Dan Pallotta's bike-tour and walkathon business has raised more than $200 million for AIDS research & other charities. So why do some people hate him so much?* *Hint: Check out the Lexus in his driveway.
By Arlyn Tobias Gajilan

(FORTUNE Small Business) – Dan Pallotta should have a lot to smile about right now. His company, Pallotta TeamWorks, runs big, complicated fundraisers like the Avon Breast Cancer 3-Day walks and the AIDSRides-USA, in which entrants bike from city to city. He launched the company out of his one-bedroom apartment nine years ago, and since then PTW has netted more than $200 million for charity and grown into a 305-person operation with offices in 15 cities. This past December he opened the doors to his stylish new 47,000-square-foot headquarters, in a converted warehouse outside Los Angeles designed by Frank Gehry protege Clive Wilkinson. And he's preparing to double the number of his outdoor-adventure fundraisers this year.

So why, during a daylong, sometimes difficult interview does Pallotta break down and start crying? Not once, but seven times? "I can be pretty emotional," jokes the 41-year-old. "I can cry at the sight of a hat, never mind one that's been dropped."

It's not haberdashery, though, that's bringing him to tears. A growing chorus of critics says that Pallotta's recent success has come at the expense of the charities he claims to champion. Some social activists, including a few from those very charities, say that Pallotta takes too big a cut of the money he raises, and that a company existing through donations has no business hiring renowned architects to design an office that would put most Fortune 500 corporations to shame. And then there's the lawsuit. Last year a dispute broke out between Pallotta and two of his beneficiaries: the San Francisco AIDS Foundation and the Los Angeles Gay & Lesbian Center. Both had been longtime partners in PTW's flagship event, the California AIDSRide, a 575-mile bike trek from San Francisco to L.A. But when the ride ended last June, discussions over unusual charges, budget overruns, and what some saw as PTW's relentless self-promotion quickly boiled over. Talks broke down last fall, and the two nonprofits ended their eight-year relationship with Pallotta and began organizing their own ride, AIDS LifeCycle, which is slated for this May (two weeks before Pallotta's). To help set up the event they hired the Honeycutt Group, a new consulting firm formed by three former PTW executives.

"That just wasn't right," says Pallotta, who sued, trying to stop what he thought was a competing, copycat event. He lost the lawsuit this past January--about $1 million in event expenses is still in dispute--but won plenty of vitriolic enemies. Pallotta's longtime boyfriend committed suicide a few years ago, and some critics who knew that fact went for the jugular. "Shove your legal remedies," one e-mail read. "I start to realize why your boyfriend killed himself. How hard is it to live with the guilt?"

Given all that, Pallotta's tears become a little more understandable. After all, he has always been completely up-front about what he can do for those charities and how much it will cost them. Technically he's a consultant--one of a select few who can stage events on a big scale--and, unlike most of the philanthropic world, his business is an unabashed for-profit venture. He pays himself and his staff well, and his approach to marketing is more Madison Avenue than March of Dimes. More significant, his track record is beyond dispute--by his own reckoning, no other private company has raised as much money for breast cancer and AIDS research in as little time.

In the often fuddy-duddy world of fundraising, Pallotta has become a rebel with an unusual cause: to change the face of charity. If you want to make a difference and fight the world's many ills, he argues, you have to hire talented people and pay them competitive salaries. You have to take risks. And, most important, you have to treat the task like a business endeavor and not a bake sale. As Pallotta puts it, "Doing good and doing well shouldn't be mutually exclusive."

Entrepreneurialism and the ability to think big came to Pallotta at a young age. While other kids in his Massachusetts neighborhood set up lemonade stands, he jury-rigged a rolling food cart, cobbling together a couple of hibachis. His Rolling Refreshments made a killing selling hamburgers and Italian sausages. As an undergrad at Harvard, he bridged his interests in public service and cycling, organizing a cross-country bike ride from Seattle to Boston. The event raised $80,000 for Oxfam, an international nonprofit fighting global poverty.

Pallotta's college trajectory seemed to point to a career in politics, but in 1980 he realized he was gay. In the early 1980s the AIDS epidemic was creating a gay backlash even in otherwise liberal Massachusetts, where the state's now openly gay senator, Barney Frank, was still in the closet. So Pallotta headed out to Los Angeles in 1985. "My 20s were a lost decade," he says. To get by, he landed odd jobs and sometimes lived off laundry quarters. But that hardship was nothing compared with watching friend after friend die from AIDS. As the 1990s began, Pallotta had already erased some 30 names from his address book.

At that point he started combining his experience and expertise into a business. He developed a reputation with local agencies as a capable fundraiser and was tapped by the Los Angeles Gay & Lesbian Center in 1993 to raise money for its new AIDS facility. To that end, Pallotta put together the first California AIDSRide in 1994 and netted just over $1 million for the center. For his efforts he earned a $140,000 fee. The next year, the San Francisco AIDS Foundation joined the center as a beneficiary, and the second ride netted a total of $3.25 million. Pallotta took home about $322,000. None of the involved parties suspected they'd end up in court eight years later.

Early on, Pallotta's business plan seemed to be a win-win proposition. In those first few years, 67 cents out of every dollar raised went to the intended charities. Only 33 cents was spent on fees and expenses. Other charities tend to be more efficient--the March of Dimes, for example, devotes about 76% of its donations to curing birth defects, and the Make-A-Wish Foundation devotes 75% to its programs--but they don't stage the kind of multiday events that PTW specializes in. Until the mid-1990s, Pallotta's costs more than complied with the Better Business Bureau's guidelines for charities, which say that overhead should take up no more than 35% of donations.

