May 16, 2012

Nonprofit Due Diligence: Customize Your Approach for Better Results

By: The Bridgespan Group
Conducting nonprofit due diligence on a potential grantee is a unique process for each situation. Personal preference, for one, matters greatly. For example, San Francisco-based Tipping Point Community looks at just four program requirements—such as whether the organization serves low-income clients—and three organization requirements—such as financial health. On the other hand, the Edna McConnell Clark Foundation evaluates prospective grantees on 21 indicators and makes multiple site visits before making an initial relatively small grant. When EMCF takes on a new grantee, however, it is typically with the potential to commit to long-term funding.

Your process for deciding whether to invest in a nonprofit will likely depend on your answers to some of the questions described in Tom Tierney’s and Joel Fleishman’s book Give Smart: Philanthropy that Gets Results:
  • How large and/or critical to your strategy would this grant be?
  • Do you believe that your potential support is very important for this nonprofit?
  • Is this grant potentially controversial in any way?
  • How familiar are you with the organization?
In other words, how thoroughly you research a nonprofit is highly dependent on the answers to the above questions.

Deciding the level of nonprofit research your grant warrants will help you focus on the most important questions and be efficient with your time (and the potential grantee’s). For example, when assessing an organization’s financials, you (or your staff) could review public documents, ask to see internal documents (like the organization’s budget, strategic plan, or board minutes), or speak to a member of the leadership team, depending on the situation. Even if your grant is large, you will likely still want to start with research you can do on your own—information you can get from public records, for example—before moving to more research that tasks the nonprofit with answering questions and producing materials. Using a phased approach, you’ll avoid taking on high-involvement activities (such as meetings and site visits) unless they will aid in decision-making.
  Here's an overview of the three levels of research from lightest to most involved:
  • Phase 1: Light-touch research—Learn (anonymously) about the nonprofit from publicly available documents and other sources, arm yourself with the basics, and prepare for direct contact with the organization if you choose to proceed. Specifically, you could conduct confidential interviews with other funders of the organization, and other stakeholders in the field. This will help you get smart both about the organization and the broader landscape that it operates within. In this phase, you won’t raise a grantee’s expectations about receiving funding, and you won’t waste its time if there are some obvious reasons to walk away.
  • Phase 2: Limited inquiry—Get in touch with the nonprofit’s primary representative (its executive director or founder, for example) while carrying out a high-level document review in order to give you a deeper sense of the organization’s strengths and weaknesses.
  • Phase 3: Full-scale research and inquiry—Engage more extensively with the organization, including conversations with a board member, meetings with staff members, and a site visit. In addition, you may seek to speak with even more leaders and other stakeholders in the field to confirm your observations with external views of the organization. These additional steps help form the most complete picture of a potential grantee.
At each stage, take stock. Ask: What have I learned? Can I make a decision? If not, what more do I need to know? If you’re interested in beginning your research, but don’t know where to look for information, take a look at the Activity Checklists and List of Materials sections for each phase that you undertake. If you’re particularly interested in where to find reliable information on a nonprofit’s finances, you can use this table as a reference.

Each philanthropist employs a different approach to his or her due diligence based on personal preference as well as the situation at hand. What approach do you take when researching nonprofits? Why have you landed on that approach?
Source: Thomas J. Tierney and Joel L. Fleishman, Give Smart: Philanthropy That Gets Results (Public Affairs, 2011).

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