A Case and Model for Aggressively Funding Effective Charities

September 24, 2020

Here’s the common wisdom from the nonprofit sector: Avoid providing or taking significant funding that comes largely from one source. But is that always good advice?

If it is good advice, then no one told the larger nonprofits. Their funding is undeniably concentrated with funding from few funding sources within the same domain. This is how most nonprofits get large. Further, nonprofits who get their primary income from either individual donations or institutional funding — where we tell nonprofits to go — comprise just 8% of nonprofits. Unless the nonprofit is a good candidate for government grants or in-kind corporate donations, then it’s unlikely to grow significantly.

Also, being underfunded as a nonprofit and unable to pick up the remainder brings its own frustration. That’s because a failure while being underfunded makes it hard to tell whether a nonprofit’s intervention was inherently ineffective or if it just didn’t have the funding it needed to succeed. No funding, on the other hand, provides no useful feedback.

Given how funding currently takes place — quite conservatively — perhaps we should encourage a more aggressive approach. I’d like us to consider the main goals of both the nonprofit and funders — referring particularly to funders with $100M+ resources. Then, appreciating any constraints that are present, let’s consider an alternative funding model — one that includes concentrated funding of greater than half, or even much more, of a nonprofit’s income.

Charitable Goals

Just so we’re on the same page, let’s be clear on what each groups’ goals are.

Funders’ Goals

Funders — like typical nonprofits — generally have a vision of what they set out to do, a particular problem (or class of problems) they want to solve. They want to have the greatest impact possible with their funds. They must factor in a number of issues concerning their grant recipients, including their ability to achieve the sought outcomes.

Nonprofits’ Goals

Nonprofits — the ones getting the funding — also have a vision. But unlike funders, these are the organizations that do the lifting to get the work done. Most nonprofits have the constant issue of making sure they bring in enough money to do the work that moves them closer to their organization’s vision.

When is significant funding too concentrated?

Of course, there are some real cases when concentrated funding actually is bad.

1. The funder mandates conditions that compromise the nonprofit’s work.

It may also make sense for a nonprofit itself to refuse concentrated funding. If a funder compromises a nonprofit’s ability to carry out its mission, then receiving concentrated funding is bad. We might see this with a funder that puts heavy restrictions on funding or adds unreasonable obstacles. This can keep the nonprofit from being as nimble as it needs to be — particularly smaller or newer nonprofits. In any case that a funder substantially compromises a nonprofit’s ability to advance its mission, that’s a valid reason for the nonprofit to refuse funding.

2. The nonprofit has many existing funding sources.

If there are multiple sources of funding for a nonprofit that are easily within reach and sufficiently large, then it may not make sense for a funder to provide especially concentrated financial support. A smaller grant may make sense here — particularly if the nonprofit doesn’t have significant room for extra funding. Technically, this means a nonprofit isn’t that neglected. If the organization can easily acquire sufficient funding from other sources, then there’s no urgency to send a large source of funding their way. There are other effective organizations that are in greater need.

When should we welcome concentrated funding?

It’s hard to say that concentrated funding is ever “good.” We’d obviously prefer — total income being constant — more diversified funding sources. Nonprofits want income to be predictable but without the risk of a large portion of funding being suddenly removed. But, in practice, concentrated funding is the norm for larger nonprofits, and the alternative is unlikely if large growth is needed. And concentrated funding is enormously better than being underfunded or not funded at all.

Here are some clear factors that point in the positive direction of providing and accepting significant funding.

1. Funding from other sources will be difficult.

From the funder’s perspective, concentrated funding can make sense if there’s good evidence that an organization can do a lot of good but that they’ll have a hard time finding reliable funding. This is commonly the case for new nonprofits or nonprofits who take on more challenging problems in creative ways. It can also be a challenge when a nonprofit offers a solution that competes with alternative solutions that existing funders are already funding. Providing significant funding can also attract other funders by increasing the nonprofit’s credibility.

If you need a prime example of this working, look no further than Katherine McCormick. McCormick single-handedly funded the research for the birth control pill while funding was dry elsewhere. This led to one of the most impactful breakthroughs of the 20th century.

2. There is plenty of room for funding without diminishing returns.

Nonprofits vary in the amount of funding that they can use efficiently. If a nonprofit has a high ceiling before diminishing returns come into play, then this also helps keep donors interested. That’s because donors can be aware of the continued funding gap — even with an existing significant grant.

3. Beginning effective works requires significant infrastructure or cost

Another point to consider is that some nonprofits need significant funding for a minimum viable level of infrastructure before they can even begin to effectively carry out their mission. Some interventions — even being cost effective — can be quite expensive to start. In this case, concentrated funding may be essential to get started since falling short of the minimal funding needed can cause an avoidable significant shortcoming, delay, or flatout failure.