As it added events around the country, though, PTW began to hit a few bumps. Before a 1996 ride from Philadelphia to Washington, D.C., Pallotta estimated that 60% of the proceeds would go to local AIDS charities, but only 19% actually did. The shortfall prompted an investigation by the Pennsylvania attorney general, resulting in a $110,000 settlement with the state. (PTW no longer hosts rides in Pennsylvania.) A Florida ride in 1997 yielded only about 12% for its beneficiaries. A 1998 ride in Wisconsin barely netted 11%. Pallotta says those events suffered from poor turnout, a fact he says supports his decision to spend more lavishly on marketing. Regardless of the reasons, by 2000, PTW's AIDSRides were burning through nearly half of every dollar on expenses. The charities were netting just 53 cents.

Pallotta says that's a half-empty method of accounting. "We never set out to have an event with a poor return," he says. "We're always looking at ways to keep costs down."

But even Pallotta's cost-cutting measures have proved controversial. Last year PTW stopped renting equipment and instead bought audiovisual systems, stages, and a small fleet of cars and trucks to haul everything around. Rather than using its own money, though, PTW passed the purchase and operating costs to its beneficiaries, even though it would legally own the equipment. Each nonprofit would be billed based on a percentage of its event's projected revenues. It's something Pallotta likes to call the Fairness Formula.

Unfortunately, not everyone felt it was fair. "We were charged for concrete barriers for a breast cancer walk in Chicago and towel service in Washington, D.C.," says Pat Christen, executive director of the San Francisco AIDS Foundation, which once relied on the California ride for about 25% of its operating budget. "Their model may work for them, but it's antithetical to the fiduciary responsibilities we have to our donors and clients." (Pallotta responds that the towel service was supposed to be a moneymaker--riders would pay a nominal fee to rent towels from his company rather than bring their own, and the charities would get a cut. But the accounting got complex, and some of those charities received a bill instead.)

It also didn't help that on many of last year's rides, Pallotta heavily cross-marketed his new 2002 events. For many veteran participants (and even new ones like me--I did the Northeast AIDSRide before I started reporting this story), it seemed a bit much. After the mandatory safety video, participants had to sit through ad after ad hyping upcoming fundraisers. Kiosks set up at the campsites each night distributed slick PTW brochures. A general store hawked Pallotta's book (a memoir called When Your Moment Comes), plus cameras, sweatshirts, and T-shirts emblazoned with the PTW logo, and most of the proceeds went to his coffers. "It was excessive," says Gwenn Baldwin, executive director of the L.A. Gay & Lesbian Center. "The marketing of other PTW events during last year's California AIDSRide diminished the focus on HIV and AIDS."

Pallotta finds that kind of criticism infuriating, and to be fair, he has to spread his compassion around to several different causes. "How can they complain when we ask them to help those suffering from problems other than AIDS?" he asks, stabbing his index finger into the air. "Who are they to limit our world-view?"

But in his zeal to take on the world's problems two and three at a time, Pallotta can sometimes seem indifferent to the concerns of individual clients. That was the case in December, when Avon rejected an early cut of a commercial PTW had prepared for an upcoming walk. The problem? The spot mentioned cancer only once, while PTW got plugged five times. Pallotta was baffled by Avon's criticism. "We say, 'Do something dramatic in the fight against breast cancer' at the top," he told his executives at a subsequent meeting. "What more do they want?"

Part of Pallotta's problems undoubtedly has to do with his seeming desire to have it both ways--to save the world and get rich doing so. For example, he drives to work in something he calls the Duck, a yellow three-wheeled electric car. "I wanted to commute guilt-free," he says; however, his other vehicle happens to be a Lexus SUV. And though he's forthcoming about PTW's finances--last year he put out a statement of every dollar raised, spent, and pocketed--he refuses to say how much he pays himself or his top deputies.

So in the face of mounting criticism, Pallotta's work continues. He's now planning the ninth California AIDSRide, this time with a new beneficiary, AIDS Project Los Angeles. Also on the calendar are breast cancer walks in four new cities, a 75-mile trek through South Africa, and an AIDS vaccine ride from Amsterdam to Paris. To fund this expansion, he has put up nearly all of his assets, including his house, to guarantee an $8 million loan. And PTW recently signed a deal with the parent of FSB's publisher, AOL Time Warner, for about $1 million in bartered ads on CNN and in magazines like Time and Fortune.

To make it all work, Pallotta will have to communicate better to die-hard riders--like Joely Polokoff. For the past two years Polokoff has cycled in the AIDSRide from New York to Boston, but this year she's thinking about supporting other charities. "Pallotta's become this big corporation with expensive-looking brochures and mailings almost every other week," she says. "That lawsuit [in L.A.] could not have been cheap. I keep wondering if the money could be better spent."

That's a sentiment Pallotta can't afford to ignore. He may be right to challenge the notion of checkbook charity with events that force ordinary people to push their bodies and wallets to extraordinary limits. He may also be right that it takes money to make money. But in a post-Sept. 11 world, where donations will be increasingly scrutinized, Pallotta might aim for a better balance between profiting and the appearance of profiteering. After all, his business is literally dependent on the charity of others. If he forgets that, he may have more to cry about.