When Restrictions Apply

Why general funding for nonprofit organizations is the future of innovation.

Seven nonprofit leaders stood anxiously at the front of the room, peering out at a group of philanthropists who had gathered at the Battery, a social club in San Francisco. The topic of the night was California prison reform. One by one, the nonprofit leaders overcame their nervousness and made their appeal, pitching for those prized, precious, unrestricted funds that organizations so desperately need to innovate.

The philanthropists in the room peppered the presenters with questions. Experts in their subject matter, the nonprofit leaders responded candidly and confidently. The resulting dialogue was stimulating, sensible—and unfortunately quite rare. Today, gatherings like this are the exception, not the rule.

As a nonprofit leader myself, I’ve seen the shifting tides of funding, and wondered how we might ensure that social sector organizations have the support they need to continue to innovate on their programs and deliver the greatest impact.

For decades, nonprofits employed subject-matter experts, and through their work in communities, these leaders would design and refine programs in synch with the realities on the ground. Based on their real-world experiences, nonprofits developed ideas for programs. They turned those ideas into grant proposals that foundations would, with any luck, fund. This process, in turn, led to relevant and innovative models to tackle large-scale social challenges.

But in the past 20 years, foundations’ approach to funding has shifted. They now strongly value private-sector perspectives, and many hire management consultants to lead their organizations. This cadre of foundation leaders believes that nonprofits can be far more efficient by decreasing overhead and delivering on programmatic objectives.

But efficient can be the enemy of good. As nonprofits try to comply and cut back on discretionary spending, many foundations become frustrated that the models aren’t delivering on promised outcomes. They turn to the experts within their own walls and write more prescriptive requests for proposals from nonprofits.

The result is a bevy of missed opportunities. Many nonprofits are a lot less innovative, because program ideas are coming from the outside, not from those who know the field best. Nonprofits have to define their strategies by chasing the funding that foundations are putting up. At times, this means entering a new geography or even developing adjacent areas of focus because of funding opportunities. This situation forces the on-the-ground experts who are running nonprofits to wedge their work into someone else’s programmatic goals.

But unlike foundation leadership, nonprofit leaders are uniquely positioned to understand the specific and evolving needs of their constituents and develop solutions to support them. To be sure, foundations and philanthropists have a high-level systems view on challenges that is extremely valuable. It allows them to see the big picture, and develop and support solutions that build off the best models in the field. And because they aren’t cost-constrained in the same way that nonprofits are, foundations can fund programs that others might not.

A good example is the Bezos Family Foundation (an funder), which recently launched a program called Vroom to help parents understand the brain science behind engaging with their young children. A large-scale campaign like this one—which brings together private companies, state governments, and community-based organizations—would be extremely difficult for many nonprofits to pull off, because it’s such an integrated effort.

Instead of simply handing over the reins of innovation to foundations, we should expect nonprofit leaders—the hands-on, detail-oriented boot-strappers who are doing the dirty work—to continually evolve their programs and design new ones when existing solutions just aren’t producing the outcomes we’re all looking to see.

Gates Grand Challenges and the USAID Development Innovations Ventures are positive steps in the field, as they allow nonprofits to conceptualize and test innovative programs. Though I worry that the $100,000 limit for initial grants is too low to effectively design, prototype, and implement a new product, service, or program. Crowdfunding platforms like Indiegogo and Global Giving are also great opportunities for nonprofits to raise unrestricted funding, but I fear that they serve as workarounds when nonprofits can’t get what they really need from foundations.

So the question remains: How might we leverage nonprofit expertise to more innovatively serve constituencies in need?

First, we need to eliminate overhead caps and allow nonprofits to structure their budgets however they choose. Second, we need to provide more unrestricted funding to give nonprofits the flexibility to pursue exploratory efforts outside directly funded projects. And, finally, when unrestricted funding is not possible, foundations and philanthropists should either provide innovation-specific funding to encourage nonprofits to evolve and refine their models, or at the very least partner with nonprofits to develop new models together.

Philanthropists, foundation leadership, and nonprofits are all driven by a passion to make the change we want to see in our world. Let’s create the conditions that give nonprofits more than a fighting chance to make it happen.

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  • Ritu Sharma's avatar

    BY Ritu Sharma

    ON March 18, 2015 12:15 PM

    The challenges with restricted funding are what are leading to Gofundme, Indiegogo like campaigns, which sometimes take all your resources and attention away from doing the work you need to do to raising funds creatively and sometimes coloring outside the lines from what is acceptable by IRS.

    In a recent foundation grant, we agreed to do additional three events to provide follow up, we were given a grant agreement that we didn’t have any input in terms of measurement, why certain metrics mattered or much in terms of direction. We found ourselves chasing these three events, that were not part of our model, not something that made sense for us to do without significant redesign and quite honestly, based on the past track record of working with that demographic pool, we didn’t have good engagement record. In the end, we barely covered our expenses, we incurred far more in staff time in creating the reports that we didn’t design or have much input in.

    Small nonprofits like us often say yes too quickly to the money without questioning and pushing back. It ends up hurting us in the long run in lost time and deviation from our core programming that matches with our skill set and resources.

    This sort of experience and laborious IRS and board bureaucracy is going to lead many to leave the sector and create more impact and mission focused B corp models. In the end, what is meant to add capacity and grow the sector (foundations) are ultimately going to cause demise of some nonprofits, burnout of nonprofit EDs and while that isn’t the intended outcome, it certainly is the case that we are seeing in our conversations.

