Yesterday I spoke with a startup nonprofit about the frustrations of fund raising these days. They had a very exciting and well constructed plan but were having a lot of trouble landing a grant.  Every foundation they talked to had a specific focus, a detailed strategy, and a confined funding cycle.  They didn’t fit the plans and timelines, the answer was repeatedly ‘no.’

Admittedly, these guys are unique.  It’s an innovative post-sec option and there are not many foundations focused on that topic, but the conversation wasn’t unique. For many nonprofits, it seems to be harder to find a foundation willing to look at a proposal.  The shift to ‘strategic philanthropy’ over the last decade has, by design, made foundations less random and more selective.  The ‘professionalization’ of philanthropy has helped move the needle on some big challenges.

The development of philanthropic consulting services has clearly improved the impact of the sector.  Bridgespan, McKinsey, Parthenon, and others all regularly support the development of foundation strategic plans.  All of the big national foundations are smarter than they were a decade ago about measuring and investing for impact. However, the increased focus may have made the sector less responsive, less entrepreneurial, and more risk averse.

The increased focus on a strategic plan has made some foundations less capable of identifying and responding to a good idea that comes in over the transom–if it doesn’t fit the plan, it doesn’t get funded.  That’s part of the planned shift to be more selective and create a portfolio of aligned grants that result in a big shift in outcomes.  But it’s also creating more missed opportunities and, in some categories/areas, making it harder to launch innovative new programs.

Compared to strategic philanthropy, venture capital is highly responsive.  After picking categories, return-seeking venture investors typically sift through inbound funding requests in search of the best ideas and teams.  Much of philanthropy has chosen a wise elder strategy. Venture investing is a bet on the best of the market.  The former has the benefits of creating an aligned portfolio, the latter has the benefit of selecting a basket of high performers.

The attempt to be more strategic appears to be making some foundations less entrepreneurial.  In many foundations, very smart people have very little authority.  Proposed investments are bundled several times each year and presented to a board for approval. That limits the response time and latitude of what is often a talented and committed group of staffers.  The market is moving faster but foundations are moving slower.  If it doesn’t fit the plan and the proposal timeline, it doesn’t get funded.

It also appears that some foundation are taking less risk when they should be taking more risk. Philanthropy has two advantages over public and private capital, it can take a long view and it can take risk.  I see more of the former and less of the latter.

My young friends (in the opening paragraph) were basically told, “Come see us when you don’t need the money and we’ll help scale.”  Some foundations are leaving early stage investing and moving to the ‘growth capital’ stage where much of the risk has already been extracted from a deal.  Again, this has real benefits; the nonprofit world needs access to growth capital (both grants and debt), but there is a real sector cost when it comes at the expense of the startup space and support for real innovation.

Foundation risk aversion also makes grantees likely to abandon a good idea for a better idea. In venture investing, a good team will iterate to the best possible niche even if it’s very different than the original pitch. That doesn’t happen as often in philanthropy. Even when a grant recipient knows they are suboptimizing they will often stick with the grant program and agreement.  A more entrepreneurial approach to philanthropy might include milestone funding and periodic evaluation of alternative approaches.

Focus and measurement are key to high impact, but for philanthropy to have a shaping (not just responding) influence, it needs to be more dynamic.  Taking six months to build a three year plan just doesn’t make sense any more.  When innovation occurs in so many unexpected places, philanthropy needs to be more responsive.

There are ‘and/both’ solutions.  Foundations can balance constructed opportunities and responsive investments, they can delegate authority and budgets to act more entrepreneurially, and they can incorporate new investment strategies.  Specific examples include:

  • leaving room in the strategy for responsive investments
  • updating a three year strategy every year in a one month planning process
  • giving talented foundation staff the ability to make investments, particularly small seed investments
  • taking more risk by targeting a percentage of the portfolio for high risk bets–commit to fail more and learn more
  • creating or funding iterative development partnerships–short cycle R&D grants with milestone funding
  • using prizes to gain leverage, foster innovation, and pay for performance
  • investing a portion of the endowment in mission-related investments

A vibrant economy that promotes opportunity and equity requires a vibrant startup sector–both return seeking and impact seeking.  It’s time for strategic philanthropy 2.0–a basket of more dynamic, risk-taking, entrepreneurial approaches to making a difference.

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