Chariot
The Five-O-One podcast hosts its first for profit company on the podcast. In this episode we are joined by Salo Serfati and Aaron Kahane, two of three co-founders of Chariot, a payment widget for nonprofits that allows them to accept donor advised fund donations at checkout.
To learn more about Chariot visit givechariot.com.
Talia: Thanks so much for being on The Five-O-One. This is a special episode in that you are the first for profit company on The Five-O-One podcast. But I think our listeners will very quickly understand why the work of charity and his show relevant to the nonprofit sector. Let's start with the basics. How are people generally giving away their money to charity? If I want to give a donation, I'll write a check or I'll go on an organization's website and I'll use my credit card at the checkout portal. But what are the other methods that people are using to give charitably? Aaron I'll start with you.
Aaron: Yeah, so there are many ways that currently exists. I think the most popular one for people our age is probably a credit card. I like giving them my credit card. It's easy. It's quick. And I can do it directly to nonprofits website.
Talia: Right. You could even pay with Apple Pay today.
Aaron: Exactly. Apple Pay, Venmo, PayPal… Some of the other ways to donate though are you could write a check, you could give from a foundation or a donor advised fund.
Talia: I'm sure many of our listeners have never heard of a donor advised fund. Could you explain what it is?
Aaron: Absolutely. A Donor Advised Fund is a specialized financial account used for the purpose of charitable giving. You could kind of think of it like a 401k or an HSA, Health Savings Account, for charity specifically. So, it allows donors to make a charitable contribution to the donor advised fund and receive an immediate tax deduction when you put that contribution in, and then over time recommend grants that your DAF sends to charities of your choosing. They've actually been in existence in some form since the 1930s. But during the 1990s, for profit, financial investment, firms began to establish affiliated nonprofit organizations to maintain these funds and they've become a lot more popular since then.
Talia: So if I wanted to give away my money through a donor advised fund, I would put it in a fund and I would get the tax write off immediately, even if I weren't giving away that money at that moment?
Aaron: Yeah, so the reason why you would get the tax benefit immediately is because the donor advised fund is actually a nonprofit. So, when you give money to them, the money is actually no longer yours. You then have an account with money that you've given to the donor advised fund that you can recommend to specific charities over time, but that money from a legal perspective is no longer your money.
Talia: It sounds pretty similar to a private foundation. Why would someone have a donor advised fund rather than a foundation?
Aaron: It's less of an operational headache to manage a donor advised fund so donor advised funds don't have a lot of the restrictions that apply to private foundations that deal with pay-out requirements or legal fees.
Salo: And in addition to that they're also more tax efficient so donors can claim a higher charitable contribution deduction compared to a private foundation. A lot of people open a donor advised fund instead of a foundation for privacy reasons. Since it's the donor advised fund that's making the donation to the charity, there's this abstraction where the donor can actually be held private and the nonprofit doesn't have to know who actually sent that money.
Talia: Okay, so it's not reported like a private foundation, you have to file a 990, which reports all of your grants from that year, but through a donor advised fund, it's bearded and people can't necessarily know the money is coming from you.
Salo: Exactly.
Talia: Okay, so, Aaron, you talked about these DAFs becoming more mainstream recently and Salo I'm wondering why that is.
Salo: So over the last four years, a lot of new companies have come in and offered the ability to open up these donor advised funds, with a much more modern experience, too, with no minimums. So, before you wouldn't need at least $25,000 to open one, now it's zero. And the fees have gone dramatically down. And so now you're seeing this democratization of these accounts where millennials -- people from all demographics -- are starting to open them, which is why they're growing at 36% year over year.
Talia: Got it. So how would I open a DAF?
Salo: You just pick a data provider -- so you can choose like, for example, Fidelity Charitable…Charles Schwab. You can the more modern ones are Charity Vest, Daffy. Groundswell. You would sign up for an account just like you sign up for, let's say, a Chase like a bank account, and then you deposit money and then from their portal, you can make donations. What we're facilitating is the ability to make donations outside of their portal on a nonprofit’s website.
Talia: Does the DAF take a cut of the donation?
Salo: No so DAFs charge an AUM fee. Typically, it ranges but the typical fee structure is that they charge around 1% or higher for the total assets that they manage.
Talia: Got it.
Aaron: But some of the more modern ones like Daffy charge a flat fee of $3 a month so it's only $36 a year, which tends to be a lot lower than some of the ones Salo was mentioning.
Salo: Yeah, and they want everyone to open up these accounts. And so charging that small monthly donation means people with small account balances will open them up.
Talia: So Aaron, right now, if someone wants to give a donation through their DAF, what would that process look like?
Aaron: Yeah, so I think that process can range. It can be anything from signing into your DAF account on the DAF website, and then clicking the donate button, searching for the tax ID number of the nonprofit that you want to give to, clicking through the donation process. And that's the more modern, easier ways to give. With some of the older DAFs – some of the communal funds – you actually you have to call the DAF. We have a friend who has a DAF in Kansas City and anytime he wants to donate, he has to call or email his DAF the amount he wants to donate to the charity he wants to give to so it can take some time.
Talia: Yeah, that sounds very involved. How is Chariot different than the process that exists today?
