Monday, November 12, 2012

The Lance Armstrong Foundation

The recent decision by Lance Armstrong to sever ties with the charity he founded, the Lance Armstrong Foundation (LAF), marks a substantial point of transition for the organization.  In reading much of the coverage of Lance Armstrong and his foundation, I have been struck by some fundamental misconceptions about the foundation.  Below, I discuss three things that hopefully help clear up these misconceptions.

1. Where the money comes from
One question that immediately arose after Lance Armstrong decided to stop fighting doping charges was how it would affect donations.  Since most public charities rely very heavily on public donations, the concern is a natural one.  The prominence of this question was underscored by quick press releases by the foundation noting an uptick in donations in recent weeks.

What many do not know, however, is that LAF does not get its revenues from the usual sources.  Though it once did rely heavily on donations, its sources of revenue have drastically changed.  For a time, it shifted from donations to merchandise sales (e.g., wrist bands) as its key income source.  However, this was only short-lived, and the organization shifted to a reliance on royalties fees (through licensing deals with Nike and others).  What once was an organization heavily reliant on donors is now one reliant equally on licensing deals.

Thus, while much discussion has been focused on how donations will change in the coming months and years, perhaps the bigger question is how sales of Livestrong-licensed products will change.

2. Where the money goes
Perhaps the largest misconception is in the realm of where LAF directs its funds.  First, it should be noted that nontrivial amounts of funds raised by LAF do not go anywhere, but are instead retained by the organization (more on this shortly).  As for the funds it does spend, LAF is quick to boast that over 80% of spending goes towards programs (i.e., efforts directly related to its mission).  Though not unheard of by any means, this percentage is indeed admirable.  The misconception arises when people interpret this as meaning 80% of spending goes towards cancer research.  At one point, grants for cancer research were a big focus of LAF.  However, LAF has steadily moved its approach away from research towards advocacy and awareness.  In fact, its primary focus now is on patient advocacy and education.  That is, the emphasis is on preventing and treating cancer with currently available tools, not seeking new means of treatment.  This is not necessarily a bad thing, but it is also not necessarily what people assume about the organization.  What it does mean is that providing grants has become less important to the organization, and spending on advertising and legal/professional services has become more important.

Thus, while many tout the millions of dollars LAF has raised and spent on its cause, this fact alone does not tell the whole story.

3. The Foundation has been preparing for this eventuality
As alluded to in the previous discussion, although over 80% of the funds LAF chooses to spend are spent on programs, LAF has consistently chosen not to spend all of the funds it raises.  Depending on whom you ask, this practice either indicates a lack of urgency in meeting its mission or prudence in keeping the organization financially secure.  Either way, however, LAF has accumulated substantial wealth that it has not yet spent.  In fact, it has retained 25% of the funds it has raised since 2003.  The result has been a substantial financial cushion – as of the end of 2011, the organization had a net worth over $100 million.

Though the motivation for this wealth accumulation is not fully known, it seems reasonable to assume that the organization did not believe the “brand” would have as large of a value in the future than it has realized in the recent past, and thus the foundation needed to keep operations at a scale that is more sustainable.  With its current net worth and an assumed annual rate of return on investments of 5%, the organization can afford to lose 38% of its current revenue stream and still have enough revenues to cover its expenses.

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