Three members of GiveDirectly‘s board of directors (Paul Niehaus, Michael Faye, and Chris Hughes) are planning to start a for-profit technology company, Segovia, aimed at improving the efficiency of cash transfer distributions in the developing world. Segovia plans to sell software to developing-country governments for use in implementing their cash transfer programs.

This development was announced today (though we have been aware of and discussing it with GiveDirectly for some time). Some discussion is available at today’s post on the Development Channel blog.

GiveDirectly and Segovia will work out of the same office space in New York City.

Dr. Niehaus, who has been our primary contact at GiveDirectly and has unofficially played the role of GiveDirectly’s full-time Executive Director, will continue to devote significant time to GiveDirectly and serve as its President with primary responsibility for GiveDirectly. He will be co-employed by Segovia and has told us that he may spend up to 20% of his time on Segovia. Dr. Faye will become Segovia’s president. (Previously, both Dr. Niehaus and Dr. Faye have had full-time jobs outside of GiveDirectly, though they have had substantial responsibilities at GiveDirectly.)

We think this development is simultaneously a potentially very positive one broadly – bringing the possibility of greatly leveraged positive impact on the world – and one that raises new issues and risks for GiveDirectly and its donors.

We think these issues and risks (discussed further below) are noteworthy but ultimately similar in magnitude to, or smaller than, similar risks that exist for our other present and past recommended charities. We plan to continue recommending GiveDirectly as a top charity and continue to see it as an outstanding giving opportunity.

Note that we have discussed all of these issues with Dr. Niehaus and Dr. Faye – they have reviewed a draft of this post – and we believe they are aware of all of the issues we discuss below.

This post focuses on the following:

What costs and benefits does this decision pose for GiveDirectly right now?

What additional issues could arise in the future, particularly potential conflicts of interest between Segovia and GiveDirectly?

Why have Dr. Niehaus, Dr. Faye, and Mr. Hughes decided to serve developing country governments and why are they using a for-profit-company structure?

What effect will this have on our recommendation of GiveDirectly?

We have not tried to formulate a view on Segovia’s possible impact because this does not seem directly relevant to GiveWell or our donors. Based on what Dr. Niehaus and Dr. Faye have told us, we believe it’s plausible that given (a) the amount of money governments transfer to recipients and (b) the amount of money that may be lost by those programs due to negligence and/or corruption, Segovia could be very impactful and may represent some of the “upside” we hoped to see from GiveDirectly.

What costs and benefits does this decision pose for GiveDirectly right now?

We discuss several potential negative impacts Segovia could have on GiveDirectly; we also discuss potential positive impacts.

What impact will Segovia have on key staff’s time allocation to GiveDirectly? Will Segovia’s existence affect the intensity with which GiveDirectly leadership work to maximize GiveDirectly’s impact? Will Segovia directly affect GiveDirectly’s ability to absorb and distribute funds to recipients? Will the general public react negatively to this announcement in a way that affects GiveDirectly’s ability to raise funds or otherwise distracts it from its core work? What benefits might Segovia have for GiveDirectly?

What impact will Segovia have on key staff’s time allocation to GiveDirectly?

Dr. Niehaus and Dr. Faye told us that they expect the following changes to staff time allocations due to Segovia:

Paul Niehaus, GiveDirectly’s President, had previously been splitting his time between GiveDirectly and his academic position at University of California at San Diego. Pending the university’s approval, he hopes to take a one-year leave of absence from his academic position to enable co-employment at GiveDirectly and Segovia. During this one-year leave of absence, he expects that the total amount of time he devotes to GiveDirectly will increase slightly and that he will spend a maximum of 20% of his time on Segovia.

Michael Faye, Segovia’s president and a member of GiveDirectly’s Board of Directors, had previously worked at a management consulting firm but spent significant time on GiveDirectly. He has now taken a leave of absence from his job and intends to spend the vast majority of his time on Segovia while still offering time to GiveDirectly. He expects the time he spends on GiveDirectly to increase. More on this below.

Melissa Harpool, Outreach Coordinator, will split her time between GiveDirectly and Segovia. Her current primary role is managing schedules, and the people whose schedules she manages will now be splitting time between Segovia and GiveDirectly. She had previously been full-time at GiveDirectly.

