Grant Makers Must Stop Looking for an ‘Exit Strategy’

Before they decide to start supporting a project, grant makers often want to know how they are going to stop giving money to it. “What is my exit strategy?” they ask — a question that invariably proves difficult to answer, in part because the concept just doesn’t fit philanthropy.

The term “exit strategy” is misappropriated from the business world. It refers to the return of capital (with, one hopes, a profit) through a sale, public offering, or refinancing of the enterprise in which the funds were invested.

Every for-profit investment must have an exit strategy — investing money does no good at all if you can’t get it back. Exit strategies are even more crucial for venture-capital funds that invest with short time horizons and must repay their investors before the fund managers can take their share of the profits — and venture-capital thinking has strongly influenced philanthropy in recent years.

But the fact that every prudent for-profit investment needs an exit strategy does not mean that grants must have them too. After all, a grant is not made with the expectation of getting anything back. What donors really mean, when they refer to an exit strategy, is that the organization or program they financed can continue after they stop supporting it. In other words, they expect the project to become self-sustaining.

This is, however, yet another venture-capital-induced misnomer. In theory, venture capitalists invest at an early stage when a new organization needs money, and, after a few years, the organization becomes profitable and no longer needs support. Unfortunately, the idea of profitability doesn’t fit philanthropy any better than a return of capital.

It is true that many new kinds of social-purpose business models are being created by social entrepreneurs, and those innovations have brought great vitality to the nonprofit world. Yet, as William Foster and Jeffrey Bradach pointed out in an article in the February issue of the Harvard Business Review, the attempt to start a business to develop a profit to subsidize a nonprofit group’s budget can frequently lead the organization into losing focus or, even worse, losing money.

It is uncommon that an organization will find a fortuitous synergy between its social purpose and its potential for making money in a business. It seems neither wise nor possible to require all nonprofit groups to develop sufficient money-making opportunities to cover their costs. At the very least, it would massively distort the character of the nonprofit world if grant makers supported only those organizations that could turn a profit.

Besides, not even businesses ever reach a permanent state of sustainability. A company is always at risk of losing money if it does not keep pace with changing market conditions. All the major American airlines were “sustainable” for decades, although none of them would pass that test today. AT&T was, for most of the 20th century, the safest investment imaginable, but, as long-distance calls shift to the Internet, it is not clear how sustainable the company will be in the future.

This constant vulnerability is, in fact, part of what keeps companies running well, just as the need to continually raise money keeps a nonprofit focused on serving relevant needs.

Most philanthropic dollars, after all, are used to provide short-term relief by conferring benefits or alleviating suffering in response to immediate needs. Nothing is wrong with that. Some might even say that this is the essence of philanthropy, and doing it well is hard enough without requiring that every grant lead to the creation of a new institution or eliminate a key cause of a social problem before it is considered a success.

In short, grant makers who look for an exit strategy or an assurance of sustainability are chasing a chimera, and it is no wonder that their questions seem so puzzling.

Yet the desire for an enduring impact is deeply embedded in the philanthropic psyche. And in philanthropy, unlike in the business world, permanence can always be bought. Given a sufficient endowment, any organization can be assured of long-term survival.

The cost, however, is staggering: If every American nonprofit organization were fully endowed, it would require an investment of roughly $20-trillion — 40 times the assets of all U.S. foundations or eight times the entire federal budget. More problematic still, the assurance that an organization continues to have and to spend its budget annually does little to ensure that it will continue to be an effective organization that meets the social needs of the day. Buying permanence through an endowment seems like a very large bet on uncertain odds.

Other less expensive ways can achieve enduring impact. Some solutions have a lasting effect, even apart from the continuity of the organizations that provide them.

KickStart (formerly ApproTEC), for example, is a nonprofit organization in San Francisco and Nairobi, Kenya, that invented and distributes foot-operated irrigation pumps to subsistence farmers in sub-Saharan Africa. Those pumps enable farmers to greatly increase their crop yields and hence their incomes. The pumps can be used indefinitely, and, unlike a one-time gift of food or money, they offer a solution that can continue independently of KickStart itself.

Although pumps don’t cure the deeper social dilemmas of the region, they do simultaneously provide both a short-term and a long-term benefit.

Grant makers that look for enduring impact may find that it lies in the results, rather than the revenue, of their grantees. Ultimately, good management that keeps an enterprise attuned to current needs and opportunities is the only real criterion for sustainability in business. Perhaps that too is the proper criterion for sustainability in the nonprofit world. A well-managed organization that can continue to raise money, manage its budget, and meet important social needs as they evolve sounds like something worth supporting. But that is not something that can be divined from the initial grant request — especially for a new project that is yet untested.

When grant makers insist on a plan for sustainability, often at the same time that they object to paying for the overhead and salaries necessary for good management and effective fund raising, they are asking the impossible of their prospective grantees. And that kind of philanthropy just isn’t, well, sustainable.

Mark R. Kramer is a founder of the Center for Effective Philanthropy, a nonprofit research organization, and managing director of the Foundation Strategy Group, an international consulting firm. He is a regular contributor to these pages. His e-mail address is kramercap@aol.com.