  • BY Paul Shoemaker

    ON March 19, 2015 03:18 AM

  • Melissa Powless Chacon's avatar

    BY Melissa Powless Chacon

    ON March 19, 2015 01:34 PM

    This is timely…considering foundation funding can manage to give unrestricted funding opportunities even if around specific topics but not box non-profits into performing to their visions versus meeting the true needs of the population to be served.

  • Melissa Powless Chacon's avatar

    BY Melissa Powless Chacon

    ON March 19, 2015 01:37 PM

    @Paul Shoemaker…hit the nail on the head. Thanks for sharing!

  • BY Daniel F. Bassill

    ON March 19, 2015 02:14 PM

    Agree with all you said. Only wonder when the meeting you described at the Battery in SF will become an on-going conversation between donors, social purpose org leaders, researchers, clients, etc. on Google+ and other on-line platforms. 

    If I share my vision, ideas, theory of change, history, challenges, goals, needs, etc. on a web site in great depth, what can I communicate in a 10-30 minute pitch that makes any sense to people who may not be thinking along with me, and who my not be doing their own deeper learning to understand how programs like mine contribute to solutions and how they can help.

    When, IF…, this becomes practice, then we can look forward to a different future.

  • BY Felix Oldenburg

    ON March 22, 2015 08:01 AM

    We like to think that private charitable giving is different to, say, buying a service. In my experience, donations are much more transactional than most donors admit. Ever more donations come with strings, or restrictions, attached. This is tolerable in some cases: a donor giving to a relief organisation in response to a specific disaster, or a foundation giving to a university for a specific line of research.

    When it comes to more innovative or entrepreneurial action, though, it is dangerous and needs to stop, for a few simple reasons.

    First, although social entrepreneurs rarely complain—feeling that they are the weaker party at the fundraising table—restrictions are terrible for the growth of their organisations. Typically, restrictions direct spending towards field activities rather than core investments in people, systems, and infrastructure that could drive growth. And just as importantly, extensive reporting on the use of funds eats up precious management resources and limits the organisation’s ability to raise funds from several donors for the same set of activities.

    In short, restrictions can be destructive because they prompt social entrepreneurs to start tailored activities that are doomed for dependency or death.

    Secondly, most restrictions are unnecessary. They have become a standard practice of presumably professional, strategic giving that nobody questions anymore. But if grant makers feel as though they need to impose control of this kind, it would seem that they do not fully buy into the organisation they’re supporting—and should have used their resources towards a better selection. Any grantee will admit that it is flexible, unrestricted funding that enables their organisation to operate at all. But luckily, in my experience, donors can be convinced more often than not to drop restrictions and opt for smarter reporting or other forms of accountability.

    Thirdly, restrictions often prompt grantees to lie to funders, especially when multiple funders impose overlapping restrictions. Tracking which money to spend on what turns into a sort of “ninja accounting” with misrepresentations that damage trust between donor and grantee, and may lead to even tighter controls—a vicious circle of mistrust that serves nobody.

    Finally, and perhaps most surprisingly, this practice may actually not be compliant with local charity regulations. Under my German jurisdiction, for example, a donor may not influence the grantee’s operations after the grant is given. If they do exercise influence on the organisation’s operations—for example, by approving spending, deciding on activities, or managing PR—they enter (taxable) sponsorship territory. If donors really want to have a pre-specified set of activities implemented for them, they should consider buying that as a service on the commercial market.

    It is time someone said it: Restrictions are not the call sign of a professional grant maker, but a contrived and corrosive control mechanism. They are bad for all parties. Let’s put an end to them.

  • jocelynwyatt's avatar

    BY jocelynwyatt

    ON March 27, 2015 03:01 PM

    Thanks for all the great comments! It’s been so validating to hear the enthusiastic support for this argument. It makes it really clear that we need to rethink the funder/grantee relationship in order for social innovation to thrive. One foundation that does a great job is Peery Foundation, who has developed practices around grantee-centered grantmaking. Mulago Foundation and Draper Richards Kaplan Foundation also do a great job of this. Any other examples of foundations that are doing well here?

  • Thank you Jocelyn, for this great piece. 

    I know I’m late to the game, but I think the trends you mention are spot on - and concerning.  If you look at other funder / entrepreneur relationships, like VC, you see that the investors are essentially placing a bet on the entrepreneur and trusting that they will use the capital as they see fit.  This investment is typically used for talent, systems, technology, marketing, etc. - all things that would qualify as “overhead” in the non-profit context and that non-profit leaders rarely get to prioritize given the restrictions you mention. 

    I think the reasons for this are two-fold (probably more than two, but I’ll start there).  (1) There is a better realization of the mutual benefit created; investors are getting the same, if not greater, value from the entrepreneur as vice versa, and (2) There is competition - if an investor were to come to the table with undue restrictions on their capital, the entrepreneur would simply choose another term sheet. 

    Of course, this gets to the real root of the issue, the mismatch of supply and demand.  Right now there is much greater demand for philanthropic capital than supply, so the lack of competition allows funders to call all of the shots (which begs the question if there needs to be much more consolidation of nonprofits). 

    If philanthropy is - as you rightly state - moving more towards a private sector mindset, I think funders need to understand the mutual value that is created in their relationship with nonprofits (they have their high-level systems view because they have learned a million lessons alongside their multiple grantees). 

    P.S. We’re seeing similar trends in impact investing, as I wrote about recently here:

    Thanks again!

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