Dr. Niehaus and Dr. Faye told us that relevant staff track their time allocation to projects and will be able to share whether or not they have hit the targets described above.

Will Segovia affect the intensity with which GiveDirectly leadership work to maximize GiveDirectly’s impact?

Dr. Niehaus told us that he retains his ambitions for and commitment to GiveDirectly’s long term impact, but splitting attention between two organizations is difficult, especially when both are growing rapidly and likely to face significant obstacles.

It is plausible that given GiveDirectly’s and Segovia’s overlapping leadership, staff and office space, those involved with both might see Segovia as the more exciting opportunity. We believe that this could lead to reduced ambition or it could reduce the quality of the mental effort GiveDirectly’s leadership dedicates to maximizing GiveDirectly’s impact.

Will Segovia directly affect GiveDirectly’s ability to absorb and distribute funds to recipients?

Assuming that GiveDirectly staff meets the time targets described above, we don’t think Segovia will have a direct impact on GiveDirectly’s ability to absorb and distribute funds to recipients.

Will GiveDirectly receive a negative response from the general public that affects its ability to raise funds or otherwise distracts it from its core work?

We continue to see GiveDirectly as an outstanding giving opportunity and plan to continue recommending it to donors. That said, we are not confident about how others will react and remain concerned about the impact that the general public’s reaction might have on GiveDirectly’s future fundraising prospects.

Dr. Niehaus and Dr. Faye told us that they have attempted to reduce the likelihood that the response is negative by speaking at length with media in advance of the announcement so that stories written about their decision present a reasonable perspective on this new development. They have also communicated with their major donors and report that they have not encountered negative reactions.

What benefits will Segovia provide for GiveDirectly?

Potential benefits include:

GiveDirectly will receive an equity stake in Segovia, which could result in GiveDirectly’s receiving additional funding in the future. The size of the stake is not yet determined. Dr. Niehaus, Dr. Faye, and Mr. Hughes are currently discussing the size of this stake with potential investors.

The technology Segovia is planning to develop would likely be helpful to GiveDirectly. Segovia would give this technology to GiveDirectly without charge.

As discussed above, Paul Niehaus has been based in San Diego and the rest of GiveDirectly staff is in New York. Dr. Faye has been employed full-time at a management consulting firm. Dr. Niehaus will be spending half his time in New York and hopes to take leave from his academic position, and Dr. Faye will now be working full-time out of the same office. Dr. Niehaus’s co-location with the rest of GiveDirectly staff will likely improve his ability to manage other staff. Dr. Faye’s co-location with Dr. Niehaus and other GiveDirectly staff may also increase his contribution to GiveDirectly. (Dr. Faye has told us that the time he has spent on GiveDirectly has increased since he took leave of absence from his job.)

Mr. Hughes intends to significantly increase his work on advocating for cash transfers. This should benefit both Segovia and GiveDirectly.

What additional issues could arise in the future, particularly potential conflicts of interests between Segovia and GiveDirectly?

There may be cases where GiveDirectly has to consider actions that would maximize its impact but might harm Segovia’s interests. GiveDirectly board members (Paul Niehaus, Michael Faye, and Chris Hughes) will hold equity stakes in Segovia, so their financial interests could come into conflict with their roles as Directors of GiveDirectly. We see the following possible conflicts of interest:

GiveDirectly’s board members’ financial interest in Segovia could lead them to use GiveDirectly as a means to promote Segovia. This could be via using Segovia’s software even if it’s not well suited to GiveDirecty’s needs, or otherwise using contacts/meetings that might take place due to GiveDirectly (e.g., government, academic or media contacts) to promote Segovia’s offering.

Segovia will also have (a) investors and (b) staff who hold significant financial stakes in Segovia, which could lead to conflicts between maximizing profit and maximizing impact.

If Segovia were bidding on a contract with a particular government, would GiveDirectly avoid offering its service in the same area/to the same government so that Segovia would have an easier path to a sale?

We have spent significant time with Paul Niehaus and some time with Michael Faye and Chris Hughes over the past few years, and we believe they have good intentions.

