10 rules for being an effective donor

From unrestricted gifts to creating feedback loops that work, Phil Buchanan, president of the Center for Effective Philanthropy, outlines what separates the good from the great when it comes to grantmaking. 

Donors often gravitate to the analogy of customers when discussing those nonprofits they fund. For example, Dave Peery, managing director of the Palo Alto–based Peery Foundation, wrote, “we think of grantees as our customers and act accordingly.”

But this thinking doesn’t quite make sense. It’s a bad analogy. Givers don’t have customers. After all, the money is flowing in the opposite direction: customers pay for something; grantees are recipients of funding. As a result, the power dynamics are totally different: In most industries, customers have choices, meaning businesses will, at least in theory, pay a price for ignoring their preferences.

While I can choose which restaurant to go to, most of us who lead a nonprofit don’t necessarily feel that we have a choice of who we raise money from. We look to raise money from almost anyone we think will give! The choice about whether to establish a relationship lies with the givers.

Here, then, are 10 rules for establishing strong working relationships with those organisations you support. These are rules that I’ve gleaned through the Center for Effective Philanthropy’s surveys of tens of thousands of grantees about hundreds of grantmakers – and from working with both exemplars and those struggling to improve their relationships with the nonprofits they fund.

1. Don’t force a fit.

Look for alignment between your goals and strategies and the goals and strategies of nonprofits. It’s a mistake to think you can use the leverage you have over grantees to get them to adapt to what you think is right. Pressure to modify priorities contributes to less positive relationships. For example, grantees pressured in this way are less forthcoming with information about problems. So, it’s crucial to prioritise alignment and fit and not try to force a match.

2. Recognise that if you’re a big giver, you live in a bubble of positivity. Take steps to burst the bubble and learn.

I’ve heard too many big givers insist that they know exactly what grantees think – that they are so down-to-earth and accessible as people that they have negated the power dynamic and created open, two-way communication. 

They’re wrong. The power dynamic always exists between the funder and the funded, and the only way to know grantees’ views is to find creative ways to get feedback.

3. Don’t assume you have what it takes to strengthen nonprofits or build their capabilities. Ask what they need and offer it only if you’re positioned to do it well.

Being good at strengthening organisations takes focus and resources. If you’re going to seek to strengthen the nonprofits you fund, find out what they are offering, and then ensure you have access to the skills and experience needed to do it well. 

For individuals, time is key. Make sure you can commit to regular, predictable hours. Volunteering can be a rewarding and effective way to contribute but be sure to approach volunteering with modesty and a focus on what the nonprofit needs.

4. Don’t restrict your gifts, and make them last.

For those organisations with goals and strategies that significantly overlap with yours, provide the unrestricted, long-term, significant funding that’s most helpful to grantees.

To make progress against shared goals requires strong organisations, but givers too often restrict funding, creating challenges and limiting nonprofits’ ability to allocate resources in ways that make the most sense. Nonprofits need flexible support, and they should build up financial reserves of at least three to six months’ operating expenses.

5. Calibrate what you ask of nonprofits to the size of your gifts.

I’ve seen grantmaking institutions with hugely cumbersome selection and evaluation processes that are making small, one-year grants. I’ve seen individual givers with unrealistic expectations for the time and attention they’ll receive given the amounts of their gifts.

Givers should be conscious of transaction costs on both the giver and grantee sides, which take time away from more important and valuable work. Right-size your process requirements to the size of the grants or gifts you’re making.

"It’s a mistake to think you can use the leverage you have over grantees to get them to adapt to what you think is right."

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Nonprofits need flexible and long-term funding if they are going to have real impact. Photo: Getty Images.

6. If you have to make a restricted gift, allow for a decent ‘overhead’ rate and offer as much flexibility as possible.

Givers often impose arbitrarily low overhead rates on programme grants; saying, for example, that only 10 per cent of a grant can support overhead or indirect costs such as rent. This means that the grantee is being paid less than the full cost of delivering the programme, which creates all kinds of headaches and transaction costs on both sides. Allow for flexibility and recognise that circumstances change, as we saw during the Covid-19 pandemic. Focus on outcomes – what was achieved – and not specific budget line-items.

7. Prioritise relationships and make your expectations clear.

If you’re a big giver, you’ll be hiring staff or retaining consultants or advisors to help you with your giving. Too often, givers prioritise subject-area expertise above all else when looking for staff or advisors. But givers should also prioritise the ability to work well with a coalition of others because that’s what it takes to make a difference when seeking to address our most stubborn societal problems.

8. Use your unique vantage point and influence to help grantees do their work better.

Givers, especially big givers, have a bird’s-eye view that no one else has; with the ability to look across communities and fields and observe what’s working and what’s not. These givers also have a caché that allows them to bring organisations together to learn from one another. Nonprofits can benefit enormously when givers use their distinctive strengths to help everyone do their work better.

9. If you have to end a relationship with a grantee, do it well – transparently and with a lot of notice.

If you’ve been consistently supporting a high-performing nonprofit but, for whatever reason, won’t be able to in the future, exit the relationship well. Nonprofits understand that givers’ goals and strategies will sometimes change, but they need both time and support to weather these transitions. Be as clear and direct as possible about the end date and your reasons for parting ways, and do so as far in advance as possible.

If you’re ending a relationship because you believe the grantee is no longer effective, again, both notice and openness are essential. Give nonprofits time to turn things around before you pull funding, and provide them with opportunities to tell you their story about what’s getting in the way of success.

10. Decline applicants in a way that’s honest and respectful of their time.

This starts with clarity about goals and strategy and good communication, which will allow nonprofits to gauge their likelihood of funding. If your selection process requires significant time, consider a two-step approach, starting with a quick letter of inquiry that allows for an initial screening and ensures that applicants with little chance of success don’t waste their time on the full process.

When you have to decline a nonprofit, do so respectfully and with candor about why. Remember that declined applicants will apply again. Today’s declined applicants are often tomorrow’s grantees.

"The effective philanthropist has to work hard to get good."

These 10 rules will help you build effective relationships with the nonprofits that you depend on to achieve your shared goals. Working well with those you support is difficult but crucial to effectiveness. As Paul Beaudet of the Wilburforce Foundation wrote, “Wilburforce can only succeed if our grantees succeed. And our grantees can succeed only if they are given the funding, tools, and resources they need to do their work.”

The fundamentals of philanthropic effectiveness are timeless. Just as the aspiring football player can only develop his or her ball skills through hard work, the effective philanthropist has to work hard to get good. But, too often, I see philanthropists who want to do the fancy stuff before they have the basics down. They want to attempt a diving header or bicycle kick before they can even deliver a simple inside-of-the-foot pass.

Master the fundamentals first, which in philanthropy means a good selection of – and strong relationships with – grantees. - PA