January 15, 2016

Five Funding Mistakes Philanthropists Can Avoid

If you're interested in creating more effective philanthropy, you'll want to avoid these five common grantmaking mistakes.

Funding mistake #1: Investing in programs at the expense of organizational health

 We know that strong organizations – with efficient IT and financial systems, thoughtful people management, compelling fundraising campaigns, etc. – are necessary for long-term success. Yet many funders view “infrastructure” investments such as hiring a talented senior team or installing new technology (investments that would virtually be automatic for a growing for-profit) as excessive “overhead” within the non-profit context. Instead, grants go primarily to support specific programs, particularly new program initiatives. And non-profits are asked to restrict nonprogram spending to unrealistically low levels (often 15% of costs for government grants).

In this way, the funding world sends an unambiguous signal: do not invest to recruit and develop the best people. Do not invest in the systems needed to support these people. And do not waste leadership time on smarter planning and management. Deliver great programs on the cheap – and do it year after year. The result is an organizational version of chronic fatigue, with non-profit teams stretched and less able to deliver the outcomes we collectively seek.

How can you avoid this pitfall in your giving?
First, avoid using set ratios for giving to program vs. non-program investments. Instead, take the time to understand what a grantee is trying to do and what it will need to get there, then determine where your gift can have the most impact. (For a deeper dive on the overhead challenge and what grantees need to succeed, see The Nonprofit Starvation Cycle.)

Funding Mistake #2: Doing too little for too many (aka, the peanut butter approach)

Many donors prefer to spread small gifts among many recipients, rather than making bigger commitments to a shortlist of grantees. At times, this makes sense. Early in your experience as a donor, for example, you may have little sense of what you want to achieve and what kinds of organizations will help you get there.

But too often the thinking that drives this “peanut butter approach” is faulty. First, donors have a tendency to be overly optimistic, to underestimate what it’s going to take to solve problems. Save the oceans for $5 million a year. Transform public education for $3 million a year. The mismatch between funding and aspirations is often alarming. At the same time, we can be risk-averse. The bigger the bet, the greater the risk. So donors hedge their bets and avoid larger investments. The problem is that it usually takes significant time and money to achieve impact. That means that small tentative commitments may be your riskiest bets of all, particularly if they keep many grantees at mediocre levels of performance rather than helping a few take great leaps forward.

How can you avoid this pitfall in your giving?
Structure your giving so that you can learn and make more informed, and often larger, investments over time. This is the same approach venture capitalists and corporations take when they are building new relationships or starting a new line of business. Where grantees are succeeding with your support, consider doing more while being sure to re-align your giving to their situation. Just as your experience changes your grantmaking, your grantees will have changing needs over time. For help thinking through how your grantmaking may change depending on where you are, see Collaboration with Grantees.

Funding Mistake #3: Assuming that a check is all you have to offer

Writing a check is the most common and straightforward form of giving. It would be a mistake to think that money is the only resource you have at your disposal. You also bring a valuable network of contacts and relationships. To support a grantee, you may be able to refer a trusted friend to serve on the board or connect the CEO to other agencies, partners, and funders in the community. You or your team may also have relevant expertise like financial or legal knowledge that can help a non-profit. The bottom line is that giving shouldn’t be a “one size fits all” proposition.

How can you avoid this pitfall in your grantmaking? To make the most of your assets, identify what your skills are, and assess your willingness to use those skills. Do you have a business or legal background you could use to advise grantees on mergers? Could you provide facilities or services at a reduced or free rate?

Examples of potential non-financial supports you could think about providing include (but are not limited to) the following:

  • Strategic supports
    • Strategic planning & business model advice
    • Organizational design advice
    • Performance management advice
    • Board development
  • Tactical supports
    • IT assistance
    • Communications / marketing support
    • Financial planning / accounting
    • Staff / management training
  • Field-related supports
    • Catalyzing collaboration, seminars and convenings
    • Offering insight and advice
    • Using the power of your voice to draw attention

Funding Mistake #4: Subordinating a grantee’s priorities to your own

It is important to take the needs of your grantees into account. Once you have identified if there are any non-financial resources you are able and willing to provide, find out if your grantee actually wants this help! You want to avoid at all costs having a grantee accept help that is a strategic distraction, for fear of alienating you. If, on the other hand, your grantee requires something you can’t provide, you might broker the relationship between a provider and your grantee. This approach allows you to have a voice in the work while still deferring to the grantee (the strategy is theirs after all) and the more knowledgeable provider. If you have determined that the grantee does not require any particular non-financial support to be effective, your direct participation is unlikely to be useful and simply writing a check will make the most sense.

How can you avoid this pitfall in your grantmaking?
Keep in mind that non-profit organizations – like all businesses – are complex. And the individuals who work in them are experienced professionals. Put offers of advice or expertise in this context. While grantees will welcome your support, it’s important to work alongside those tasked with day-to-day execution and to not underestimate what you may have to learn. For more information, see On the Money (GEO) and More Than Money (CEP).

Funding Mistake #5: Asking too much of your grantee

As a “great giver,” you’ve developed a strategy to help you get the most out of your resources. You’ve established milestones to track how well you are doing. A new challenge is ensuring that this good thinking doesn't inadvertently undermine the work your grantees have underway. How could this happen? After all, you became a donor because of your belief in the organization, its mission, and its team. One unavoidable truth is the imbalance of power between a funder and a grantee. CEOs are unlikely to say no to donor requests if they put significant dollars in jeopardy. They will take another meeting, write another report, they may even adjust programming to meet your preferences.

But the work of a non-profit shouldn’t be driven by funder requests; not when the expertise of staff vastly exceeds that of its donors. And a CEO’s time is a scarce resource. With every extra hoop you ask a non-profit to jump through, the cost of raising funds goes up and the potential value of your donation goes down.

How can you avoid this pitfall in your grantmaking?
First, keep outcomes front and center and avoid prescribing how the work gets done. If you want to talk about strategy, be sure it’s the grantee’s strategy – not yours – that drives your grantee’s decisions. At the same time, respect your grantee’s time and limited resources by making communications clear and regular, but not burdensome.

Now that you know some of the pitfalls well-meaning donors encounter in the road to driving social change, you will be ready to avoid them and create strong partnerships with your grantees.

This "how to" draws heavily upon Higher-Impact Philanthropy (Tierney, 2007), Delivering on the Promise of Nonprofits (Bradach, Tierney, and Stone, 2008), Galvanizing Philanthropy (Ditkoff and Colby, 2009), as well as other elements of TBG’s IP on philanthropy.

Sources Used For This Case Study:

  • Jeffrey L. Bradach, Thomas J. Tierney, Nan S. Stone, Delivering on the Promise of Nonprofits, (Harvard Business Review, 2008)
  • Susan Wolf Ditkoff and Susan J. Colby, Galvanizing Philanthropy, (Harvard Business Review, 2009)
  • Thomas J. Tierney, Higher-Impact Philanthropy (Philanthropy, 2007)

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