I know I’m an unrestricted funding broken record, but I need to share just one more story. A few weeks ago I was halfway around the world at the Skoll World Forum. I met three CEO’s of significant NGO’s – all in the $10 million revenue range – who told me restricted funding is strangling them.
Every one said they’d rather be HALF THE SIZE with 100% unrestricted funds because they would have MORE IMPACT.
Not just because it would be less hassle, which is also true. Two of the three have even turned away 7-figure restricted grants in the last year that would have increased the size of their organizations.
Again, not a novel observation, but the scale of it has reaffirmed my position that restricted funding is probably the #1 most debilitating grant-making practice in the social sector.
How in the world could an NGO have more impact at half the size, and why would a rational leader of an organization turn down $1 million-plus? The answer is both simple and complex.
Let’s say you’re at $5 million annual revenue and someone gives you a $2 million grant (awesome, right??!!), but that $2 million can only be spent on scaling up the program or service that is designed to help alleviate poverty, improve math skills, whatever the case may be. (Okay, I can probably make that work…)
Also, you can’t spend any of the $2 million on new staff or “overhead” or administration. That means you have to deliver a lot more services without any more staff or internal capacity to support the increased services. (Now I’m getting worried, how can I deliver more services without the capacity to deliver it?)
Then, after you’ve received the grant, the needs on the ground have shifted and there is a new opportunity that would create way more social and community impact, but you can’t spend any of the $2 million on it because the grant won’t allow you to. (Wow, that seems really counter-productive. Maybe I never should have accepted the grant at all.)
If that whole scenario sounds a little absurd, especially for those of us that have ran private sector businesses, then you are correct. And it happens every day in the social sector. (Nonprofit Executive Director, Vu Le broke it down in his piece: Ordering a Cake and Restricting It Too.)
Most grants have restrictions and sometimes they work out, but much of the time they either start to strangle a nonprofit because they can’t build a stronger organization or they keep them from optimizing their impact because they are constrained on how to spend the funds.
The effects of this have been documented in the Stanford Social Innovation Review’s “The Nonprofit Starvation Cycle,” and leading sources of information on nonprofits – GuideStar, Charity Navigator, and BBB Wise Giving Alliance have come out publicly to denounce the “overhead ratio” as a valid indicator of nonprofit performance.
At the end of the day, what really matters is that a nonprofit is achieving their mission and increasing their impact. So let’s focus on that. Unrestricted grants don’t mean zero accountability. But let’s track what matters. What impact is the organization having? Can they demonstrate it? Have we built a relationship on a foundation of mutual trust?
If theses answers are solid, where the nonprofit spends their grant dollars is irrelevant.