In addition, Dr. Niehaus, Dr. Faye, and Mr. Hughes hope to identify investors whose primary motivation is social impact, and believe that choosing investors wisely is a priority. They have also told us that they plan to expand GiveDirectly’s board to 6-7 directors, 3-4 of whom have no overlap with Segovia. Dr. Niehaus told us that overlapping directors would recuse themselves from votes that involve conflicts.

Why have Dr. Niehaus, Dr. Faye, and Mr. Hughes decided to serve developing country governments and why are they using a for-profit-company structure?

Dr. Niehaus and Dr. Faye believe that Segovia’s product is one that governments will want to purchase, and the product will have significant social impact. They have had a long-standing interest in working directly with governments.

Dr. Niehaus and Dr. Faye told us of their hope that GiveDirectly would work with government-run cash transfer programs in November 2013. We discuss this possibility in our review of GiveDirectly, relying on a summary of a conversation we had with them at the time.

Dr. Niehaus and Dr. Faye told us recently that they had initially hoped governments would transfer funds directly to/through GiveDirectly. The developing-country governments that GiveDirectly spoke with preferred technology to fully outsourcing implementation, saying that they already had a significant number of individuals employed to implement their cash transfer programs. Instead, governments asked for software that could improve their operations, which Segovia now aims to provide.

GiveDirectly still believes it will have opportunities to implement government programs, but Dr. Niehaus and Dr. Faye have come to the conclusion that there will be many more cases where governments want technology alone.

Dr. Niehaus and Dr. Faye pointed us to a World Economic Forum report estimating that developing-country governments distribute $400 billion in transfers each year. Dr. Niehaus and Dr. Faye have also told us that data showing rates of leakage of 50% or more are not uncommon in large public-sector transfer programs (i.e., the amount that never reaches the intended recipients). (More information about these sources in this footnote.) They believe that governments will see that purchasing Segovia’s product will save them money by allowing them to transfer more money to recipients at lower overall cost.

We find the above explanation of Segovia’s potential impact plausible but have not tried to vet it as we don’t think our take on it has direct relevance to GiveDirectly or the donors who use our research.

We have the impression that the belief that Segovia could have great social impact is the primary driver of Dr. Niehaus’s, Dr. Faye’s, and Mr. Hughes’ desire to start Segovia.

Why has GiveDirectly settled on this corporate structure as opposed to another structure?

Dr. Niehaus, Dr. Faye, and Mr. Hughes had initially expected to undertake this project as part of GiveDirectly’s existing non-profit structure but told us that they decided on the structure of a for-profit, independent company for three reasons:

Recruiting. We spoke with the recruiting firm that GiveDirectly retained for this search, and the person who led the search told us that recruiting top technology talent was slow. In some cases, the engineers GiveDirectly contacted were not interested in working for a non-profit. Even when GiveDirectly offered compensation packages competitive with for-profit companies, some engineers balked when they saw the negative attention that the media and donors give to high salaries in the non-profit sector. Dr. Niehaus, Dr. Faye, and Mr. Hughes place high priority on recruiting the very best possible talent, so while they feel they could have reasonable success recruiting as a non-profit, they see the improved recruiting prospects associated with a for-profit to be a major consideration. Investment. GiveDirectly told us that there are investors who would support Segovia as a for-profit entity but would not be interested in supporting GiveDirectly, the non-profit. Legal advice. GiveDirectly received legal advice that an independent for-profit company is the most straightforward way to avoid jeopardizing GiveDirectly’s tax exempt status.

What effect will this have on our recommendation of GiveDirectly?

We do not expect the existence of Segovia to change our recommendation of GiveDirectly. We expect GiveDirectly to continue to successfully distribute cash to very poor individuals in the developing world, and believe that the issues and risks described above are smaller than, or at worst similar in importance to, those that exist with all of our other recommended charities.

We will continue to follow GiveDirectly closely and report on its progress.

We have written previously about the “upside” we saw in GiveDirectly. We think that Segovia may be one example of that “upside” — Dr. Niehaus and Dr. Faye, partly through their work on GiveDirectly, saw an opportunity for significant social impact and are now pursuing it. However, we think the attention they will now pay to Segovia likely diminishes the upside of future donations to GiveDirectly.