Three Truths After Five Years on the Foundation Side

I began my career in philanthropy as many do — working for nonprofits. Specifically, I was a fundraiser. I’ve done everything from cold-calling lists of alumni asking for donations, to being the primary grant writer for a national nonprofit. I’ve been the equivalent of a major gifts officer where I cultivated high net-worth donors and orchestrated over-the-top fundraising events like celebrity poker tournaments. During my years on the fundraising side of the table, I learned that social problems are more complex and interconnected than we think. Solving these problems often follows a trajectory of two steps forward and one step back — and that’s a best-case scenario. I also learned that “the donor is always right.” And in grappling with this last truth, I learned what all nonprofits learn — how to stretch a dollar, how to roll (i.e., hide) administrative and payroll expenses in ‘direct’ or ‘program’ costs, and how to spin a lukewarm result into “lessons learned that will generate even more impact in the next grant cycle.”

Then, I moved to the other side of the table. Now, I’ve been working as a foundation executive for five years and there are some uncomfortable truths that I’ve learned here as well. These are three things that I find myself saying every week, over and over:

1. The world isn’t predictable (i.e. SH#T Happens)

Tell me if this sounds familiar: Send out RFP, review and vet applications, pick grant recipient, send out check, wait, read report, celebrate impact. This standard grantmaking process is not inherently bad, but it does assume that whatever was written in the application is exactly what will happen. It is a linear transaction, assuming predictability. I give you money, and you give me the promised impact.

But the world is not predictable, and it is particularly unpredictable in rural Kenya, with gang members in Detroit, or with new technologies used by farmers in Bolivia. While this seems like an obvious truth, it’s one that most philanthropic funders ignore. How do we know? Research shows that 76% of funders don’t even ask in their grant application about what could go wrong to disrupt a project. Apparently, they are not worried.

However, they should be. Many projects, even of well-established nonprofits and programs, are just one “oh my gosh” moment away from significant, impact-killing shortfalls. These moments are not all earthquakes and hurricanes. More often than not, they are similar to one of these:

  • The general contractor building a nonprofit hospital has a nervous breakdown and flees the country.
  • Currency demonetization cuts the value of your grant by 30%.
  • A program officer goes out on maternity leave before signing the grant agreement inadvertently causing a three-month delay in delivering funds.
  • The CEO of a grantee contracts dengue fever for the second time and can no longer live in the country.
  • A national bank is suddenly embroiled in an embezzlement and corruption scandal. All accounts are frozen and a grantee can’t access their cash.
  • A misclassification of a grantee's recycling business moves it to ‘junk business’ status, causing the insurance bill to triple overnight. It takes months to resolve, during which the grantee can’t operate.

All of these are real-life scenarios from Open Road’s portfolio over the past five years — a portfolio with 100 additional examples of “roadblocks hitting the fan.” In every case, the roadblock threatened the viability of the project — and sometimes the organization as a whole.

No matter what their sector, geography, annual budget, or other variable, your grantees are not immune to unpredictability. It’s real, it matters, and left unaddressed, it affects impact.

2. A dollar is a dollar is a dollar

When a dollar moves from your wallet to a corporate bank to a foundation endowment to a nonprofit’s checking account, there’s no magical transformation. It doesn’t change color, or become more rigid and stiff. You can still fold it and stuff it in your pocket. That dollar also doesn’t lose its purchasing power from the corporate bank to the nonprofit account. Staples will still accept that dollar to buy pencils, computers, or even “word of the day” desk calendars. A dollar that is used to support a loan, a working line of credit, or a cash reserve fund in its corporate account can still do those things in a nonprofit account.

Yet, “nonprofit dollars” are treated very differently than any other dollar in circulation. We treat the dollars in nonprofit accounts as if they can’t do the same thing as the dollars in our own business accounts. Why? Because we say so. We tell nonprofits that their dollar is different — it’s restricted. “You can’t spend that on salaries or rent,” we say. "You can’t use that dollar to take out a loan or working line of credit.” And because of inherent power-dynamics and the pressing need for funds, nonprofits accept these artificial restrictions turning their dollars into rigid coupons instead of the flexible currency it actually is.