Arguments against concentrated funding worth reevaluating

Large funding institutions regularly make a lot of claims about why they shouldn’t provide concentrated funding. Some make sense, but others are questionable. It’s worth reconsidering these rationales as funders reflect on their ability and strategies for making the biggest impact. Here are some rationales for funders refusing to provide concentrated funding and why they should be reconsidered.

1. We don’t want the organization to be too dependent on the funder.

This argument often feels like a catch-22 from the nonprofit’s perspective. Nonprofits are absolutely dependent on funding. Unless they’re getting mostly service/goods-based revenue, fundraising is the nature of their model. Saying that one doesn’t want to fund a nonprofit because of this dependence puts them in a position where no funder can ever really provide significant support. In practice, however (I’ll say it again), nonprofits that have successfully grown in scale often have concentrated support from few funding types and sources. Nearly all nonprofits seek out funding support and are inherently dependent on it.

Good nonprofits work hard to attract new funding all the time. If they aren’t, then this is worth a conversation. But providing a nonprofit with capacity is often essential to help them obtain the staffing necessary to attract and actively pursue funding from others. Significant funding will also help a nonprofit to carry out its mission — which also attracts funders. It’s perhaps better to conceptualize providing concentrated funding for an organization as also funding that organization’s ability to fundraise.

It’s also important to set realistic expectations of a nonprofit. Say a nonprofit started out raising $100K a year before the large funder comes along. Now the funder provides them with a lump-sum grant of $1.5M expected to last over three years. We’ll say the nonprofit’s version of fully funded for this period is $1M a year. It sounds like a funder has set them up for total success by providing for half their budget each year. But even a nonprofit that doubled its revenue year-over-year — starting within the same year that it received the grant — would fall just short of the $1.5M it needs to address the shortfall. See below for what this looks like.

Revenue Year 1: $1.5M (Grant) + $200K (Fundraising) = $1.7M

Year 1 Need: $1M (Met)

Revenue Year 2: $700K (remainder from Year 1) + $400K (Fundraising) = $1.1M

Year 2 Need: $1M (Met)

Revenue Year 3: $100K (remainder from Year 2) + $800K (Fundraising) = $900K

Year 3 Need: $1M (Not Met)

This scenario actually demands startling fundraising growth, and the nonprofit still falls short at the end. Fundraising departments — particularly new ones — can typically take years to generate a return on investment. Further, the industry average rate of nonprofit growth is 7.6% — not even accounting for inflation — which means it takes 9.5 years for the average nonprofit to double in revenue size. Only the top fifth fastest growing nonprofits over one year gained 90% in revenue. Keep in mind that this was only one two-year segment, which doesn’t account for nonprofits that regressed to their mean growth in future years. We also know that just because a nonprofit has a great fundraising department doesn’t necessarily mean it’s an effective charity. And an effective charity doesn’t necessarily have a fast-growing fundraising program. But an effective charity that has a high ceiling for efficient scale does need funding to realize its potential impact.

This example highlights how smaller organizations that are scaling up benefit the most from significant, concentrated funding. Without it — particularly in the beginning — it’s incredibly hard to plan long-term because you can’t rely on your budget. That’s because fostering the necessary relationships with new funders typically takes significant time.

It’s also worth noting that dependency when a nonprofit performs well is less of an issue for funders with significant resources. If a nonprofit does very well with a large grant, this should cause a wealthy funder to excitedly continue funding as they can afford to do so.

2. Giving concentrated funding will scare off other funders.

Nonprofits that both succeed in their mission and actively seek funding are the ones that get more funding. The mere fact that a nonprofit was recently successful in acquiring funding doesn’t necessarily scare off more funding. Consider larger nonprofits like The Red Cross or academic institutions like Harvard. Despite being flush with cash, their ability to both communicate their outcomes and make a good pitch means people still donate. One reason for this is that nonprofits can often dream bigger and nothing is more inspiring than a previous big win.

In fact, in some cases funders do not provide funding to organizations because they are perceived as being too small — even if they have significant room to grow. Helping an organization to “level up” could in fact attract some funders who would have previously dismissed them.

If a funder still fears their funding will scare off others, then the funder may be wise to introduce the nonprofit to funders within their own network. This is a tactic funders don’t take nearly enough. Newer nonprofits struggle enormously with getting these contacts, so this would be doing them a huge favor. As mentioned before, it’s just not realistic to expect a nonprofit to undergo repeated exponential growth to make up a difference in funding that it’s never come close to before. Indeed, it’s possible that significant funding will attract large donors to help fill in the gap. But this will likely take time. A funder could even incentivize separate fundraising by matching or multiplying gifts raised by the nonprofit.

