Funding Puzzle

“We don’t tell Coca-Cola how much sugar to put in a Coke or AmEx whom they should lend to. When we own stock, we are not there to try and change people (or programs).”

Who said that? It was Warren Buffet, one of the most financially successful persons in the world. Those lines should resonate strongly with anyone involved in how the relationship between funder (a la investor) and nonprofit (a la company) works.

This is not a new topic – Social Venture Partners (SVP) talks about general operating support. Bridgespan has talked about The Nonprofit Starvation Cycle. The Center for Effective Philanthropy has updated its work on the harmful effects of restricted funding. Grantmakers for Effective Organizations (GEO) continues to advocate for capacity and operational funding, etc., all to their credit.

All this matters because it elucidates a fundamental truth — we need to change the game, change the way funders and nonprofits mutually contract for community success. We can use Buffet’s quote as a jumping off point to explain how this works, why it matters, and the often-unintended negative consequences our current funding system creates.

Buffet’s line hits home for two reasons:

1) If the richest dude in the world feels wrong “telling Coca-Cola how much sugar to put in a Coke or AmEx whom they should lend to,” then how in the world can any funder tell a nonprofit how to run its programs or restrict how it spends its funds? Just to be clear, Buffett’s personal financial success does not equate to human or humanitarian success, a fact with which I’m sure Buffett himself would agree.

There are obvious differences between the private and nonprofit sector. Neither of those dynamics does anything to lessen the main point here. Because the significant majority of philanthropic and public funding is still restricted in small or significant ways, we thereby handicap nonprofits in their ability to build the best programs and strongest organizations to ultimately help the most kids, families, environment, etc. This is a truism that we’d be glad to debate anywhere anytime, based on 12 years of intense hands-on, close, as trusting-as-possible relationships SVP has had with hundreds of non-profits across 26 cities (www.svpi.org).

2) It makes us realize that SVP has framed this issue too narrowly and tactically over the years. Advocating for general operating support, or even more broadly, unrestricted funding, minimizes the stakes. Those are tactical, though important, steps a funder can take to help a nonprofit become stronger and more successful in the fulfillment of its mission.

What really matters, though, is forming a fundamentally new kind of agreement, a mutually accountable one, where funders invest resources without restrictions (like Buffet) and nonprofits are truly accountable for their results (like Coca-Cola).

There is really one primary thing that leads to the convoluted, restricted, often-controlling relationships that funders form with nonprofits — the lack of a single metric of success, a la earnings per share. That’s an unavailable fact. Things like the power of money, the inability of some nonprofits to scale a measurement infrastructure (often because of poor funding), etc., also contribute, but it’s the lack of that agreed outcome that primarily leads to this convoluted funding system.

Funders need something tangible to hold on to and account for their investment (a very valid motivation), but their solutions to the lack of a single outcome — to restrict funds, to attach way too many strings, to limit the spending on “overhead” — cause far more problems and hindrances than successes and empowerment.

It is as if a nonprofit is asked to build a 100-piece puzzle to put together a strong, coherent organization. They get 100 pieces from funders, but some of the pieces can only be put in certain places and they get four or five of some of the same pieces from different funders. You can envision the patchwork result, as if you are sitting at your kitchen table right now. What does it look like to you? Some unfilled holes in the puzzle? Some excess, unusable pieces lying around the edges?

All in all, a much less coherent puzzle (i.e. nonprofit organization) than for what one would hope.

I’ll never forget the time I sat down with a long-time, local executive director. He had built a relatively mature, $3 million+ nonprofit. I assured him confidentiality and asked how he had dealt with this “patchwork puzzle” dynamic over the years. He had decided several years previously to hire a full-time accountant just to re-arrange and allocate all of their incoming funding sources in such a way that everyone’s restrictions were met, but the organization wasn’t crippled or patch-worked together.

He had reached a point of enough scale to hire someone and sophistication to understand how to move all the parts around skillfully (nothing was done inappropriately; he just got good at playing the game). He eventually had enough resources and experience to put the puzzle back together. I am sure his story is far from unique.

Funders have to take the first step by providing unrestricted funding; by deciding if they want to invest (or not) in an organization and its stated goals and outcomes straight up; and, by investing the funds necessary to help nonprofits build their measurement systems and infrastructure right alongside programs.

Nonprofits need to make the case, unapologetically and clearly, for unrestricted funding; to get better and stronger at reporting and delivering social outcomes (for their clients more so than their funders); and take a whole-organization, not just strong- programs, approach to their work.

So it’s not “just” general operating support or unrestricted funding that is the main point here.

We need to change the game, change the way funders and nonprofits mutually contract for community success. Make no mistake. It’s a two-way street. If a guy investing billions of dollars every day can operate that way, there is no reason why the philanthropic sector can’t do so.

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Paul Shoemaker is executive connector at Social Venture Partners/Seattle. His email is shoe@svpseattle.org