What makes a good grantmaker? The answers to this and other questions were recently discussed in a brown bag lunch on Grantmaking 101:
To provide some context, here are a few statistics that the informal panel cited on the nonprofit sector: There are 1.1 million nonprofits registered in the US, and roughly $1 trillion flows through the nonprofit sector. Surprisingly, 60% of this dollar amount comes from fee-for-service (all of those nonprofit hospitals), and only 2% comes from foundation grants. It's worth noting here that "nonprofit" represents a tax status, not whether or not an organization has operations that are profitable.
Broadly, nonprofit funders include the government (through RFPs), individuals (direct contributions), and foundations. There are a number of foundation varieties - public, private, corporate, community, family, and donor-advised funds. Most foundations dole out grants through a 'docket process' - this essentially means that a grantseeker must wait until a quarterly board meeting in order to get funding (or to find out that they have been denied funding), since the foundation staff can only present proposed grants for approval once per quarter or so.
Unfortunately, social sector funding is a challenging process. Foundations are an ineffective market mechanism, and funding decisions are often based on relationships or transient areas of interest. Foundation income infrequently has a direct tie to the quality or effectiveness of the organization's service. Also, although tax law requires grantmaking foundations to give away at least 5% of their endowments each year, foundations are allowed to include their own operating costs towards this hurdle and therefore actually give away less than 5%.
This session highlighted striking differences between nonprofit and for-profit investment. For example, when a for-profit startup raises venture money, they often get a pool of capital to invest in up-front costs and to use for runway on development, marketing, and other essential steps in creating a business. At the same time, there are a number of legal barriers to foundations providing this much funding to a nonprofit. There's some algorithm for figuring out the maximum dollars that a foundation can provide, but safe to say it's roughly in the neighborhood of 25% of the organization's budget for that year. Can you imagine if a startup raising venture money wasn't permitted - by federal law - to raise more than 25% of that year's budget from any one investor?
Foundations work around this cap somewhat by providing multi-year grants, and in each year they give a certain committed amount such that no year goes over the cap. While this helps to direct dollars to an organization, it still doesn't address the need for up-front capital. Unfortunately, the process of "forming a round" - very common in the venture capital world - is almost nonexistent in the social sector.
So, getting back to the first question - what makes a good grantmaker? It looks a lot like what makes a good investor:
- giving grantseekers a clear picture of timeline and where they are in the process
- providing funds for overall operations, and not just specific program costs
- being thorough in your research
- being sensitive to reporting requirements that you impose upon grantees
- providing a quick no if you're not interested, so that applicants can move on
Something to shoot for regardless of packed schedules, and even more packed inboxes.
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