Moreover, just as a dollar doesn’t lose its purchasing power when transferred from the foundation to the nonprofit, it also doesn’t gain anything either. It can’t do anything more than it does in a corporate bank account. If one dollar buys ten pencils for a for-profit business, then it buys ten pencils for a nonprofit. That dollar doesn’t magically buy 20 pencils, just because it’s coming from a nonprofit account. And yet, this is an implicit assumption. Just as you’d never expect to attract top-talent in New York City at $30,000 a year, you shouldn’t expect nonprofits to do so either,  just because they are nonprofits.

For too long in philanthropy, we have ignored the financial needs of running a business — including non-profitable businesses. Needs such as cash reserves, access to working capital, and R&D budgets that fuel growth and enable continuous improvement. Instead, we have become so accustomed to the artificial restrictions we set up under the guise of accountability or impact measurement, that we start to believe that a nonprofit dollar is materially different from a corporate one. I’ve had many a funder and nonprofit tell me that grantees “can’t” take out a loan, as if their dollars are actually incapable of supporting such a normal business financing product. But in 2017 alone, Open Road loaned nearly $5 million in working capital and bridge loans to nonprofits and social enterprises.

A dollar is a dollar is a dollar. Its properties and abilities neither expand nor contract when it enters a nonprofit’s bank account. And yes, a dollar can only be used for one thing at a time. A dollar spent on pens cannot also be spent on salaries. But that is the result of choices, not limitations of the dollar itself. So, if we are to leverage every dollar for impact to its maximum use, let a dollar be a dollar and then make choices about how to use it.

3. It’s not written in stone

Nowhere in the laws of man or nature does it say, “Thou shalt approve grant dockets only once a year” Or, “The full Board is required to approve additional disbursements” or “Thou must complete an evaluation report before additional funds may be disbursed or grant renewals approved.”

Yet, whatever our current grantmaking procedures, we often treat them as inviolable laws. At Open Road, we receive regular referrals from other donors with ten times as many assets as we do who say “I want to help my grantee, but I can’t because… it’s against policy,” or “we don’t have a procedure for that,” or “we don’t have the money,” which typically just means that they didn’t budget for it.

The point is, whatever our bureaucratic procedures may be, they are not, in fact, written in stone. We can change them.

I’m not advocating for no rules or no bureaucracy. As my own staff will attest, I love creating organizational systems, policies, and procedures. Such rules help set expectations, create consistency, and maintain standards. They also — let’s be honest — provide an easy “out” when we don’t want to do something.

But after creating the rule, implementing the system, and training staff on the proper procedure, too many organizations forget that in the beginning, we made it up! At some point in our organization’s history, we made a (possibly arbitrary) choice to do this instead of that. And the great thing about these choices is that they can be amended.

Change is hard. This is true for even the most flexible organizations and often much harder for larger, older, or more institutionalized groups. So, changing your grant cycles to better meet grantee cash-flows, or changing your budgeting procedures to include contingency funds, or changing your communication policies to be more directly accessible to grantees — all of this may be hard. But we can do it. And if we don’t do these things, that’s a choice too. It’s not “just the way things are.” It’s an active choice and whatever our choice, we should be prepared to own it and its consequences for our grantees.

Lessons learned

No matter what side of the table you sit on, trying to generate positive change in the world is hard. There are no easy answers and few ready-made solutions. However, I have also learned that funders and nonprofits have more in common than we think. Both nonprofits and foundations face the constraints of limited resources and the hard choices of where to allocate finite funds and human capital. Neither of us can achieve our goals without the other. And yet, the have versus have-not mentality of philanthropy, the image of a grantee and a funder sitting on opposite sides of a table haggling over resources in the middle, damages us both. Wouldn’t it be better to sit on the same side of the table, look at our resources and abilities holistically and tackle our shared objectives together? Wouldn’t it be nice to take the lessons learned – the real lessons learned before they get spun into future ‘success’ stories – from both nonprofit and foundation worlds to create a better system? It may be hard and it may be uncomfortable, but I am sure that doing so would generate even greater impact in all of our grant cycles.

This article is the second in a four-part series sharing what Open Road has learned about risk management in philanthropy and how the organization has evolved over the past five years to better address the need for fast, flexible contingency funding in the sector. This series will include findings from Open Road’s research and practical guidance on best practices for managing risk in order to maximize impact in philanthropy.

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