The Funder Problem: Good Intentions Aren’t Enough
Editor’s note: This post is part of the NextBillion series, “A Survival Guide for Raising Capital,” – one of several topics we’ll be covering through special series this year. Click here for more details on our 2018 series.
“This data suggests that the biggest barriers to effective impact and the greatest pain points for nonprofits and social enterprises are their own funders.”
I expect this news comes as a shock to many funders, who are generally trying to affect positive change in the world. But at Open Road Alliance, unfortunately, this finding didn’t come with too much surprise.
We are a philanthropic initiative that provides emergency grants and loans to nonprofits and social enterprises that are facing an impact-threatening problem. Over the past five years, we’ve been systematically collecting data about the roadblocks applicants are up against to better understand trends around “what goes wrong” during project implementation (ultimately, so that we can better mitigate risk as a sector). We analyzed that data, pulling from over 100 funding applications – all of which described projects with real-life obstacles. We found that, distressingly, close to half (46 percent) of all problems we’ve seen are caused by funders.
Our data suggest that there are a variety of funder-created scenarios that cause disruptions. None of them reflects well upon funders: not because we saw nefarious behavior or deliberately malicious intent, but because funders are not changing how they operate quickly enough to prevent negative consequences to their grantees. It is not enough to have good intentions. The results of this study call for funders to look carefully at the consequences of their practices and make necessary changes.
We identified three categories of funder-related roadblocks that account for the most frequent challenges: change in funder strategy, delay of disbursement and policy inflexibility. All of these are essentially procedural fixes and require only that funders become better attuned to the financial needs of their grantees.
The most common problem funders cause stems from a change in funder strategy and the all-too-common poor internal or external communications that accompany it. Here is the story in a nutshell, and it’s one we hear frequently: At some level in the foundation, a new strategy is introduced, which may cause existing grantees to be excluded because they no longer fit the new plan. Often, the impending strategy change is conveyed in advance to grantees, but the grantees are repeatedly reassured that their check will still be forthcoming. So, the grantee staff plans for continuing programs, keeps staff employed and doesn’t go looking for new funding. Along the way, they generally incur or plan for expenses that they believe the funder’s promised money will cover.
And then, word comes that the money isn’t available after all. This can be after months of repeated promises and can even involve canceled disbursements of next tranches in a multi-year grant. Sometimes, it appears that program officers have been ill-informed themselves and genuinely believed the money would be available. But often, no reason is given other than, “The board or investment committee has mandated a change in our focus and you no longer fit.”
This behavior is inexcusable; it represents sloppy internal procedures and a lack of concern for the harm caused to the grantee. The damage to nonprofits and social entrepreneurs is serious and real. It’s a breach of an actual or implied contract to pay for contracted work. It’s also disrespectful and wastes untold hours for staff. And it’s unnecessary. Changes in procedures to prevent miscommunication and a willingness to make the grantee whole when the status of their money was misrepresented are straightforward solutions.
The category of delayed disbursement is similar in almost all respects to a change in strategy. In this case, the money does come through eventually but is massively delayed, again generally after many assurances that it will arrive soon. The organizations being funded have payroll to meet, rent and bills to pay, and supplies to purchase, just as any business does, just as the funder does. So why would anyone believe that delays affect a nonprofit or social entrepreneur any less? Given their usual lean financial status, these organizations cannot afford disruptions in funding and shouldn’t have to deal with the organizational distress caused by lack of funds.
Our last most common category is funder inflexibility. Should a grantee have any even slightly unusual need or request, many funders cannot accommodate them, even if they wanted to. In one illustrative case, a foundation with more than $1 billion in endowed funds referred one of its grantees to Open Road because it could not find a way to provide an interim $90,000 grant to the project between grant cycles. This despite an already approved pending $1 million grant to the grantee’s project, which the foundation touted as the most impactful in that particular portfolio.
In another example, a grantee of a different large foundation knew that a currency devaluation was possible after an upcoming election, which if it occurred could cause them to fall short on their budget. When the grantee organization suggested adding a contingency budget to protect the project from the effects of abnormal fluctuations, the program officer, while agreeing that this was a smart, effective solution, had no way to approve or implement the request.
Policy issues and internal miscommunications that cause delays or failure to deliver funds are not insurmountable problems; they are bureaucratic ones that can be resolved with a commitment by the funder to repair practices and policies that are harming those they are funding.
Funders who do not change policy to prevent harm to the grantee – or funders who do not act responsibly to repair damage caused by their actions – are operating in bad faith. In much of our daily life, a promise is a promise, and it should be true in philanthropy as well. Our grantees are valued partners who deserve the highest standard of respect and service.