(Photo by iStock/Olivier Le Moal)
Philanthropy’s misunderstanding of risk and the “guardrails” funders impose to minimize it have created a paradox: Under-resourced nonprofits that will never be fully equipped to effect the lasting systemic change that philanthropy seeks. This misalignment stems from investing in programs without also investing in institutions.
While there have been promising shifts toward trust-based philanthropy and flexible, multi-year grants in recent years, unrestricted funding for nonprofits comprises less than 40 percent of grants from private foundations. Funders continue to rely on guardrails, such as restricted, project-based funding, short-term grants, and extensive reporting requirements, as their primary tools to help ensure returns on social investments. But when nonprofits do not have enough liquid unrestricted net assets (LUNA) to cover their liabilities, they are at risk of stagnation, illiquidity, and even insolvency. In other words, nonprofits also need to build their net assets.
There is a solution: Enterprise capital for nonprofits, or multi-year, unrestricted funding that strengthens their financial position. While enterprise capital shares characteristics with other funding approaches like general operating support, its purpose and uses are different. Rather than providing revenue to cover day-to-day expenses, enterprise capital builds net assets, enabling nonprofits to make investments in revenue-generation strategies, maintain resources to mitigate cash flow mismatches, and adapt to shifting macro environments like the government funding uncertainties of the past year. By strengthening organizational capacity, financial resilience, and adaptability, enterprise capital helps nonprofits and funders alike deliver the ambitious systemic change they seek.
Undercapitalizing Creates Risk
Funders and nonprofit leaders often think about effective funding for nonprofits in terms of ensuring enough revenue to cover recurring expenses, such as program administration, operations, and staff salaries. Many nonprofits have strong, long-standing relationships with funders who provide general operating support or programmatic support that covers these costs. On paper, organizations may even appear wealthy given the expanding size of their budgets. This, however, masks the fact that they are increasingly asset-constrained. As the budget expands, monthly expenses increase, meaning there are fewer resources (net assets) available to cover costs should funding delays or disruptions occur.
For example, a youth-services organization in New York experienced rapid revenue growth ($10 million revenue increase over five years) but did not grow its balance sheet in parallel. This created a dangerous mismatch between its expanded operations and its financial foundation. The nonprofit provides essential services to vulnerable youth, and a large portion of its revenue comes from state government contracts for housing and mental health services. Since payment is only received once services have been delivered, the organization must spend cash upfront before it is reimbursed.
Many of the nonprofit’s funders had given unrestricted support for several consecutive years, but few funders had provided enterprise capital specifically to align with the organization’s business model. As a result, net assets were low when compared to the overall budget, and two-thirds of net assets were restricted, leaving the organization with limited resources to continue operating through funding disruptions. The organization was effectively one small disaster away from illiquidity, despite successful fundraising, an outstanding reputation, and a track record of program delivery. By neglecting the balance sheet, funders overlooked a critical ingredient for protecting programs and advancing financial sustainability.
For funders of organizations like this one, the analysis is simple: What financial resources does the enterprise require to continue operating without risk of running out of cash? For well-capitalized organizations—those with sufficient levels of LUNA—the answer may simply be more general operating support or full-cost program grants. For others, the solution could be a one-time enterprise capital injection that enables them to build new revenue streams, access low-cost working capital loans or lines of credit, or deploy cash to function as a financial reserve.
From Budgets to Enterprise Sustainability
Funders can protect their social investments by shifting from a sole focus on their grantees’ annual income and expenses to a comprehensive focus on the business model as revealed through both the budget and the balance sheet, the latter of which reveals capital structure and liquidity position. Think of a nonprofit’s capital structure like a building’s foundation. The programs and services are the visible structure above ground—what funders and the public see and admire. But without a solid foundation below, even a seemingly sturdy building will erode over time.
A nonprofit’s capital structure is the financial position invisible to most observers but essential for stability, growth, and weathering storms. Just as a building’s foundation must be proportionate to its height and designed for local environmental conditions, a nonprofit’s capital structure must be aligned with its business model, growth trajectory, and the funding environment in which it operates to ensure that the type of funding—long-term, short-term or permanent—matches the uses of funds. A true risk assessment requires funders to examine the balance sheet to understand whether a nonprofit’s foundation can support its structure.
