by selling a package to schools and districts. But this new direction constitutes a major pivot, and in fact is likely to deter new donations.
What’s less clear to me is: who would fund these prizes? An exit rewards not just the company but the original investor. Would a prize reward the original grant-maker in the same way? Buterin’s paper indicates that 100% of winnings would go to the creators of the project. That sounds great for the creators, but seems to fall short of the tightly aligned incentive structure venture capital enjoys.
One thing I love about this loop for non-profits is that it enables mini-loops. And here the public goods framework actually exceeds the venture model. Venture’s “small wins” – raising a Series A-G – rarely achieve liquidity for their employees. Stakeholders conspire to ensure there is one exit. And even that exit often comes with “golden handcuffs” – conditions or gotchas. For a public goods project, one can imagine several off-ramps along the journey. And one can also imagine the ultimate off-ramp: unlike venture-backed companies, public goods projects may actually shut down operations once their mission has been fulfilled (eg., eliminate malaria).
To make this more concrete, let’s say you’re the governor of a state that’s struggling with low COVID vaccination rates. You get together with your various advisors and determine that it’s worth $500 million for the state to achieve 90% vaccination rates. You might come up with something like this:
One need not progress through these loops in order; an accomplished scientist may go straight for the $100m prize and a middle-school student may be satisfied after winning their $100 prize. But packaging them together is, if nothing else, good marketing: it celebrates the impact we can have at different levels, scaffolds a path of lifelong learning, and calls out the open problems for a given field.
But again: where will the money come from? How would prizes ever incentivize funders the way exits do?
One thought: what if philanthropy turned itself on its head and allocated 100% of funds not toward grants but prizes? Would a “grant economy” organically emerge? Banks and other lenders making bets, ie., investments, based on the prospect of participating in the prize winnings?