3 Reasons Why ‘Capacity Building’ Is Not a Grantmaking Strategy

My work has taken me from the Florida Keys to Washington’s Olympic Peninsula and without fail, no matter which community I visit, I will at some point hear nonprofit funders comment, “Oh no, we don’t do capacity building. It’s just not a part of our focus.”

“We don’t do capacity building,” is often followed by a sideways glance that suggests I’ve broached a subject that’s uninspiring, at best, and taboo, at worst. In other words, why help nonprofits make payroll, when we can discuss programs creating chronicle-worthy headlines?

Does this sound familiar? If you fund capacity building, have you felt the need to defend why?

It’s understandable. Subjects like payroll don’t create excitement, and we must create board buy-in and enthusiasm if our ideas and initiatives are ever to be implemented.

However, if you are in the philanthropy business, you are in the capacity-building business.

We can’t create the type of long-term, lasting change we seek without strong organizations.

As grant-makers, we’re dependent on nonprofit leaders that can sustain and scale their impact without applying for more grant dollars.

Here’s what I mean: To borrow an example from our for-profit friends, have you ever seen the show “Shark Tank” on ABC?

If so, you know that the first questions asked after the entrepreneur’s pitch will be, “What are your sales for the last year?” and “How much do you plan to sell this year?”

The sharks dig into the company’s ability to effectively market, sell and scale their product, before digging into its competitive advantages or how it’s manufactured.

The sharks know that investing in sales and marketing isn’t a separate strategy. It’s an integral part of their investment strategy. More precisely, it’s the path to their return.

I have never met an investor that restricts their funds from sales and marketing. That would be foolish. Investors (funders) depend on a company’s revenue growth, increased profits and sales multipliers to create a return on their investment (impact).

In the same way, nonprofit capacity and sustainability are not separate or standalone strategies. They are critical components of all grants and to ensuring our philanthropy creates long-term, lasting impact.

Yet, we reverse this order all the time. We ask the nonprofit about its programs, outcomes and impact, and then maybe (not always) we’ll dive into a sustainability plan.

Now, you may be thinking, why don’t we just fund sustainable nonprofits and stop this article here? We can just reject nonprofits that need to build their capacity, right?

Well, we wouldn’t have many eligible applicants. According to Network for Good’s 2017 research across 10,000 nonprofits, the overwhelming majority heavily relied on single‐source funding.

A startling 78 percent of nonprofits applying for grants have no written or specific fundraising plan to sustain their program, after the grant period (on the other hand, 85 percent view their funders as credible, go-to sources for technical fundraising assistance).

Further, according to a new report released by GuideStar, approximately 50 percent of U.S. nonprofits are operating with less than one month’s cash reserves.

Therefore, if we want to create long-term change and lasting good, we must stop referring to capacity building as a standalone strategy. We must view it as part of a comprehensive, holistic strategy. Here are three reasons why.

Also, alongside each reason, I’ve listed a peer example from the foundations that Network for Good partners with. I encourage you to consider how you might implement or modify one of these takeaways for your foundation.

1. Nonprofits Must Respond to Emerging Needs, Not Live By Contracts

Do you believe the environmental challenges we face today are the same as 50 years ago? Do you believe child development and education is unaffected by the growth in social media?

As our communities’ complex challenges evolve, we must ensure that the nonprofits we fund have the resources they need to stay nimble and responsive.

Nonprofit leaders operating with razor-thin margins, no process to measure success or retain talent will be caught flat-footed during times of emerging needs or a shifting landscape.

So, practically speaking, what can you do?

As part of The Walton Family Foundation’s Environment Grant reports, nonprofits are asked, “What notable obstacles did you face during this grant period?” as well as, “What changes to the project were made?”

The program staff is interested in knowing how work plans, staffing and timelines may shift throughout the grant period. This enables them to coach the grantee on navigating unforeseen challenges, re-allocating funds from the original proposal or calling in additional support, instead of using the report to rigidly enforce grant contracts.

What would happen if you asked your grantees these questions in your reports?

2. Short-Term Strategies Don’t Fix Long-Term Challenges

Do you believe that racism has been wholly eradicated? Do you feel all Americans have affordable health care? No, of course not. These issues are multifaceted and will, undoubtedly, continue to evolve in the foreseeable future.

If we wish to confront longstanding issues plaguing our communities, grant strategies must be designed with the long-term in mind. However, grant funding is inherently short-term in nature (do you know any funders that make 10-year commitments through an annual grant cycle?).

Yet, how often do we measure outcomes created 10 years after the grant period ends? Do we know if those dollars are creating the same impact today? Has the program declined?

Hopefully not.

Shifting to multi-year commitments is not sufficient. We must ensure with greater certainty that our grantees have the capacity to self-fund their programs, long after the grant period.

So, practically speaking, what can you do?

The YouthBridge Community Foundation is an emergent, three-staff member foundation in St. Louis, Mo. The foundation’s CEO, Michael Howard, regularly educates YouthBridge donors and donor-advised fund holders on how to make gift decisions with the long term in mind.

“You’ve proven your commitment to lasting good and meaningful change,” was the headline phrase from a recent newsletter, educating stakeholders on why the foundation is building the capacity of local nonprofits. This education is enabling YouthBridge to increase their investment in the fundraising capacity of nonprofits serving children and youth in the St. Louis area.

Do your board members and donors understand the importance of nonprofit sustainability? How might you educate them in your next communication?

3. Community Needs Outweigh Grantmaking Budgets

Will you be able to fund 100 percent of the letters of inquiry or grant applications you receive this year?

Most likely not.

This is where we derive the phrase, “competitive grantmaking.” Grantmaking is competitive because needs (generally) always outweigh grant dollars available.

Because grantmaking is a zero-sum game (a dollar here can’t be invested there) we need to measure the “impact-per-dollar” of each grant. We must ask ourselves, “Will we create more outcomes if we invest a dollar into this program or that one?”

To expand this metric with confidence, grantmakers should pair grant dollars with an investment in an organization’s fundraising capacity. Network for Good has found that, on average, every $1 invested into a nonprofit’s fundraising capacity produces $10 in program or general operating funding. These are dollars that can be used to amplify and expand the nonprofit’s impact—without tying up additional grant dollars from the funder.

So, practically speaking, what can you do?

The Tahoe Truckee Community Foundation recently revamped its annual grants process to provide community impact staff with greater depth and insight into the applicant’s strengths and weaknesses.

During this process, nonprofits are asked to express any concerns around their ability to financially sustain their programs, and some even take a comprehensive assessment.
For a group that identifies fundraising as a core challenge, a micro-grant for fundraising services is bundled into their award, ensuring that the organization not only diversifies revenue, but also increases the impact of each grant dollar over time.

Have you considered bundling a micro-grant for fundraising capacity alongside a restricted or program grant? Could you pilot this concept with a handful of your grantees?