In the for-profit world, investors understand this intuitively. For-profit companies build their capital structures with equity investments that allow businesses to innovate, expand, and absorb risk, and are supplemented with working capital to smooth cash flow and long-term debt for major investments aligned with revenue-generating activities. Tech startups often operate at a loss for years (sometimes decades) while building infrastructure and market share, backed by patient equity capital from investors who understand that building a sustainable business model takes time. Why don’t we extend the same patience when funding the big ideas that will solve society’s biggest social problems?
Many nonprofits receive general operating support and program grants that help meet budgetary needs but do little to address the overall financial position of the organization. In addition, they often lack access to low-cost working capital to match receivables and payables and operate with little to no growth capital for infrastructure investments (such as investment in staff, technology, or real estate) or revenue-generating activities.
A healthy capital structure is one in which funding is designed to align with an organization’s assets, liabilities, and net assets. For example, a nonprofit affordable housing developer needs multiple years of flexible funding to support the equity required to raise debt and to succeed during the development process, given the long-term nature of real estate development. This long-term source of funds matches a long-term use of funds.
Capital Structure to Weather Uncertainty
Big Thought, an education nonprofit in Dallas, is an example of an organization that was able to use enterprise capital to build its financial foundation before the storm hit.
Big Thought began in 1987 as a small organization with a $300,000 annual budget, working to close educational opportunity gaps in marginalized communities, and faced the typical challenges of unpredictable funding cycles (from the public and philanthropic sectors) and restricted grants. In response, Big Thought sought longer-term support to sustain the organization. This included $12.85 million in enterprise capital funding from the Wallace Foundation between 2011 and 2024 to support the design and implementation of multiple programmatic initiatives. The funding provided the foundational capital to launch the Big Thought Institute, an initiative to collect and document best practices in learning methods and systems, and Thriving Minds, an after-school program serving both educational institutions and community organizations. Over the past decade, these programs have leveraged $36.6 million in additional funding from both the public and philanthropic sectors, illustrating the scale of implementation and capacity enterprise capital helped make possible.
These enterprise investments, and the organizational infrastructure and revenue pathways they enabled Big Thought to build, have been essential in helping the organization survive and thrive despite recent seismic shifts in public and private funding since the pandemic, including recent federal cuts and changes in philanthropic priorities. Despite these cuts, Big Thought has not had to compromise mission delivery because enterprise capital enabled the organization to invest in diversified revenue pathways while exploring how to lower operating costs through technology applications.
Rethinking Risk for Greater Impact
For funders seeking to maximize impact, the path forward requires four fundamental shifts:
- Focus on net assets, not just the budget. Balance sheet strength is fundamental to sustainable mission delivery. This begins with training your team to read the financial statements of their grantees and identify the strength (or lack thereof) of their net assets in the context of their mission and lines of business. Funders should design an underwriting process that not only assesses an organization’s mission alignment and staff capacity but also includes a review of the balance sheet’s role in achieving its goals.
- Consider the risk that short-term, restricted funding may create for nonprofits. Evaluate whether restrictions actually enable grantees to operate programs efficiently and maximize impact. If you are providing general operating support, are you growing the organization’s balance sheet in parallel? Deepen your understanding of how an organization operates—both internally and in the communities it serves. Reflect on the full range of services and capacities necessary to achieve its impact and how the provision of additional funding for net assets can supplement both program and service delivery.
- Identify non-financial ways to support your grantees. Check in on grantees. Ask what services they need while being transparent about what you can offer. Candid conversations offer the platform to align the goals of both grant maker and grantee by ensuring that the funder understands the realities driving the grantee’s success and raising up all the elements that must be addressed to ensure the impact that both funders and grantees expect.
- Respond to the moment. The financial realities of this moment place a special premium on moving more quickly and creatively to address the ongoing challenges facing the social sector. Consider how new financial collaborations can overcome specific institutional constraints to move more funding faster.
As numerous studies and MacKenzie Scott’s giving have demonstrated, enterprise capital works. The nonprofit sector doesn’t need more guardrails—it needs funders willing to invest with the scale and patience necessary to solve society’s most vexing challenges.
Read more stories by Andrea Levere.