Aaron: Yeah, so we're trying to make giving with your DAF as easy as your credit card. And the way we're doing that is we're creating a payment widget that nonprofits add to their website to accept DAF donations directly at checkout. You can imagine like a PayPal button for DAFs. By doing this we're hoping to get more of this idle $160B that sits in DAFs, into the hands of nonprofits, drive adoption of donor advised funds by raising awareness of them on nonprofits payment pages, and then finally further the donor advised fund adoption by enabling one of the biggest pain points -- the friction of donating.
Talia: This seems pretty obvious to me. Is there a lot of competition in this space?
Aaron: There's no one in this space that we know of building DAF integrations so that nonprofits can add a payment option at checkout to accept money from donor advised funds. There are two options to help nonprofits with DAF donations -- DAF direct and DAF widget. But both options redirect you to your DAF account, and as a user, you have the same flow that you would have without the widget. On the nonprofit side, there's also no way to track the status of that donation or even if the donation was submitted, but with our button, as a nonprofit, you'd be able to see when the grant was submitted when it was approved when the money was sent over.
Talia: Is it possible that people would just put money in their DAF get that tax write off and then not give it away to charity?
Salo: We call that zombie philanthropy, and that is a criticism that DAFs received. And they don't have that same payout requirement that foundations have. So, there are people that could do that. Actually though, if you look at the statistics, the payout rates for DAFs are around 20%. So, they're already way higher than foundations. A lot of the times the reason why people keep these dollars in the DAFs is because it's kind of hard to pay with them. It's a whole process. Most of the time when people are asked to donate it's like on the spot and you want to do it there and then, and with DAFs, that's not the case. And so we really think that a tool like Chariot can increase the output from that.
Talia: So you guys have been at this only for a few months, Aaron, I know you left a job at Bain, and Salo, you left Blackrock to pursue Chariot. I'm curious how you guys even got into the nonprofit space to begin with.
Salo: So I've always found it very important to donate 10% of my income to charity. And after college, I worked for BlackRock, which is very big finance firm, and I realized there exist a lot of technology for managing people's wealth, what I call the 90%. There was very little technology for the other 10% that had to go to charity. And I was always curious, how can we solve for that.
Aaron: When I graduated, I told Salo I wanted to get involved in this space. I knew he was already pretty involved in it. He actually got me into using an Excel spreadsheet to track my charity. So, when I started making money, I reached out to him and said what can we do in the space like it's pretty tech backwards. So, we thought of this checking account called MyTen.
Talia: What is that?
Salo: We built an app for friends to manage their charitable giving. It was basically a checking account with a debit card linked to it, where they can deposit money, and then they can spend those charitable dollars with that debit card. Something we didn't know when making this app was that once people started this behavior, which we call proactive giving -- setting aside dollars first, the way they interact with charity completely changes.For one, it didn't hurt any more to donate because they said “Hey, I have $10,000 set aside for charity. Of course. I can donate $100.” So the pain went away. Second, they started seeing their charitable dollars as an investment rather than an expense. So, it's how can I use these $10,000 most effectively to create the change that I want to see in the world? And what we realized is that donor advised funds are these giving vehicles that allow people to have proactive giving.
Talia: So now you've created Chariot. How many people are you guys today? Have you raised? What stage have you reached in the creation of your company?
Aaron: Yeah, so we are currently there's three of us so Salo and I met a Penn. We lived together. Actually, our third co-founder Drew Schneider I met at Bain.
Salo: And then in terms of like our company, we got accepted to Y Combinator which basically gives us $500,000 in pre-seed funding and access to a whole network of startups of mentorship nonprofits. So YC accepts a handful of nonprofits every year and we've been able to connect with them and hear their pain points, which has been helpful in developing this product.
Talia: And how do nonprofits add this button?
Aaron: We're literally following the flow of PayPal. So it's an experience that they already are accustomed to. It's just as easy as adding a PayPal button.
Salo: Yeah, it's an HTML snippet. If they have someone technical, they can do it in less than a day. So it should be very easy. We’re hoping to have the chariot widget fully built out in the next few months.
Aaron: We're trying to move really quickly. There's a possible upcoming recession, and something that I think a lot of people don't realize is that DAFs tend to be very resilient during recessions. There's a great study actually on this, by Dan Heist, and then Danielle Vance McMullen on how payout rates from DAFs to nonprofits actually increased during times of recession, and I think nonprofits will really need our button more than ever, during a possible upcoming recession. So we're trying to really move quickly to get this button out there so we can help as many nonprofits as possible.
Talia: And I guess the theory behind that is the money has already been set aside so it's not like they're putting more money into their bucket of giving -- that money is already there. They're gonna give it away anyway.
Aaron: Exactly. I think it's that point. And then also, just the fact that people want to be more charitable and want to give back when times are tough.
Talia: Any final remarks for our listeners?
Salo: In a world where everyone has money set aside for charity -- doesn't matter if you're in the lower income bracket, higher income bracket -- everyone has something to give. And in a world where that money is set aside first, it's just a world where people are already consciously deciding that there's something more than you to give back. And so that's the word we want to drive.