Helping a nonprofit recruit board members (independent of the funder) is another way to help a nonprofit get funding. Board members play a large role in a nonprofit’s fiscal health and network. Helping the nonprofit get good board candidates can diversify funding dramatically.

These are all ways to ensure that funding from others is encouraged so that this issue is not a barrier to providing significant funding.

3. Giving concentrated funding means the nonprofit is evaluated less and from fewer perspectives.

Nonprofits get no shortage of feedback. This comes from other major donors, other foundations, media, and its general supporters. Internally, the board of directors also provides feedback and oversees the ED and ensures staff are successful in carrying out the organization’s mission. Feedback doesn’t only come from major donors.

Often, a nonprofit needs to gather a lot of data to successfully evaluate its activities. Interestingly, a nonprofit that is underfunded not only has a harder time carrying out its mission, but might also struggle to gather the data needed to make this evaluation possible. An underfunded nonprofit may also fail to implement its programs in its best form thereby providing an inaccurate measure of its potential.

This data from evaluations is also the same data that the nonprofit needs to make its case to other funders. Nonprofits themselves play a crucial role in helping along the evaluation by capturing the data in the first place.

4. Giving in larger amounts means other qualified nonprofits may not get funding.

In practice, many large funders have significant reserves so that an inability to fund other deserving nonprofits is not an actual issue. Of course, another way a funder can support more qualified nonprofits is to do more fundraising itself. This will mean leveraging its network for very high net worth individuals.

Of course, not every funder even has the ability to provide concentrated funding. This is only an option for very large funders. It could also be true for funders who grant to nonprofits that have a relatively low budget ceiling before their spends are less effective.

If funders fear being able to provide resources for enough qualified nonprofits, then this is probably a call for more donors and groups that direct funding. There are ways to do this. Consider ideas like The Funding Network, which has a kind of giving auction to attract new donors to nonprofits. There are also meta-funders that attract funding for groups that fall under a particular umbrella. Within Effective Altruism, this would be groups like Givewell, Animal Charity Evaluators, Effective Altruism Funds, The Life You Can Save, and Giving What We Can.

Another way to provide sufficient funding for effective charities is for more Effective Altruism-aligned organizations to spring up like Founders Pledge, Generation Pledge (still growing), and Raising for Effective Giving. These organizations find niche groups and provide them with a meaningful experience and medium for them to give to effective nonprofits. These groups are necessary to help make up the large funding gap that effective nonprofits face.

All these funders and groups are excellent for funding on the margins and, depending on the nonprofit, could accommodate a large portion of a nonprofit’s budget.

5. We want to wait for a “hinge event” where we can better leverage our resources.

The rationale here is that we should wait for an ultra-high-impact “hinge event” before aggressively spending resources. A “hinge event” is an especially sensitive time in history that opens itself to an extremely high impact intervention. A deep dive into the interaction between longtermism (valuing the world’s sentient beings over very long time scales) and funding models is beyond the scope of this essay. Still, it’s worth highlighting some exceptions to the premise that leveraging compounded investment returns for far-future charitable use in these hinge events is the default best way to go.

This approach is often a more Effective Altruism-type criticism. But from the slow rate that most funders in general spend down their reserves, you’d think that they too were operating under the same rationale. Here are some exceptions to this long-wait approach.

i. Intermediate charitable opportunities may make the hinge event less likely to occur at all. This may be particularly true for opportunities that relate to broad or meta-issues like policy that could influence extreme-suffering risks and existential risks. It may also be much more cost-effective to address a root cause of a hinge event before it becomes critical. Addressing a broad cause area earlier may also have ancillary positive impacts outside of the hinge event itself.

ii. The future hinge event(s) that eventually occurs — assuming it’s not passed over by mistake — may require only a fraction of reserves. Or the hinge event may be so obvious that governments are willing to do the intervention themselves. This means that the unused saved funds may be quite significant. This is a missed valuable opportunity to do good for opportunities that feel below the perceived threshold to trigger a large spend.

iii. The future hinge event may affect one’s ability to leverage saved resources (see economic nullification and collapse arguments by Michael Dickens). It may be that the event requires long-term planning so that earlier interventions need to be set to successfully address the hinge event, essentially a narrow window of opportunity (see also window argument by Michael Aird). The hinge event may also affect investments or the ability to timely liquidate the investments into an actionable intervention.

(Note that I didn’t interpret this long-term investment approach being advanced as an absolute statement in its original form and recognized that the original author, Phil Trammell, highlighted some potential exceptions within his approach. Feel free to read his work for a first-hand look at his position.)

