The best thing about becoming a funder is that people have started laughing at my jokes …
The relationship between funders and grantees is asymmetrical. One person needs money, the other has money. I should know. I’ve been on both sides of the divide. After twelve years as a fundraising CEO, I know how it feels. I remember the hours running up to a potentially significant funder meeting. The anxiety that flows. I remember how tempting it was to laugh at jokes I didn’t find funny. I will always remember how patronised and belittled I sometimes felt. I remember feeling disempowered and demotivated by funders. I felt defensive and I would sometimes act suspiciously, like a child falsely accused of stealing the chocolates hanging from the Christmas Tree (this also happened but it’s another story). I know a few noble fundraisers who enjoy the relationship and who battle on with undiminished enthusiasm, but I also get the sense I’m not alone in my frustration.
Then again, sometimes, special funders come along. Funders with exceptional humility and empathy. Funders who place impact above control or attribution and who understood their role was both easier and more powerful than mine. Funders who listened and who I could trust as I shared our work, warts and all. Funders, most importantly, who trusted me and provided unrestricted grants. These flexible grants are critical for a charity to grow successfully.
And so, when I became a funder, I had some great models to emulate. And guess what? Nearly all the best funders have one thing in common: they employ staff with experience working in non-profits. By understanding how the funding relationship feels and how charities work, funders with experience ‘at the coalface’ bring a perspective so often lacking in Foundations. It’s a perspective which might help balance the relationship a little, but more importantly, it’s a perspective that can make money go further. That can create more bang for each philanthropic buck.
One area Foundations often get it wrong is in the choice between restricted and unrestricted grants.
In 2019, I carried out an unscientific but hopefully illustrative Twitter Poll amongst fundraisers. I asked them whether they’d prefer a $100k project grant or $50k unrestricted. The smaller, unrestricted grant won by two to one. That makes sense because those fundraisers know just how inefficient restricted grants are and how much more impact they have when they win unrestricted support. What makes less sense is why so many grant makers continue to restrict their grants. If charities value unrestricted funds so highly, you’d think funders must have some pretty good reasons for making restricted grants.
Here are some of the drivers that lead funders to prefer restricted grants:
- We will know where our money is going
- We want to avoid funding reserves
- We want to make sure more money goes to the front-line
- We don’t want our funds to be a ‘drop in the ocean’
- There’s a particular thing the charity isn’t doing that it really should be doing
- They have asked us to fund a specific project
- We want to keep grantees on their toes and stop them just sitting back knowing their core operating budget and reserves are covered
- We can enjoy more tangible recognition through a named project
These conscious drivers are driven by subconscious drivers:
- We don’t trust the charity to make good decisions
- We don’t trust the charity to work hard to maximise its impact
- Attribution for ‘our’ impact is more important to us than maximising ‘total’ impact
- This gives us more control
- We don’t know the charity well enough
My golden rule for funders is this: If you don’t trust the charity, don’t trust the project! And conversely, if you do trust them, give them unrestricted funds. If attribution matters, there are plenty of ways in which to achieve that without restricting grants.
A grant agreement, like any contract, aligns the interests of the counterparties. If a charity is well governed and well led, it’s interested in maximising its long-run impact in line with its Mission. There should only be two instances in which a funder might want to restrict a grant. The first, is if its Mission isn’t aligned with the charity’s. In that case, the funder shouldn’t fund or at least they should be clear that they are effectively agreeing a contract for services delivered and not a grant. The second is where the funder needs reports and assurance to retain trust in the charity. By only funding charities whose Missions are aligned with their own, funders can create grant agreements that include only the minimum requirements for reporting and assurance. At The Peter Cundill Foundation, we begin by spending a lot of time really getting to know each charity. After we begin funding, charities share their key milestones and then send six-monthly updates against them, audited accounts and any generic impact reports that our partners publish. These reports are enough for us to retain trust in the partner while spotting other ways we might help.
There are heaps of reasons why unrestricted grants make so much more sense. Here are my top dozen. Unrestricted grants:
- Allow repeatable reporting (would a commercial company provide individual reports on different aspects of their work to each investor?)
- Simplify accounting and avoid the need for complex grant ‘tessellation’ (fitting each grant into the cost structure of the organisation like a puzzle)
- Reduce the complexity and the cost of audit
- Reduce the overall cost of fundraising and the fundraising/expenditure ratio because unrestricted funds are both essential and, given most funders’ inclination to restrict grants, more expensive to raise
- Are flexible – if the organisation is well run, money is allocated to where it’s needed and that may change within a grant cycle
- Reduce grantees’ incentive to ‘Mission creep’ as they ‘follow the money’
- Encourage long-termism by reducing the short-term focus on keeping the lights on
- Allow the grant-maker to focus on the 10,000 feet and one-foot views and to leave the bit in the middle to the organisation, saving time on both sides
- Empower and motivate entrepreneurial leaders (given all of the above)
- Potentially strengthen a charity’s governance by increasing the CEO’s accountability to the Board of Trustees (as opposed to funders)
- Potentially improve transparency which helps build trust – restricted grants can create a vicious circle leading to distrust, unrestricted grants create a virtuous circle
- Encourage charities to compete for funds on strategy, leadership, governance and impact per dollar received, rather than on their ability to dream up the most fundable projects in an inefficient race to the bottom
One bright spot amongst the Covid induced chaos of 2020, is that many foundations have increased their unrestricted giving. The big questions are whether and why they might flip back to restricted funding as we get through this particularly difficult period. Unless a funder isn’t interested in impact, why would they go back to making only restricted grants? For answers to that one, please do share this article with funders everywhere.