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Funding Nonprofits for Failure

April 23, 2012

Before I continue with arguments I made in yesterday’s post, I thought some additional context would be beneficial. While preparing my talk for the BmoreFail conference, I gathered perspectives on risk taking, failure and innovation from several nonprofit professionals. Here’s a sampling:

From a nonprofit executive director,

Revenue is hard to come by for nonprofits and we are under intense pressure to have “wins” and put up good numbers.  A nonprofit has to feel pretty secure to take risks.  It’s awfully hard to go back year after year and explain your outcomes for comprehensive bills that go nowhere or relatively low numbers when [you’re] serving residents with the most significant barriers.

From a community leader who serves on numerous nonprofit board of directors,

Based on my experience with nonprofits in Baltimore, I think they are willing or even eager to innovate to achieve their mission, and they expect to take reasonable risks to achieve their goals. Nonprofits are usually created to solve  a problem, often a long-standing problem. They need to be smart, ingenious, innovative, and willing to take the risk of trying something new since the status quo has likely created the problem and is not effectively solving it […] But I’ve heard foundation folks say it is sometimes hard to find good programs to support, and the several times I have read grant requests for United Way and [Baltimore Community Foundation] I’ve often had to try to make sense out of fuzzy, poorly-written proposals. Effective fundraising means having a project that is well thought-out and has the potential to do good. The fundraiser needs to be totally honest and needs to see the process as educating the  potential funder about the problem and the proposed solution. The fundraiser also must match the project to the priorities of the funder. It’s not easy.

And, finally, perspective from a former foundation staffer,

[F]oundations/funders are market creators who are not inspired by market demand or to fill a gap but by legacy and institutional values. As long as funders fund to their interests and not to the needs of population or place, then we will have a rift. Funders are becoming even more introspective and niche in their investing. They are creating distinct and very narrow funding silos that limit service providers/grantees [ability] to address the emerging needs of their population/place. In [the] private sector, investors are not market creators…entrepreneurs are. In the social sector, investors set markets and the field reacts at the detriment to people and place. And lest not even begin to discuss power dynamics….

Each perspective is compelling, honest and insightful. The first two points speak directly and indirectly to the nonprofit starvation cycle that leaves nonprofits “so hungry for decent infrastructure that they can barely function as organizations.” How can a nonprofit consider taking risks when it expends so much effort just to keep the proverbial doors open? And how can a fundraiser develop into the rockstar she needs to be when her employer has little money to invest in her development?

Bridgespan Group consultants Ann Goggins Gregory and Don Howard note that while organizations with robust infrastructure are more likely to succeed, most nonprofits don’t spend enough on overhead and compare nonprofit overhead spending with that of the for-profit sector. For example, overhead rates across for-profit industries average about 25 percent of total expenses, while government agencies and foundations average permitted indirect cost allowances are between 10 percent to 15 percent of each grant.

The final point, funders as “market creators,” is an extremely important one, and also speaks to the starvation cycle–though less directly. Foundation leader Paul Brest and philanthropy advisor Sean Stannard-Stockton have debated the merits of “problem-solving philanthropy” and “philanthropic buying and investment” for a few years. The philanthropic landscape is diverse–though not nearly enough–but only philanthropic investment is organically sympathetic to overhead spending, capacity building and systems, and there aren’t enough Venture Philanthropy Partners or Mulago Foundations to go around.

“Philanthropic buying” and “problem-solving philanthropy” typify how institutional philanthropy is generally practiced. And while both are necessary, “philanthropic investment” is best positioned to empower nonprofit enterprises to become entrepreneurial “market creators” encouraged to take the sort of risks that might have lasting and profound social impact.

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