An Alternative Approach To Thinking About Funding

Vu Le (“voo lay”) is a thought leader in the nonprofit space. One of his provocative essays made the claim that the more timid funding model traditionally found in popular foundations falls short. Instead, he called for a more aggressive model typically used in funding politically conservative organizations.

Le chastised underfunded and often restricted grants that ask for results as if the nonprofit had full funding. The nonprofit is constantly looking for funding and is given no real opportunity to prove itself or take the necessary risks to grow.

Le contrasts the current model with the aggressive model conservative funders have taken with institutions like the Heritage Foundation. This means funding organizations an entire decade or more at a time. This directly addresses the dynamic that nonprofits have with both accomplishing their mission and being able to take the multi-years-long road of relationship building and building up trust so that other funding resources are secured. Conservative funders realize that expecting a nonprofit to make exponential growth after funding for just a few years is not realistic.

Le’s approach is expensive. It means larger payouts, more than 10% of a funder’s endowment, each year — not including the funder’s internal costs. But the idea is that it gets results.

A Workable Blueprint For Large Funders

So where do we start for this alternative approach? Here’s a proposal.

Phase 1: After vetting, provide an initial unrestricted grant for proof of concept — a large, complicated project that takes no longer than 1–2 years. This grant should cover the entire budget including an ability to appropriately evaluate its programs and fundraise.

It’s worth pointing out as well that some nonprofits need significant infrastructure to accomplish its mission whereas others — while still having room for funding — are able to advance in their mission from a lower budget point. Naturally, this doesn’t necessarily mean that an organization requiring more infrastructure to get started is less efficient.

This phase is also unique in that it requires relatively less capital — in many cases much less than $1M. But it’s also inherently riskier. This is a phase that could even be taken on by funders with far less than $100M in the bank. If a smaller funder would want to take on this type of task, however, then it would be wise for them to collaborate with a larger funder. This way, the smaller funding organization can hand off the funding opportunity for the later, more expensive phases (should Phase 1 be successful).

Phase 2: If the project from phase one was successful, provide a second multi-year, unrestricted grant to cover its entire budget. The funding can cover 3–5 years. This should cover mid-level scaling of the organization, the nonprofit’s continued ability to evaluate its programs, and to take on another project that is larger and more complicated than the first. This is also a good time for the funder to introduce the nonprofit to other funders, prospective board members, and other important contacts.

A conversation exploring continued funding should begin to take place as soon as possible. This way — assuming funding is continued — there aren’t disruptive periods of time where the nonprofit is without funding. Also, after the funding takes place, a nonprofit will need time to organize and plan.

Phase 3: If the nonprofit was successful in phase two, then it’s time to consider placing the nonprofit in its best position to be successful in the much longer term. This means a grant that would fund its budget for at least ten years — and funding in a way that lets the nonprofit tackle large projects in line with its mission. This funding would also allow the nonprofit to scale up its staffing in line with its needs. This is also a good time for the funder to make an introduction to further funders. If done collaboratively, the funder may be able to split the cost of this very large grant with another funder.

Hypothesis Testing Models

The approach described above is one model. But whether the approach uses this model or another, it would be valuable to test the models against each other. One way very large funder’s could do this would be for the funder to make very large grants to create additional funding organizations. Then these new funders could take different approaches.

Of course, this solution is challenging. It requires the initial major funding organization to give up control. It also raises questions about who will run these new organizations and how different their visions should be. And it does increase inefficiency by duplication of infrastructure across organizations.

That said, it does allow for multiple different funding approaches to be tried by each new funding institution. To the degree that multiple of the new and old funding organizations agree on grantees, it diversifies the funding sources and increases the number of different viewpoints evaluating the organization. The different leadership and strategies of the organizations may result in varying degrees of risk taking. This could result in successful projects and organizations that would not have occurred otherwise.

If this inefficiency of creating new funding organizations is too much, then the funding sources could also be related but managed under different departments. One model to expand upon here is the one taken by Effective Altruism Funds which houses multiple different funds decided by different teams. This approach can be taken not only with different areas of funding, but also different approaches to funding.

Takeaway & Reflection

We must be careful to not underfund nonprofits as we test interventions. An underfunded charity may give us an inaccurate measurement of that intervention’s success. If we want to have confidence in an intervention’s success, we have to fund it properly.

The nonprofit sector takes on incredibly hard problems. That’s especially the case for nonprofits that follow the principles of Effective Altruism. If we expect these nonprofits to take on these enormous problems and have a chance at victory, then they need to be funded in a way that sets them up for success. Proper funding that allows for long-term planning is one of the best paths to that success. And there are ways to accomplish that goal while balancing concerns from both the nonprofits receiving funding and the funding institutions themselves. The funding sector is long overdue for such an innovation.

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